PWC Capital Inc. Third Quarter Report July 31, 2016

PWC Capital Inc. Announces Results for its Third Quarter Ended July 31, 2016

LONDON, Ontario--(BUSINESS WIRE)-- PWC Capital Inc. (TSX: PWC)

THIRD QUARTER SUMMARY (1)(compared to the same periods in the prior year unless otherwise noted)

PWC Capital Inc.

• Net income (loss) of PWC Capital Inc. (the “Corporation”) for the three months ended July 31, 2016, was ($84,000) or ($0.03) per common share (basic and diluted) compared to ($919,000) or ($0.04) per common share (basic and diluted) for the previous quarter and $1.2 million or $0.01 per common share (basic and diluted) for the same period a year ago. Net income for the same period a year ago included a net gain of $1.8 million on debt settlement. The change in net income (loss) from the previous quarter was due primarily to an increase in the net income of the Corporation’s principal subsidiary, VersaBank (formerly Pacific & Western Bank of Canada) (the “Bank”).
• Net income (loss) of the Corporation for the nine months ended July 31, 2016, was ($1.2 million) or ($0.10) per common share (basic and diluted) compared to ($1.5 million) or ($0.08) per common share (basic and diluted) for the same period a year ago. Net income for the same period a year ago included a net gain of $1.8 million on debt settlement as noted above.

VersaBank

• Net income of the Bank for the current quarter was $2.5 million or $0.09 per common share (basic and diluted), increasing by 36% from $1.8 million or $0.06 per common share (basic and diluted) for the previous quarter and compared to $1.7 million or $0.05 per common share (basic and diluted) a year ago, an increase of 44%. Net income increased from the previous quarter and a year ago primarily as a result of an increase in net interest income. Net income for the current quarter also included restructuring charges of $98,000 compared to $445,000 for the previous quarter.
• Net income of the Bank for the nine months ended July 31, 2016 was $6.6 million or $0.25 per common share (basic and diluted), increasing by 21% from $5.4 million or $0.21 per common share (basic and diluted) for the same period a year ago with the increase due primarily to an increase in net interest income reduced by restructuring charges. Net income for the same period a year ago included an income tax recovery of $724,000 related to previously unrecognized deferred income tax assets.
• Net interest margin or spread for the current quarter increased to 2.31% from 2.23% for the previous quarter and from 2.24% for the same period a year ago.
• For the nine months ended July 31, 2016, net interest margin or spread increased to 2.28% compared to 2.22% for the same period a year ago.
• Credit quality remains exceptional with no gross impaired loans at July 31, 2016 or at April 30, 2016, or a year ago.

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

PRESIDENT’S COMMENTS

PWC Capital owns approximately 12.6 million common shares (63%) of VersaBank and 100% of the common shares of our software company, AMSDMS Software Inc. The Bank is by far our largest and most important investment and the value of PWC is highly dependent on the Bank’s value.

I am pleased to report that our Bank has completed a record quarter. Net earnings for the 3rd quarter represented a 36% increase over the previous quarter and on year-to-date basis a 21% increase over the same period last year. The considerable investment we have made in technology is rapidly increasing core earnings. Rapid growth, of course, requires additional capital and a few months ago we initiated a strategic review to address this. This review is ongoing and we hope to be in a position to disclose the results this fall.

We have built a highly scalable financial institution whose products and services are in very high demand, Loan and lease receivables acquired through our Bulk Purchase Program continued to grow steadily and the portfolio increased by 5% to $740 million. We purchase loans and lease receivables from an increasing number of non-bank and fintech financiers who operate throughout Canada in a variety of industries, many of which are taking advantage of new technologies to reach their customers. Our program enables this type of financing and indirectly provides much needed financing for small businesses and greater choice for consumers across Canada. We have developed state of the art high capacity systems that allow us to process large numbers of these small ticket transactions. Credit risk is reduced to acceptable levels by substantial cash deposits made by our partners to be available to offset credit losses. Our Bank is at the leading edge of this new method of financing and this new business is a driving force behind the Bank’s rapidly increasing profits.

The remainder of the Bank’s lending portfolio is comprised of a variety of loans including loans to government entities, credit card receivables and Commercial Real Estate (CRE) loans. The latter class of loans makes up the largest component (70%). A few years ago we made the strategic decision to de-emphasise this type of lending particularly in major urban centres that we thought had the potential to become ‘overheated’. As part of this strategy, in 2013 we closed our Calgary branch and reduced our lending in the Toronto GTA. CRE financing still makes a significant contribution to the Bank’s overall earnings. However, we do not expect much growth in this portfolio and CRE loans balances declined slightly in the 3rd quarter to a balance of $530 million.

Asset quality remained industry leading with the Bank again reporting no impaired loans. We pride ourselves on maintaining stellar credit adjudication and processes that for decades has consistently delivered industry leading results.

Our Bank now has one of the largest and geographically diverse deposit gathering networks in Canada with partners that include many of the large banks’ brokerage firms. This channel provides a steady, reliable source of low cost deposits. In addition to this channel we created two new channels for acquiring deposits. The first involved developing an internet banking solution for niche markets that have unique challenges in dealing with the traditional banks and the second involved receiving deposits from our Bulk Purchase vendors. These two low cost channels now provide approximately 35% of the Bank’s new deposits and are serving to reduce the Bank’s overall cost of funds and increase its NIM, which increased to an industry leading 2.31% in the 3rd quarter.

Total revenue for the quarter increased by 12% to $10.2 million compared to the same quarter last year and on a year-to-date basis increased by 13% to $29.3 million. Net income for the quarter was $2.5 million ($.09 per common share) versus $1.8 million ($.06 per common share) earned in the previous quarter. On a year-to-date basis our Bank earned $6.6 million for the nine months ended July 31st, a 21% increase over the same period last year.

Through utilization of specialized software and well-experienced staff, we are able to rapidly acquire large volumes of loans, leases and deposits with minimal costs in niche markets that are not well served by the larger financial institutions. This has enabled our Bank to earn excellent margins without accepting much risk. The financial market place is embracing innovative new ideas and our Bank is at the forefront of prudently applying new ideas and technology to provide Canadians with greater choice and more economical financing solutions.

Our Bank’s increased earnings, together with the savings associated with the redemption of 800,000 Preference B shares last year, significantly improved our company’s profit situation. The net loss reduced significantly from $919,000 last quarter to $84,000 loss this quarter. I am pleased with this reduction; however we continue to review strategies on how to release value to us, the shareholders and hope to be in a position to report to you on this review later this fall.

FINANCIAL HIGHLIGHTS

(unaudited)						for the three months ended						for the nine months ended
						July 31			July 31			July 31			July 31
($CDN thousands except per share amounts )							2016			2015			2016			2015
VersaBank
Results of operations
	Net interest income					$	9,836		$	8,727		$	28,338		$	25,013
	Net interest margin*						2.31%			2.24%			2.28%			2.22%
	Non-interest income						343			368			953			1,010
	Total revenue						10,179			9,095			29,291			26,023
	Provision for credit losses						24			297			449			1,226
	Non-interest expenses						6,654			6,421			19,177			18,222
	Restructuring charges						98			-			543			-
	Income before income taxes						3,403			2,377			9,122			6,575
	Net income						2,456			1,707			6,574			5,448
	Return on average common equity*						4.90%			2.64%			4.37%			3.96%
	Gross impaired loans to total loans						0.00%			0.00%			0.00%			0.00%
	Provision for credit losses as a % of average loans						0.01%			0.02%			0.03%			0.09%
PWC Capital Inc. (consolidated)
Results of operations
	Net income of the Bank					$	2,456		$	1,707		$	6,574		$	5,448
	Additional interest expense of PWC						(1,784)			(1,657)			(5,354)			(4,878)
	Interest expense relating to Class B
	Preferred Share dividends						(617)			(381)			(1,848)			(2,731)
	Net non-interest and other expenses of PWC						45			(129)			(50)			(154)
	Gain on debt settlement						-			1,790			-			1,790
	Provision for income taxes						(184)			(100)			(551)			(973)
	Net income (loss)					$	(84)		$	1,230		$	(1,229)		$	(1,498)
	Net income attributable to non-controlling interests						916			451			2,337			957
	Net income (loss) attributable to shareholders						(1,000)			779			(3,566)			(2,455)
						$	(84)		$	1,230		$	(1,229)		$	(1,498)
	Income (loss) per common share:
		Basic				$	(0.03)		$	0.01		$	(0.10)		$	(0.08)
		Diluted				$	(0.03)		$	0.01		$	(0.10)		$	(0.08)
												as at
												July 31			July 31
PWC Capital Inc. (consolidated)													2016			2015
Balance Sheet Summary
	Cash and securities											$	152,178		$	157,388
	Total loans												1,499,006			1,376,236
	Total assets												1,682,001			1,558,807
	Deposits												1,357,963			1,275,523
	Notes payable and preferred share liabilities												107,365			99,924
	Shareholders' (deficit) equity												(4,154)			1,835
* This is a non-GAAP measure. See definition under 'Basis of Presentation' in the attached
Management's Discussion and Analysis.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

This management’s discussion and analysis (MD&A) of operations and financial condition for the third quarter of fiscal 2016, dated August 30, 2016, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 31, 2016, included herein which have been prepared in accordance with International Financial Reporting Standards (IFRS). This MD&A should also be read in conjunction with the Corporation’s MD&A and the audited consolidated financial statements for the year ended October 31, 2015, all of which are available on SEDAR at www.sedar.com. Except as discussed below, all other factors discussed and referred to in the MD&A for the year ended October 31, 2015, remain substantially unchanged.

Basis of Presentation

Non-GAAP and Additional GAAP Measure

Net Interest Income and Net Interest Margin or Spread

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

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

Basel III Common Equity Tier 1, Tier 1 and total capital adequacy ratios and the leverage ratio are determined in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).

Return on Average Common Equity

Return on average common equity for VersaBank (the “Bank”), (formerly Pacific & Western Bank of Canada), is defined as annualized net income of the Bank less amounts relating to preferred share dividends, divided by average common shareholders’ equity which is average shareholders’ equity less amounts relating to preferred shares recorded in equity.

Non-Interest Expenses to Total Assets Ratio

The ratio of non-interest expenses to total assets is determined by dividing non-interest expenses of the Bank by total assets.

PWC Capital Inc.

PWC Capital Inc. (the “Corporation”) is a holding company whose shares trade on the Toronto Stock Exchange. Its principal subsidiary, VersaBank of which it currently owns approximately 63% of its issued common shares, operates as a Schedule I bank under the Bank Act (Canada). The Bank’s shares also trade on the Toronto Stock Exchange. On May 13, 2016, the Bank changed its name from Pacific & Western Bank of Canada to VersaBank.

On March 7, 2016, the Corporation and the Bank announced they were undertaking a review of their strategic alternatives. At this time, there can be no assurance that the strategic review process of either the Corporation or the Bank will result in a transaction for either entity or, if a transaction is undertaken, as to its nature, terms or timing.

Net income (loss) of the Corporation for the three months ended July 31, 2016, was ($84,000) or ($0.03) per common share (basic and diluted) compared to ($919,000) or ($0.04) per common share (basic and diluted) for the previous quarter and $1.2 million or $0.01 per common share (basic and diluted) for the same period a year ago. Net income for the same period a year ago included a net gain of $1.8 million on debt settlement. The change in net income (loss) from the previous quarter was due primarily to an increase in the net income of the Bank.

Net income (loss) of the Corporation for the nine months ended July 31, 2016, was ($1.2 million) or ($0.10) per common share (basic and diluted) compared to ($1.5 million) or ($0.08) per common share (basic and diluted) for the same period a year ago. Net income for the same period a year ago included a net gain of $1.8 million on debt settlement as noted above.

For the three months ending July 31, 2016, interest expense of the Corporation on a non-consolidated basis consisted of $1.8 million relating to its notes payable compared to $1.8 million for the previous quarter and $1.7 million for the same period a year ago and interest expense of $617,000 relating to dividends on its Class B Preferred Shares compared to $616,000 for the previous quarter and $381,000 for the same period a year ago. These dividends are recorded as interest expense in the consolidated financial statements of the Corporation as the Preferred Shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Balance Sheet.

For the nine months ending July 31, 2016, interest expense of the Corporation on a non-consolidated basis consisted of $5.4 million relating to its notes payable compared to $4.9 million for the same period a year ago and interest expense of $1.9 million relating to dividends on its Class B Preferred Shares compared to $2.7 million for the same period a year ago. Interest expense relating to dividends on Class B Preferred Shares decreased from a year ago as a result of the redemption of 800,000 Class B Preferred Shares in May 2015.

Non-interest expenses of the Corporation on a non-consolidated basis are not significant and relate primarily to the costs of being a publicly traded company including directors’ fees, listing and annual filing fees and professional fees.

The Corporation on a non-consolidated basis also incurs corporate income tax related to dividends paid on its outstanding Class B Preferred Shares.

VersaBank

The Bank is a technologically proficient Canadian Schedule I chartered bank which operates using an electronic branchless model. It sources its deposits through a well-established and widely diversified network of deposit brokers and purchases loan and lease receivables. The Bank also makes residential development and commercial loans and mortgages which are sourced through direct contact with its lending staff.

Net income of the Bank for the current quarter was $2.5 million or $0.09 per common share (basic and diluted), increasing by 36% from $1.8 million or $0.06 per common share (basic and diluted) for the previous quarter and compared to $1.7 million or $0.05 per common share (basic and diluted) a year ago, an increase of 44%. Net income increased from the previous quarter and a year ago primarily as a result of an increase in net interest income. Net income for the current quarter also included restructuring charges of $98,000 compared to $445,000 for the previous quarter.

Net income of the Bank for the nine months ended July 31, 2016 was $6.6 million or $0.25 per common share (basic and diluted), increasing by 21% from $5.4 million or $0.21 per common share (basic and diluted) for the same period a year ago with the changes due primarily to an increase in net interest income reduced by restructuring charges and an increase in non-interest expenses. Net income for the same period a year ago included an income tax recovery of $724,000 related to previously unrecognized deferred income tax assets.

Total assets of the Bank at July 31, 2016 were $1.69 billion compared to $1.70 billion at the end of the previous quarter and $1.56 billion a year ago. Lending assets were $1.50 billion compared to $1.52 billion at the end of the previous quarter and $1.38 billion a year ago. Credit quality remains strong with no gross impaired loans at July 31, 2016, or at April 30, 2016 or a year ago.

Total Revenue

Total revenue of the Bank consists of net interest income and non-interest income. Non-interest income consists primarily of fees from credit card operations.

For the three months ended July 31, 2016, total revenue increased to $10.2 million from $9.7 million for the previous quarter and from $9.1 million for the same period a year ago, an increase of 12%, with the increases due to growth in net interest income.

For the nine months ended July 31, 2016, total revenue increased by 13% to $29.3 million from $26.0 million a year ago with the increase due to growth in net interest income.

Net Interest Income

Net interest income for the three months ended July 31, 2016 increased to $9.8 million from $9.4 million for the previous quarter and from $8.7 million for the same period a year ago, an increase of 13%. The increase in net interest income from a year ago was due primarily to growth in lending assets which grew to $1.50 billion at July 31, 2016 from $1.38 billion last year and from a decrease in the Bank’s cost of funds which decreased to 1.82% from 2.00% a year ago.

Net interest income for the nine months ended July 31, 2016 increased to $28.3 million from $25.0 million for the same period year ago with the increase due primarily to growth in lending assets and a decrease in the Bank’s cost of funds which decreased to 1.92% from 2.02% a year ago.

Net Interest Margin

Net interest margin or spread for the three months ended July 31, 2016 increased to 2.31% from 2.23% for the previous quarter and 2.24% for the same period a year ago. Net interest margin has increased as a result of a decrease in the Bank’s cost of deposits as noted above.

Net interest margin or spread for the nine months ended July 31, 2016 increased to 2.28% from 2.22% for the same period a year ago with the increase due to the factors described above.

Provision for Credit Losses

The Bank maintains high credit quality and strong underwriting standards and as a result traditionally requires minimal provisions for credit losses. The provision for credit losses for the current quarter was $24,000 compared to $213,000 for the previous quarter and $297,000 for the same period a year ago. The provision for credit losses decreased from a year ago due to a lower amount of write offs related to credit card receivables as well as a change in Ioan mix over the past year with a decrease in commercial mortgages and loans offset by growth in loan and lease receivables sourced through the bulk finance program which require a lower collective allowance due to the cash holdbacks that are retained.

The provision for credit losses for the nine months ended July 31, 2016 was $449,000 or 3 basis points of average loans compared to $1.2 million or 9 basis points of average loans for the same period a year ago with the decrease due to the change in loan mix as noted above.

Non-Interest Expenses

Non-interest expenses of the Bank, excluding restructuring costs, totalled $6.7 million for the current quarter compared to $6.5 million for the previous quarter and $6.4 million for the same period a year ago. The increase in non-interest expenses from the previous quarter was due primarily to an increase in premises costs due to the opening of new premises. The increase in non-interest expenses from a year ago was due primarily to an increase in employee compensation and an increase in premises costs.

Non-interest expenses of the Bank, excluding restructuring costs, for the nine months ended July 31, 2016 totalled $19.2 million compared to $18.2 million with the increase due to higher employee compensation as a result of an increase in employee complement and an increase in premises costs. However the Bank continues to see economies of scale as non-interest expenses as a percentage of average assets for the current period decreased to 1.54% from 1.61% for the same period a year ago.

Restructuring Charges

During the three months ended July 31, 2016, the Bank incurred restructuring charges totalling $98,000 and for the nine months ended July 31, 2016 incurred restructuring charges of $543,000 relating to rebranding of the Bank and costs associated with the review of strategic alternatives commenced by the Bank in the previous quarter.

Income Taxes

The statutory federal and provincial income tax rate of the Bank is approximately 27%, similar to that of the previous periods. The statutory rate is impacted by certain items not being taxable or deductible for income tax purposes.

For the three months ended July 31, 2016, the provision for income taxes was $947,000 compared to $708,000 for the previous quarter and $670,000 for the same period a year ago with the changes due to the level of earnings in the Bank.

For the nine months ended July 31, 2016, the provision for income taxes was $2.5 million compared to $1.1 million for the same period a year ago with the change due to a higher level of earnings in the Bank and an income tax recovery of $724,000 recorded last year relating to the recognition of previously unrecognized deferred income tax assets of the Bank.

Comprehensive Income

Comprehensive income is comprised of net income for the period and other comprehensive income which consists of unrealized gains and losses on available-for-sale securities. Comprehensive income of the Bank for the three months ended July 31, 2016 was $2.5 million compared to $1.8 million for the previous quarter and $1.7 million a year ago. For the nine months ended July 31, 2016, comprehensive income of the Bank was $6.6 million compared to $5.5 million a year ago. Due to the current composition of the Bank’s treasury portfolio, which consists primarily of liquid securities, unrealized gains or losses in the portfolio are not significant and as a result comprehensive income does not differ significantly from net income.

Consolidated Balance Sheet

Substantially all of the Corporation’s consolidated assets relate to the operations of the Bank. Total assets of the Corporation at July 31, 2016 were $1.68 billion compared to $1.70 billion at the end of previous quarter and $1.56 billion a year ago. The increase from a year ago was due to growth in lending assets which grew to $1.50 billion from $1.38 billion last year. Growth in lending assets was primarily a result of an increase in loan and lease receivables sourced through the Bank’s bulk purchase program as discussed below.

Cash and Securities

Cash and cash equivalents consist of deposits with Canadian financial institutions and government treasury bills with less than ninety days to maturity from the date of acquisition. Securities in the treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds and debt of other financial institutions. Amounts invested in each of these securities are determined based on liquidity needs, investment yield and capital management considerations. Cash and securities, which are held primarily for liquidity purposes, totalled $152 million or 9.0% of total assets compared to $144 million or 8.5% of total assets at the end of the previous quarter and $157 million or 10.0% of total assets a year ago. The current level of cash and securities as a percentage of total assets is expected to continue to decrease in the coming months.

Loans

At July 31, 2016, loans totalled $1.50 billion compared to $1.52 billion at the end of the previous quarter and $1.38 billion a year ago. The decrease in loans from the previous quarter was due primarily to repayments in commercial mortgages and loans partially offset by growth in loan and lease receivables purchased through the Bank’s bulk purchase program. The growth in loans from a year ago was due primarily to increases in construction mortgages and loan and lease receivables purchased through the Bank’s bulk purchase program.

At July 31, 2016, the balances of individual loan categories compared to the end of the previous quarter reflects a continuation of the change in lending strategy where focus on government loans has decreased due to market conditions and has been replaced by an emphasis on loan and lease receivables purchased through the bulk purchase program. Compared to a year ago, individual loan categories showed growth in construction mortgages and loan and lease receivables and a decrease in government loans as discussed above and a decrease in commercial mortgages and loans which was due primarily to timing of repayments and advances.

As noted above, loan and lease receivables purchased through the bulk purchase program continued to show strong growth. The balance of loan and lease receivables increased to $740 million at July 31, 2016 from $706 million at the end of the previous quarter, a net increase of $34 million, and from $563 million last year, a net increase of $177 million or 31%. The bulk purchase program, which consists of the purchase of individual loan and lease receivables, continues to be a key initiative and the primary driver for growth of the lending portfolio. The credit quality of these loan and lease receivables is strong and normally attracts a lower collective allowance due to the level of cash holdbacks that are retained.

Total new lending for the quarter was $234 million compared to $198 million for the previous quarter and $277 million a year ago. Loan repayments for the quarter totalled $259 million compared to $173 million for the previous quarter and $246 million a year ago. For the nine months ended July 31, 2016, new lending totalled $662 million compared to $750 million for the same period a year ago and loan repayments totalled $610 million compared to $591 million last year. At July 31, 2016, loan commitments representing loans in the Bank’s pipeline totalled $301 million compared to $228 million at the end of the previous quarter and $210 million a year ago.

Residential mortgage exposures

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

Under OSFI’s definition, the Bank’s exposure to residential mortgages at July 31, 2016 totalled $647,000 compared to $658,000 at the end of the previous quarter and $816,000 a year ago. The Bank did not have any HELOC’s outstanding at July 31, 2016, or at the end of the previous quarter or a year ago.

Credit Quality

Gross impaired loans at July 31, 2016, were $nil, unchanged from the end of the previous quarter and a year ago. At July 31, 2016, the collective allowance totalled $2.9 million compared to $3.1 million at the end of previous quarter and compared to $3.1 million a year ago. The collective allowance decreased from the previous quarter as a result of a decrease in commercial mortgages and loans offset by growth in loan and lease receivables sourced through the bulk finance program which require a lower collective allowance due to the cash holdbacks that retained. Included in the collective allowance at July 31, 2016 was $1.1 million relating to credit card receivables which is similar to the end of the previous quarter and 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 Bank is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for. The Bank’s exposure to loan losses in Western Canada and to the oil and gas industry is not significant. As well, the Bank is not concentrated in the housing markets in Toronto and Western Canada.

The geographic concentration of the Bank’s lending portfolio at July 31, 2016 has not changed significantly from that at the end of the previous quarter and a year ago where the overall lending portfolio remains concentrated in the province of Ontario.

Other Assets

Other assets of the Corporation totalled $30.8 million at July 31, 2016, compared to $30.6 million at the end of the previous quarter and $25.2 million a year ago with the change from a year ago due to an increase in accounts receivable. Also included in other assets are prepaid expenses, capital assets and the deferred income tax asset of the Bank.

The deferred income tax asset of the Bank was $6.9 million at July 31, 2016, compared to $7.6 million at the end of the previous quarter and $8.3 million a year ago. The changes from previous periods were primarily a result of the utilization of loss carryforwards due to taxable income earned by the Bank over the past year. The deferred income tax asset is a result of income tax losses of the Bank totalling approximately $20.2 million incurred in previous years. These income tax loss carry-forwards are not scheduled to begin expiring until 2027 if unutilized.

In addition, the Corporation has income tax loss carry-forwards which total approximately $75.7 million, the benefit of which has not been recorded. These loss carry-forwards are not scheduled to begin expiring until 2026 if unutilized. At the current tax rate of 27% this would result in approximately $20 million savings against future income.

Deposits and Other Liabilities

Deposits are used as a primary source of financing growth in assets and are raised primarily through a well established and well diversified deposit broker network across Canada. Deposits at July 31, 2016, totalled $1.36 billion compared to $1.38 billion at the end of the previous quarter and $1.28 billion a year ago and consist primarily of guaranteed investment certificates. The increase in deposits from a year ago was due to the raising of new deposits to fund the growth in lending assets.

Of the total amount of deposits outstanding, $17.3 million or approximately 1.28% of total deposits at the end of the current quarter were in the form of demand savings accounts compared to $17.9 million or 1.30% of total deposits at the end of the previous quarter and $17.7 million or approximately 1.40% of total deposits a year ago. In addition, the Bank has chequing accounts related to trustees in the Canadian bankruptcy industry as discussed below.

The Bank continues to grow and expand its deposit broker network across Canada. In addition, in order to further diversify its sources of deposits and reduce its cost of new deposits, the Bank has another source of funds, that being a specialized chequing facility platform for trustees in the Canadian bankruptcy industry. The Bank has developed banking software to enable this market to efficiently administer its chequing accounts with these services provided to trustees across Canada. At July 31, 2016, balances from this source totalled $160.3 million compared to $141.4 million at the end of the previous quarter and $108.7 million a year ago.

Other liabilities typically consist of accounts payable and accruals and holdbacks payable related to the bulk purchase program. At July 31, 2016, other liabilities totalled $88.8 million compared to $84.1 million at the end of the previous quarter and $60.4 million a year ago with the increase primarily due to holdbacks associated with loan and lease receivables purchased through the bulk purchase program which have shown significant growth over the past year.

An additional source of financing growth in assets and a source of liquidity is the use of margin lines and securities sold under repurchase agreements. At July 31, 2016, there were no amounts outstanding from these sources compared to none outstanding at the end of the previous quarter and a year ago.

Securitization Liabilities

Securitization liabilities relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At July 31, 2016, securitization liabilities totalled $43.7 million compared to $43.6 million at the end of the previous quarter and $43.6 million a year ago. The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Residential mortgages and other assets are pledged as collateral for securitized liabilities. There have been no securitization transactions in the past several years.

Notes Payable

Notes payable, net of issue costs, totalled $82.0 million at July 31, 2016 compared to $81.8 million at the end of the previous quarter and $75.2 million a year ago. Notes payable include Series C Notes with a face value of $61.7 million maturing in 2018 and other notes payable totalling $8.4 million maturing in 2017, and subordinated notes issued by the Bank totalling $14.5 million. The subordinated notes, which are currently callable, bear interest at rates ranging from 8.00% to 11.00% and mature between 2019 and 2021.

The Series C Notes bear interest at 9.00% per annum and allow the Corporation at its option, to pay interest on the Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. At the option of the holder, the Series C Notes are convertible into common shares of the Bank held by the Corporation. During the nine months ended July 31, 2016, as payment of the interest due on the Series C Notes, the Corporation distributed 493,725 common shares it owned of the Bank which resulted in loss on distribution of $956,000 and which was charged to directly to shareholders’ equity.

Preferred Share Liabilities

At July 31, 2016, the Corporation had 1,094,058 Class B Preferred Shares outstanding with a redemption value of $27.4 million before deducting issue costs and amounts recorded in equity on issuance. As the Class B Preferred Shares must be redeemed by the Corporation in 2019, the preferred share liability is being adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount. The adjustment is included in interest expense in the Consolidated Statement of Income (Loss), calculated using an effective interest rate of 9.78%.

Shareholders’ Equity (Deficit)

At July 31, 2016, shareholders’ equity (deficit) was ($4.2 million) compared to ($2.8 million) at the end of the previous quarter and $1.8 million a year ago with the change from the previous periods due to operating losses incurred by the Corporation and charges to shareholders’ equity relating to losses on distribution of subsidiary’s shares.

Common Shares outstanding at July 31, 2016 totalled 44,592,260, unchanged from the end of the previous quarter. At July 31, 2016, there were also 314,572 Class A Preferred Shares and 1,094,058 Class B Preferred Shares outstanding, all of which were unchanged from the end of the previous quarter.

The holders of Class B Preferred Shares are entitled to fixed cumulative dividends at the rate of 6.72%, payable in cash. The Class B Preferred Shares also provide each holder, at its option, with the right to convert into Common Shares of the Corporation on the basis of 12.5 Common Shares of the Corporation for each Class B Preferred Share.

Common Share options totalled 418,709 at July 31, 2016 compared to 421,959 common shares options outstanding at the end of the previous quarter with the decrease due to the expiry of 3,250 options.

At July 31, 2016, there were 40,000 common share options of the Bank outstanding, unchanged from the end of the previous quarter.

Normal Course Issuer Bids

On March 11, 2016, the Corporation obtained approval from the Toronto Stock Exchange (TSX) to proceed with Normal Course Issuer Bids (NCIBs) for its Common Shares and Class B Preferred Shares.

Pursuant to the Common Shares NCIB, the Corporation may purchase for cancellation up to 2,740,000 of its Common Shares representing 9.98% of the public float. Daily purchases are limited to 25% of the average daily trading volume which is 6,518 common shares, other than block purchase exceptions.

Pursuant to the Class B Preferred Shares NCIB, the Corporation may purchase for cancellation up to 109,000 of its Class B Preferred Shares representing 9.98% of the public float. Daily purchases are limited to 1,000 Class B Preferred Shares, other than block purchase exceptions.

Both NCIBs commenced on March 16, 2016 and will terminate on March 15, 2017, or such earlier date as the Corporation may complete its purchases pursuant to the NCIBs. Purchases made by the Corporation will be made through the facilities of the TSX or alternative trading systems and in accordance with the rules of the TSX, and the prices that the Corporation will pay for any Common Shares and Class B Preferred Shares will be the market price of such shares or notes at the time of acquisition.

During the three months ended July 31, 2016, the Corporation did not purchase and cancel any Common Shares or Class B Preferred Shares through the NCIBs.

Non-Controlling Interests

Non-controlling interests relate to the amount which outside interests own of the common equity of the Bank as well as the amounts of preferred shares issued by the Bank to outside interests. Non-controlling interests totalled $88.4 million at July 31, 2016, compared to $87.4 million at the end of the previous quarter and $77.5 million a year ago. Non-controlling interests increased from the end of the previous quarter as a result of earnings of the Bank and from a year ago as a result of earnings of the Bank and the Corporation’s ownership interest in the Bank decreasing from 68% a year ago to 63% at July 31, 2016. The decrease in the ownership interest in the Bank was a result of the Bank issuing common shares to outside interests and the Corporation transferring common shares of the Bank it owned to settle notes payable and pay interest on Series C Notes over the past year.

Updated Share Information

As at August 30, 2016, there were no changes since July 31, 2016 in the number of outstanding Common Shares, Common Share options and Class A and Class B Preferred Shares.

Off-Balance Sheet Arrangements

As at July 31, 2016, the Corporation does not have any significant off-balance sheet arrangements other than loan commitments and letters of credit resulting from normal course business activities. See Note 14 to the unaudited interim consolidated financial statements for more information.

Related Party Transactions

The Corporation’s and the Bank’s Board of Directors and Senior Executive Officers represent key management personnel. Other than key management personnel, the Corporation has no other related parties for which there were transactions or outstanding balances during the period. See Note 15 to the unaudited interim consolidated financial statements for details on related party transactions and balances.

Risk Management

The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2015, and are found on pages 41 to 48 of the Corporation’s 2015 Annual Report.

Capital Management and Capital Resources

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

• Increased focus on tangible common equity.
• All forms of non-common equity such as the Bank’s conventional subordinated notes must be non-viability contingent capital (NVCC) compliant. NVCC compliant means the subordinated notes must include a clause that would require conversion to common equity in the event that OSFI deems the institution to be insolvent or a government is ready to inject a “bail out” payment.
• Changes in the risk-weighting of certain assets.
• Additional capital buffers.
• Requirements for levels of liquidity and new liquidity measurements.

The Bank reports its regulatory capital ratios using the Standardized approach for calculating risk-weighted assets, as defined under Basel III, which requires the Bank to carry significantly more capital for certain credit exposures compared to requirements under the Advanced Internal Ratings Based (AIRB) methodology. As a result, regulatory capital ratios of banks that utilize the Standardized approach are not directly comparable with the large Canadian banks which use the AIRB methodology.

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

Under the Basel III standards, total regulatory capital of the Bank was $187.2 million at July 31, 2016 compared to $184.6 million at the end of the previous quarter and $176.6 million a year ago. The increase in total regulatory capital from the previous periods was due primarily to earnings in the Bank during the periods and a private placement of common shares totalling $5.0 million by the Bank in March 2016.

At July 31, 2016, the Bank exceeded the current Basel III regulatory capital requirements referred to above with a CET1 ratio of 10.70% compared to 10.59% at the end of the previous quarter and 10.68% a year ago. At July 31, 2016, the Bank’s Tier 1 capital ratio was 12.82% compared to 12.73% at the end of the previous quarter and 13.01% a year ago. In addition, the Bank’s total capital ratio was 13.53% at July 31, 2016, compared to 13.44% at the end of the previous quarter and 14.01% a year ago. At July 31, 2016, the Bank’s leverage ratio was 9.77% compared to 9.68% at the end of the previous quarter and 9.84% a year ago.

See Note 16 to the interim consolidated financial statements for more information regarding capital management.

Interest Rate Risk Management

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

		July 31, 2016						October 31, 2015
		Increase 100bps			Decrease 100bps			Increase 100bps			Decrease 100bps
Impact on projected net interest
income during a 12 month period		$	2,761		$	(2,579)		$	3,371		$	(3,114)
Impact on reported equity
during a 60 month period		$	(1,014)		$	1,096		$	295		$	(86)
Duration difference between assets and
liabilities (months)			0.3						0.8

The Bank’s sensitivity to changes in interest rates and its duration difference between assets and liabilities at July 31, 2016 has not changed significantly since October 31, 2015. As indicated by the above, the impact on net interest income during a 12 month period of a 100 basis point increase would be approximately $2.8 million and the impact on net interest income of a 100 basis point decrease would be approximately ($2.6 million). Similarly at July 31, 2016, the impact on equity during a 60 month period of a 100 basis point increase would be approximately ($1.0 million) and the impact on equity of a 100 basis point decrease would be approximately $1.1 million. The duration difference between assets and liabilities is less than 1 month compared to approximately 1 month at October 31, 2015 and shows that the Bank’s assets and liabilities would reprice at approximately the same time in the event of a change in interest rates.

Liquidity of the Corporation

A large percentage of the cash and securities reflected on the Corporation’s Consolidated Balance Sheets is that of the Bank. As a holding company, PWC Capital Inc., on a non-consolidated basis, has no revenue generating activities and has cash obligations relating primarily to notes payable (see Note 6 to the interim consolidated financial statements), preferred shares (see Note 9 to the interim consolidated financial statements) and other operational requirements. On a non-consolidated basis, the Corporation does not depend on funding from its subsidiary, the Bank, other than normal dividends that may be declared from time to time by the Bank. As a result, the settlement of the obligations described above will be dependent upon cash and proceeds received from the sales of Bank shares, borrowings by the Corporation, equity contributions and/or restructuring of the Corporate group.

The unaudited Consolidated Statement of Cash Flows for the nine months ended July 31, 2016 shows cash provided by (used in) operations of ($7.2 million) compared to ($53.6 million) for the same period last year. Operating cash flow is primarily affected by the change in the balance of its deposits (a positive change in deposits has a positive impact on cash flow and a negative change in deposits has a negative impact on cash flow) as compared to the change in the balance of its loans (a positive change in loans has a negative impact on cash flow and a negative change in loans has a positive impact on cash flow). Based on factors such as liquidity requirements and opportunities for investment in loans and securities, the amount of deposits received and loans funded are managed in ways that result in the balances of these items giving rise to either negative or positive cash flow from operations. The Corporation believes it will be able to continue to fund operations and meet contractual obligations as they become due.

Contractual Obligations

Contractual obligations as disclosed in the MD&A and audited consolidated financial statements for the year ended October 31, 2015, have not changed significantly at July 31, 2016.

Capital Assets

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

Summary of Quarterly Results

($CDN thousands except per share amounts)		2016									2015													2014
		Q3			Q2			Q1			Q4			Q3			Q2			Q1			Q4
Results of operations:
Total interest income		$	17,628		$	17,347		$	17,228		$	16,686		$	16,514		$	15,631		$	15,630		$	15,080
Interest expense			10,193			10,439			10,432			10,043			9,933			10,185			10,359			10,382
Net interest income			7,435			6,908			6,796			6,643			6,581			5,446			5,271			4,698
Non-interest income			344			285			325			384			2,158			304			338			791
Total revenue			7,779			7,193			7,121			7,027			8,739			5,750			5,609			5,489
Provision for credit losses			24			213			212			319			297			427			502			400
Non-interest expenses			6,610			6,563			6,058			6,413			6,442			6,240			5,588			6,401
Restructuring charges			98			445			-			-			-			-			-			-
Income (loss) before income taxes			1,047			(28)			851			295			2,000			(917)			(481)			(1,312)
Income tax provision (recovery)			1,131			891			1,077			(123)			770			242			1,088			(283)
Net income (loss)		$	(84)		$	(919)		$	(226)		$	418		$	1,230		$	(1,159)		$	(1,569)		$	(1,029)
Net income attributable to non-controlling interests			916			655			766			897			451			287			219			284
Net income (loss) attributable to shareholders			(1,000)			(1,574)			(992)			(479)			779			(1,446)			(1,788)			(1,313)
Income (loss) per common share
Basic		$	(0.03)		$	(0.04)		$	(0.03)		$	(0.02)		$	0.01		$	(0.04)		$	(0.05)		$	(0.04)
Diluted		$	(0.03)		$	(0.04)		$	(0.03)		$	(0.02)		$	0.01		$	(0.04)		$	(0.05)		$	(0.04)

The financial results for each of the last eight quarters are summarized above. Total interest income and net interest income continued to increase through 2015 and in the first three quarters of 2016 as a result of growth in lending assets, specifically loan and lease receivables purchased through the Bank’s bulk purchase program.

Non-interest income has been comparable over the quarters and increased in the third quarter of 2015 as a result of a net gain on debt settlement in the Corporation. The other component of non-interest income consists primarily of credit card fees and has been consistent through the eight quarters.

Restructuring charges in the third and second quarters of 2016 relate to rebranding of the Bank and costs associated with the review of strategic alternatives commenced by the Bank in the second quarter as discussed previously.

The provision for income taxes in each of the quarters reflects the effective statutory income tax rate of 27% applied to earnings in the Bank. The provision for income taxes in the fourth and second quarters of 2015 and the fourth quarter of 2014 includes positive income tax adjustments relating to a change in the estimate of previously unrecognized deferred income tax assets of the Bank.

Significant Accounting Policies and Use of Estimates and Judgments

Significant accounting policies are detailed in Note 3 of the Corporation’s 2015 Audited Consolidated Financial Statements. There have been no material changes in accounting policies since October 31, 2015.

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

When preparing financial statements, management is required to make an assessment of the Corporation’s ability to continue as a going concern. At July 31, 2016, the Corporation had a shareholders’ deficit of $4.20 million which was primarily the result of operating losses and charges against equity of the parent company. The Corporation’s primary investment, VersaBank, on its own, has shareholders’ equity of $184.5 million (see Note 19 to the interim consolidated financial statements). In determining whether the Corporation on a non-consolidated basis has the ability to realize its assets and settle its obligations in the normal course of business and operate as a going concern, management must make certain estimates regarding future operating expenses and other obligations of the Corporation on a non-consolidated basis and the net realizable value of the Corporation’s investment in the common shares of the Bank. These obligations include the Series C Notes payable of the parent company which mature in 2018 (see Note 6 to the interim consolidated financial statements) and the Class B Preferred shares of the parent company which must be redeemed in 2019 (see Note 9 to the interim consolidated financial statements). By their very nature, these estimates made by management involve inherent risks and uncertainties, both general and specific, and risks exist that these estimates and predictions may not be achieved. The estimated net realizable value of the investment in the common shares of the Bank is impacted by current market conditions and market volatility and could impact the Corporation’s ability to declare dividends on its Class B Preferred Shares.

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

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

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

Loans

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

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

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

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

or,

(ii) observable market prices for the loan.

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

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

Allowance for Credit Losses

An allowance for credit losses is maintained which, in management’s opinion, is adequate to absorb all credit related losses in its loan portfolio. The allowance for credit losses consists of both individual and collective allowances and is reviewed on a monthly basis. The allowance is included in loans on the Consolidated Balance Sheets.

Evidence of impairment of loans is assessed at both an individual asset and collective level. All individually significant loans are assessed for impairment first. All individually significant loans found not to be specifically impaired and all loans which are not individually significant are then collectively assessed for impairment.

The collective allowance is determined by separating loans into categories that are considered to have common risk elements and reviewing factors such as current portfolio credit quality trends, exposure at default, probability of default and loss given default rates and business and economic conditions. The collective allowance may also be adjusted by management using its judgment taking into account other observable and unobservable factors.

Corporate Income Taxes

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

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

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

Future Change in Accounting PoliciesFinancial instruments (IFRS 9)

In July, 2014, the International Accounting Standards Board (IASB) issued the final revised IFRS 9 standard which addresses classification, measurement and impairment of financial instruments and hedge accounting. IFRS 9 specifies that financial assets be classified into one of three categories: financial assets measured at amortized cost, financial assets measured at fair value through profit or loss or financial assets measured at fair value through other comprehensive income. The standard also includes an expected credit loss model and a general hedging model.

IFRS 9 will be mandatorily effective for the Corporation’s fiscal year beginning on November 1, 2018, although early adoption is permitted. In January 2015, OSFI determined that Domestic Systematically Important Banks (D-SIBs) should adopt IFRS 9 for their annual periods beginning November 1, 2017, while early adoption is permitted but not required for other federally regulated Canadian banks with October year ends such as the Bank.

Controls and Procedures

During the quarter ended July 31, 2016, there were no changes in the Corporation’s internal controls over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal controls over financial reporting.

Forward-Looking Statements

The statements in this management’s discussion and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, many of which are out of our control. Risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada; global commodity prices, the effects of competition in the markets in which we operate; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations regulating financial services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; and our anticipation of and success in managing the risks implicated by the foregoing. For a detailed discussion of certain key factors that may affect our future results, please see page 48 of our 2015 Annual Report.

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

PWC CAPITAL INC.Consolidated Balance Sheets(Unaudited)

(thousands of Canadian dollars)
							July 31			October 31			July 31
As at								2016			2015			2015
Assets
Cash and cash equivalents							$	142,198		$	130,614		$	134,914
Securities (note 4)								9,980			22,433			22,474
Loans, net of allowance for credit losses (note 5)								1,499,006			1,447,660			1,376,237
Other assets								30,817			24,437			25,182
							$	1,682,001		$	1,625,144		$	1,558,807
Liabilities and Equity
Deposits							$	1,357,963		$	1,325,828		$	1,275,523
Notes payable (note 6)								82,045			80,467			75,231
Securitization liabilities (note 7)								43,685			43,525			43,625
Other liabilities (note 8)								88,758			71,306			60,427
Preferred share liabilities (note 9)								25,320			24,850			24,693
								1,597,771			1,545,976			1,479,499
Equity (deficit) attributable to shareholders:
	Share capital (note 10)							29,285			29,285			29,285
	Deficit							(31,926)			(27,345)			(26,904)
	Other equity (deficit)							(1,516)			(560)			(563)
	Accumulated other comprehensive income							3			9			17
								(4,154)			1,389			1,835
Non-controlling interests								88,384			77,779			77,473
								84,230			79,168			79,308
							$	1,682,001		$	1,625,144		$	1,558,807

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

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

(thousands of Canadian dollars, except per share amounts)
							for the three months ended							for the nine months ended
							July 31			July 31				July 31			July 31
								2016			2015				2016			2015
Interest income:
	Loans						$	17,288		$	16,130			$	51,287		$	46,564
	Securities							340			384				916			1,211
								17,628			16,514				52,203			47,775
Interest expense:
	Deposits and other							7,438			7,544				22,922			21,828
	Notes payable							2,138			2,008				6,294			5,918
	Preferred share liabilities							617			381				1,848			2,731
								10,193			9,933				31,064			30,477
Net interest income								7,435			6,581				21,139			17,298
Non-interest income (note 11)								344			2,158				954			2,800
Total revenue								7,779			8,739				22,093			20,098
Provision for credit losses (note 5b)								24			297				449			1,226
								7,755			8,442				21,644			18,872
Non-interest expenses:
	Salaries and benefits							3,604			3,566				10,530			9,379
	General and administrative							2,393			2,500				7,336			7,766
	Premises and equipment							613			376				1,365			1,125
								6,610			6,442				19,231			18,270
	Restructuring charges							98			-				543			-
								6,708			6,442				19,774			18,270
Income before income taxes								1,047			2,000				1,870			602
Income tax provision (note 12)								1,131			770				3,099			2,100
Net income (loss)							$	(84)		$	1,230			$	(1,229)		$	(1,498)
Net income (loss) attributable to:
	Shareholders						$	(1,000)		$	779			$	(3,566)		$	(2,455)
	Non-controlling interests							916			451				2,337			957
Net income (loss)							$	(84)		$	1,230			$	(1,229)		$	(1,498)
Basic loss per common share (note 13)							$	(0.03)		$	0.01			$	(0.10)		$	(0.08)
Diluted loss per common share							$	(0.03)		$	0.01			$	(0.10)		$	(0.08)
Weighted average number of common shares outstanding								44,592,000			44,592,000				44,592,000			42,695,000

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

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

(thousands of Canadian dollars)
							for the three months ended							for the nine months ended
							July 31			July 31				July 31			July 31
								2016			2015				2016			2015
Net income (loss)							$	(84)		$	1,230			$	(1,229)		$	(1,498)
Other comprehensive income (loss), net of tax
	Net unrealized gains (losses) on assets held as available-for-sale (1)							(2)			(8)				(9)			6
Comprehensive income (loss)							$	(86)		$	1,222			$	(1,238)		$	(1,492)
Total comprehensive income (loss) attributable to:
	Shareholders						$	(1,002)		$	768			$	(3,572)		$	(2,455)
	Non-controlling interests							916			454				2,334			963
							$	(86)		$	1,222			$	(1,238)		$	(1,492)

(1) Net of income tax benefit for three months of $1 (2015 – $3) and income tax benefit for the nine months of $3 (2015 – $2 expense)

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

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

(thousands of Canadian dollars)
							for the three months ended							for the nine months ended
							July 31			July 31				July 31			July 31
								2016			2015				2016			2015
Common shares (note 10(a)):
Balance, beginning of the period							$	26,977		$	26,977			$	26,977		$	25,637
Issued on payment of Class B preferred share dividends								-			-				-			1,340
Balance, end of the period							$	26,977		$	26,977			$	26,977		$	26,977
Preferred shares (note 10(a)):
Class A preferred shares
Balance, beginning and end of the period							$	1,061		$	1,061			$	1,061		$	1,061
Class B preferred shares
Balance, beginning and end of the period							$	1,247		$	1,247			$	1,247		$	1,247
Total share capital							$	29,285		$	29,285			$	29,285		$	29,285

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

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

(thousands of Canadian dollars)
							for the three months ended							for the nine months ended
							July 31			July 31				July 31			July 31
								2016			2015				2016			2015
Deficit:
Balance, beginning of the period							$	(30,584)		$	(27,169)			$	(27,345)		$	(22,466)
Net loss attributable to shareholders								(1,000)			779				(3,566)			(2,455)
Dividends paid								-			-				(66)			(66)
Dividends paid by subsidiary								(346)			(514)				(1,050)			(951)
Other								4			-				101			(966)
Balance, end of the period							$	(31,926)		$	(26,904)			$	(31,926)		$	(26,904)
Other equity (deficit):
Balance, beginning of the period							$	(1,516)		$	2,180			$	(560)		$	2,759
Loss on distribution of subsidiary shares								-			(2,748)				(956)			(3,339)
Other								-			5				-			17
Balance, end of the period							$	(1,516)		$	(563)			$	(1,516)		$	(563)
Accumulated other comprehensive income net of taxes:
Balance, beginning of the period							$	5		$	28			$	9		$	17
Other comprehensive income (loss)								(2)			(8)				(9)			6
Change in non-controlling interests								-			(3)				3			(6)
Balance, end of the period							$	3		$	17			$	3		$	17
Total shareholders' equity (deficit)							$	(4,154)		$	1,835			$	(4,154)		$	1,835
Non-controlling interests:
Balance, beginning of the period							$	87,434		$	53,403			$	77,779		$	30,460
Common shares issued by subsidiary								-			-				5,000			-
Net income attributable to non-controlling interests								916			451				2,337			957
Impact of subsidiary shares distributed								-			23,867				3,758			29,724
Preferred shares, net of issue costs and income tax,
issued by subsidiary								-			-				-			16,657
Dividends paid by subsidiary								(204)			(245)				(600)			(321)
Other								238			(3)				110			(4)
Balance, end of the period							$	88,384		$	77,473			$	88,384		$	77,473
							$	84,230		$	79,308			$	84,230		$	79,308

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

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

(thousands of Canadian dollars)
									July 31				July 31
for the nine months ended										2016				2015
Cash provided by (used in):
Operations:
	Net loss								$	(1,229)			$	(1,498)
	Adjustments to determine net cash flows:
		Items not involving cash:
			Provision for credit losses							449				1,226
			Income tax provision							3,099				2,100
			Stock-based compensation							-				17
			Interest income							(52,203)				(47,775)
			Interest expense							31,064				30,477
			Gain on debt settlement							-				(1,790)
		Interest received								51,303				47,258
		Interest paid								(28,511)				(24,550)
		Income taxes paid								(2,491)				(824)
	Change in operating assets and liabilities:
		Loans								(50,339)				(152,229)
		Deposits								32,325				82,448
		Change in other assets and liabilities								9,337				11,524
										(7,196)				(53,616)
Investing:
	Purchase of securities									(9,583)				-
	Proceeds from sale and maturity of securities									21,844				25,905
										12,261				25,905
Financing:
	Proceeds of shares issued by subsidiary, net of costs									5,000				15,690
	Notes payable									1,000				1,167
	Other liabilities									2,235				-
	Purchase of preferred shares for cancellation									-				(195)
	Dividends paid									(66)				(66)
	Dividends paid by subsidiary									(1,650)				(1,272)
										6,519				15,324
Increase (decrease) in cash and cash equivalents										11,584				(12,387)
Cash and cash equivalents, beginning of the period										130,614				147,301
Cash and cash equivalents, end of the period									$	142,198			$	134,914
Cash and cash equivalents is represented by:
	Cash								$	142,198			$	44,925
	Cash equivalents									-				89,989
Cash and cash equivalents, end of the period									$	142,198			$	134,914

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

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

Three and nine month periods ended July 31, 2016 and 2015

1. Reporting entity:

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

The Corporation’s principal subsidiary is VersaBank (“VB” or the “Bank”) which operates as a Schedule I bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions (OSFI). The Bank, whose shares of which the Corporation owns approximately 63% (October 31, 2015 – 68%), trade on the Toronto Stock Exchange, is involved in the business of providing commercial lending services to selected niche markets.

2. Basis of preparation:

a) Statement of compliance:

These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and have been prepared in accordance with International Accounting Standard (IAS) 34 – Interim Financial Reporting and do not include all of the information required for full annual financial statements. These interim Consolidated Financial Statements should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements for the year ended October 31, 2015.

The interim Consolidated Financial Statements for the three months and nine months ended July 31, 2016 and 2015 were approved by the Audit Committee of the Board of Directors on August 30, 2016.

b) Basis of measurement:

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

c) Functional and presentation currency:

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

d) Use of estimates and judgments:

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

When preparing financial statements, management is required to make an assessment of the Corporation’s ability to continue as a going concern. At July 31, 2016, the Corporation had a shareholders’ deficit of $4,154,000 which was primarily the result of operating losses and charges against equity of the parent company. The Corporation’s primary investment, VersaBank, on its own, has shareholders’ equity of $184,537,000 (see Note 19). In determining whether the Corporation on a non-consolidated basis has the ability to realize its assets and settle its obligations in the normal course of business and operate as a going concern, management has made certain estimates regarding future operating expenses and other obligations of the Corporation on a non-consolidated basis and the net realizable value of the Corporation’s investment in the common shares of the Bank. These obligations include the Series C Notes payable of the parent company which mature in 2018 (see Note 6) and the Class B Preferred shares of the parent company which must be redeemed in 2019 (see Note 9). By their very nature, these estimates made by management involve inherent risks and uncertainties, both general and specific, and risks exist that these estimates and predictions may not be achieved. The estimated net realizable value of the investment in the common shares of the Bank is impacted by current market conditions and market volatility. This estimate could impact the Corporation’s ability to declare dividends on its Class B Preferred Shares and meet its debt and equity obligations described above.

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

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

3. Significant accounting policies:

The accounting policies applied by the Corporation in these interim Consolidated Financial Statements are the same as those applied by the Corporation as at and for the year ended October 31, 2015 and are detailed in Note 3 of the Corporation’s 2015 Audited Consolidated Financial Statements.

4. Securities:

Portfolio analysis:

			July 31			October 31			July 31
				2016			2015			2015
Available-for-sale securities
Securities issued or guaranteed by:
Canadian provincial governments			$	9,713		$	9,607		$	9,634
Canadian municipal governments				267			279			276
Total available-for-sale securities			$	9,980		$	9,886		$	9,910
Held-to-maturity security
Debt of other financial institutions			$	-		$	12,547		$	12,564
Total securities			$	9,980		$	22,433		$	22,474

Canadian provincial government securities are carried at fair value based on quoted market prices (Level 1). Canadian municipal debt falls into Level 2 of the fair value hierarchy. See Note 3 (c) of the October 31, 2015 consolidated financial statements for more information.

5. Loans:

a) Portfolio analysis:

			July 31			October 31			July 31
				2016			2015			2015
Government loans			$	65,112		$	72,181		$	77,246
Loan and lease receivables				739,735			618,432			563,197
Residential mortgages				99,681			112,759			106,428
Commercial mortgages				220,699			269,193			260,348
Construction mortgages				260,711			237,100			232,467
Commercial loans				82,023			104,996			105,655
Credit card receivables and other				28,733			31,168			29,190
				1,496,694			1,445,829			1,374,531
Collective allowance				(2,893)			(3,212)			(3,118)
Accrued interest				5,205			5,043			4,824
Total loans, net of allowance for credit losses			$	1,499,006		$	1,447,660		$	1,376,237

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

			July 31			October 31			July 31
				2016			2015			2015
Government loans			$	14		$	18		$	20
Loan and lease receivables				332			269			250
Residential mortgages				121			268			238
Commercial mortgages				483			587			535
Construction mortgages				747			776			782
Commercial loans				138			228			227
Credit card receivables and other				1,058			1,066			1,066
			$	2,893		$	3,212		$	3,118

The Corporation holds security against the majority of its loans in the form of either mortgage interests over property, other registered securities over assets, guarantees and holdbacks on consumer loan and lease receivables (note 8).

b) Allowance for credit losses:

The allowance for credit losses results from the following:

										July 31			July 31
											2016			2015
For the three months ended				Collective			Individual			Total Allowance			Total Allowance
Balance, beginning of the period				$	3,104		$	-		$	3,104		$	3,086
Provision for credit losses					24			-			24			297
Write-offs					(235)			-			(235)			(265)
Balance, end of the period				$	2,893		$	-		$	2,893		$	3,118
										July 31			July 31
											2016			2015
For the nine months ended				Collective			Individual			Total Allowance			Total Allowance
Balance, beginning of the period				$	3,212		$	-		$	3,212		$	2,905
Provision for credit losses					449			-			449			1,226
Write-offs					(768)			-			(768)			(1,013)
Balance, end of the period				$	2,893		$	-		$	2,893		$	3,118

c) Impaired loans:

At July 31, 2016, there were $nil impaired loans (October 31, 2015 - $nil). At July 31, 2016, loans, other than credit card receivables, past due were $nil (October 31, 2015 - $nil). At July 31, 2016, credit card receivables overdue by one day or more totalled $2,527,000 (October 31, 2015 - $2,773,000).

6. Notes payable:

							July31			October 31			July31
								2016			2015			2015
Ten year term Series C Notes unsecured, maturing 2018, effective interest of 10.85%							$	59,676		$	59,053		$	58,851
Ten year term, unsecured, callable, subordinated notes payable by the Bank to an unrelated party, maturing between 2019 and 2021, net of issue costs of $461 (October 31, 2015 - $541), effective interest of 10.06%								14,039			13,959			13,934
Notes payable, secured by 1,731,658 shares of the Bank held by the Corporation, maturing in 2017, net of issue costs of $25 (October 31, 2015 - $50) effective interest of 7.99%								8,330			7,455			2,446
							$	82,045		$	80,467		$	75,231

7. Securitization liabilities:

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

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized residential insured mortgages and other assets are pledged as collateral for these liabilities.

8. Other liabilities:

			July 31			October 31			July 31
				2016			2015			2015
Accounts payable and other			$	11,075		$	10,303		$	8,083
Holdbacks payable on loan and lease receivables				77,683			61,003			52,344
			$	88,758		$	71,306		$	60,427

9. Preferred share liabilities:

At July 31, 2016, the Corporation has Class B Preferred Shares outstanding which have a redemption value of $27.4 million (October 31, 2015 – $27.4 million) less unamortized issue and conversion costs of $2.0 million (October 31, 2015 – $2.5 million).

As the preferred shares must be redeemed by the Corporation in 2019, the preferred share liability is being adjusted over the remaining term to redemption, until the liability is equal to the estimated redemption amount. The adjustment is included in interest expense in the Consolidated Statement of Income (Loss) calculated using an effective interest rate of 9.78% (2015 – 9.78%).

10. Share capital:

a) Share capital:

								Stock Options
						Commonsharesoutstanding		Number		Weighted-averageexerciseprice
Outstanding, October 31, 2015						44,592,260		466,423		$	6.23
Expired						-		(47,714)			11.22
Outstanding, July 31, 2016						44,592,260		418,709		$	5.66

In addition, at July 31, 2016, there were 314,572 (October 31, 2015 - 314,572) Class A Preferred Shares outstanding and 1,094,058 (October 31, 2015 - 1,094,058) Class B Preferred Shares outstanding.

The holders of Class B Preferred Shares are entitled to fixed cumulative dividends at the rate of 6.72%, payable in cash. The Class B Preferred Shares also provide each holder, at its option, with the right to convert into common shares of the Corporation on the basis of 12.5 common shares of the Corporation for each Class B Preferred Share.

b) Stock-based compensation:

The Corporation recorded in the Consolidated Statement of Income (Loss) for the three months and nine months ended July 31, 2016 an expense of $1,000 (July 31, 2015 - $3,000 recovery) and $2,000 recovery (July 31, 2015 - $28,000 recovery) respectively relating to DSU’s. At July 31, 2016 there were 166,060 (October 31, 2015 – 160,660) DSU’s outstanding.

11. Non-Interest Income:

			for the three months ended							For the nine months ended
			July 31			July 31				July 31			July 31
				2016			2015				2016			2015
Credit card non-interest revenue			$	328		$	360			$	916		$	978
Other income				16			8				38			32
Gain on debt settlement				-			1,790				-			1,790
			$	344		$	2,158			$	954		$	2,800

12. Income taxes:

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

					for the three months ended							for the nine months ended
					July 31			July 31				July 31			July 31
						2016			2015				2016			2015
Income tax on earnings of the Bank					$	947		$	670			$	2,548		$	1,851
Recognition of previously unrecognized deferred income tax asset						-			-				-			(724)
Income tax on dividends paid by the Corporation						184			100				551			973
					$	1,131		$	770			$	3,099		$	2,100

13. Loss per common share:

					for the three months ended							for the nine months ended
					July 31			July 31				July 31			July 31
						2016			2015				2016			2015
Net loss attributable to common shareholders					$	(1,000)		$	779			$	(3,566)		$	(2,455)
Less: dividends on preferred shares						(16)			(16)				(49)			(49)
Less: dividends on preferred shares of subsidiary						(346)			(514)				(1,050)			(951)
						(1,362)			249				(4,665)			(3,455)
Average number of common shares outstanding						44,592,000			44,592,000				44,592,000			42,695,000
Loss per common share:					$	(0.03)		$	0.01			$	(0.10)		$	(0.08)

14. Commitments and contingencies:

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

			July 31			October 31			July 31
				2016			2015			2015
Loan commitments			$	300,924		$	243,253		$	210,108
Undrawn credit card lines				129,955			140,071			142,783
Letters of credit				41,418			39,015			36,940
			$	472,297		$	422,339		$	389,831

15. Related party transactions:

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

The Corporation has loans to employees and key management personnel. At July 31, 2016 amounts due from key management personnel totalled $2,030,000 (October 31, 2015 - $2,030,000). The interest rates charged on these loans are similar to those charged in an arms-length transaction. Interest income earned on the above loans for the three months and nine months ended July 31, 2016 was $16,000 (July 31, 2015 - $16,000) and $47,000 (July 31, 2015 - $48,000) respectively. There were no provisions for credit losses related to loans issued to key management personnel for the three months and nine months ended July 31, 2016 and 2015.

16. Capital management:

a) Overview:

The Corporation’s policy is to maintain a capital base that is sufficient to sustain current operating activities and to ensure the Corporation has the ability to meet its obligations as they come due.

The Corporation’s principal subsidiary is the Bank and as a result, the following discussion on capital management is with respect to the capital management of the Bank. OSFI sets and monitors capital requirements for the Bank. Capital is managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and take into account forecasted capital needs and conditions in financial markets.

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

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

During the period ended July 31, 2016 there were no material changes in the Bank’s management of capital.

b) Risk-Based Capital Ratios:

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

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

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

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

						July 31, 2016							October 31, 2015
						"All-in"			"Transitional"				"All-in"			"Transitional"
Common Equity Tier 1 (CET1) capital
	Directly issued qualifying common share capital					$	147,369		$	147,369			$	142,369		$	142,369
	Retained earnings						7,827			7,827				2,903			2,903
	Accumulated other comprehensive income						4			4				13			13
CET1 capital before regulatory adjustments							155,200			155,200				145,285			145,285
	Total regulatory adjustments to CET1						(7,101)			(4,261)				(9,031)			(3,612)
Common Equity Tier 1 capital						$	148,099		$	150,939			$	136,254		$	141,673
Additional Tier 1 (AT1) capital
	Directly issued qualifying AT1 instruments					$	29,337		$	29,337			$	29,337		$	29,337
Tier 1 capital						$	177,436		$	180,276			$	165,591		$	171,010
Tier 2 capital
	Directly issued capital instruments subject to
	phase out from Tier 2					$	9,800		$	9,800			$	12,700		$	12,700
Tier 2 capital before regulatory adjustments							9,800			9,800				12,700			12,700
	Total regulatory adjustments to Tier 2 capital						-			-				-			-
Tier 2 capital						$	9,800		$	9,800			$	12,700		$	12,700
Total capital						$	187,236		$	190,076			$	178,291		$	183,710
Total risk-weighted assets						$	1,384,117		$	1,386,957			$	1,320,158		$	1,325,576
Capital ratios
	CET1 Ratio						10.70%			10.88%				10.32%			10.69%
	Tier 1 Capital Ratio						12.82%			13.00%				12.54%			12.90%
	Total Capital Ratio						13.53%			13.70%				13.51%			13.86%

c) Leverage Ratio:

The leverage ratio, which is prescribed under the Basel III Accord, is a supplementary measure to the risk-based capital requirements and is defined as the ratio of Tier 1 capital to its total exposures. The leverage ratio is calculated as follows:

			July 31			October 31
				2016			2015
On-balance sheet assets			$	1,685,294		$	1,625,806
Asset amounts deducted in determining Basel III "all in" Tier 1 Capital				(7,101)			(9,031)
Total on-balance sheet exposures				1,678,193			1,616,775
Off-balance sheet exposure at gross notional amount			$	472,297		$	422,339
Adjustments for conversion to credit equivalent amount				(334,857)			(301,674)
Off-balance sheet exposures				137,440			120,665
Tier 1 Capital				177,435			165,591
Total Exposures				1,815,633			1,737,440
Leverage Ratio				9.77%			9.53%

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

17. Interest rate and liquidity risk:

A large percentage of the cash and securities reflected on the Corporation’s Consolidated Balance Sheets is that of the Bank (note 19). As a holding company, PWC Capital Inc., on a non-consolidated basis, has no revenue generating activities and has cash obligations relating primarily to notes payable (note 6), preferred shares (note 9) and other operational requirements. On a non-consolidated basis, the Corporation does not depend on funding from its subsidiary, the Bank, other than normal dividends that may be declared from time to time by the Bank. As a result, the settlement of the obligations described above will be dependent upon cash and proceeds received from the sales of Bank shares, borrowings by the Corporation, equity contributions and/or restructuring of the Corporate group.

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

				July 31, 2016							October 31, 2015
				Increase 100 bps			Decrease 100 bps				Increase 100 bps			Decrease 100 bps
Impact on projected net interest
income during a 12 month period				$	2,761		$	(2,579)			$	3,371		$	(3,114)
Impact on reported equity
during a 60 month period				$	(1,014)		$	1,096			$	295		$	(86)
Duration difference between assets and
liabilities (months)					0.3							0.8

18. Fair Value of Financial Instruments:

Fair values are based on management’s best estimates of market conditions and valuation policies at a certain point in time. The estimates are subjective and involve particular assumptions and matters of judgment and as such, may not be reflective of future fair values. The Corporation’s loans and deposits lack an available market as they are not typically exchanged. Therefore, they are not necessarily representative of amounts realizable upon immediate settlement. See Note 23 to the October 31, 2015 Audited Consolidated Financial Statements for more information on fair values.

		July 31, 2016							October 31, 2015
					Fair value							Fair value
		Book			of assets				Book			of assets
		Value			and liabilities				Value			and liabilities
Assets
Cash and cash equivalents		$	142,198		$	142,198			$	130,614		$	130,614
Securities			9,980			9,980				22,433			22,386
Loans			1,499,006			1,499,432				1,447,660			1,449,567
Other financial assets			12,094			12,094				4,622			4,622
Liabilities
Deposits		$	1,357,963		$	1,371,029			$	1,325,828		$	1,333,366
Notes payable			82,045			75,300				80,467			66,333
Securitization liabilities			43,685			47,335				43,525			47,604
Other financial liabilities			88,758			88,758				71,306			71,306
Preferred share liabilities			25,320			16,027				24,850			16,433

19. Subsidiary company information:

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

Consolidated balance sheets
					July 31			October			July 31
						2016			2015			2015
Cash and cash equivalents					$	142,048		$	127,078		$	134,883
Securities						9,980			22,433			22,474
Loans, net of allowance for credit losses						1,499,006			1,447,660			1,376,237
Other assets						34,260			28,635			29,508
					$	1,685,294		$	1,625,806		$	1,563,102
Deposits					$	1,357,963		$	1,325,828		$	1,275,523
Subordinated notes payable						14,039			13,959			13,934
Securitization liabilities						43,685			43,525			43,625
Other liabilities						85,070			67,872			57,610
						1,500,757			1,451,184			1,390,692
Shareholders' equity						184,537			174,622			172,410
					$	1,685,294		$	1,625,806		$	1,563,102

Consolidated statements of income
				for the three months ended							for the nine months ended
				July 31			July 31				July 31			July 31
					2016			2015				2016			2015
Interest income				$	17,628		$	16,513			$	52,200		$	47,772
Interest expense					7,792			7,786				23,862			22,759
Net interest income					9,836			8,727				28,338			25,013
Non-interest income					343			368				953			1,010
Total revenue					10,179			9,095				29,291			26,023
Provision for credit losses					24			297				449			1,226
Net interest and non-interest income after
provision for credit losses					10,155			8,798				28,842			24,797
Non-interest expense					6,654			6,421				19,177			18,222
Restructuring charges					98			-				543			-
Income before income taxes					3,403			2,377				9,122			6,575
Income tax expense					947			670				2,548			1,127
Net income				$	2,456		$	1,707			$	6,574		$	5,448

VersaBank, a Schedule I chartered bank, is a branchless financial institution with approximately $1.7 billion in assets. VersaBank specializes in providing commercial lending services to selected niche markets and receives its deposits through a diversified deposit broker network across Canada.

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

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

To receive company news releases, please contact:

Wade MacBain at [email protected] (519) 488-1280

View source version on businesswire.com: http://www.businesswire.com/news/home/20160831005953/en/

FOR FURTHER INFORMATION PLEASE CONTACT:
PWC Capital Inc.
Investor Relations:
Wade MacBain, 519-488-1280
[email protected]
Visit our website at: http://pwccapital.com

Source: PWC Capital Inc.