Pacific & Western Credit Corp. announces results for its first quarter ended January 31, 2012

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Mar 08, 2012, 17:40 ET

LONDON, ON, March 8, 2012 /CNW/ -

FIRST QUARTER SUMMARY

(three months ended January 31, 2012, compared to three months ended January 31, 2011, unless otherwise noted):

Pacific & Western Credit Corp. (the "Corporation") implemented International Financial Reporting Standards (IFRS) as of November 1, 2011 and prior period results have been restated to an IFRS basis. Key results for the first quarter of 2012 include the following.

Pacific & Western Bank of Canada

Net income for the Bank for the three months ended January 31, 2012 was $1.8 million compared to $1.2 million for the same period a year ago.
Total revenue (teb) for the Bank for the three months ended January 31, 2012 increased to $8.3 million from $7.0 million a year ago.
Lending assets of Pacific & Western Bank of Canada (the "Bank"), Pacific & Western Credit Corp.'s wholly-owned subsidiary, at January 31, 2012 increased to $1.22 billion from $1.07 billion a year ago, an increase of 14%.
Credit quality remains strong with gross impaired loans at January 31, 2012 decreasing to $1.7 million or 0.14% of total loans from $2.5 million or 0.23% of total loans a year ago.

Pacific & Western Credit Corp.

Net income (loss) of Pacific & Western Credit Corp. for the three months ended January 31, 2012 was ($853,000) or ($0.03) per share (($0.03) diluted) compared to ($1.3 million) or ($0.09) per share (($0.09) diluted) for the same period a year ago. Prior to the payment of dividends on Class B Preferred Shares, which are recorded as interest expense for accounting purposes, net income (loss) of the Corporation for the current quarter was $307,000 compared to ($67,000) a year ago.

PRESIDENT'S COMMENTS

Strong performance in the Bank's Lending Operations and gains earned on the sale of securities in the Bank's preferred share portfolio were key drivers to the Bank and PWCC's significant improvement in earnings. During the first quarter the Bank earned $2,955,000 (TEB) before income taxes and $1,837,000 after income taxes. PWCC earned $461,000 before income taxes and had a loss of $853,000 after income taxes. PWCC's income tax allocation included an income tax provision of $454,000 relating to refundable income tax on dividends paid on its Class B Preferred Shares, and an income tax allocation of $860,000 relating to gains made by the Bank on the sale of preferred shares. This latter tax provision had no impact on shareholder's equity.

The Bank's core lending operations continued to grow during the quarter with loan balances increasing from $1,132,000,000 to $1,218,000,000. Spread on the loan portfolio remained relatively constant at approximately 2.07% before provisions. Sectors of the loan portfolio showing significant growth were public sector loans which increased by 16% to a $172 million, residential construction loans which increased by 27% to $96 million, commercial construction loans which increased by 34% to $87 million, and bulk loan and lease financing which increased by 19% to $74 million. This increase in lending activity together with gains taken on sales from the Bank's preferred share portfolio resulted in a significant improvement in the Bank's total revenue which increased to $8.3 million over the $7 million achieved in the same quarter last year. Credit quality remained outstanding during the quarter with gross impaired loans decreasing to $1.7 million or .14% of total loans from $2.5 million or .23% of total loans a year ago. At January 31^st the Bank's collateral coverage of its commercial loan portfolio was more than double the loan balance.

At the end of the quarter the Bank's regulatory capital was $159 million, a significant improvement over the total regulatory capital of $149 million at the end of the previous quarter. Adjustments related to IFRS conversion were primarily responsible for this increase.

On January 2^nd we launched two new credit cards for Home Hardware, one for Home Hardware's retail customers and another for Home Hardware's small construction contractors. At the end of the quarter we had approved approximately 8,600 applications. In future quarters we will produce segmented statements to clearly show the progress we are making in this very important new segment of our Bank's business. We expect that our credit card services will contribute significantly to the Bank's earnings, however, during the early stages, because the majority of costs associated with issuing new cards are incurred upfront of revenues, the credit card program will cause a drag on earnings until such time that revenue earned on balances exceeds expenses. In the first quarter the credit card operations realized a loss of $486,000.

The second project that we have invested considerable time and money in is the development of custom banking software for the trustees in bankruptcy industry. We expect to launch this new product early in April with one of Canada's largest trustees and to fully roll out the new product toward the end of our fiscal year. Once operational this new product should greatly increase the diversity of our deposit gathering network and result in a significant reduction to our cost of funds.

Our first quarter results are beginning to reflect the impact of the various initiatives we undertook over the past few years. Thinly priced public sector loans for the most part have matured with only one thinly priced hospital loan remaining and scheduled to repay in April. Selling down our preferred share portfolio has resulted in significant gains, and the bulk financing program that we launched last year has pushed through its breakeven point and is now providing an ever increasing contribution. The Home Hardware credit card program is now operational and although our balances are exceeding our initial expectations it will be a number of months before revenues exceed expenses. Custom software for the trustee in bankruptcy industry will soon be launched, though like the credit card program it will take time before this new initiative contributes significantly to our bottom line. We are pleased with the progress that we have made building a strong, diversified and profitable Canadian bank.

FINANCIAL HIGHLIGHTS
(unaudited)	for the three months ended
		January 31		October 31		January 31
($ thousands, except per share amounts)		2012		2011		2011
Pacific & Western Bank of Canada
Balance Sheet Summary
Cash and securities	$	323,411	$	319,838	$	298,274
Total loans		1,217,851		1,131,526		1,068,662
Average loans		1,174,689		1,117,615		1,027,766
Total assets		1,574,341		1,482,469		1,397,863
Deposits		1,359,923		1,269,730		1,150,903
Subordinated notes payable		49,692		49,651		40,025
Shareholder's equity		93,539		93,311		88,627
Capital ratios (2011 amounts based on CGAAP)
Total regulatory capital	$	158,566	$	149,066	$	133,590
Risk-weighted assets		1,193,930		1,118,036		1,041,242
Assets-to-capital ratio		10.12		9.87		10.44
Tier 1 risk-based capital ratio		8.56%		8.89%		8.84%
Total risk-based capital ratio		13.28%		13.33%		12.83%
Results of operations (teb) *
Net interest income per financial statements	$	4,772	$	4,826	$	4,242
Teb adjustment		258		378		548
Net interest income (teb)		5,030		5,204		4,790
Spread		1.31%		1.40%		1.39%
Other income		3,405		8,650		2,280
Provision for credit losses		185		118		76
Total revenue		8,250		13,736		6,994
Non-interest expenses		4,857		4,334		4,286
Credit card operating expenses		438		-		-
Net income		1,837		6,227		1,238
Return on average total assets		0.48%		1.68%		0.36%
Gross impaired loans to total loans		0.14%		0.14%		0.23%
Provision for (recovery of) credit losses as
a % of average loans		0.02%		0.01%		0.01%
Pacific & Western Credit Corp., (consolidated)
Results of operations
Net income for the Bank	$	1,837	$	6,227	$	1,238
Deduct interest expense on notes of the parent		(626)		(1,213)		(913)
Non-interest expenses of the parent		(450)		(2,326)		(392)
Provision for income taxes		(454)		(2,763)		-
Net income (loss) before interest expense relating to Class B Preferred Share dividends		307		(75)		(67)
Interest expense relating to Class B Preferred Share dividends		(1,160)		(1,208)		(1,196)
Net loss for the Corporation	$	(853)	$	(1,283)		$ (1,263)
Loss per common share:
Basic	$	(0.03)	$	(0.05)	$	(0.09)
Diluted	$	(0.03)	$	(0.05)	$	(0.09)

*Non-IFRS measures

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

This management's discussion and analysis (MD&A) of operations and financial condition for the first quarter of fiscal 2012 should be read in conjunction with the unaudited interim consolidated financial statements for the period ended January 31, 2012, included herein which have been prepared in accordance with International Financial Reporting Standards (IFRS) for the first time. This MD&A should also be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2011, together with notes which were prepared in accordance with previous Canadian Generally Accounting Principles ("CGAAP") and MD&A 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, 2011, remain substantially unchanged.

Impact of Adoption of International Financial Reporting Standards (IFRS)

General

The Corporation adopted IFRS as its financial reporting framework on November 1, 2011 with a transition date of November 1, 2010, such that prior period comparative information in the interim financial statements and MD&A for the first quarter of 2011 and future periods reflects conversion from previous CGAAP to an IFRS basis. On transition, IFRS requires the application of certain mandatory and optional transition exemptions. The details of the restatement and the mandatory and selected optional exemptions, which the Corporation applied on transition, are set out in Note 4 to the accompanying unaudited interim consolidated financial statements. As IFRS represents a new accounting framework, it is generally not appropriate to directly compare the Corporation's financial position and results of operations as stated under IFRS to the financial position and results of operations as stated under CGAAP.

While many of the accounting principles and standards comprising IFRS are similar to CGAAP, certain standards and rules are fundamentally different resulting in significant changes to previously reported financial position and financial results. The most significant differences relate to the following items:

De-recognition of Transfers of Certain Financial Assets

Under IFRS, certain financial assets that previously qualified for de-recognition on transfer have been re-recognized. This has resulted in retroactively re-recognizing the assets that were previously considered to have been sold as amortizing assets that continue to reside on the Consolidated Statement of Financial Position, earning interest income over their term and recording an interest bearing liability relating to proceeds received as a result of the securitization transaction. This has also resulted in an adjustment to Retained Earnings (Deficit) intended to unwind the previously reported impact of all securitization transactions undertaken. As at November 1, 2010, insured mortgages which previously qualified for de-recognition under CGAAP and which are required to be added back to the consolidated financial position under IFRS totalled $24.1 million and opening Retained Earnings (Deficit) was reduced by $558,000 representing an estimate of the reversal of after-tax gains on securitizations previously recognized. As at November 1, 2011, insured mortgages which were re-recognized totalled $42.9 million and opening Retained Earnings (Deficit) was reduced by $747,000 representing an estimate of the reversal of after-tax gains on securitizations previously recognized.

Impairment of Available-For-Sale Securities

Under IFRS the basis for determining impairment in the Corporation's available-for-sale securities, specifically the preferred shares it holds in its treasury portfolio, changes from that used under CGAAP. The result was that any impairment in these securities as determined under IFRS prior to November 1, 2010 has been recorded at the date of transition through a transfer between Accumulated Other Comprehensive Income (Loss) and Retained Earnings (Deficit). Total Shareholders' Equity remains unchanged as a result of this adjustment.

The impact at November 1, 2010 was a transfer of approximately $19.2 million between Accumulated Other Comprehensive Income (Loss) and Retained Earnings (Deficit). At October 31, 2011, $10.8 million was the amount, net of income taxes, reallocated between Accumulated Other Comprehensive Income (Loss) and Retained Earnings (Deficit). As the impairment charges reduce the amortized cost on these available-for-sale securities, any sales after October 31, 2010 in excess of the reduced amortized cost results in gains on sale at the time of disposition. As a result, gains totalling $12.1 million before income taxes have been recorded in the comparative figures for the year ended October 31, 2011.

See Note 4 to the Interim Consolidated Financial Statements for more information.

Recognition of Loan Fee Income

Under IFRS, loan fees earned by the Corporation are recognized into income over the expected term of the loan using the effective interest method. Previously under CGAAP, the Corporation recognized a portion of loan fees that related to administration and set up activities in income immediately. The impact of the transition has resulted in Shareholder's Equity at November 1, 2010 reducing by approximately $2.0 million and 2011 net loss reducing by approximately $618,000.

Loan Loss Provisioning

Both CGAAP and IFRS calculate loan losses using the incurred loss model. However IFRS is more specific as to what qualifies as an incurred event. Under IFRS, incurred losses require objective evidence of impairment, must have a reliably measurable effect on the present value of estimated future cash flows and be supported by observable data. This difference did not have a significant impact on the Corporation's determination of individually assessed provisions but may impact how the Corporation determines its collective allowance in the future. Any adjustments to the Corporation's collective allowance that may be required however, are not expected to be material.

IFRS 1

IFRS 1 First time Adoption of IFRS provides a framework for the transition to IFRS. Generally, retroactive application is applied to the opening consolidated statement of financial position at November 1, 2010 as though the Corporation had always applied IFRS. However IFRS 1 permits both mandatory exceptions to retroactive application and optional exemptions from other IFRS standards. The Corporation has evaluated all optional exemptions under IFRS 1, and determined that no specific elective exemptions were material.

Overview

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

Pacific & Western Credit Corp.

Net income (loss) of the Corporation for the three months ending January 31, 2012 was ($853,000) or ($0.03) per share (($0.03) diluted) compared to ($1.26 million) or ($0.09) per share (($0.09) diluted) for the same period last year. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) for the three months ending January 31, 2012 was $307,000 compared to ($67,000) last year. These dividends are recorded as interest expense in the consolidated financial statements as the preferred shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Statement of Financial Position.

The results of the Corporation for the current quarter included a loss of $486,000, including the provision for credit losses and non-interest expenses net of fee income, from the private label credit card program which was launched on January 2, 2012 and gains totalling $3.2 million from the sale of preferred shares included in the Corporation's treasury portfolio. This is in comparison to gains totalling $2.5 million on the sale of preferred shares realized in the same period a year ago.

Pacific & Western Bank of Canada

Net income of the Bank for the three months ending January 31, 2012 was $1.8 million compared to $1.2 million for the same period a year ago. The increase in net income of the Bank for the current quarter was due primarily to increased net interest income resulting from the growth in lending assets as well as increased gains from sale of preferred shares as discussed above, reduced by costs totalling $500,000 from the Bank's private label credit card program which was launched on January 2, 2012.

Net interest income (teb) for the Bank for the three months ended January 31, 2012 was $5.03 million compared to $4.79 million for the same period last year. Net interest income increased from a year ago primarily as a result of the growth in lending assets but was reduced by a lower level of net interest income earned on the Bank's treasury portfolio due primarily to the sale of preferred shares over the past year which reduced the yield from treasury assets as well as the cost of holding higher levels of liquid assets. Net interest margin or spread (teb) for the Bank for the three months ended January 31, 2012 was 1.31% compared to 1.39% last year. While the Bank saw its spread from lending assets in the current quarter increase from the same period a year ago, overall spread (teb) for the current quarter was less due to the factors discussed above.

At January 31, 2012, total assets of the Bank were $1.57 billion compared to $1.40 billion a year ago with the increase due to growth in lending assets which increased to $1.22 billion at January 31, 2012 from $1.07 billion last year, an increase of 14%, as well as an increase in cash and securities which increased from $298 million last year to $323 million this year. The growth in lending assets was due primarily to an increase in commercial term mortgages and loans and in residential construction mortgages. Also included in lending assets at January 31, 2012 were credit card receivables totalling $2.3 million relating to the private label credit card program which was launched on January 2, 2012.

Credit quality remains strong, with gross impaired loans decreasing to $1.7 million at January 31, 2012 from $2.5 million a year ago. At January 31, 2012, the ratio of gross impaired loans as a percentage of total loans was 0.14% compared to 0.23% last year.

Total Revenue (teb)

Total revenue (teb) of the Bank was $8.25 million for the current quarter compared to $6.99 million for the same period last year. Total revenue increased from a year ago due to the growth in net interest income in the current quarter and gains on the sale of preferred shares in the current quarter being higher than that recorded in the same period a year ago.

The provision for credit allowances, which is also included in total revenue, totalled $185,000 in the current quarter compared to $76,000 a year ago with the increase due primarily to a collective allowance totalling $62,000 being recorded in the current quarter relating to credit card receivables outstanding at the end of the quarter and an increase of $117,000 in the collective allowance due to the growth in lending assets.

Net Interest Income and Net Interest Margin

Net interest income (teb) of the Bank was $5.03 million for the current quarter compared to $4.79 million for the same period a year ago. Net interest margin or spread (teb) for the Bank, which is net interest income as a percentage of average assets, was 1.31% for the current quarter compared to 1.39% for the same period a year ago. Net interest income (teb) for the current quarter increased from the same period a year ago primarily as a result of growth in lending assets from last year however the growth in net interest income from lending operations was reduced by a lower level of net interest income from treasury operations primarily as a result of the sale over the past year of higher yielding preferred shares in the Bank's treasury portfolio and the cost of holding higher levels of liquid assets.

Other Income

Other income for the three months ended January 31, 2012 was $3.4 million compared to $2.3 million for the same period a year ago. Other income for the current period included gains totalling $3.2 million from the sale of preferred shares and fees earned from credit card operations of $14,000. Other income in the same period a year ago consisted primarily of gains on the sale of preferred shares of $2.5 million and other charges totalling $219,000.

Non-Interest Expenses

Non-interest expenses, including those relating to the private label credit card program, totalled $5.8 million for the current quarter compared to $4.6 million for the same period a year ago. The increase in non-interest expenses for the current quarter was due to increases in general and administrative expenses relating to the credit card operations and other volume related expenses in the quarter. In addition, salaries and benefits increased in the current quarter compared to a year ago as a result of increased staff relating to credit card operations, an increase in staff in the lending area and higher amounts being recorded for stock based compensation in the current quarter compared to a year ago.

Income Taxes

The Corporation's statutory federal and provincial income tax rate and that of the Bank is approximately 29%, unchanged from a year ago. The effective rate is impacted by non-taxable dividend income earned on preferred shares held in the Bank's treasury portfolio, the tax benefit on operating losses in the parent company not being recorded for accounting purposes and other items not being taxable or deductible for income tax purposes with the primary item being the dividends on Class B Preferred Shares recorded as interest expense in the Consolidated Statement of Income (Loss). For the current quarter the Corporation's consolidated provision for income taxes was $1.3 million compared to $921,000 a year ago and includes an income tax provision of $454,000 in the parent company relating to a refundable income tax on dividends paid by the Corporation on its Class B Preferred Shares in the period and an income tax provision of $860,000 relating to gains on the sale of preferred shares.

At January 31, 2012, the deferred income tax asset in the Bank was $11.6 million compared to $11.3 million a year ago and is primarily a result of income tax losses from previous periods, the benefit of which was recorded at the time. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized.

The ultimate realization of the deferred income tax asset cannot be determined with certainty, however management is of the opinion that it is more likely than not that the Bank will be able to realize the deferred income tax asset in future years. The realization of the deferred income tax asset is dependent upon the Bank being able to generate taxable income in future years sufficient to offset the income tax losses. The ability to generate sufficient taxable income may be dependent upon the Bank generating income from operations or on converting non-taxable income sources to taxable income sources during the carry-forward period. It is also dependent upon the market value of the preferred shares recovering in value as they are carried at market value for income tax purposes with mark-to-market adjustments being added to or deducted from taxable income. At January 31, 2012, the Bank had significantly reduced its holdings of preferred shares and the market value of the remaining preferred shares had increased from a year ago. At the end of the current quarter, the value of preferred shares totalled $20.7 million compared to $59.1 million a year ago.

Comprehensive income (loss)

Total comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). The Corporation's other comprehensive income (loss) consists of the after-tax changes in unrealized gains and losses on available-for-sale securities. Total comprehensive income (loss) for the three months ended January 31, 2012 was ($2.5 million) compared to ($937,000) a year ago with the difference due to the higher net loss for the period compared to a year ago and in a lower amount of unrealized gains on available-for-sale assets in the current quarter as the Corporation continues to realize on the unrealized gains on available-for-sale securities recorded in prior periods.

Credit Card Operations

On January 2, 2012, the Bank launched its private label credit card program. As at January 31, 2012, 8,600 credit cards had been issued and the amount of credit card receivables outstanding totalled $2.3 million. Based on the balances outstanding at January 31, 2012, the Bank recorded a collective allowance of $62,000 for the quarter. In addition, the Bank incurred non-interest expenses totalling $438,000 in the current quarter relating to the credit card program. These expenses consisted of salaries and benefits relating to the credit card operations, expenses for activities carried out by third parties to administer the program, marketing and promotional costs and well as general and administrative expenses. As noted above, revenue from the credit card program in the form of fees totalled $14,000 in the quarter and as a result, the loss from the credit program for the first quarter totalled $486,000. The Bank anticipates that this program will continue be a net investment until the credit card balances increase to a level sufficient to yield a positive rate of return.

Consolidated Statement of Financial Position

Total assets of the Corporation at January 31, 2012, were $1.57 billion compared to $1.41 billion a year ago with the increase due primarily to growth in lending assets which increased from $1.07 billion to $1.22 billion at January 31, 2012, an increase of 14%.

Cash and Securities

Cash and cash equivalents typically consist of deposits with Canadian chartered banks, government treasury bills and bankers acceptances with less than ninety days to maturity from the date of acquisition. Securities in the Corporation's treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, bankers' acceptances and corporate debt and preferred shares. Cash and securities, which are held primarily for liquidity management purposes, totalled $326 million or 21% of total assets at January 31, 2012 compared to $307 million or 22% of total assets a year ago. Cash and cash equivalents were $240 million of the total amount of cash and securities at January 31, 2012 compared to $99 million a year ago and increased from a year ago as a result of the Corporation focusing its strategy on holding higher levels of liquid assets. In addition, current market conditions enable the Corporation to earn higher yields on cash and cash equivalents than on government securities.

At January 31, 2012, the net unrealized gain in the Corporation's securities portfolio was $3.4 million compared to a net unrealized gain of $17.3 million a year ago with the decrease due to gains being realized over the past year. These amounts are recorded net of income taxes in Accumulated Other Comprehensive Income (Loss). The fair values of securities held in the Corporation's treasury portfolio are based primarily on market values as the securities the Corporation owns are publicly traded. The Corporation is of the view that there is no objective evidence of impairment relating to any unrealized losses on the remaining securities it owns and no further impairment charges are required at this time.

Mortgages and Loans

Mortgages and loans totalled $1.22 billion at January 31, 2012, compared to $1.07 billion a year ago with the increase being primarily in commercial term mortgages and loans and in residential construction mortgages. New lending in the current quarter totalled $139 million compared to $183 million a year ago and loan repayments for the current quarter totalled $55 million compared to $101 million last year. New lending in the current quarter was less than a year ago due primarily to a large bulk lease financing transaction totalling $43 million which closed in the first quarter of 2011. Loan commitments at January 31, 2012 were $276 million compared to $226 million a year ago with the increase due primarily to amounts available to be drawn on credit cards. At January 31, 2012, the Corporation's lease portfolio totalled $142 million compared to $137 million at October 31, 2011 and $170 million a year ago. While the Corporation has seen significant repayments in its lease portfolio over the past year, it is continuing to enter into agreements with vendors for its bulk lease financing program and expects to see accelerated growth in this niche market in the coming months.

As noted previously, on January 2, 2012 the Corporation launched its private label credit card program. By the end of January, a total of 8,600 credit cards had been issued with a total of $2.3 million in credit card receivables outstanding, well in excess of the Corporation's expectations. The Corporation expects to see significant growth in credit card receivables in the coming months as the spring and summer months arrive.

Credit Quality

Gross impaired loans at January 31, 2012 totalled $1.7 million or 0.14% of total loans compared to $2.5 million or 0.23% of total loans a year ago. The Corporation has maintained its high credit quality and requires minimal provisions for credit losses. Provisions for credit losses in the current quarter were $185,000 compared to $76,000 a year ago with the increase due to the growth in its loan portfolio and the balances outstanding in its new private label credit card program which require additional collective allowances to be recorded.

At January 31, 2012 the Corporation's collective allowance totalled $3.0 million compared to $3.4 million a year ago with the decrease due primarily to the reduction of the collective allowance relating to personal loans which were outstanding a year ago and written off against the related collective allowance in 2011. At January 31, 2012, the Corporation's individually assessed allowance for credit losses totalled $1.6 million compared to $1.5 million a year ago. Based on results from ongoing stress testing of the loan portfolio under various scenarios, and the secured nature of the existing loan portfolio, the Corporation is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for.

Other Assets

Other assets totalled $31.3 million at January 31, 2012 compared to $29.6 million a year ago. Included in other assets is the deferred income tax asset of the Bank totalling $11.6 million compared to $11.3 million last year and capital assets and prepaid expenses totalling $16.0 million at January 31, 2012 compared to $17.4 million last year.

Deposits and Other Liabilities

Deposits are used as a primary source of financing growth in assets and are raised entirely through a well established and well diversified deposit broker network across Canada. Deposits at January 31, 2012 totalled $1.36 billion compared to $1.21 billion a year ago, and consist primarily of guaranteed investment certificates. Of these amounts, $33.9 million or approximately 2.8% of total deposits at the end of the quarter were in the form of demand deposits compared to $37.8 million or approximately 3.1% of total deposits a year ago, with the remaining deposits having fixed terms. Total deposits increased from last year in order to fund the growth in lending assets. In order to diversify its sources of deposits and reduce its cost of new deposits, the Corporation has identified a new deposit niche, that being deposits of trustees in bankruptcy. The Corporation is currently developing new banking software to serve this new deposit market and expects to launch this product in the second quarter of 2012.

A second source of financing growth in assets, and a source of liquidity, is the use of margin lines and securities sold under repurchase agreements. From time to time, the Corporation uses these sources of short-term financing when the cost of borrowing is less than the interest rates that would have to be paid on new deposits. At January 31, 2012, the Corporation did not have any amounts outstanding relating to margin lines or securities sold under repurchase agreements nor were any amounts outstanding a year ago.

Other liabilities consist primarily of the fair value of derivatives and accounts payable and accruals. At January 31, 2012, other liabilities totalled $30.6 million compared to $25.6 million a year ago. The fair value of derivatives at the end of the current quarter totalled $19.8 million compared to $14.0 million last year with the change due primarily to changes in rates from a year ago. Under the accounting standard for hedges, the offsetting amount is included in the carrying values of the assets to which they relate.

Securitization Liabilities

The Corporation has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At January 31, 2012, the amount of securitization liabilities totalled $43.4 million compared to $33.1 million a year ago with the increase due to securitization transactions entered into between February 1, 2011 and October 31, 2011.

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 $42.5 million are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $77.7 million at January 31, 2012 compared to $80.0 million a year ago. Excluding issue costs, notes payable consist of Series C Notes totalling $61.7 million maturing in 2018 and a short term note in the amount of $200,000. The Series C Notes bear interest at 9.00% per annum. In addition, the Corporation has outstanding subordinated notes totalling $21.5 million issued by the Bank to an external party. These subordinated notes bear interest at rates ranging from 8.00% to 11.00%, are callable by the Bank, and mature between 2019 and 2021.

Preferred Share Liabilities

At January 31, 2012, the Corporation had 1,909,458 Class B Preferred Shares outstanding with a total value of $47.7 million, before deducting issue costs of $2.5 million. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $41.3 million, net of issue and conversion costs, representing the fair value of the Corporation's obligation to make future payments of principle and interest has been classified on the Corporation's Consolidated Statement of Financial Position as Preferred Share Liabilities. In addition, an amount of $4.3 million, net of issue costs, representing the equity portion of the Class B Preferred Shares, has been included in Shareholders' Equity on the Corporation's Consolidated Statement of Financial Position. As the Class B Preferred Shares must be redeemed by the Corporation in 2019 for $47.7 million, the preferred share liability amount of $41.3 million will be adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount, with the increase included in interest expense in the Consolidated Statement of Operations, calculated using an effective interest rate of 11.8%.

Liquidity

At January 31, 2012, Pacific & Western Credit Corp., on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations due to the end of fiscal 2012. These obligations relate primarily to payments of interest on notes payable and the expected cash portion of dividends on Class B Preferred Shares. The funding for the obligations of the Corporation beyond 2012 is expected to come primarily from cash in the Corporation and interest income earned by the Corporation.

Shareholders' Equity

At January 31, 2012, Shareholders' Equity was $21.7 million compared to $14.1 million a year ago with the increase due primarily to the issue of common shares and warrants pursuant to a public offering which closed during 2011, partially offset by net losses incurred from last year.

Common shares outstanding at January 31, 2012 totalled 26,824,737 compared to 14,651,048 a year ago with the change due to 7,476,000 common shares issued in 2011 under a public offering, 3,200,000 common shares issued in 2011 under private placements and 1,497,689 common shares issued in 2011 as part of the dividends on the Class B Preferred Shares. Common share options outstanding totalled 1,163,033 at the end of the quarter compared to 508,333 a year ago with the change due to common share options issued, net of the expiry of common share options. In addition, the Corporation has 5,398,700 warrants outstanding at January 31, 2012 resulting from the public offering and the private placement which if exercised would result in one common share being issued for $2.80, as well as 747,600 broker warrants outstanding which if exercised would result in a unit consisting of one common share and one-half warrant being issued for $2.25 each and 56,070 broker warrants which if exercised would result in one warrant being issued for $0.22 each. All the warrants expire in November 2012.

At January 31, 2012, 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.

The Corporation's book value per common share at January 31, 2012 was $0.61 compared to $0.58 a year ago. Assuming the outstanding Class B Preferred Shares are converted into common shares on the basis of $5.00 per share, the Corporation's book value per common share at January 31, 2012 would be $1.71 per share.

Updated Share Information

As at March 7, 2012, there were no changes in the number of outstanding common shares, common share warrants or options, Class A or Class B Preferred Shares since January 31, 2012.

Capital Management

Total regulatory capital in the Corporation's principal subsidiary, the Bank, totalled $158.6 million at January 31, 2012 compared to $133.6 million a year ago with the increase due primarily to $7.1 million of additional Tier 1 capital in the form of common shares being issued by the Bank to the Corporation in 2011, additional subordinated notes issued by the Bank last year to an external party, improvements in the market value of preferred shares which the Bank holds in its securities portfolio and operating results of the Bank over the past year. Regulatory capital includes the after-tax effect of unrealized gains and losses on available-for-sale equity securities owned by the Bank.

The Bank's total risk-based capital ratio, which is the ratio of regulatory capital to risk-weighted assets, was 13.28% at January 31, 2012 compared to 12.83% a year ago. The Bank's Tier 1 risk-based capital ratio, which is the ratio of Tier 1 capital to risk-weighted assets, was 8.56% at the end of the quarter compared to 8.84% last year. The Bank's assets-to-capital ratio was 10.12 at the end of the quarter compared to 10.44 a year ago. The changes in the Bank's capital ratios from a year ago were due to the increase in regulatory capital as well as an increase in risk-weighted assets, primarily from the increase in lending assets.

As per OSFI's Capital Adequacy Guidelines, financial institutions may elect a phase-in of the impact of the conversion to IFRS on their regulatory capital reporting. The Bank made this election to phase-in the IFRS conversion impact over a five quarter period starting with the first quarter ending January 31, 2012. The phase-in amount is based on the impact on Retained Earnings (Deficit) of IFRS conversion as at November 1, 2011 and is recognized in regulatory capital on a straight-line basis. The estimate of the phase-in amount over the full five quarters is a reduction of regulatory capital of approximately $14.0 million and relates primarily to the impairment, net of income taxes, in previous years of available-for-sale securities. In the absence of this election, the Banks Tier 1 and Total capital would have been 7.63% and 11.89% respectively at January 31, 2012.

See note 15 to the interim consolidated financial statements for more information regarding capital management.

Summary of Quarterly Results

												CGAAP
(thousands of dollars except per share amounts)		2012		2011								2010
			Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2

Results of operations:
Total interest income		$	15,021	$	14,798	$	14,584	$	13,594	$	13,389	$	13,648	$	13,459	$	11,417
Interest expense			12,022		12,374		12,969		11,995		11,235		11,105		11,750		10,953
Net interest income			2,999		2,424		1,615		1,599		2,154		2,543		1,709		464
Provision for (recovery of) credit losses			185		118		37		78		76		(473)		19		(735)
Other income (charges)			3,405		8,649		315		919		2,210		481		(215)		62
Total revenue			6,219		10,955		1,893		2,440		4,288		3,497		1,475		1,261
Non-interest expenses			5,758		6,680		5,582		4,293		4,630		4,486		4,338		4,251
Income (loss) before income taxes			461		4,275		(3,689)		(1,853)		(342)		(989)		(2,863)		(2,990)
Income tax provision (recovery)			1,314		5,558		(154)		293		921		390		(338)		(160)
	Net income (loss)	$	(853)	$	(1,283)	$	(3,535)	$	(2,146)	$	(1,263)	$	(1,379)	$	(2,525)	$	(2,830)
Earnings (loss) per share
	- basic	$	(0.03)	$	(0.06)	$	(0.17)	$	(0.14)	$	(0.09)	$	(0.10)	$	(0.18)	$	(0.21)
	- diluted	$	(0.03)	$	(0.06)	$	(0.17)	$	(0.14)	$	(0.09)	$	(0.10)	$	(0.18)	$	(0.21)

The financial results of the Corporation for each of the last eight quarters are summarized above. The Corporation's results, particularly total interest income and net interest income are comparable between quarters and reflect the increase in lending assets with some seasonality occurring during the spring and summer months due to residential construction lending. Other income during the current quarter and in previous quarters in 2011 includes gains on the sale of preferred shares held in the Corporation's treasury portfolio.

Non-interest expenses over the past year have been comparable between quarters until the last three quarters. Non-interest expenses increased in the fourth quarter of 2011 as a result of expenses being incurred totalling approximately $1.3 million relating to professional and consulting fees for implementation of the Corporation's private label credit card program. The Corporation does not expect to incur significant consulting and professional fees relating to implementation of the private label credit card program in 2012. Non-interest expenses increased in the first quarter of 2012 compared to a year ago as a result of increased staff relating to lending operations and the credit card program and increased general and administrative expenses incurred in the quarter to administer the credit card program which launched on January 2, 2012.

The provision for income taxes in the fourth quarter of 2011 includes an income tax adjustment of $2.8 million relating to income taxes in the parent company and in the first quarter of 2012, includes an income tax provision of $454,000 in the parent company relating to a refundable income tax on dividends paid by the Corporation on the Class B Preferred Shares in the current period.

Significant Accounting Policies

Significant accounting policies are detailed on pages 58 to 63 of the Corporation's 2011 Annual Report. There have been no changes in accounting policies or new significant accounting policies adopted during the current period.

Future Change in Accounting Policies

International Financial Reporting Standards

IFRS 9: Financial instruments (IFRS 9)

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

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

Risk Management

The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2011, and are found on pages 39 to 43 of the Corporation's 2011 Annual Report.

Controls and Procedures

Due to the Corporation's adoption of IFRS effective November 1, 2011, management identified and implemented changes to certain accounting processes and procedures during the period November 1, 2011 to January 31, 2012 in order to comply with IFRS. These changes relate to conversion of historical CGAAP financial information to IFRS for comparative purposes, as well as:

Accounting for securitized mortgages on the Corporation's Statement of Financial Position.
Accounting for securitization liabilities.
Accounting for securitized mortgages interest income and securitization liability interest expense.
Accounting for impaired available-for-sale securities and sales of impaired available-for-sale securities.
Accounting for loan fee income.

In addition during the current quarter, as a result of the launch of the Corporation's private label credit card program in January 2012, certain accounting processes and procedures were implemented relating to the recording of outstanding credit card receivable balances, recording of related collective allowances, recording of revenue from credit cards and recording of expenses relating to the credit card program.

As a result, management revised certain existing controls over financial reporting and implemented new controls to provide reasonable assurance that the risk of material misstatements in the Corporation's financial reporting has been reduced to an acceptably low level.

There were no other changes in the Corporation's policies and procedures and other processes during the three months ended January 31, 2012 that comprise its internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.

Dated: March 7, 2012

Forward-Looking Statements

The statements in this management's discussion and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, many of which are out of our control. Risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada; the effects of competition in the markets in which we operate; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations regulating financial services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; and our anticipation of and success in managing the risks implicated by the foregoing. For a detailed discussion of certain key factors that may affect our future results, please see pages 43 and 44 of our 2011 Annual Report.

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

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Financial Position
(Unaudited)

(thousands of Canadian dollars)
As at			January 31 2012		October 31 2011		January 31 2011		November 1 2010

Assets
Cash and cash equivalents		$	240,204	$	194,899	$	99,351	$	96,989
Securities (note 5)			85,354		130,844		208,128		232,119
Loans, net of allowance for credit losses (note 6)			1,217,851		1,131,526		1,068,662		986,871
Other assets			31,292		28,100		29,635		27,367
		$	1,574,701	$	1,485,369	$	1,405,776	$	1,343,346

Liabilities and Shareholders' Equity
Deposits		$	1,359,923	$	1 ,269,730	$	1,212,173	$	1,150,903
Notes payable (note 7)			77,728		77,581		79,986		75,559
Securitization liabilities (note 8)			43,431		43,247		33,106		24,297
Other liabilities			30,583		30,024		25,564		37,442
Preferred share liabilities (note 9)			41,341		41,256		40,868		40,744
			1,553,006		1,461,838		1,391,697		1,328,945
Shareholders' equity:
	Share capital (note 10)		70,592		69,900		44,735		44,054
	Retained earnings (deficit)		(51,391)		(50,472)		(43,508)		(42,179)
	Accumulated other comprehensive income		2,494		4,103		12,852		12,526
			21,695		23,531		14,079		14,401

		$	1,574,701	$	1,485,369	$	1,405,776	$	1,343,346

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

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

(thousands of Canadian dollars, except per share amounts)

For the three month period ended			January 31 2012		January 31 2011

Interest income:
	Loans	$	12,727	$	10,741
	Securities		1,252		1,809
	Loan fees		1,042		839
			15,021		13,389

Interest expense:
	Deposits and other		8,844		7,947
	Notes payable		2,018		2,089
	Preferred share liabilities		1,160		1,199
			12,022		11,235

Net interest income			2,999		2,154

Other income (note 11)			3,405		2,210
Net interest and other income			6,404		4,364

Provision for credit losses (note 6)			185		76
Net interest and other income after provision for credit losses			6,219		4,288

Non-interest expenses:
	Salaries and benefits		2,790		2,323
	General and administrative		2,532		1,836
	Premises and equipment		436		471
			5,758		4,630

Income (loss) before income taxes			461		(342)

Income taxes			1,314		921

Net loss		$	(853)	$	(1,263)

Basic earnings (loss) per share		$	(0.03)	$	(0.09)

Diluted earnings (loss) per share		$	(0.03)	$	(0.09)

Weighted average number of common shares outstanding			26,435,000		14,507,000

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

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

(thousands of Canadian dollars)
For the three month period ended			January 31 2012		January 31 2011
Net loss		$	(853)	$	(1,263)

Other comprehensive income, net of tax
	Net unrealized gains on assets held as available-for- sale ⁽¹⁾		889		1,737
	Amount transferred to profit or loss on disposal of available-for-sale assets ⁽²⁾		(2,498)		(1,411)
			(1,609)		326

Comprehensive loss		$	(2,462)	$	(937)

(1)	Net of income tax benefit (expense) of ($329) (2011 - ($643))
(2)	Net of income tax benefit (expense) of $924 (2011 - $595)

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

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


(thousands of Canadian dollars)

For the three month period ended		January 31 2012		January 31 2011

Common shares (note 10):
Balance, beginning of the period	$	61,886	$	38,295
Issued on payment of Class B preferred share dividends		674		674
Balance, end of the period	$	62,560	$	38,969

Common share warrants:
Balance, beginning and end of the period	$	2,003	$	-

Preferred shares (note 10):

Class A preferred shares
Balance, beginning and end of the period	$	1,061	$	1,061

Class B preferred shares:
Balance, beginning and end of the period	$	4,262	$	4,262

Contributed surplus (note 10):

Balance, beginning of the period	$	688	$	436
Fair value of stock options granted		18		7
Balance, end of the period	$	706	$	443

Retained earnings (deficit):

Balance, beginning of the period	$	(50,472)	$	(42,179)
Net loss		(853)		(1,263)
Dividends paid		(66)		(66)
Balance, end of the period	$	(51,391)	$	(43,508)

Accumulated other comprehensive income (loss) net of taxes:

Balance, beginning of the period	$	4,103	$	12,526
Other comprehensive income		(1,609)		326
Balance, end of the period	$	2,494	$	12,852

Total shareholders' equity	$	21,695	$	14,079

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

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

(thousands of Canadian dollars)
For the three month period ended				January 31 2012		January 31 2011
Cash provided (used in):
Operations:
	Net loss		$	(853)	$	(1,263)
	Adjustments for:
		Provision for credit losses		185		76
		Change in derivative financial instruments		(204)		219
		Deferred income taxes		860		921
		Stock-based compensation		18		7
		Gain on disposal of securities		(3,199)		(2,369)
		Unrealized gains on held-for-trading securities		-		(152)
		Interest income		(15,021)		(13,389)
		Interest expense		12,022		11,235
	Mortgages and loans			(85,727)		(88,667)
	Interest received			15,052		13,103
	Proceeds from mortgage securitizations			-		8,575
	Deposits			90,193		61,270
	Interest paid			(10,652)		(8,701)
	Income taxes paid			(454)		-
	Change in other assets and liabilities			(3,334)		(8,612)
				(1,114)		(27,747)
Investing:
	Purchase of securities			(155)		(131,511)
	Proceeds from sale and maturity of securities			46,640		157,186
				46,485		25,675
Financing:
	Proceeds on issuance of notes payable			-		4,500
	Dividends paid			(66)		(66)
				(66)		4,434
Increase in cash and cash equivalents				45,305		2,362
Cash and cash equivalents, beginning of the period				194,899		96,989
Cash and cash equivalents, end of the period			$	240,204	$	99,351
Cash and cash equivalents is represented by:
	Cash		$	224,310	$	64,533
	Cash equivalents			15,894		34,818
Cash and cash equivalents, end of the period			$	240,204	$	99,351

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

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

Three month periods ended January 31, 2012 and 2011

1. Reporting entity:

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

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

2. Basis of preparation:

a) Statement of compliance

These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

These interim Consolidated Financial Statements have been prepared in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting.

The interim Consolidated Financial Statements should be read in conjunction with the Corporation's audited Consolidated Financial Statements for the year ended October 31, 2011. As these statements are being prepared for interim reporting purposes, they do not include all of the disclosures required for annual financial statements prepared under IFRS. Transitional reconciliations and disclosures required under IFRS that were not included in the Corporation's most recent annual financial statements have been included in Note 4(a).

The interim Consolidated Financial Statements for the three months ended January 31, 2012 and 2011 were been approved by the Board of Directors on March 7, 2012.

b) Basis of measurement:

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

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 judgements

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

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

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

3. Significant accounting policies:

These interim Consolidated Financial Statements are the Corporation's first set of interim financial statements prepared under IFRS. As a result of the application of the new accounting framework, certain accounting policies have changed. However many of the IFRS accounting policies are consistent with those used under the previous reporting framework.

The significant accounting principles used in the preparation of these interim Consolidated Financial Statements were applied consistently to all periods presented in preparing the opening Statement of Financial Position as at November 1, 2010 and are summarized below:

a) Principles of consolidation:

The Corporation holds 100% of the common shares of Pacific & Western Bank of Canada, Arctic Financial Ltd., PW Capital Inc., Pacific & Western Public Sector Financing Corp. and Versabanq Innovations Inc. The Consolidated Financial Statements include the accounts of these subsidiaries.

All significant intercompany accounts and transactions have been eliminated.

b) Revenue recognition:

Interest income on securities and loans is recognized in net interest income using the effective interest method over the expected life of the instrument. Interest income earned but not yet collected on securities and loans is included in the respective securities and loans categories on the Consolidated Statement of Financial Position.

Interest income is recognized on impaired loans and is accrued using the rate of interest used to discount the future cash flows for purposes of measuring the impairment loss.

Loan fee income includes i) fees charged for servicing loans which are recognized by the Corporation upon the provision of the service to the customer, ii) loan fees which are collected from customers upon loan initiation which are amortized into income using the effective interest method over the expected life of the loan, and iii) loan fees which are collected from customers where it is unlikely that the lending arrangement will be executed are recognized by the Corporation once loan arrangement negotiations are terminated.

c) Financial instruments

Upon initial recognition, all financial instruments are measured at fair value.

For purposes of measuring financial instruments subsequent to initial recognition, the Corporation groups all financial instruments into distinct classification categories. All financial assets are grouped as one of the following classification categories: financial assets at fair value through profit or loss, held-to-maturity, loans and receivables or available-for-sale. All financial liabilities are grouped as one of the following classification categories: financial liabilities at fair value through profit or loss, which are primarily interest rate swaps, or other financial liabilities.

The table below outlines the Corporation's classification and measurement of financial instruments as per "IAS 39: Financial instruments: recognition and measurement":


Balance sheet line item	IAS 39 classification category	Measurement basis after initial recognition

Financial assets
Cash and cash equivalents	Held-to-maturity	Amortized cost

Securities	Available-for-sale	Fair value
	Held-to-maturity	Amortized cost
Loans	Loans and receivables	Amortized cost
Other assets - accounts receivable	Loans and receivables	Amortized cost

Financial liabilities
Deposits	Financial liabilities measured at amortized cost	Amortized cost
Notes payable	Financial liabilities measured at amortized cost	Amortized cost
Securitization liabilities	Financial liabilities measured at amortized cost	Amortized cost
Other liabilities - derivatives	Financial liabilities at fair value through profit or loss	Fair value
Other liabilities - accounts payable	Financial liabilities measured at amortized cost	Amortized cost

Financial assets and liabilities at fair value through profit or loss are measured at fair value with gains and losses recognized in profit or loss. Financial assets that are classified as held-to-maturity, loans and receivables and financial liabilities other than those at fair value through profit or loss, are measured at amortized cost using the effective interest method. Available-for-sale financial assets are measured at fair value with unrealized gains and losses, net of tax, recognized in other comprehensive income (loss).

Estimates of fair value are developed using a variety of valuation methods and assumptions. The Corporation follows a fair value hierarchy to categorize the inputs used to measure fair value for its financial instruments. The fair value hierarchy is based on quoted prices in active markets (Level 1), models using inputs other than quoted prices but with observable market data (Level 2), or models using inputs that are not based on observable market data (Level 3).

i) Cash and cash equivalents:

Cash and cash equivalents include government treasury bills and deposits with Canadian chartered banks with less than ninety days to maturity from the date of acquisition, net of cheques and other items in transit. Cash and cash equivalents are used by the Corporation to manage short-term obligations and are highly liquid.

ii) Securities:

The Corporation holds securities primarily for liquidity purposes and for investment 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 the carrying value of the securities 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 security. 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.

For securities classified as held-to-maturity, the 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. The impairment loss is recognized in profit 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 profit or loss to reflect the net recoverable amount of the impaired security.

For equity securities classified as available-for-sale, changes in the fair value of the securities are recognized in other comprehensive income. The recognition of an impairment loss results in the reclassification of cumulative declines in fair value of the security from other comprehensive income to profit or loss, and is measured as the difference between the acquisition cost (less any premium/discount amortization) and the current fair value, less any impairment loss previously recognized in profit 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 profit 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.

iii) 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 principle and interest. Loans where interest or principle 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 a current status within 180 days from the date the payment has become contractually in arrears. All loans are classified as impaired when interest or principle 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 principle is contractually 365 days in arrears.

As the loans are classified as loans and receivables and measured at amortized cost, the 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 profit 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 profit 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 the fair value, less costs to sell.

iv) 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 individually assessed and collective assessed allowances and is reviewed on a monthly basis. The allowance is presented as a component of loans on the Consolidated Statement of Financial Position.

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 impaired and all loans which are not individually significant are then collectively assessed for impairment by aggregating them into groups with similar credit risk characteristics.

v) Derivative instruments:

Derivatives are reported as other assets when they have a positive fair value and as other liabilities when they have a negative fair value. Derivatives may be embedded in other financial instruments. Derivatives embedded in other financial instruments are valued as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host contract; the terms of the embedded derivative would meet the definition of a derivative if it was a free standing instrument; and the combined contract is not held for trading or designated at fair value through profit or loss. For financial statement disclosure purposes the embedded derivatives are combined with the host contract.

Interest rate swap agreements are entered into for asset liability management ("ALM") purposes.

When hedge accounting criteria are met, derivative contracts are accounted for as described below.

To meet the criteria for hedge accounting, the Corporation documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets or liabilities on the Consolidated Statement of Financial Position. The Corporation also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items.

There are three main types of hedges: (i) fair value hedges, (ii) cash flow hedges and (iii) net investment hedges.

The Corporation has only fair value hedges outstanding. In a fair value hedge, the change in the fair value of the hedging derivative is offset in the Consolidated Statement of Income by the changes in the fair value of the hedged item relating to the hedged risk. The Corporation utilizes fair value hedges primarily to convert fixed rate financial assets to floating rates. The main financial instrument designated in fair value hedging relationships consists of loans. If the derivative expires or is sold, terminated, no longer meets the criteria for hedge accounting, or the designation is revoked, hedge accounting is discontinued. Any adjustment up to that point to a hedged item for which the effective interest method is used, is amortized to the Consolidated Statement of Income as part of the recalculated effective interest rate of the item over its remaining term.

Any hedge ineffectiveness is measured and recorded in net interest income in the Consolidated Statement of Income.

Derivative contracts which do not qualify for hedge accounting are marked-to-market and the resulting net gains or losses are recognized in other income in the Consolidated Statement of Income.

vi) Transaction costs

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Transaction costs related to held-to-maturity, loans and receivables, and available-for-sale financial assets, as well as other financial liabilities are capitalized and amortized over the expected life of the instrument using the effective interest method. Transaction costs related to financial assets and liabilities at fair value through profit or loss are expensed in the Consolidated Statement of Income as incurred.

vii) Securitized mortgages and securitization liabilities:

The Corporation previously transferred pools of Government of Canada guaranteed residential mortgages to the Canada Housing Trust^TM (CHT), a Canada Mortgage and Housing Corporation (CMHC) sponsored entity.

When the derecognition criteria are not met, securitization transactions result in securitized mortgages being maintained on the Corporation's Consolidated Statement of Financial Position and result in the recognition of securitization liabilities when cash is received from counterparties to the transaction. Securitized mortgages are presented and accounted for as loans on the Consolidated Statement of Financial Position. Securitization liabilities are presented as a separate line item in the liabilities section of the Consolidated Statement of Financial Position.

Interest income earned on securitized mortgages and interest expense incurred on securitization liabilities are recognized using the effective interest method over the expected life of the underlying instrument.

d) Property and equipment:

Property and equipment is initially measured at cost. Subsequent to initial recognition, property and equipment is measured at cost less accumulated amortization and impairment losses.

When property and equipment is comprised of significant individual component parts and the amortization methods and/or useful lives differ for those component parts, each component part is amortized separately. A significant replacement of a component part is recognized as an addition along with the derecognition of the replaced part.

Amortization is calculated using the following estimates:


	Amortization method	Useful life	Residual value
Building	Straight-line	20 years	3%
Computer hardware	Straight-line	5 years	0%
Computer software	Straight-line	5 years	0%
Furniture and equipment	Straight-line	10 years	0%
Leaseholds	Straight-line	5 - 10 years	0%
Other equipment	Straight-line	700/2500 hours	25%
Other equipment	Straight-line	3 - 20 years	25%

Amortization methods, useful lives and residual values are reviewed at each reporting date.

Amortization and impairment write-downs are included as a component of premises and equipment expense.

e) Impairment of non-financial assets:

At each reporting date, the Corporation reviews its non-financial assets to determine whether there are any indications of impairment. An asset may be assessed for impairment at the individual asset level, or as part of a cash-generating unit (CGU) to which the asset belongs in situations where the asset does not generate cash inflows that are largely independent from those of other assets.

If indications of impairment exist, the asset or the CGU's recoverable amount is estimated. The recoverable amount is the greater of the asset or CGU's value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Impairment is recognized if the carrying value of the asset or CGU exceeds its recoverable amount. Impairment losses are recognized as premises and equipment expense in the Consolidated Statement of Income

f) 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 tax assets and liabilities arise from temporary differences between financial statement carrying values and the respective tax bases of those assets and liabilities. Deferred 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 Consolidated Financial Statements to the extent that it is likely that the Corporation will have sufficient taxable income to enable the benefit of the deferred tax asset to be realized. A valuation allowance is established against deferred tax assets if it is not likely that some or all of the benefits of the tax asset will be realized. Unrecognized deferred tax assets are reassessed for recoverability at each reporting period end.

Current and deferred income taxes are recorded in profit or loss for the period, except to the extent that the tax arose from a transaction that is recorded either in comprehensive loss or equity, in which case the tax on the transaction will also be recorded either in comprehensive loss or equity. Accordingly, current and deferred income taxes are presented in the Consolidated Financial Statements as a component of profit or loss, or as a component of comprehensive income or loss.

g) Employee benefits:

i) Short-term employee benefits:

Short-term employee benefit obligations are recognized as employees render their services and are measured on an undiscounted basis.

A liability is recognized for the amount expected to be paid under a short-term cash bonus plan if the Corporation has a legal or constructive obligation to make such payments as a result of past service provided by the employee and the obligation can be estimated reliably.

ii) Share-based payment transactions:

Equity-settled grants

Employee stock options are measured using the Black-Scholes pricing model which is used to estimate the fair value of the options at the date of grant. Inputs to the Black-Scholes model include the closing share price on the grant date, the exercise price, the expected option life, the expected dividend yield, the expected volatility and the risk-free interest rate. Once the expected option life is determined, it is used in formulating the estimates of expected volatility and the risk free rate. Expected future volatility is estimated using a historical volatility look-back period that is consistent with the expected life of the option.

The fair value of options which vest immediately are recognized in full as of the grant date, whereas the fair value of options which vest over time are recognized over the vesting period using the graded method which incorporates management's estimates of the options which are not expected to vest (i.e. forfeitures). The effect of a change in the estimated number of options expected to vest is a change in estimate and the cumulative effect of the change is recognized prospectively once the estimate is revised.

The fair value of stock options granted is recorded in salaries and benefits expense in the Consolidated Statement of Income and in share capital, as a component of contributed surplus, in the Consolidated Statement of Financial Position. When options are exercised, the consideration received and the estimated fair value previously recorded in contributed surplus is recorded as share capital.

Cash-settled grants

For deferred share units (DSU) that call for settlement in cash, the Corporation measures the compensation granted at the fair value of the liability incurred. The fair value of the liability incurred is estimated by reference to the closing share price of the Corporation at the end of each reporting period. Until the liability is settled, the Corporation remeasures the fair value of the liability at each reporting period end and at the date of settlement, with any changes in fair value recognized as salaries and benefits expense. The fair value of the DSU liability is included in "other liabilities" in the Consolidated Statement of Financial Position.

h) Share capital

The Corporation's share capital consists of common shares, common share warrants, preferred shares, and contributed surplus.

i) Share issuance costs

Costs directly incurred with raising share capital are charged against the respective common share and preferred share balances to which the financing relates.

ii) Common share warrants

Warrants are issued in combination with common shares as part of public and private placement unit offerings. Warrants are allocated a share of the gross proceeds of the offering based upon their pro-rata share of the calculated fair value of the total unit fair value issued using the Black-Scholes pricing model as an estimate of warrant fair value.

When warrants are exercised and expire, the consideration received and the estimated fair value previously recorded in common share warrants is recorded as share capital.

iii) Contributed surplus

Contributed surplus consists of the fair value of stock options granted since inception, less amounts reversed for exercised stock options. If granted options vest and then subsequently expire or are forfeited, no reversal of contributed surplus is recognized.

4. Transition to IFRS:

a) Newly adopted accounting standards

Canadian publicly accountable enterprises are required to transition from Canadian Generally Accepted Accounting Principles (CGAAP) to International Financial Reporting Standards (IFRS) effective for fiscal years beginning on or after January 1, 2011. For the Corporation, the change in financial reporting standards is effective for interim and annual financial statements of the fiscal year ending October 31, 2012, however transitional rules require restatement of comparative amounts for the interim and annual financial statements of the fiscal year ending October 31, 2011. Consequently, the Corporation's transition date to IFRS is November 1, 2010.

Beginning with the interim period ended January 31, 2012, the Consolidated Financial Statements are prepared in accordance with IFRS. All adjustments to the Consolidated Financial Statements to facilitate the first time adoption of IFRS have been stipulated in "IFRS 1: First-time adoption of International Financial Reporting Standards". The majority of the transitional adjustments required as a result of the adoption of IFRS are applied retrospectively against opening retained earnings at November 1, 2010, unless IFRS 1 specifically provides for prospective application.

The adoption of IFRS has resulted in changes to a selection of the Corporation's significant accounting policies and consequently has resulted in modifications to the opening Consolidated Statement of Financial Position. Furthermore, existing note disclosure under CGAAP has been enhanced by additional note disclosures required under IFRS.

i) Elected exemptions from full retrospective application

IFRS 1 provides first-time adopters with certain exemptions which provide relief from the full retrospective application of the general requirements contained in IFRS. The Corporation has elected to apply the following optional exemptions from full retrospective application:

Share-based payment transactions

The Corporation has elected not to apply "IFRS 2: Share-based payment" to any of its stock option equity awards which were granted on or before November 7, 2002 or which were fully vested before November 1, 2010 or liability awards that were settled before November 1, 2010, the date of transition to IFRS.

Business combinations

The Corporation has elected not to apply "IFRS 3: Business combinations" retrospectively to past business combinations that occurred before the date of transition to IFRS.

Designation of previously recognized financial instruments

IFRS 1 provides the Corporation with the flexibility to change the classification of certain of its financial instruments at the date of transition to IFRS assuming the relevant criteria are met. The Corporation has chosen not to change the designation of any of its financial assets or liabilities.

ii) Mandatory exceptions from full retrospective application

The Corporation applied the following mandatory exceptions to the retrospective application of IFRS:

Estimates

The Corporation's estimates at the date of transition to IFRS were consistent with the estimates made at that same date in accordance with CGAAP (after adjustments to reflect any differences in accounting policies), and there was not objective evidence to suggest that those estimates were in error. Furthermore, any estimates required upon adoption of IFRS which were not previously required under CGAAP were developed to reflect conditions that existed at the date of transition.

Derecognition of financial assets and liabilities

The Corporation applied the derecognition requirements of "IAS 39: Financial instruments: recognition and measurement" prospectively for transactions occurring on or after January 1, 2004.

Hedge accounting

All of the hedges entered into by the Corporation before its opening IFRS Statement of Financial Position qualified for hedge accounting under IFRS. In certain instances where the methodology used for testing hedge effectiveness did not qualify under IFRS but the previous hedging relationship continued under IFRS, the Corporation adopted a new methodology for effectiveness testing. In addition, no transactions entered into before the date of transition to IFRS were retrospectively designated as hedges upon the date of transition.

iii) Accounting policy changes and quantitative impact on the Consolidated Financial Statements

The following changes are quantified in the tables on pages 41 through 43.

a) Loans

1) Securitization transactions

IFRS 1 requires that the opening IFRS Statement of Financial Position recognize all assets and liabilities whose recognition is required by IFRS.

Securitization transactions facilitated through the Canada Mortgage Bond (CMB) and National Housing Act Mortgage Backed Security (NHA-MBS) programs entered into by the Corporation in fiscal 2010 and fiscal 2011 do not qualify for treatment as sales of mortgages under "IAS 39: Financial instruments: recognition and measurement" because not all of the risks and rewards of ownership were substantially transferred.

Under CGAAP, mortgages which were securitized and sold to the Canada Housing Trust^TM qualified as sales of mortgages because control over the transferred assets were surrendered, therefore the securitized mortgages were derecognized. Under IFRS, these securitization transactions do not qualify for derecognition, therefore the securitized assets and securitization liabilities must be recognized in the Consolidated Statement of Financial Position. At November 1, 2010, securitized residential mortgages including accrued interest income totalling $24,093,000, deferred tax assets totalling $353,000, securitization receivables totalling $381,000 and securitization liabilities and accrued interest expense totalling $24,297,000 which were not previously recognized under CGAAP have been recognized under IFRS. Retained interests totalling $2,542,000 previously recognized in securities, and other liabilities comprised of servicing liabilities totalling $171,000 and mark-to-market adjustments of derivatives totalling $1,033,000, which were previously recognized under CGAAP have been derecognized under IFRS. The impact on the opening Deficit and Accumulated Other Comprehensive Income (Loss) at November 1, 2010 amounted to decreases of $558,000 and $250,000 each respectively.

Under IFRS 1, the Corporation applied the mandatory exception derecognition requirements of IAS 39 prospectively for transactions occurring on or after January 1, 2004 although it had the option under IFRS 1 to apply IAS 39 at the date of transition to IFRS.

2) Recognition of interest on impaired loans

"IAS 39: Financial instruments: recognition and measurement" requires that once a loan is determined to be impaired, interest income continues to be recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Under CGAAP, the accrual of interest income ceased when a loan was determined to be impaired and the carrying amount of the loan was reduced to its estimated realizable amount. Under IFRS, impaired loans continue to accrue interest and are assessed for impairment. The net impact on "Loans, net of allowances for credit losses" on the Consolidated Statement of Financial Position is $nil, as $566,000 in accrued interest income was offset by a provision for credit losses of $566,000.

No optional exemptions were available to the Corporation under IFRS 1, therefore IAS 39 was applied retrospectively as if it was always in place.

3) Capitalization of loan fees

"IAS 39: Financial instruments: recognition and measurement" requires that when fees earned are an integral part of the effective interest rate of a loan instrument, they should be accounted for as an adjustment to the effective interest rate.

Loan fees earned by the Corporation are being recognized into income over the expected life of the loan using the effective interest rate method.

Previously, the Corporation recognized a portion of a loan fee into income immediately for the recovery of administrative costs incurred, with the balance of the fee being amortized into income over the term of the loan. The immediate recognition of loan fees is not allowed under IFRS, except in certain circumstances as described in (note 3(b)). Accordingly, the carrying value of loans has been reduced by $2,084,000 relating to the deferred loan fees, a deferred tax asset totalling $546,000 has been recognized, and a decrease in other liabilities totalling $115,000 has been recognized upon transition to IFRS. The net effect of these adjustments was to increase the opening deficit by $1,423,000.

No optional exemptions were available to the Corporation under IFRS 1, therefore IAS 39 was applied retrospectively as if it was always in place.

b) Impairment of available-for-sale equity securities

"IAS 39: Financial instruments: recognition and measurement" requires that financial assets be assessed for impairment at each reporting date if there is objective evidence to suggest that a financial asset or group of financial assets have become impaired. For equity securities, a significant or prolonged decline in the fair value of an equity instrument provides objective evidence of impairment.

The Corporation recognized impairments on its available-for-sale equity instruments upon conversion to IFRS as the market values of these securities were below their cost in previous periods. The decline in the market value of these securities was deemed to be significant and the loss was sufficiently prolonged to suggest that the securities were impaired.

The losses which were previously recognized in Accumulated Other Comprehensive Income were reclassified to profit or loss upon the recognition of the impairment loss and were measured as the difference between the acquisition cost and the fair value, less any impairment losses previously recognized in profit or loss.

Once an available-for-sale equity instrument has been impaired, all subsequent losses are recognized in profit or loss until the asset is disposed of.

IAS 39 specifically prohibits the reversal of impairment losses through profit or loss if the available-for-sale financial asset is an equity instrument.

CGAAP required an assessment of impairment to be based both on the existence of objective evidence of impairment and on the determination of whether the impairment loss was "other than temporary". The assessment of "other than temporary" was a judgmental assessment made by management. The Corporation did not recognize impairment losses on the majority of its equity instruments under CGAAP because it used the "debt model" to measure impairment of preferred shares. As a result of the assessment using the debt model it was determined the losses were temporary as the decline in fair value was due to depressed market conditions and not due to impairment of any issuer. All interest and dividends payments were made on time with no change in credit rating for any issuer. The use of the "debt model" and the "other than temporary" determination that was available under CGAAP does not exist under IFRS.

There was no impact on Shareholders' Equity at November 1, 2010, other than the reclassification of impairment losses totalling $19,152,000, net of income taxes, from Accumulated Other Comprehensive Income to Retained Earnings.

No optional exemptions were available to the Corporation under IFRS 1, therefore IAS 39 was applied retrospectively as if it was always in place.

c) Share-based payment transaction adjustments

"IFRS 2: Share-based payment" requires that stock options granted with terms that require vesting in instalments over the vesting period be measured using graded vesting where each instalment is measured as a separate stock option grant. Since each tranche has a different vesting period, the fair value measurement could differ for each tranche. The grant date fair value is amortized into income over the vesting period of each tranche.

IFRS 2 also requires that accruals of compensation cost be based on the number of equity instruments that are expected to vest.

Since the Corporation issues stock options which typically vest over a two year period, a fair value measurement was calculated for each tranche and each tranche was measured with reference to the number of stock option units that were expected to vest.

IFRS 2 also requires that cash settled share-based payment transactions be measured at the fair value of the liability at each reporting period end.

Under CGAAP, the Corporation had a choice of measuring stock option grants using the graded method or by using the straight-line method. Previously, the Corporation elected to measure all tranches of stock option grants using the straight-line method as if they were a single award.

Under CGAAP, the Corporation had a choice of estimating the number of option units expected to vest and incorporating those estimates into compensation cost, or it could accrue compensation cost as if all instruments would vest and only recognize the effect of forfeitures as they occurred. Previously, the Corporation assigned a forfeiture rate and elected to recognize subsequent changes in forfeitures as they occurred.

First-time adopters have the option of applying the requirements of IFRS 2 retrospectively for all stock option awards, or they can elect to apply an exemption available in IFRS 1 to not apply IFRS 2 to any of its stock option equity awards which were granted on or before November 7, 2002 or equity awards which were fully vested before November 1, 2010 or liability awards settled before November 1, 2010, the date of transition to IFRS. The Corporation has elected to apply this exemption.

d) Componentization of property and equipment

"IAS 16: Property, plant and equipment" requires that each item of property and equipment with a cost that is significant in relation to the total cost of the item shall be amortized separately. Significant components are amortized separately if their useful lives and amortization methods differ.

Major maintenance costs on items of property and equipment are capitalized if the criteria for recognition are satisfied. Upon recognition, the carrying amount of any previous maintenance costs are derecognized.

The Corporation has componentized its assets in instances where a piece of equipment has components which are significant in relation its total cost and where the useful lives and amortization methods differ.

Under CGAAP, the Corporation had a choice of separating significant component parts and amortizing them separately when practical, or it could amortize the cost of an acquired asset as a whole. Previously, the Corporation elected not to amortize the component parts of its assets separately as it was not practical.

The impact of the componentizing certain items of property and equipment at November 1, 2010 resulted in a decrease in property and equipment totalling $148,000, an increase in the deferred tax asset totalling $15,000, and an adjustment to opening deficit totalling $133,000.

IFRS provides the Corporation with a choice of measuring its property and equipment using either the cost model or the revaluation model. The cost model requires that after initial recognition, an asset is measured at cost less any accumulated amortization and impairment losses. The revaluation model requires that after initial recognition, an asset is measured at its fair value at the date of revaluation, less any accumulated amortization and impairment losses.

The Corporation has elected to measure all of its property and equipment using the cost model. This accounting policy choice has resulted in no accounting differences upon transition to IFRS as the accounting treatment is essentially the same as that required under CGAAP.

First-time adopters have the option of electing to use fair value as deemed cost for property and equipment in the calculation of the opening IFRS Statement of Financial Position. The Corporation has elected not to apply this exemption.

iv) The quantitative impact of the aforementioned accounting policy changes are outlined below:

Reconciliation of the Consolidated Statement of Financial Position - November 1, 2010, January 31, 2011 and October 31, 2011


			Balance	IFRS Adjustment				Balance
As at November 1, 2010			CGAAP	Securitization	AFS	Other		IFRS
Assets
Cash and cash equivalents		$	96,989	-	-	-	$	96,989
Securities			234,661	(2,542)	-	-		232,119
Loans, net of allowances for credit losses			964,862	24,093	-	(2,084)		986,871
Other assets			26,220	734	-	413		27,367
		$	1,322,732	22,285	-	(1,671)	$	1,343,346
Liabilities and Shareholders' Equity
Deposits		$	1,150,903	-	-	-	$	1,150,903
Notes payable			75,559	-	-	-		75,559
Securitization liabilities			-	24,297	-	-		24,297
Other liabilities			38,396	(1,204)	-	250		37,442
Preferred share liabilities			-	-	-	40,744		40,744
			1,264,858	23,093	-	40,994		1,328,945
Preferred share liabilities			40,744	-	-	(40,744)		-
Shareholders' equity:
	Share capital		44,054	-	-	-		44,054
	Retained earnings (deficit)		(20,548)	(558)	(19,152)	(1,921)		(42,179)
	Accumulated other comprehensive income (loss)		(6,376)	(250)	19,152	-		12,526
			17,130	(808)	-	(1,921)		14,401
		$	1,322,732	22,285	-	(1,671)	$	1,343,346


			Balance	IFRS Adjustment				Balance
			CGAAP	Securitization	AFS	Other		IFRS
As at January 31, 2011

Assets
Cash and cash equivalents		$	99,351	-	-	-		$ 99,351
Securities			211,324	(3,196)	-	-		208,128
Loans, net of allowances for credit losses			1,038,181	32,722	-	(2,241)		1,068,662
Other assets			28,013	1,203	-	419		29,635
		$	1,376,869	30,729	-	(1,822)	$	1,405,776

Liabilities and Shareholders' Equity
Deposits		$	1,212,173	-	-	-	$	1,212,173
Notes payable			79,986	-	-	-		79,986
Securitization liabilities			-	33,106	-	-		33,106
Other liabilities			26,349	(1,316)	-	531		25,564
Preferred share liabilities			-	-	-	40,868		40,868
			1,318,508	31,790	-	41,399		1,391,697

Preferred share liabilities			40,868	-	-	(40,868)		-

Shareholders' equity:
	Share capital		44,735	-	-	-		44,735
	Retained earnings (deficit)		(22,443)	(803)	(17,929)	(2,333)		(43,508)
	Accumulated other comprehensive income (loss)		(4,799)	(258)	17,929	(20)		12,852
			17,493	(1,061)	-	(2,353)		14,079

		$	1,376,869	30,729	-	(1,822)	$	1,405,776


			Balance	IFRS Adjustment				Balance
As at October 31, 2011			CGAAP	Securitization	AFS	Other		IFRS
Assets
Cash and cash equivalents		$	194,899	-	-	-	$	194,899
Securities			135,137	(4,293)	-	-		130,844
Loans, net of allowances for credit losses			1,090,932	42,917	-	(2,323)		1,131,526
Other assets			26,171	1,536	-	393		28,100
		$	1,447,139	40,160	-	(1,930)	$	1,485,369
Liabilities and Shareholders' Equity
Deposits		$	1,269,730	-	-	-	$	1,269,730
Notes payable			77,581	-	-	-		77,581
Securitization liabilities			-	43,247	-	-		43,247
Other liabilities			31,219	(1,871)	-	676		30,024
Preferred share liabilities			-	-	-	41,256		41,256
			1,378,530	41,376	-	41,932		1,461,838
Preferred share liabilities			41,256	-	-	(41,256)		-
Shareholders' equity:
	Share capital		69,900	-	-	-		69,900
	Retained earnings (deficit)		(36,444)	(747)	(10,755)	(2,526)		(50,472)
	Accumulated other comprehensive income (loss)		(6,103)	(469)	10,755	(80)		4,103
			27,353	(1,216)	-	(2,606)		23,531
		$	1,447,139	40,160	-	(1,930)	$	1,485,369

Reconciliation of Net Income (Loss) and Total Comprehensive Income (Loss) - January 31, 2011 and October 31, 2011.


		Balance		IFRS Adjustment						Balance
		CGAAP		Securitization		AFS		Other		IFRS
For the period ended January 31, 2011

Interest income	$	13,163	$	380	$	-		(154)	$	13,389
Interest expense		10,924		311	$	-		-		11,235
Net interest income		2,239		69		-		(154)		2,154
Provision for credit losses		40		-		-		36		76
Net interest income after provision for credit losses		2,199		69		-		(190)		2,078
Other income (charges)		362		(397)		2,245		-		2,210
Net interest income and other income (charges)		2,561		(328)		2,245		(190)		4,288
Non-interest expense		4,388		-		-		242		4,630
Loss before income taxes		(1,827)		(328)		2,245		(432)		(342)
Income tax expense (recovery)		2		(84)		651		352		921
Net income (loss)	$	(1,829)	$	(244)	$	1,594	$	(784)	$	(1,263)

Other comprehensive income, net of tax:
Net unrealized gains (losses) on assets held as available-for-sale		1,394		(9)		-		352		1,737
Amount transferred to profit or loss on disposal of available-for-sale assets		183		-		(1,594)		-		(1,411)
Total other comprehensive income		1,577		(9)		(1,594)		352		326
Total comprehensive income (loss)	$	(252)	$	(253)	$	-	$	(432)	$	(937)



		Balance		IFRS Adjustment						Balance
For the year ended October 31, 2011		CGAAP		Securitization		AFS		Other		IFRS

Interest income	$	55,113	$	1,564	$	-	$	(474)	$	56,203
Interest expense		47,256		1,317		-		-		48,573
Net interest income		7,857		247		-		(474)		7,630
Provision for credit losses		165		-		-		144		309
Net interest income after provision for credit losses		7,692		247		-		(618)		7,321
Other income (charges)		593		(436)		12,098		-		12,255
Net interest income and other income (charges)		8,285		(189)		12,098		(618)		19,576
Non-interest expense		21,117		-		-		68		21,185
Loss before income taxes		(12,832)		(189)		12,098		(686)		(1,609)
Income tax expense (recovery)		2,998		-		3,508		112		6,618
Net income (loss)	$	(15,830)	$	(189)	$	8,590	$	(798)	$	(8,227)

Other comprehensive income, net of tax:
Net unrealized gains (losses) on assets held as available-for-sale		(1,581)		(218)		-		-		(1,799)
Amount transferred to profit or loss on disposal of available-for-sale assets		1,854		-		(8,590)		112		(6,624)
Total other comprehensive income		273		(218)		( 8,590)		112		(8,423)
Total comprehensive income (loss)	$	(15,557)	$	(407)	$	-	$	( 686)	$	(16,650)

v) Impact on the Consolidated Statement of Cash Flows

Despite the transitional adjustments posted to the Consolidated Financial Statements, the net impact on the Consolidated Statement of Cash Flows was $nil as ending balances of cash resources did not change. However, the classification of transactions in the Consolidated Statement of Cash Flows changed with the adoption of IFRS, such that mortgage and loan activities and securitization activities were reclassified from investing activities to operating activities, and deposit taking activities were reclassified from financing activities to operating activities. This change in classification is deemed reasonable given that such activities support the main revenue producing activities of the Corporation. Furthermore, interest paid and received during the period, and income taxes paid, is no longer disclosed as supplementary cash flow information, rather it is included as a component of operating activities, as prescribed by IFRS.

b) Future accounting standard changes

The following accounting pronouncements as issued by the IASB, which may have an impact on the Corporation's future financial results, were not effective for the Corporations fiscal year end of October 31, 2012 and therefore have not been applied in preparing these Consolidated Financial Statements.

i) IFRS 9: Financial instruments (IFRS 9)

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

ii) IFRS 10: Consolidated Financial Statements (IFRS 10)

In May 2011, the IASB issued IFRS 10 to replace the consolidation requirements of "IAS 27: Consolidated and Separate Financial Statements" and "SIC-12: Consolidation - Special Purpose Entities". The mandatory effective date for the adoption of IFRS 10 was set for annual periods beginning on or after January 1, 2013, with earlier application permitted.

IFRS 10 requires that consolidated financial statements include all controlled entities as determined under a single control model, irrespective of the nature of the investee and eliminating the risk and rewards approach included in SIC-12. The impact of IFRS 10 on the Corporation's Consolidated Financial Statements is not determinable at this time but is not expected to be material.

iii) IFRS 12: Disclosure of Interests in Other Entities (IFRS 12)

In May 2011, the IASB issued IFRS 12 to establish disclosure objectives which enable users of the financial statements to evaluate the nature of, and risks associated, with interests in other entities, and the effects of those interests on financial position, performance and cash flows. Minimum disclosure requirements to meet the disclosure objectives are specified in IFRS 12. The mandatory effective date for the adoption of IFRS 12 was set for annual periods beginning on or after January 1, 2013, with earlier application permitted. No impact on the Consolidated Financial Statements is expected with the adoption of IFRS 12, with the exception of disclosure changes, the effect of which is not determinable at this time.

iv) IFRS 13: Fair value measurement (IFRS 13)

In May 2011, the IASB issued IFRS 12 to define fair value, to establish a single framework for measuring fair value when required by IFRS and to mandate specific disclosures about fair value measurements. The mandatory effective date for the adoption of IFRS 13 was set for annual periods beginning on or after January 1, 2013, with earlier application permitted. The impact of IFRS 13 on the Corporation's Consolidated Financial Statements is not determinable at this time.

v) IAS 1: Presentation of Financial Statements (IAS 1)

In June 2011, the IASB amended IAS 1 to revise the way other comprehensive income (OCI) is presented. Separate subtotals will now be required for those elements which may be reclassified to profit or loss and those elements that will not. Also, the income tax associated with items presented before tax is to be shown separately for each of the two groups of OCI items without changing the option to present items of OCI either before tax or net of tax. The mandatory effective date for the adoption of the IAS 1 amendments was set for annual periods beginning on or after July 1, 2012, with earlier application permitted. The impact of IAS 1 on the Corporation's Consolidated Financial Statements is not expected to be significant given the changes relate primarily to presentation of the Consolidated Statement of Comprehensive Income or Loss.

vi) IAS 19: Employee Benefits (IAS 19)

In June 2011, the IASB amended IAS 19 for changes to defined benefit pension plan accounting and disclosures, to modify the accounting for termination benefits, to clarify the classification of employee benefits as either current or long-term, and to incorporate other matters submitted to the IFRS Interpretations Committee. The mandatory effective date for the adoption of the IAS 19 amendments was set for annual periods beginning on or after January 1, 2013, with earlier application permitted. The impact of IAS 19 on the Corporation's Consolidated Financial Statements is not expected to be significant as the Corporation does not offer a defined benefit pension plan to its employees, but is not fully determinable at this time.

vii) IAS 27: Separate Financial Statements (IAS 27)

In May 2011, the IASB amended IAS 27 to remove the consolidation requirements which are now contained in IFRS 10. The existing accounting and disclosure requirements for separate financial statements have remained substantially unchanged. The mandatory effective date for the adoption of the IAS 27 amendments was set for annual periods beginning on or after January 1, 2013, with earlier application permitted. The impact of IAS 27 on the Corporation's subsidiary financial statements is not expected to be significant, but is not fully determinable at this time.

5. Securities:

a) Portfolio analysis:


			January 31 2012		October 31 2011		January 31 2011		November 1 2010
Available-for-sale securities
Securities issued or guaranteed by:
	Canadian federal government	$	16,275	$	28,940	$	28,595	$	32,691
	Canadian provincial governments		-		21,214		25,644		26,341
	Canadian municipal governments		3,975		4,622		5,314		5,359
Corporate debt			44,104		46,069		87,737		100,443
Corporate equity			21,000		29,999		60,062		66,645
Total available-for-sale securities		$	85,354	$	130,844	$	207,352	$	231,479
Held-to-maturity securities
Corporate debt		$	-	$	-	$	776	$	640
Total securities		$	85,354	$	130,844	$	208,128	$	232,119

6. Loans:

a) Portfolio analysis:


			January 31		October 31		January 31		November 1
			2012		2011		2011		2010
Residential mortgages
	Insured	$	37,692	$	36,685	$	50,985	$	62,838
	Uninsured		201,057		176,555		163,648		158,793
Securitized mortgages			42,532		42,712		32,544		23,949
Corporate and government loans			929,507		869,767		815,840		734,536
Other loans and credit cards			6,953		4,833		5,611		7,430
			1,217,741		1,130,552		1,068,628		987,546
Allowance for credit losses:
	Collective		( 3,006)		(2,827)		(3,381)		(3,812)
	Individual		( 1,597)		(1,560)		(1,478)		(1,614)
			( 4,603)		(4,387)		(4,859)		(5,426)
			1,213,138		1,126,165		1,063,769		982,120
Accrued interest			4,713		5,361		4,893		4,751
Total loans, net of allowance for credit losses		$	1,217,851	$	1,131,526	$	1,068,662	$	986,871

For the period ended January 31, 2012 $338,000 (January 31, 2011 - $499,000) in loan fee income was recorded which was not included in the carrying amount of the loans.

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


		January 31 2012		October 31 2011		January 31 2011		November 1 2010

Residential mortgages	$	445	$	367	$	370	$	339
Corporate and government loans		2,455		2,408		2,194		1,935
Other loans and credit cards		106		52		817		1,538
	$	3,006	$	2,827	$	3,381	$	3,812

The Corporation holds collateral against loans in the form of mortgage interests over property, other registered securities over assets and guarantees. Estimates of fair value are based on the nature of the underlying collateral. For mortgages secured by real estate, the value of collateral is determined at the time of borrowing by an appraisal. For loans secured by equipment, the value of collateral is assigned by the nature of the underlying equipment held. The fair value of collateral securing loans that are not impaired at January 31, 2012 totalled $2,029,858,000 (2011 - $1,649,773,000)

b) Allowance for credit losses:

The allowance for credit losses results from the following:


						January 31 2012		October 31 2011		January 31 2011		November 1 2010
		Collective		Individual		Total Allowance		Total Allowance		Total Allowance		Total Allowance
Balance, beginning of the period	$	2,827	$	1,560	$	4,387	$	5,426	$	5,426	$	9,534
Provision for (recovery of) credit losses		148		37		185		309		76		(597)
Recoveries (write-offs)		31		-		31		(1,348)		(643)		(3,511)
Balance, end of the period	$	3,006	$	1,597	$	4,603	$	4,387	$	4,859	$	5,426

c) Impaired loans:


	January 31, 2012
		Gross impaired		Individual allowance		Net impaired
Residential mortgages	$	1,617	$	1,597	$	20
Other loans and credit cards		40		-		40
	$	1,657	$	1,597	$	60

	January 31, 2011
		Gross impaired		Individual allowance		Net impaired
Residential mortgages	$	1,625	$	1,453	$	172
Other loans and credit cards		823		25		798
	$	2,448	$	1,478	$	970

	November 1, 2010
		Gross impaired		Individual allowance		Net impaired
Residential mortgages	$	1,588	$	1,416	$	172
Other loans and credit cards		2,230		198		2,032
	$	3,818	$	1,614	$	2,204

	October 31, 2011
		Gross impaired		Individual allowance		Net impaired
Residential mortgages	$	1,588	$	1,560	$	28
Other loans and credit cards		45		-		45
	$	1,633	$	1,560	$	73

Impaired loans at January 31, 2012 include foreclosed real estate held for sale with a gross carrying value of $158,000 (2011 - $149,000) and a related allowance of $110,000 (2011 - $110,000). Real estate held for sale is measured at the lower of cost and the fair value less costs to sell.

Interest income recognized on impaired loans during the period ended January 31, 2012 totalled $36,000 (2011 - $37,000). An individual allowance has been recognized equal to the entire amount of interest accrued on impaired loans to reflect the recoverable amounts for impaired loans.

At January 31, 2012, loans past due but not impaired totalled $15,000 (2011 - $nil).

7. Notes payable:


		January 31 2012		October 31 2011		January 31 2011		November 1 2010

Ten year term Series C Notes unsecured, maturing 2018, net of note issue costs of $4,282, effective interest of 10.56%	$	57,423	$	57,309	$	52,162	$	50,592

Notes payable, unsecured, maturing 2012, net of note issue costs of $nil effective interest of 7.00%		200		200		7,773		4,942

Ten year term, unsecured, callable, subordinated notes payable by the Bank to a third party, maturing between 2019 and 2021, net of note issue costs of $1,395 , effective interest of 10.92%		20,105		20,072		20,051		20,025

	$	77,728	$	77,581	$	79,986	$	75,559

8. 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 December 2016 - December 2020. Securitized insured mortgages with a carrying value of $42,532,000 (2011 - $32,572,000) are pledged as collateral for these liabilities.

Both the securitized mortgages and the securitization liabilities are scheduled to mature in a period in excess of 5 years.

9. Preferred share liabilities:

At January 31, 2012, the Corporation has outstanding 1,909,458 (2011 - 1,909,458) Class B Preferred Shares with a total value of $47.7 million (2011 - $47.7 million) less issue costs of $2.5 million (2011 - $2.6 million). As these Class B preferred shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $41.3 million (2011 - $40.9 million), net of issue costs, representing the fair value of the Corporation's obligation to make future payments of principle and interest has been classified on the Corporation's Consolidated Statement of Financial Position as a preferred share liability. In addition, an amount of $4.3 million (2011 - $4.3 million) representing the equity element of the Class B Preferred Shares, net of issue costs, has been classified in share capital on the Consolidated Statement of Financial Position.

As the preferred shares must be redeemed by the Corporation for approximately $47.7 million (2011 - $47.7 million), the preferred share liability amount of $41.3 million (2011 - $40.9 million) is being adjusted over the remaining term to redemption, until the liability amount is equal to the estimated redemption amount with the increase included in interest expense in the Consolidated Statement of Income calculated using the effective interest rate of 11.8%.

10. Share capital:

		Stock Options
	Common shares outstanding	Number		Weighted- average exercise price
Outstanding, November 1, 2010	14,434,242	508,333	$	7.87
Granted	-	670,000		2.80
Issued for cash proceeds	10,676,000	-		-
Issued pursuant to Class B Preferred Share dividend	1,127,352	-		-
Expired	-	(35,300)		6.97
Outstanding, October 31, 2011	26,237,594	1,143,033		4.93

Granted	-	50,000		1.90
Issued for cash proceeds	-	-		-
Issued pursuant to Class B Preferred Share dividend	587,143	-		-
Expired	-	(30,000)		6.00
Outstanding, January 31, 2012	26,824,737	1,163,033	$	4.77

The Corporation also has 6,202,370 warrants outstanding at January 31, 2012 to acquire common shares and common share warrants. In addition, at January 31, 2012, there were 314,572 (2011 - 314,572) Class A Preferred Shares outstanding and 1,909,458 (2011 - 1,909,458) Class B Preferred Shares outstanding.

During the period ended January 31, 2012, the Corporation recognized $18,000 (2011 - $7,000) of compensation expense relating to the estimated fair value of stock options granted. During the quarter, 50,000 options were granted to an officer who is a member of the Corporation's key management personnel. These options are exercisable into common shares at $1.90 per share and expire in January, 2022. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following assumptions: (i) risk-free interest rate of 1.31%, (ii) expected option life of 60 months and (iii) expected volatility of 57.71%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $0.95 per option.

During the period ended January 31, 2012, the Corporation issued 128,574 DSU's (2011 - 46,669) to its directors. DSU expense recognized in the period totalled $324,000 (2011 - $229,000).

11. Other income:


		January 31 2012		January 31 2011

Other income (charges)	$	2	$	(63)
Gain on sale of securities		3,199		2,492
Mark-to-market adjustment for derivatives		204		(219)

	$	3,405	$	2,210

12. Derivative instruments:

At January 31, 2012, the Corporation had outstanding contracts for asset liability management purposes to swap from fixed to floating interest rates with notional amounts totalling $183,007,000 (2011 - $196,782,000), of which $182,136,000 (2011 - $196,319,000) qualified for hedge accounting with the remaining amounts relating to economic hedges as described below. The Corporation only enters into these interest rate contracts for its own account and does not act as an intermediary in this market. These contracts have a risk-weight of $524,000 (2011 - $667,000) for purposes of determining the Bank's regulatory capital ratios. As required under the accounting standard relating to hedges, at January 31, 2012, $19,751,000 (2011 - $13,957,000) relating to these contracts was included in other liabilities and the offsetting amount included in the carrying values of the assets to which they relate. Approved counterparties are limited to Canadian chartered banks.

In addition, the Corporation has entered into interest rate swaps that do not qualify for hedge accounting with accredited counterparties as a result of transactions with the Canada Housing Trust^TM. At January 31, 2012 the notional amount of these contracts totalled $871,000 (2011 - $463,000).

13. Commitments and contingencies:

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


		January 31 2012		January 31 2011
Loan commitments	$	275,522	$	226,351
Letters of credit		30,741		26,346

	$	306,263	$	252,697

In the ordinary course of business, cash and securities are pledged against liabilities and off-balance sheet items.

Details of assets pledged are as follows:


		January 31 2012		January 31 2011
Collateral related to derivative transactions	$	18,431	$	13,721
Collateral related to letters of credit		9,171		5,124

	$	27,602	$	18,845

14. Related party transactions:

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

The Corporation issues both mortgages and personal loans to key management personnel. At January 31, 2012 balances due from key management personnel totalled $940,000 (2011 - $2,740,000) of which $nil (2011- $1,861,000) are secured by residential or other property.

The interest rates charged on related party loans are similar to that charged in an arms-length transaction. Interest income earned on related party loans for the period ended January 31, 2012 totalled $11,000 (2011 - $30,000). There was $nil (2011- $nil) provision for credit losses related to loans issued to key management personnel.

15. Capital management:

a) Overview:

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

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

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

The goal is to maintain adequate regulatory capital to be considered well capitalized, protect consumer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all the while providing a satisfactory return to shareholders. The Bank's regulatory capital is comprised of share capital, retained earnings and unrealized losses on available-for-sale equity securities (Tier 1 capital) and unrealized gains on available-for-sale equity and the face value of subordinated notes (Tier 2 capital). Subordinated notes included in regulatory capital are limited to 50% of Tier 1 capital (leverageable amount).

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

During the period ended January 31, 2012, there were no material changes in the Bank's management of capital.

b) Assets-to-Capital Multiple:

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


		January 31, 2012		January 31, 2011
		IFRS		CGAAP

Total assets (on and off-balance sheet)		$	1,605,083	$	1,395,302

Capital
	Common shares	$	103,965	$	96,865
	Retained earnings (deficit)		(12,920)		(406)
	Unrealized gain (loss) on available-for-sale equity securities		5,333		(4,369)
	Subordinated notes (leverageable amount)		51,077		41,500
	OSFI phase-in adjustment of the impact of IFRS		11,111		-
Total regulatory capital		$	158,566	$	133,590

Assets-to-capital ratio			10.12		10.44

The Bank was in compliance with the assets-to-capital ratio prescribed by OSFI throughout the periods presented. Regulatory capital and related calculations for all comparable periods presented are reported under CGAAP as the Corporation is not required by OSFI to restate such figures.

c) Risk-Based Capital Ratio:

OSFI requires banks to measure capital adequacy in accordance with guidelines for determining risk adjusted capital and risk-weighted assets including off-balance sheet credit instruments. Based on the deemed credit risk for each type of asset, a weighting of 0% to 150% is assigned to determine the risk-based capital ratio. OSFI recommends that banks maintain a minimum total risk-based capital ratio in excess of 10% and a Tier 1 risk-based capital ratio in excess of 7%.

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


		January 31, 2012				January 31, 2011
		IFRS				CGAAP
		Notional Drawn Amount		Risk Weighted Balance		Notional Drawn Amount		Risk Weighted Balance

Balance sheet assets	$	1,574,341	$	1,045,578	$	1,368,953	$	905,426
Off-balance sheet assets		489,271		124,702		515,212		117,201
Charge for operational risk				23,650				18,615
Total risk-weighted assets			$	1,193,930			$	1,041,242
Regulatory capital				158,566				133,590
Total risk-based capital ratio				13.28%				12.83%
Tier 1 risk-based capital ratio				8.56%				8.84%

Impact of IFRS on Regulatory Capital

Reporting of the Bank's regulatory capital under IFRS commenced on November 1, 2011. As per OSFI's Capital Adequacy Guidelines, financial institutions may elect a phase-in of the impact of the conversion to IFRS on their regulatory capital reporting. The Bank made this election to phase-in the IFRS conversion impact over a five quarter period starting with the first quarter ending January 31, 2012. The phase-in amount is based on the impact on Retained Earnings (Deficit) of IFRS conversion as at November 1, 2011 and is recognized in regulatory capital on a straight-line basis. The estimate of the phase-in amount over the full five quarters is a reduction of regulatory capital of approximately $14.0 million and relates primarily to the impairment in previous years of available-for-sale securities. In the absence of this election, the Bank's Tier 1 and Total capital ratios would be 7.63% and 11.89% respectively at January 31, 2012.

16. Interest rate position:

The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact spread, net interest income and the economic value of assets, liabilities and 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 shareholder's equity over a 60 month period if no remedial actions are taken.


		January 31,2012			January 31,2011
		Increase 100 bps		Decrease 100 bps		Increase 100 bps	Decrease 100 bps

Sensitivity of projected net interest income during a 12 month period	$	4,228	$	(4,202)	$	2,671	n/m
Sensitivity of projected net interest income during a 60 month period		(8,708)		14,830		943	n/m

Duration difference between assets and liabilities (months)		1.0				1.6

*n/m - not meaningful due to current level of market interest rates

17. Subsidiary company information:

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

Consolidated balance sheets

		January 31 2012		October 31 2011		January 31 2011		November 1 2010

Cash and cash equivalents	$	238,057	$	188,994	$	90,146	$	88,991
Securities		85,354		130,844		208,128		232,119
Loans, net of allowance for credit losses		1,217,851		1,131,526		1,068,662		986,871
Other assets		33,079		31,105		30,927		28,520
	$	1,574,341	$	1,482,469	$	1,397,863	$	1,336,501

Deposits	$	1,359,923	$	1,269,730	$	1,212,173	$	1,150,903
Subordinated notes payable		49,692		49,651		40,051		40,025
Securitization liabilities		43,431		43,247		33,106		24,297
Other liabilities		27,756		26,530		23,906		35,712
		1,480,802		1,389,158		1,309,236		1,250,937



Share capital		103,965		103,965		96,865		95,365
Retained earnings (deficit)		(12,920)		(14,757)		(21,090)		(22,327)
Accumulated other comprehensive income		2,494		4,103		12,852		12,526
Shareholder's equity		93,539		93,311		88,627		85,564

	$	1,574,341	$	1,482,469	$	1,397,863	$	1,336,501

Consolidated statement of operations
		January 31 2012		January 31 2011
Interest income	$	15,008	$	13,363
Interest expense		10,236		9,121
Net interest income		4,772		4,242
Other income		3,405		2,280
Net interest income and other income		8,177		6,522
Provision for credit losses		185		76
Net interest and other income after provision for credit losses		7,992		6,446
Non-interest expense		5,295		4,286
Income before income taxes		2,697		2,160
Income tax expense		860		922
Net income	$	1,837	$	1,238

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 innovative financing to large corporate and government entities including hospitals, school boards, universities and colleges, municipalities and provincial and federal government agencies.

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

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

To receive company news releases, please contact:
Wade MacBain at [email protected] (519) 675-4201

Investor Relations: (800) 244-1509, [email protected]
Public Relations & Media: Tel Matrundola, Vice-President, (416) 203-0882, [email protected]
Visit our website at: http://www.pwbank.com

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Pacific & Western Credit Corp. announces results for its first quarter ended January 31, 2012

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