VersaBank(VBNK) - 2021 Q4 - Annual Report

Independent Auditors' Report Opinion KPMG LLP issued an unqualified opinion, stating that VersaBank's consolidated financial statements for the years ended October 31, 2021, and 2020, are fairly presented in all material respects, prepared in accordance with IFRS - The auditors, KPMG LLP, have issued an unqualified opinion on the Bank's consolidated financial statements[3] - The financial statements audited include the consolidated balance sheets, statements of income and comprehensive income, changes in shareholders' equity, and cash flows for the years ended October 31, 2021 and 2020[7] Key Audit Matters The primary key audit matter was the 'Assessment of Allowance for Credit Losses for Performing Loans', considered significant due to high estimation uncertainty and judgment, with the allowance for expected credit losses for performing loans amounting to $1.453 million - The primary key audit matter was the assessment of the Allowance for Expected Credit Losses (ECL) for performing loans, which amounted to $1.453 million[10] - This area required significant auditor judgment due to estimation uncertainty in assessing significant increases in credit risk (SICR), selecting forward-looking information (FLI), and applying expert credit judgment (ECJ), especially concerning the impact of COVID-19[11][12][13] - Audit procedures included testing controls over the ECL process, independently assessing loan risk ratings, and involving credit risk specialists to evaluate the Bank's methodology, FLI, and ECJ adjustments[14][18] Responsibilities of Management and Auditors Management is responsible for preparing fair financial statements, maintaining internal controls, and assessing going concern, while auditors aim to obtain reasonable assurance that statements are free from material misstatement and issue an opinion - Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, including internal controls and going concern assessment[20][21] - The auditors' objectives are to obtain reasonable assurance about the absence of material misstatement and to issue an opinion, exercising professional judgment and skepticism throughout the audit[22][24] Consolidated Financial Statements Consolidated Balance Sheets As of October 31, 2021, VersaBank's total assets increased to $2.42 billion from $1.94 billion in 2020, with total liabilities growing to $2.08 billion from $1.69 billion, and shareholders' equity rising to $332.1 million from $255.3 million Consolidated Balance Sheet Summary (in thousands of CAD) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Total Assets | $2,415,086 | $1,943,885 | | Cash | $271,523 | $257,644 | | Loans, net | $2,103,050 | $1,654,910 | | Total Liabilities | $2,082,980 | $1,688,597 | | Deposits | $1,853,204 | $1,567,570 | | Subordinated notes payable | $95,272 | $4,889 | | Total Shareholders' Equity | $332,106 | $255,288 | | Share capital | $241,466 | $182,094 | | Retained earnings | $90,644 | $73,194 | Consolidated Statements of Income and Comprehensive Income For the year ended October 31, 2021, net income increased by 15.3% to $22.4 million from $19.4 million in 2020, driven by higher net interest income and a significant rise in non-interest income, with basic and diluted earnings per share increasing to $0.96 from $0.82 Consolidated Income Statement Summary (in thousands of CAD, except per share amounts) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Net interest income | $60,157 | $54,125 | | Non-interest income | $5,200 | $60 | | Total revenue | $65,357 | $54,185 | | Provision for (recovery of) credit losses | ($438) | ($344) | | Non-interest expenses | $35,006 | $27,777 | | Income before income taxes | $30,789 | $26,752 | | Net income | $22,380 | $19,405 | | Basic and diluted income per common share | $0.96 | $0.82 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased from $255.3 million in 2020 to $332.1 million in 2021, primarily due to the issuance of $75.1 million in common shares and $22.4 million in net income, partially offset by preferred share redemptions and dividend payments - Total shareholders' equity grew by $76.8 million to $332.1 million at the end of fiscal 2021[31] - Key changes in 2021 included the issuance of $75.1 million in common shares, redemption of all Series 3 preferred shares ($15.7 million), and the addition of $22.4 million in net income[31] Consolidated Statements of Cash Flows The Bank's cash position increased by $14.7 million to $271.5 million in 2021, with operations using $108.3 million due to increased loans, investing activities using $8.4 million for acquisitions, and financing activities providing $131.4 million from subordinated notes and common share issuances Consolidated Cash Flow Summary (in thousands of CAD) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Cash provided by (used in) Operations | ($108,305) | $139,595 | | Cash provided by (used in) Investing | ($8,440) | $9,755 | | Cash provided by (used in) Financing | $131,403 | ($30,851) | | Change in cash | $14,658 | $118,499 | | Cash, end of year | $271,523 | $257,644 | Notes to Consolidated Financial Statements Note 3. Significant accounting policies The Bank's significant accounting policies align with IFRS, covering consolidation, business combinations, revenue recognition, financial instrument classification, a three-stage Expected Credit Loss (ECL) model, and IFRS 16 for leases - The Bank uses a three-stage model for estimating Expected Credit Losses (ECL): Stage 1 for performing loans (12-month ECL), Stage 2 for loans with a significant increase in credit risk (Lifetime ECL), and Stage 3 for credit-impaired loans[54][55] - To incorporate forward-looking information (FLI) into its ECL calculations, the Bank utilizes credit risk modeling systems and macroeconomic scenario data from Moody's Analytics, including baseline, upside, and downside scenarios[66][67] - The Bank adopted IFRS 16 for leases, resulting in the recognition of right-of-use assets and corresponding lease liabilities on the balance sheet[87] Note 4. Acquisition On November 30, 2020, the Bank acquired Digital Boundary Group (DBG) for $9.9 million, recognizing $5.8 million in goodwill and $3.9 million in intangible assets, with DBG contributing $5.2 million to non-interest income and $1.5 million to net income in fiscal 2021 - The Bank acquired Digital Boundary Group (DBG) for total consideration of $9.9 million, consisting of $8.5 million in cash and a $1.4 million deferred payment[98] - The acquisition generated $5.8 million in goodwill and $3.9 million in intangible assets (customer relationships, brands, etc)[101] - In fiscal 2021, DBG contributed $5.2 million to the Bank's non-interest income and $1.5 million to its net income[102] Note 6. Loans, net of allowance for credit losses The Bank's net loan portfolio grew 27% to $2.10 billion in 2021 from $1.65 billion in 2020, primarily comprising Point of Sale Loans and Leases and Commercial Real Estate Mortgages, with total allowance for credit losses decreasing to $1.45 million and no impaired loans at year-end Loan Portfolio by Category (in thousands of CAD) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Commercial real estate mortgages | $757,576 | $606,299 | | Commercial real estate loans | $26,569 | $25,574 | | Point of sale loans and leases | $1,279,576 | $980,677 | | Public sector and other financing | $32,587 | $37,596 | | Total Loans (Gross) | $2,096,308 | $1,650,146 | Allowance for Credit Losses (ECL) by Stage (in thousands of CAD) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Stage 1 ECL | $1,316 | $1,583 | | Stage 2 ECL | $137 | $192 | | Stage 3 ECL | $ - | $ - | | Total ECL Allowance | $1,453 | $1,775 | - As of October 31, 2021, the Bank had no impaired loans, consistent with the prior year[132] - The average effective yield on the total loan portfolio was 4.52% in 2021, down from 4.94% in 2020[131] Note 9. Deposits Total deposits increased to $1.85 billion in 2021 from $1.57 billion in 2020, sourced through a diversified network, with the average effective interest rate on deposits decreasing to 1.19% from 1.55% Deposits Summary (in thousands of CAD) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Deposits | $1,853,204 | $1,567,570 | | Average effective interest rate | 1.19% | 1.55% | Note 13. Share Capital The Bank's total share capital increased to $241.5 million in 2021 from $182.1 million in 2020, driven by a $73.2 million common share offering and the redemption of $16.8 million in Series 3 preferred shares - In September 2021, the Bank completed a common share offering, including an over-allotment option, issuing 6,325,000 shares for total net cash proceeds of CAD $73.2 million[145][146] - On April 30, 2021, the Bank redeemed all 1,681,320 of its outstanding Series 3 preferred shares for an aggregate amount of $16.8 million[153] Note 17. Nature and extent of risks arising from financial instruments The Bank manages credit, liquidity, and market risks through a robust framework, employing policies for loan approval and concentration limits, matching cash flows for liquidity, and using simulation and stress testing for interest rate sensitivity - The Bank's primary risks are identified as credit risk, liquidity risk, and market risk (mainly interest rate risk)[165] - Credit risk management involves policies on loan approval, concentration limits, and risk rating; due to COVID-19, the Bank increased the frequency and comprehensiveness of its credit risk reviews[167][169] Interest Rate Sensitivity Analysis (in thousands of CAD) | Impact of Rate Change | +100 bps | -100 bps | | :--- | :--- | :--- | | Sensitivity of Net Interest Income (12 months) | | | | 2021 | $4,147 | ($3,220) | | 2020 | $2,569 | ($2,099) | | Sensitivity of Reported Equity (60 months) | | | | 2021 | $1,603 | ($1,586) | | 2020 | ($2,527) | $1,604 | Note 22. Capital management The Bank maintains a strong capital base, exceeding all OSFI regulatory requirements under Basel III, with a CET1 ratio of 15.18% and a Total Capital Ratio of 20.80% as of October 31, 2021, bolstered by a common share offering and USD $75 million in Tier 2 subordinated notes - The Bank's capital management goal is to maintain a well-capitalized position to protect depositors, support growth, and provide shareholder returns[196] Regulatory Capital Ratios | Ratio | Oct 31, 2021 | Oct 31, 2020 | Regulatory Minimum* | | :--- | :--- | :--- | :--- | | CET1 Capital Ratio | 15.18% | 13.88% | 7.0% | | Tier 1 Capital Ratio | 15.86% | 15.73% | 8.5% | | Total Capital Ratio | 20.80% | 16.16% | 10.5% | | Leverage Ratio | 12.60% | 12.19% | 3.0% | *Includes 2.50% capital conservation buffer. - In 2021, the Bank strengthened its capital position by issuing USD $75 million in NVCC-compliant subordinated notes (qualifying as Tier 2 capital) and completing a common share offering that increased regulatory capital by CAD $75.1 million[200][201]