EX-4.5 3 dp220105_ex0405.htm EXHIBIT 4.5

 

Exhibit 4.5

 

 

Interim Consolidated Financial Statements

July 31, 2024

(Unaudited)

 

1 

 

VERSABANK

Consolidated Balance Sheets 

(Unaudited)

 

(thousands of Canadian dollars)  

As at  July 31
2024		  October 31
2023		  July 31
2023
Assets         
Cash  $247,983   $132,242   $87,726 
Securities (note 4)   153,026    167,940    182,944 
Loans, net of allowance for credit losses (note 5)   4,049,449    3,850,404    3,661,672 
Other assets (note 6)   65,978    51,024    48,503 
   $4,516,436   $4,201,610   $3,980,845 
Liabilities and Shareholders' Equity               
Deposits  $3,821,185   $3,533,366   $3,328,017 
Subordinated notes payable (note 7)   101,641    106,850    101,585 
Other liabilities (note 8)   184,625    184,236    186,200 
    4,107,451    3,824,452    3,615,802 
Shareholders' equity:               
Share capital (note 9)   228,471    228,471    228,191 
Contributed surplus   2,789    2,513    2,339 
Retained earnings   177,584    146,043    134,461 
Accumulated other comprehensive income   141    131    52 
    408,985    377,158    365,043 
   $4,516,436   $4,201,610   $3,980,845 

 

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

 

2 

 

VERSABANK

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

 

(thousands of Canadian dollars, except per share amounts)
   for the
three months ended		  for the
nine months ended
   July 31
2024		  July 31
2023		  July 31
2024		  July 31
2023
Interest income:            
Loans  $66,614   $56,206   $197,786   $153,765 
Other   5,032    3,883    14,395    9,480 
    71,646    60,089    212,181    163,245 
Interest expense:                    
Deposits and other   45,357    33,725    130,097    85,100 
Subordinated notes   1,345    1,435    4,330    4,333 
    46,702    35,160    134,427    89,433 
Net interest income   24,944    24,929    77,754    73,812 
Non-interest income   2,052    1,930    6,594    5,650 
Total revenue   26,996    26,859    84,348    79,462 
Provision for (recovery of) credit losses (note 5)   (1)   171    (112)   793 
    26,997    26,688    84,460    78,669 
Non-interest expenses:                    
Salaries and benefits   7,507    7,453    21,454    24,139 
General and administrative   4,833    4,446    12,723    10,888 
Premises and equipment   1,194    980    3,566    2,913 
    13,534    12,879    37,743    37,940 
Income before income taxes   13,463    13,809    46,717    40,729 
Income tax provision (note 10)   3,758    3,806    12,485    11,046 
Net income  $9,705   $10,003   $34,232   $29,683 
Other comprehensive income (loss):
 
Items that may subsequently be reclassified to net income: Foreign exchange gain (loss) on translation of foreign operations
   2    (42)   10    (47)
Comprehensive income  $9,707   $9,961   $34,242   $29,636 
Basic and diluted income per common share
(note 11)		  $0.36   $0.38   $1.29   $1.10 

 

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

 

3 

 

VERSABANK

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

(thousands of Canadian dollars)
   for the
three months ended		  for the
nine months ended
   July 31
2024		  July 31
2023		  July 31
2024		  July 31
2023
Common shares (note 9):            
Balance, beginning of the period  $214,824   $215,233   $214,824   $225,982 
Purchased and cancelled during the period   -    (689)   -    (11,438)
Balance, end of the period  $214,824   $214,544   $214,824   $214,544 

Preferred shares (note 9):

 

Series 1 preferred shares

 

                    
Balance, beginning and end of the period  $13,647   $13,647   $13,647   $13,647 
                     
Total share capital  $228,471   $228,191   $228,471   $228,191 
Contributed surplus:                    
Balance, beginning of the period  $2,717   $2,147   $2,513   $1,612 
Stock-based compensation (note 9)   72    192    276    727 
Balance, end of the period  $2,789   $2,339   $2,789   $2,339 
Retained earnings:                    
Balance, beginning of the period  $168,776   $125,398   $146,043   $109,335 
Adjustment for purchased and cancelled common shares   -    (45)   -    (1,854)
Net income   9,705    10,003    34,232    29,683 
Dividends paid on common and preferred shares   (897)   (895)   (2,691)   (2,703)
Balance, end of the period  $177,584   $134,461   $177,584   $134,461 
Accumulated other comprehensive income:                    
Balance, beginning of the period  $139   $94   $131   $99 
Other comprehensive income (loss)   2    (42)   10    (47)
Balance, end of the period  $141   $52   $141   $52 
                     
Total shareholders' equity  $408,985   $365,043   $408,985   $365,043 

 

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

 

4 

 

VERSABANK

Consolidated Statements of Cash Flows

(Unaudited)

 

(thousands of Canadian dollars)      
   for the nine months ended
   July 31
2024		  July 31
2023
Cash provided by (used in):          
Operations:          
Net income  $34,232   $29,683 
Adjustments to determine net cash flows:          
Items not involving cash:          
Provision for (recovery of) credit losses   (112)   793 
Stock-based compensation   276    727 
Income tax provision   12,485    11,046 
Interest income   (212,181)   (163,245)
Interest expense   134,427    89,433 
Amortization   1,792    1,348 
Accretion of discount on securities   (95)   (126)
Foreign exchange rate change on assets and liabilities   (8,272)   (667)
Interest received   207,137    157,430 
Interest paid   (129,261)   (68,786)
Income taxes paid   (15,568)   (13,276)
Change in operating assets and liabilities:          
Loans   (193,956)   (664,618)
Deposits   282,909    651,238 
Change in other assets and liabilities   5,609    33,997 
    119,422    64,977 
Investing:          
Sale (purchase) of securities (note 19)   14,130    (42,155)
Purchase of property and equipment   (18,681)   (350)
    (4,551)   (42,505)
Financing:          
Purchase and cancellation of common shares   -    (13,292)
Redemption of subordinated notes payable   (5,000)   - 
Dividends paid   (2,691)   (2,703)
Repayment of lease obligations   (541)   (527)
    (8,232)   (16,522)
Change in cash   106,639    5,950 
Effect of exchange rate changes on cash   9,102    (6,805)
Cash, beginning of the period   132,242    88,581 
Cash, end of the period  $247,983   $87,726 

 

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

 

5 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

1.Reporting entity:

 

VersaBank (the “Bank”) operates as a Schedule I bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions Canada (“OSFI”). The Bank, whose shares trade on the Toronto Stock Exchange and Nasdaq Stock Exchange, provides commercial lending and banking services to select niche markets in Canada and the United States as well as cybersecurity services through the operations of its wholly owned subsidiary DRT Cyber Inc., (“DRTC”). The Bank is incorporated and domiciled in Canada, and maintains its registered office at Suite 2002, 140 Fullarton Street, London, Ontario, Canada, N6A 5P2.

 

2.Basis of preparation:

 

a)Statement of compliance:

 

These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and have been prepared in accordance with International Accounting Standard (“IAS”) 34 – Interim Financial Reporting and do not include all of the information required for full annual financial statements. These interim Consolidated Financial Statements should be read in conjunction with the Bank’s audited Consolidated Financial Statements for the year ended October 31, 2023.

 

The interim Consolidated Financial Statements for the three and nine months ended July 31, 2024 and 2023 were approved by the Audit Committee of the Bank’s Board of Directors on September 3, 2024.

 

b)Basis of measurement:

 

These interim Consolidated Financial Statements have been prepared on the historical cost basis except securities (note 4), the investment in Canada Stablecorp Inc. (note 6) and an interest rate swap (note 12), which are measured at fair value in the Consolidated Balance Sheets.

 

c)Functional and presentation currency:

 

These interim Consolidated Financial Statements are presented in Canadian dollars, which is the Bank’s functional currency. Functional currency is also determined for each of the Bank’s subsidiaries, and items included in the interim financial statements of the subsidiaries are measured using their functional currency.

 

6 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

d)Use of estimates and judgements:

 

In preparing these interim Consolidated Financial Statements, management has exercised judgement 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 judgement was applied include assessing significant changes in credit risk on financial assets and in the selection of relevant forward-looking information in assessing the Bank’s allowance for expected credit losses on its financial assets as described in note 5 – Loans. Estimates are applied in the determination of the allowance for expected credit losses on financial assets, the fair value of stock options granted as described in note 9, the fair value of the investment in Canada Stablecorp Inc. as described in note 6, and the measurement of deferred taxes. It is reasonably possible, on the basis of existing knowledge, that actual results may vary from those expected in the development 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 known.

 

3.Significant accounting policies and future accounting changes:

 

The accounting policies applied by the Bank in these interim Consolidated Financial Statements are the same as those applied by the Bank as at and for the year ended October 31, 2023 and are detailed in note 3 of the Bank’s 2023 audited Consolidated Financial Statements.

 

4.Securities:

 

As at July 31, 2024, the Bank held securities totaling $153.0 million (October 31, 2023 - $167.9 million), including accrued interest, comprised of a Government of Canada Treasury Bill for $150.0 million with a face value of $150.0 million at maturity on August 1, 2024, yielding 4.51%, and a Government of Canada Bond for $3.0 million with a face value totaling $3.0 million, yielding 4.76%, with a 3.75% coupon and maturing on May 1, 2025.

 

5.Loans, net of allowance for credit losses:

 

The Bank organizes its lending portfolio into the following four broad asset categories: Point-of-Sale Loans and Leases, Commercial Real Estate Mortgages, Commercial Real Estate Loans, and Public Sector and Other Financing. These categories have been established in the Bank’s proprietary, internally developed asset management system and have been designed to catalogue individual lending assets as a function primarily of their key risk drivers, the nature of the underlying collateral, and the applicable market segment.

 

The Point-of-Sale Loans and Leases Receivable Purchase Program (“POS/RPP Financing”) asset category is comprised of point-of-sale loan and lease receivables acquired from the Bank’s network of origination and servicing partners as well as warehouse loans that provide bridge financing to the Bank’s origination and servicing partners for the purpose of accumulating and seasoning practical volumes of individual loans and leases prior to the Bank purchasing the cashflow receivables derived from same.

 

7 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

The Commercial Real Estate Mortgages (“CRE Mortgages”) asset category is comprised primarily of Residential Construction, Term, CMHC Insured and Land Mortgages. All of these loans are business-to- business loans with the underlying credit risk exposure being primarily consumer in nature given that the vast majority of the loans are related to properties that are designated primarily for residential use. The portfolio benefits from diversity in its underlying security in the form of a broad range of such collateral properties.

 

The Commercial Real Estate Loans (“CRE Loans”) asset category is comprised primarily of condominium corporation financing loans.

 

The Public Sector and Other Financing (“PSOF”) asset category is comprised primarily of public sector loans and leases, a small balance of corporate loans and leases and single family residential conventional and insured mortgages.

 

Summary of loans and allowance for credit losses:

 

(thousands of Canadian dollars)      
   July 31
2024		  October 31
2023		  July 31
2023
Point-of-sale loans and leases  $3,228,354   $2,879,320   $2,776,126 
Commercial real estate mortgages   736,345    889,069    810,630 
Commercial real estate loans   8,523    8,793    9,298 
Public sector and other financing   56,923    55,054    49,627 
    4,030,145    3,832,236    3,645,681 
Allowance for credit losses   (2,401)   (2,513)   (2,697)
Accrued interest   21,705    20,681    18,688 
Total loans, net of allowance for credit losses  $4,049,449   $3,850,404   $3,661,672 

8 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

The following table provides a summary of loan amounts, ECL allowance amounts, and expected loss (“EL”) rates by lending asset category:

 

(thousands of Canadian dollars)
   As at July 31, 2024  As at October 31, 2023
   Stage 1  Stage 2  Stage 3  Total  Stage 1  Stage 2  Stage 3  Total
Point-of-sale loans and leases  $3,219,239   $9,057   $58   $3,228,354   $2,873,078   $6,242   $-   $2,879,320 
ECL allowance   565    -    -    565    100    -    -    100 
EL %   0.02%   0.00%   0.00%   0.02%   0.00%   0.00%   0.00%   0.00%
Commercial real estate mortgages  $524,773   $211,572   $-   $736,345   $717,755   $155,993   $15,321   $889,069 
ECL allowance   1,213    387    -    1,600    1,699    523    -    2,222 
EL %   0.23%   0.18%   0.00%   0.22%   0.24%   0.34%   0.00%   0.25%
Commercial real estate loans  $7,083   $1,440   $-   $8,523   $8,793   $-   $-   $8,793 
ECL allowance   48    11    -    59    42    -    -    42 
EL %   0.68%   0.76%   0.00%   0.69%   0.48%   0.00%   0.00%   0.48%
Public sector and other financing  $56,281   $642   $-   $56,923   $49,293   $5,761   $-   $55,054 
ECL allowance   176    1    -    177    104    45    -    149 
EL %   0.31%   0.16%   0.00%   0.31%   0.21%   0.78%   0.00%   0.27%
Total loans  $3,807,376   $222,711   $58   $4,030,145   $3,648,919   $167,996   $15,321   $3,832,236 
Total ECL allowance   2,002    399    -    2,401    1,945    568    -    2,513 
Total EL %   0.05%   0.18%   0.00%   0.06%   0.05%   0.34%   0.00%   0.07%

 

The Bank’s maximum exposure to credit risk is the carrying value of its financial assets. The Bank holds security against the majority of its loans in the form of mortgage interests over property, other registered securities over assets, guarantees and/or cash reserves (holdbacks) on loan and lease receivables included in the POS/RPP Financing portfolio (see note 8).

 

Allowance for credit losses

 

The Bank must maintain an allowance for expected credit losses that is adequate, in management’s opinion, to absorb all credit related losses in the Bank’s lending and treasury portfolios. The expected credit loss methodology requires the recognition of credit losses based on 12 months of expected losses for performing loans which is reflected in the Bank’s Stage 1 grouping. The Bank recognizes lifetime expected losses on loans that have experienced a significant increase in credit risk since origination which is reflected in the Bank’s Stage 2 grouping. While there is elevated credit risk in the Bank’s POS/RPP Financing portfolio as at the measurement date, management does not believe that this represents significant increase in credit risk in that portfolio and the majority of this portfolio remains in Stage 1. Impaired loans require recognition of lifetime losses and are reflected in Stage 3 grouping.

 

Forward-looking Information

 

The Bank has sourced credit risk modeling systems and forecast macroeconomic scenario data from Moody’s Analytics, a third-party service provider for the purpose of computing forward-looking credit risk parameters under multiple macroeconomic scenarios that consider both market-wide and idiosyncratic factors and influences. The macroeconomic indicator data utilized by the Bank for the purpose of sensitizing probability of default and loss given default term structure data to forward economic conditions include, but are not limited to: real GDP, the national unemployment rate, long term interest rates, the consumer price index, the S&P/TSX Index and the price of oil. These specific macroeconomic indicators were selected in an attempt to ensure that the spectrum of fundamental macroeconomic influences on the key drivers of the credit risk profile of the Bank’s balance sheet, including: corporate, consumer and real estate market

 

9 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

dynamics; corporate, consumer and SME borrower performance; geography; as well as collateral value volatility, are appropriately captured and incorporated into the Bank’s forward macroeconomic sensitivity analysis.

 

Key assumptions driving Moody’s Analytics’ baseline macroeconomic forecast trends this quarter include: the Bank of Canada cutting interest rates at its September and December policy meetings; the Canadian economy returning to modest growth in late 2024 and early 2025 and inflation approaching the Bank of Canada’s target by the end of 2024; elevated debt service obligations strain household finances but result in only modest loan deterioration; high financing costs and low sales volumes cause home prices to contract until the end of the 2024 when falling interest rates help rejuvenate demand; the various military conflicts continue but do not escalate to other regional powers; supply-chain bottlenecks continue to ease which aids in moderating inflation; outbreaks of disease or illness have very little economic impact; and global oil prices stabilize with West Texas Intermediate in the low US $80 per barrel range until early 2025.

 

Management developed ECL estimates using credit risk parameter term structure forecasts sensitized to individual baseline, upside and downside forecast macroeconomic scenarios, each weighted at 100%, and subsequently computed the variance of each to the Bank’s reported ECL as at July 31, 2024 in order to assess the alignment of the Bank’s reported ECL with the Bank’s credit risk profile, and further, to assess the scope, depth and ultimate effectiveness of the credit risk mitigation strategies that the Bank has applied to its lending portfolios (see Expected Credit Loss Sensitivity below).

 

Expected credit loss sensitivity:

 

The following table presents the sensitivity of the Bank’s estimated ECL to a range of individual macroeconomic scenarios, that in isolation may not reflect the Bank’s actual expected ECL exposure, as well as the variance of each to the Bank’s reported ECL as at July 31, 2024:

 

(thousands of Canadian dollars)            
   Reported
ECL		  100%
Upside		  100% Baseline  100% Downside
Allowance for expected credit losses  $2,401   $1,574   $1,867   $2,570 
Variance from reported ECL        (827)   (534)   169 
Variance from reported ECL (%)        (34%)   (22%)   7%

10 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the three months ended July 31, 2024:

 

(thousands of Canadian dollars)            
   Stage 1  Stage 2  Stage 3  Total
Point-of-sale loans and leases            
Balance at beginning of period  $207   $-   $-   $207 
Transfer in (out) to Stage 1   -    -    -    - 
Transfer in (out) to Stage 2   -    -    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   358    -    -    358 
Loan originations   -    -    -    - 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   358    -    -    358 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $565   $-   $-   $565 
Commercial real estate mortgages                    
Balance at beginning of period  $1,643   $299   $-   $1,942 
Transfer in (out) to Stage 1   65    (65)   -    - 
Transfer in (out) to Stage 2   (230)   230    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   (172)   (58)   -    (230)
Loan originations   7    -    -    7 
Derecognitions and maturities   (100)   (19)   -    (119)
Provision for (recovery of) credit losses   (430)   88    -    (342)
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $1,213   $387   $-   $1,600 
Commercial real estate loans                    
Balance at beginning of period  $58   $-   $-   $58 
Transfer in (out) to Stage 1   -    -    -    - 
Transfer in (out) to Stage 2   (11)   11    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   1    -    -    1 
Loan originations   -    -    -    - 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   (10)   11    -    1 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $48   $11   $-   $59 
Public sector and other financing                    
Balance at beginning of period  $185   $10   $-   $195 
Transfer in (out) to Stage 1   9    (9)   -    - 
Transfer in (out) to Stage 2   -    -    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   (18)   -    -    (18)
Loan originations   -    -    -    - 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   (9)   (9)   -    (18)
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $176   $1   $-   $177 
                     
Total balance at end of period  $2,002   $399   $-   $2,401 

11 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the three months ended July 31, 2023:

 

(thousands of Canadian dollars)            
   Stage 1  Stage 2  Stage 3  Total
Point-of-sale loans and leases            
Balance at beginning of period  $627   $-   $-   $627 
Transfer in (out) to Stage 1   52    (52)   -    - 
Transfer in (out) to Stage 2   (85)   85    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   52    (33)   -    19 
Loan originations   -    -    -    - 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   19    -    -    19 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $646   $-   $-   $646 
Commercial real estate mortgages                    
Balance at beginning of period  $1,647   $120   $-   $1,767 
Transfer in (out) to Stage 1   14    (14)   -    - 
Transfer in (out) to Stage 2   (106)   106    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   138    44    -    182 
Loan originations   56    -    -    56 
Derecognitions and maturities   (94)   (5)   -    (99)
Provision for (recovery of) credit losses   8    131    -    139 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $1,655   $251   $-   $1,906 
Commercial real estate loans                    
Balance at beginning of period  $59   $-   $-   $59 
Transfer in (out) to Stage 1   -    -    -    - 
Transfer in (out) to Stage 2   -    -    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   (5)   -    -    (5)
Loan originations   -    -    -    - 
Derecognitions and maturities   (4)   -    -    (4)
Provision for (recovery of) credit losses   (9)   -    -    (9)
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $50   $-   $-   $50 
Public sector and other financing                    
Balance at beginning of period  $70   $3   $-   $73 
Transfer in (out) to Stage 1   -    -    -    - 
Transfer in (out) to Stage 2   (8)   8    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   (4)   10    -    6 
Loan originations   16    -    -    16 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   4    18    -    22 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $74   $21   $-   $95 
                     
Total balance at end of period  $2,425   $272   $-   $2,697 

12 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the nine months ended July 31, 2024:

 

(thousands of Canadian dollars)            
   Stage 1  Stage 2  Stage 3  Total
Point-of-sale loans and leases            
Balance at beginning of period  $100   $-   $-   $100 
Transfer in (out) to Stage 1   -    -    -    - 
Transfer in (out) to Stage 2   -    -    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   465    -    -    465 
Loan originations   -    -    -    - 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   465    -    -    465 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $565   $-   $-   $565 
Commercial real estate mortgages                    
Balance at beginning of period  $1,699   $523   $-   $2,222 
Transfer in (out) to Stage 1   297    (297)   -    - 
Transfer in (out) to Stage 2   (392)   392    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   (278)   (169)   -    (447)
Loan originations   84    -    -    84 
Derecognitions and maturities   (197)   (62)   -    (259)
Provision for (recovery of) credit losses   (486)   (136)   -    (622)
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $1,213   $387   $-   $1,600 
Commercial real estate loans                    
Balance at beginning of period  $42   $-   $-   $42 
Transfer in (out) to Stage 1   -    -    -    - 
Transfer in (out) to Stage 2   (11)   11    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   6    -    -    6 
Loan originations   11    -    -    11 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   6    11    -    17 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $48   $11   $-   $59 
Public sector and other financing                    
Balance at beginning of period  $104   $45   $-   $149 
Transfer in (out) to Stage 1   27    (27)   -    - 
Transfer in (out) to Stage 2   -    -    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   32    (17)   -    15 
Loan originations   13    -    -    13 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   72    (44)   -    28 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $176   $1   $-   $177 
                     
Total balance at end of period  $2,002   $399   $-   $2,401 

13 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the nine months ended July 31, 2023:

 

(thousands of Canadian dollars)            
   Stage 1  Stage 2  Stage 3  Total
Point-of-sale loans and leases            
Balance at beginning of period  $545   $-   $-   $545 
Transfer in (out) to Stage 1   122    (122)   -    - 
Transfer in (out) to Stage 2   (257)   257    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   236    (135)   -    101 
Loan originations   -    -    -    - 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   101    -    -    101 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $646   $-   $-   $646 
Commercial real estate mortgages                    
Balance at beginning of period  $1,150   $137   $-   $1,287 
Transfer in (out) to Stage 1   93    (93)   -    - 
Transfer in (out) to Stage 2   (224)   224    -    - 
Transfer in (out) to Stage 3   -    (13)   13    - 
Net remeasurement of loss allowance   560    6    (13)   553 
Loan originations   205    -    -    205 
Derecognitions and maturities   (129)   (10)   -    (139)
Provision for (recovery of) credit losses   505    114    -    619 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $1,655   $251   $-   $1,906 
Commercial real estate loans                    
Balance at beginning of period  $54   $-   $-   $54 
Transfer in (out) to Stage 1   -    -    -    - 
Transfer in (out) to Stage 2   -    -    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   -    -    -    - 
Loan originations   -    -    -    - 
Derecognitions and maturities   (4)   -    -    (4)
Provision for (recovery of) credit losses   (4)   -    -    (4)
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $50   $-   $-   $50 
Public sector and other financing                    
Balance at beginning of period  $17   $1   $-   $18 
Transfer in (out) to Stage 1   -    -    -    - 
Transfer in (out) to Stage 2   (8)   8    -    - 
Transfer in (out) to Stage 3   -    -    -    - 
Net remeasurement of loss allowance   6    12    -    18 
Loan originations   59    -    -    59 
Derecognitions and maturities   -    -    -    - 
Provision for (recovery of) credit losses   57    20    -    77 
Write-offs   -    -    -    - 
Recoveries   -    -    -    - 
Balance at end of period  $74   $21   $-   $95 
                     
Total balance at end of period  $2,425   $272   $-   $2,697 

14 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

Credit quality:

 

The Bank assigns a risk rating to each lending asset comprising its lending portfolio. A risk rating is assigned as a function of each new credit application, annual review or an amendment to a facility. The risk rating considers the credit risk attributes of the lending asset, structure, individual borrower circumstances as well as local, regional and global macroeconomic and market conditions. The Bank aggregates its risk rating assignments into the following three broad categories:

 

i)Satisfactory – The borrower and lending asset valuation are of acceptable credit quality.

 

ii)       Watchlist – The borrower or the lending asset valuation exhibits potential credit weakness or a downward trend which, if not mitigated, will potentially weaken the Bank’s position. The lending asset requires close supervision.

 

iii)       Classified – The collection of the structural payment and/or the full repayment of the lending asset is uncertain.

 

As of July 31, 2024, 97% (October 31, 2023 – 99%) of the Bank’s lending assets were categorized Satisfactory. There was no material change in the Bank’s processes for managing credit risk during the current quarter.

 

6.Other assets:

 

(thousands of Canadian dollars)         
   July 31
2024		  October 31
2023		  July 31
2023
Accounts receivable  $5,710   $3,858   $3,177 
Prepaid expenses and other   21,517    22,130    21,682 
Property and equipment   24,239    6,536    6,687 
Right-of-use assets   2,909    3,427    3,602 
Deferred income tax asset   2,251    4,058    2,641 
Interest rate swap (note 12)   150    1,517    1,118 
Investment (note 6a)   953    953    953 
Goodwill   5,754    5,754    5,754 
Intangible assets   2,495    2,791    2,889 
   $65,978   $51,024   $48,503 

 

a)In February 2021, the Bank acquired an 11% investment in Canada Stablecorp Inc. for cash consideration of $953,000. The Bank has made an irrevocable election to designate this investment at fair value through other comprehensive income at initial recognition and any future changes in the fair value of the investment will be recognized in other comprehensive income (loss). Amounts recorded in other comprehensive income (loss) will not be reclassified to profit and loss at a later date.

 

15 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

7.Subordinated notes payable:

 

(thousands of Canadian dollars)         
   July 31
2024		  October 31
2023		  July 31
2023
Issued April 2021, unsecured, non-viability contingent capital compliant, subordinated notes payable, principal amount of US $75.0 million, fixed effective interest rate of 5.38%, maturing May 2031.  $101,641   $101,931   $96,669 
Issued March 2019, unsecured, non-viability contingent capital compliant, subordinated notes payable, principal amount of $5.0 million, $500,000 is held by related party (note 14), fixed effective interest rate of 10.41%, maturing March 2029.   -    4,919    4,916 
   $101,641   $106,850   $101,585 

 

On April 30, 2024, the Bank redeemed its $5.0 million, unsecured, non-viability contingent capital compliant, subordinate note payable using the Bank’s general funds.

 

8.Other liabilities:

 

(thousands of Canadian dollars)         
   July 31
2024		  October 31 2023  July 31
2023
Accounts payable and other  $9,252   $9,681   $7,265 
Current income tax liability   3,109    7,466    4,527 
Deferred income tax liability   332    731    659 
Lease obligations   3,230    3,771    3,944 
Cash collateral and amounts held in escrow   6,421    8,818    9,657 
Cash reserves on loan and lease receivables   162,281    153,769    160,148 
   $184,625   $184,236   $186,200 

 

9.Share capital:

 

a)Common shares:

 

At July 31, 2024, there were 25,964,424 (October 31, 2023 - 25,964,424) common shares outstanding.

 

On August 5, 2022, the Bank received approval from the Toronto Stock Exchange (“TSX”) to proceed with a Normal Course Issuer Bid (“NCIB”) for its common shares. On September 21, 2022, the Bank received approval from the Nasdaq to proceed with a NCIB for its common shares. Pursuant to the NCIB, VersaBank was authorized to purchase for cancellation up to 1,700,000 of its common shares representing approximately 9.54% of its public float.

 

16 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

The Bank was eligible to make purchases commencing on August 17, 2022 and the NCIB was terminated on August 16, 2023. The purchases were made by VersaBank through the facilities of the TSX and alternate trading systems and the Nasdaq in accordance with the rules of the TSX and such alternate trading systems and the Nasdaq, as applicable, and the prices that VersaBank paid for the Common Shares was at the market price of such shares at the time of acquisition. VersaBank made no purchases of Common Shares other than open market purchases. All shares purchased under the NCIB were cancelled.

 

No common shares were issued or purchased in the quarter end July 31, 2024. For the quarter ended July 31, 2023, the Bank purchased and cancelled 79,562 common shares for $734,000, reducing the Bank’s Common Share capital value by $689,000 and retained earnings by $45,000.

 

No common shares were issued or purchased in the nine-month period ended July 31, 2024. For the nine- month period ended July 31, 2023, the Bank purchased and cancelled 1,321,358 common shares for $13.3 million, reducing the Bank’s Common Share capital value by $11.4 million and retained earnings by $1.9 million.

 

b)Preferred shares:

 

At July 31, 2024, there were 1,461,460 (October 31, 2023 - 1,461,460) Series 1 preferred shares outstanding. These shares are Basel III compliant, non-cumulative rate reset preferred shares and include non-viability contingent capital (“NVCC”) provisions. As a result, these shares qualify as Additional Tier 1 Capital (see note 15).

 

The holders of the Series 1 preferred shares are entitled to receive a non-cumulative fixed dividend in the amount of $0.6772 annually per share, payable quarterly, as and when declared by the Board of Directors for the period ending October 31, 2024. The dividend represents an annual yield of 6.772% based on the stated issue price per share. Thereafter, the dividend rate will reset every five years at a level of 543 basis points over the then five year Government of Canada bond yield.

 

The Bank maintains the right to redeem, subject to the approval of OSFI, up to all of the outstanding Series 1 preferred shares on October 31, 2024 and on October 31 every five years thereafter at a price of $10.00 per share. Should the Bank choose not to exercise its right to redeem the Series 1 preferred shares, holders of these shares will have the right to convert their shares into an equal number of non-cumulative, floating rate Series 2 preferred shares. Holders of Series 2 preferred shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors, equal to the 90-day Government of Canada Treasury bill rate plus 543 basis points.

 

17 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

c)Stock options

 

Stock option transactions during the three and nine-month periods ended July 31, 2024 and 2023:

 

   for the three months ended  for the nine months ended
   July 31, 2024  July 31, 2023  July 31, 2024  July 31, 2023
   Number of options  Weighted average exercise price  Number of options  Weighted average exercise price  Number of options  Weighted average exercise price  Number of options  Weighted average exercise price
Outstanding, beginning of period   861,793   $15.90    952,776   $15.53    874,393   $15.90    965,766   $15.53 
Granted   -    -    -    -    -    -    1,500    15.90 
Exercised   -    -    -    -    -    -    -    - 
Forfeited/cancelled   (2,325)   15.90    (26,000)   15.90    (14,925)   15.90    (40,490)   15.90 
Expired   -    -    -    -    -    -    -    - 
Outstanding, end of period   859,468   $15.90    926,776   $15.52    859,468   $15.90    926,776   $15.52 

 

For the three and nine-month periods ended July 31, 2024, the Bank recognized $72,000 (July 31, 2023 - $192,000) and $276,000 (July 31, 2023 - $1.0 million) in compensation expense related to the estimated fair value of options granted.

 

10.Income tax provision:

 

Income tax provision for the three and nine month periods ended July 31, 2024 was $3.8 million (July 31, 2023 - $3.8 million) and $12.5 million (July 31, 2023 - $11.0 million) respectively. The Bank’s combined statutory federal and provincial income tax rate in Canada is approximately 27% (2023 - 27%). The Bank’s effective rate reflects the statutory rate adjusted for certain items not being taxable or deductible for income tax purposes.

 

11.Income per common share:

 

(thousands of Canadian dollars, except shares outstanding and per share amounts)
   for the three months ended  for the nine months ended
   July 31
2024		  July 31
2023		  July 31
2024		  July 31
2023
Net income  $9,705   $10,003   $34,232   $29,683 
Less: dividends on preferred shares   (247)   (247)   (741)   (741)
    9,458    9,756    33,491    28,942 
Weighted average number of common shares outstanding   25,964,424    25,957,755    25,964,424    26,386,915 
Income per common share:  $0.36   $0.38   $1.29   $1.10 

 

Common shares associated with the Series 1 NVCC preferred shares are contingently issuable shares and would only have a dilutive impact upon issuance.

 

18 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

12.Derivative instruments:

 

At July 31, 2024, the Bank had an outstanding contract established for asset liability management purposes to swap between fixed and floating interest rates with a notional amount totaling $22.4 million (October 31, 2023 - $20.8 million), of which $22.4 million (October 31, 2023 - $20.8 million) qualified for hedge accounting. The Bank enters into interest rate swap contracts for its own account exclusively and does not act as an intermediary in this market. As required under the accounting standard relating to hedges, at July 31, 2024, $150,000 (October 31, 2023 - $1.5 million) relating to this contract was included in other assets and the offsetting amount included in the carrying values of the assets to which they relate. Approved counterparties are limited to major Canadian chartered banks. The carrying amount of the hedged item recognized in the loans was $22.7 million.

 

13.Commitments and contingencies:

 

The amount of credit-related commitments represents the maximum amount of additional credit that the Bank could be obligated to extend.

 

(thousands of Canadian dollars)      
   July 31
2024		  October 31
2023		  July 31
2023
Loan commitments  $367,494   $405,426   $341,679 
Letters of credit   66,167    75,963    82,847 
   $433,661   $481,389   $424,526 

 

14.Related party transactions:

 

The Bank’s Board of Directors and Senior Executive Officers represent key management personnel and are related parties. At July 31, 2024, amounts due from these related parties totaled $1.5 million (October 31, 2023 - $1.5 million) and an amount due from a corporation controlled by key management personnel totalled $4.8 million (October 31, 2023 - $3.9 million). The interest rates charged on loans and advances to related parties are based on mutually agreed-upon terms. Interest income earned on the above loans for the three and nine months ended July 31, 2024, was $41,000 (July 31, 2023 - $26,000) and $121,000 (July 31, 2023 - $75,000). As at July 31, 2024, there were no specific provisions for credit losses associated with loans issued to key management personnel (October 31, 2023 - $nil), and all loans issued to key management personnel were current. On April 30, 2024, the Bank redeemed all of its issued and outstanding $5.0 million subordinated note payable originally issued in April 2019; $500,000 of this amount was held by a related party (note 7).

 

19 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

15.Capital management:

 

a)Overview:

 

The Bank’s policy is to maintain a strong capital base so as to retain investor, creditor and market confidence as well as to support the future growth and development of the business. The impact of the level of capital held on shareholders’ return is an important consideration, and the Bank recognizes the need to maintain a balance between the higher returns that may be possible with greater leverage and the advantages and security that may be afforded by a more robust capital position.

 

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 that take into account, amongst other items, forecasted capital requirements and current and anticipated financial market conditions.

 

The goal is to maintain adequate regulatory capital for the Bank to be considered well capitalized, protect deposits and provide capacity to support organic growth as well as to capitalize on 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 fair value through other comprehensive income securities (Common Equity Tier 1 capital), preferred shares (Additional Tier 1 capital) and subordinated notes (Tier 2 capital).

 

The Bank monitors its capital adequacy and related capital ratios on a daily basis and has stipulated policies, which are approved by the Board of Directors, setting internal targets and thresholds for its capital ratios. These capital ratios consist of the leverage ratio and the risk-based capital ratios.

 

The Bank makes use of the Standardized Approach for credit risk as prescribed by OSFI and, therefore, may include eligible ECL allowance amounts in its Tier 2 capital, up to a maximum of 1.25% of its credit risk-weighted assets calculated under the Standardized Approach.

 

During the period ended July 31, 2024, 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 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 the purpose of determining their risk-based capital ratios. Required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 capital ratio (“CET1”), an 8.5% Tier 1 capital ratio and a 10.5% Total capital ratio, all of which include a 2.50% capital conservation buffer.

 

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, both on and off-balance sheet

 

20 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

assets of the Bank are assigned a weighting ranging between 0% to 150% to determine the Bank’s risk- weighted equivalent assets and its risk-based capital ratios.

 

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

 

(thousands of Canadian dollars)

 

   July 31
2024		  October 31
2023
Common Equity Tier 1 (CET1) capital      
Directly issued qualifying common share capital  $214,824   $214,824 
Contributed surplus   2,789    2,513 
Retained earnings   177,584    146,043 
Accumulated other comprehensive income   141    131 
CET1 before regulatory adjustments   395,338    363,511 
Regulatory adjustments applied to CET1   (10,842)   (12,699)
Common Equity Tier 1 capital  $384,496   $350,812 
           
Additional Tier 1 capital          
Directly issued qualifying Additional Tier 1 instruments  $13,647   $13,647 
Total Tier 1 capital  $398,143   $364,459 
           
Tier 2 capital          
Directly issued Tier 2 capital instruments  $103,568   $109,033 
Tier 2 capital before regulatory adjustments   103,568    109,033 
Eligible stage 1 and stage 2 allowance   2,401    2,513 
Total Tier 2 capital  $105,969   $111,546 
Total regulatory capital  $504,112   $476,005 
Total risk-weighted assets  $3,273,524   $3,095,092 
           
Capital ratios          
CET1 capital ratio   11.75%   11.33%
Tier 1 capital ratio   12.16%   11.78%
Total capital ratio   15.40%   15.38%

 

As at July 31, 2024 and October 31, 2023, the Bank exceeded all of the minimum Basel III regulatory capital requirements prescribed by OSFI.

 

21 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

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 the Bank’s total exposures. The Basel III minimum leverage ratio is 3.0%. The Bank’s leverage ratio is calculated as follows:

 

(thousands of Canadian dollars)

   July 31
2024		  October 31
2023
On-balance sheet assets  $4,516,436   $4,201,610 
Assets amounts adjusted in determining the Basel III          
Tier 1 capital   (10,842)   (12,699)
Total on-balance sheet exposures   4,505,594    4,188,911 
Total off-balance sheet exposure at gross notional amount  $433,661   $481,389 
Adjustments for conversion to credit equivalent amount   (275,050)   (281,705)
Total off-balance sheet exposures   158,611    199,684 
Tier 1 capital   398,143    364,459 
Total exposures   4,664,205    4,388,595 
Leverage ratio   8.54%   8.30%

 

As at July 31, 2024 and October 31, 2023, the Bank was in compliance with the leverage ratio prescribed by OSFI.

 

22 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

16.Interest rate risk position:

 

The Bank is subject to interest rate risk, which is the risk that a movement in interest rates could negatively impact net interest margin, net interest income and the economic value of assets, liabilities and shareholders’ equity. The following table provides the duration difference between the Bank’s assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s earnings during a 12 month-period.

 

(thousands of Canadian dollars)

   July 31, 2024  October 31, 2023
   Increase
100 bps		  Decrease
100 bps		  Increase
100 bps		  Decrease
100 bps
Increase (decrease):            
Impact on projected net interest income during a 12 month period  $5,444   $(5,457)  $4,046   $(4,059)
Duration difference between assets and liabilities (months)   (2.8)    (2.0) 

 

17.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 judgement and, as such, may not be reflective of future fair values. The Bank’s loans and deposits lack an available market as they are not typically exchanged and, therefore, the book value of these instruments is not necessarily representative of amounts realizable upon immediate settlement. See note 21 of the October 31, 2023 audited Consolidated Financial Statements for more information on fair values.

 

(thousands of Canadian dollars)
   July 31, 2024  October 31, 2023
   Carrying Value  Fair value Level 1  Fair Value Level 2  Fair Value Level 3  Total Fair Value  Carrying Value  Fair value Level 1  Fair Value Level 2  Fair Value Level 3  Total Fair Value
Assets                              
Cash  $247,983   $247,983   $-   $-   $247,983   $132,242   $132,242   $-   $-   $132,242 
Securities   153,026    153,026    -    -    153,026    167,940    167,940    -    -    167,940 
Loans   4,049,449    -    -    4,007,130    4,007,130    3,850,404    -    -    3,837,599    3,837,599 
Derivatives   150    -    150    -    150    1,517    -    1,517    -    1,517 
Other financial assets   953    -    -    953    953    953    -    -    953    953 
Liabilities                                                  
Deposits  $3,821,185   $-   $-   $3,791,490   $3,791,490   $3,533,366   $-   $-   $3,436,491   $3,436,491 
Subordinated notes payable   101,641    -    98,390    -    98,390    106,850    -    109,033    -    109,033 
Other financial liabilities   181,184    -    -    181,184    181,184    176,039    -    -    176,039    176,039 

23 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

18.Operating segmentation:

 

The Bank has established two reportable operating segments, those being Digital Banking and DRTC (cybersecurity services). The two operating segments are strategic business operations providing distinct products and services to different markets and are separately managed as a function of the distinction in the nature of each business. The following summarizes the operations of each of the reportable segments:

 

Digital Banking – The Bank employs a branchless business-to-business model using its proprietary financial technology to address underserved segments in the Canadian and US banking markets. VersaBank obtains its deposits and provides the majority of its loans and leases electronically via innovative deposit and lending solutions for financial intermediaries.

 

DRTC (cybersecurity services and banking and financial technology development) – Leveraging its internally developed IT security software and capabilities, VersaBank established a wholly-owned subsidiary, DRT Cyber Inc., to pursue significant large-market opportunities in cybersecurity and develop innovative solutions to address the rapidly growing volume of cyber threats challenging financial institutions, multi-national corporations and government entities.

 

The basis for the determination of the reportable segments is a function primarily of the systematic, consistent process employed by the Bank’s chief operating decision maker, the Chief Executive Officer, and the Chief Financial Officer in reviewing and interpreting the operations and performance of each segment. The accounting policies applied to these segments are consistent with those employed in the preparation of the Bank’s Consolidated Financial Statements, as disclosed in note 3 of the Bank’s 2023 audited Consolidated Financial Statements.

 

Performance is measured based on segment net income, as included in the Bank’s internal management reporting. Management has determined that this measure is the most relevant in evaluating segment results and in the allocation of resources.

 

24 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

The following table sets out the results of each reportable operating segment as at and for the three and nine months ended July 31, 2024 and 2023:

 

(thousands of Canadian dollars)  
   for the three months ended
  July 31, 2024  July 31, 2023
   Digital
Banking		  DRTC  Eliminations/ Adjustments  Consolidated  Digital
Banking		  DRTC  Eliminations/ Adjustments  Consolidated
Net interest income  $24,944   $-   $-   $24,944   $24,929   $-   $-   $24,929 
Non-interest income   175    2,219    (342)   2,052    101    2,020    (191)   1,930 
Total revenue   25,119    2,219    (342)   26,996    25,030    2,020    (191)   26,859 
Provision for (recovery of) credit losses   (1)   -    -    (1)   171    -    -    171 
    25,120    2,219    (342)   26,997    24,859    2,020    (191)   26,688 
Non-interest expenses:                                        
Salaries and benefits   5,945    1,562    -    7,507    5,891    1,562    -    7,453 
General and administrative   4,729    446    (342)   4,833    4,257    380    (191)   4,446 
Premises and equipment   824    370    -    1,194    610    370    -    980 
    11,498    2,378    (342)   13,534    10,758    2,312    (191)   12,879 
Income (loss) before income taxes   13,622    (159)   -    13,463    14,101    (292)   -    13,809 
Income tax provision   3,811    (53)   -    3,758    3,999    (193)   -    3,806 
Net income (loss)  $9,811   $(106)  $-   $9,705   $10,102   $(99)  $-   $10,003 
                                         
Total assets  $4,507,158   $27,285   $(18,007)  $4,516,436   $3,971,781   $25,485   $(16,421)  $3,980,845 
                                         
Total liabilities  $4,102,239   $29,471   $(24,259)  $4,107,451   $3,609,832   $29,123   $(23,153)  $3,615,802 

 

(thousands of Canadian dollars)      
   for the nine months ended
   July 31, 2024  July 31, 2023
   Digital Banking  DRTC  Eliminations/ Adjustments  Consolidated  Digital Banking  DRTC  Eliminations/ Adjustments  Consolidated
Net interest income  $77,754   $-   $-   $77,754   $73,812   $-   $-   $73,812 
Non-interest income   557    7,055    (1,018)   6,594    225    5,999    (574)   5,650 
Total revenue   78,311    7,055    (1,018)   84,348    74,037    5,999    (574)   79,462 
Provision for (recovery of) credit losses   (112)   -    -    (112)   793    -    -    793 
    78,423    7,055    (1,018)   84,460    73,244    5,999    (574)   78,669 
Non-interest expenses:                                        
Salaries and benefits   17,040    4,414    -    21,454    19,505    4,634    -    24,139 
General and administrative   12,450    1,291    (1,018)   12,723    10,250    1,212    (574)   10,888 
Premises and equipment   2,437    1,129    -    3,566    1,845    1,068    -    2,913 
    31,927    6,834    (1,018)   37,743    31,600    6,914    (574)   37,940 
Income (loss) before income taxes   46,496    221    -    46,717    41,644    (915)   -    40,729 
Income tax provision   12,431    54    -    12,485    11,779    (733)   -    11,046 
Net income (loss)  $34,065   $167   $-   $34,232   $29,865   $(182)  $-   $29,683 
                                         
Total assets  $4,507,158   $27,285   $(18,007)  $4,516,436   $3,971,781   $25,485   $(16,421)  $3,980,845 
                                         
Total liabilities  $4,102,239   $29,471   $(24,259)  $4,107,451   $3,609,832   $29,123   $(23,153)  $3,615,802 
                                         

 

The Bank has operations in the US, through both its Digital Banking and DRTC businesses, however as at July 31, 2024, substantially all of the Bank’s earnings and assets are based in Canada.

 

25 

 

VERSABANK

Notes to Interim Consolidated Financial Statements 

(Unaudited)

 

Three & nine month periods ended July 31, 2024 and 2023

 

19.Comparative balances:

 

The interim financial statements have been reclassified, where applicable, to conform with the financial statement presentation used in the current period. Cash flows related to the Bank’s investments in securities were reflected in operating activities in the comparative period and are now reflected as investing activities, consistent with the presentation and disclosure in the Bank’s annual audited financial statements for the year ended October 31, 2023. The change did not affect the Bank’s comparative period earnings.

 

20.Subsequent event:

 

Acquisition of Stearns Bank Holdingford, N.A.

 

On August 30, 2024 the Bank through its wholly-owned US subsidiary VersaHoldings US Corp., acquired 100% of the outstanding shares of shares of Minnesota-based Stearns Bank Holdingford, N.A. ("SBH"), a privately held, wholly-owned subsidiary of Stearns Financial Services Inc. based in St. Cloud, Minnesota, for cash consideration of approximately US$14.0 million (CA$19.3 million), subject to closing related adjustments. SBH is a fully operational, OCC (Office of the Comptroller of the Currency)-chartered national bank, focused on small business lending. The acquisition follows the approval for acquisition received in June 2024 from OSFI, as well as the US’s OCC and the US Federal Reserve.

 

Upon the close of the share acquisition of SBH, the Bank acquired approximately US$61.1 million in assets and assumed approximately US$54.1 million in deposits and other liabilities and renamed SBH as VersaBank USA. The acquisition will provide the Bank with access to US deposits to support the growth of its Receivable Purchase Program business, which the Bank launched in the United States in Fiscal 2022. The acquisition is expected to be accretive to the Bank’s earnings per share within the first year after closing; and, VersaBank USA was well capitalized, as per the OCC’s definition of same, with a Total Capital ratio in excess of 10% as at August 30, 2024.

 

26