VersaBank(VBNK) - 2022 Q3 - Quarterly Report

Interim Consolidated Financial Statements Consolidated Balance Sheets The Consolidated Balance Sheets provide a snapshot of VersaBank's financial position as of July 31, 2022, October 31, 2021, and July 31, 2021, showing significant growth in total assets, loans, and deposits, alongside an increase in shareholders' equity Consolidated Balance Sheet Highlights (thousands of Canadian dollars) | As at | July 31, 2022 | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | :--- | | Total Assets | $3,075,343 | $2,415,086 | $2,285,771 | | Loans, net of allowance for credit losses | $2,814,121 | $2,103,050 | $1,952,154 | | Deposits | $2,475,063 | $1,853,204 | $1,817,746 | | Shareholders' Equity | $346,648 | $332,106 | $252,032 | Consolidated Statements of Income and Comprehensive Income The Consolidated Statements of Income and Comprehensive Income detail VersaBank's financial performance for the three and nine months ended July 31, 2022 and 2021. The Bank reported increased net interest income and total revenue for both periods, but a decrease in basic and diluted earnings per common share for the nine-month period, primarily due to a higher weighted average number of common shares outstanding Income Statement Highlights (thousands of Canadian dollars, except per share amounts) | Metric | 3 Months Ended July 31, 2022 | 3 Months Ended July 31, 2021 | 9 Months Ended July 31, 2022 | 9 Months Ended July 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $20,062 | $14,542 | $54,189 | $44,011 | | Total revenue | $21,239 | $15,729 | $58,140 | $47,121 | | Net income | $5,720 | $5,436 | $16,229 | $16,470 | | Basic and diluted income per common share | $0.20 | $0.25 | $0.56 | $0.72 | | Weighted average number of common shares outstanding | 27,441,082 | 21,123,559 | 27,441,082 | 21,123,559 | - Net interest income increased by 37.96% for the three months ended July 31, 2022, and by 23.12% for the nine months ended July 31, 2022, compared to the prior year periods[5] - Basic and diluted income per common share decreased by 20% for the three months and 22.22% for the nine months ended July 31, 2022, despite an increase in net income for the three-month period and a slight decrease for the nine-month period, primarily due to a higher weighted average number of common shares outstanding[5] Consolidated Statements of Changes in Shareholders' Equity The Consolidated Statements of Changes in Shareholders' Equity illustrate the movements in common shares, preferred shares, contributed surplus, retained earnings, and accumulated other comprehensive income (loss) for the three and nine months ended July 31, 2022 and 2021. Key changes include an increase in total share capital and retained earnings, reflecting net income and stock-based compensation Shareholders' Equity Highlights (thousands of Canadian dollars) | Metric | July 31, 2022 | July 31, 2021 | | :--- | :--- | :--- | | Total share capital | $242,510 | $166,404 | | Retained earnings | $104,071 | $85,626 | | Accumulated other comprehensive income (loss) | $67 | $2 | | Total shareholders' equity | $346,648 | $252,032 | - Total shareholders' equity increased by $94,616 thousand (37.54%) from July 31, 2021, to July 31, 2022[6] - The Bank recognized $1.0 million in stock-based compensation for the nine months ended July 31, 2022, compared to $nil in the prior year[6] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows present the cash generated from or used in operating, investing, and financing activities for the nine months ended July 31, 2022 and 2021. The Bank experienced a significant net cash outflow from operations and investing activities in 2022, leading to a substantial decrease in cash at the end of the period Cash Flow Highlights (thousands of Canadian dollars) | Activity | 9 Months Ended July 31, 2022 | 9 Months Ended July 31, 2021 | | :--- | :--- | :--- | | Cash provided by (used in) Operations | $(45,896) | $(10,230) | | Cash provided by (used in) Investing | $(134,173) | $(8,493) | | Cash provided by (used in) Financing | $(3,271) | $59,271 | | Change in cash | $(183,340) | $40,548 | | Cash, end of the period | $84,214 | $297,005 | - Cash used in operations increased significantly from $(10,230) thousand in 2021 to $(45,896) thousand in 2022, primarily driven by a substantial increase in loans[7] - Investing activities resulted in a cash outflow of $(134,173) thousand in 2022, largely due to the purchase of securities, compared to $(8,493) thousand in 2021[7] Notes to Interim Consolidated Financial Statements 1. Reporting Entity VersaBank operates as a Schedule I bank in Canada, regulated by OSFI, providing commercial lending and banking services in Canada and the US. It also offers cybersecurity services through its subsidiary, DRT Cyber Inc. (DRTC). The Bank has two reportable operating segments: Digital Banking and DRTC - VersaBank operates as a Schedule I bank under the Bank Act (Canada) and is regulated by OSFI[8] - The Bank provides commercial lending and banking services in Canada and the United States[8] - The Bank has two reportable operating segments: Digital Banking and DRTC (cybersecurity services and banking/financial technology development)[8] 2. Basis of Preparation This section outlines the basis for preparing the interim Consolidated Financial Statements, which adhere to IFRS and IAS 34. The statements are prepared on a historical cost basis, with certain exceptions, and are presented in Canadian dollars. Management applies significant judgment and estimates, particularly in assessing credit risk and expected credit losses, which are influenced by dynamic macroeconomic conditions - Interim Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standard (IAS) 34 – Interim Financial Reporting[10] - Statements are prepared on the historical cost basis, except for the investment in Canada Stablecorp Inc. which is measured at fair value through other comprehensive income[12] - Management exercises significant judgment and uses estimates, particularly in assessing credit risk, expected credit losses, and deferred income taxes, with consideration of macroeconomic factors like monetary policy, inflation, and geo-political risks[14][16] a) Statement of compliance%20Statement%20of%20compliance) This subsection confirms that the interim Consolidated Financial Statements adhere to International Financial Reporting Standards (IFRS) and IAS 34 – Interim Financial Reporting - These interim Consolidated Financial Statements comply with IFRS as issued by the IASB and IAS 34 – Interim Financial Reporting[10] b) Basis of measurement%20Basis%20of%20measurement) The statements are primarily prepared on a historical cost basis, with the exception of certain investments measured at fair value through other comprehensive income - The statements are prepared on the historical cost basis, with the exception of the investment in Canada Stablecorp Inc. which is measured at fair value through other comprehensive income[12] c) Functional and presentation currency%20Functional%20and%20presentation%20currency) The interim Consolidated Financial Statements are presented in Canadian dollars, which also serves as the Bank's functional currency - The interim Consolidated Financial Statements are presented in Canadian dollars, which is the Bank's functional currency[13] d) Use of estimates and judgements%20Use%20of%20estimates%20and%20judgements) Management applies significant judgment and estimates in areas such as credit risk assessment, expected credit losses, and deferred income taxes, influenced by dynamic macroeconomic conditions - Management applies significant judgment and estimates in areas such as assessing significant changes in credit risk, selecting forward-looking information for expected credit losses (ECL), and measuring deferred income taxes[14] - Estimates are influenced by macroeconomic factors including monetary policy tightening, inflation, labor market strength, and geo-political risks, leading to inherent uncertainty[16] 3. Significant Accounting Policies and Future Accounting Changes The Bank's accounting policies remain consistent with those applied in the 2021 audited Consolidated Financial Statements, with the notable update of presenting segmented information in accordance with IFRS 8 Segment Reporting, effective January 31, 2022 - The Bank's accounting policies are consistent with those from the year ended October 31, 2021[18] - Effective January 31, 2022, the Bank began presenting segmented information in its Consolidated Financial Statements in accordance with IFRS 8 Segment Reporting, identifying Digital Banking and DRTC as reportable operating segments[18] 4. Securities During the quarter ended July 31, 2022, VersaBank purchased Government of Canada Treasury Bills and a U.S. Government Treasury Bill, totaling approximately $134.1 million. These securities are measured at amortized cost, with their carrying value approximating fair value - During the quarter ended July 31, 2022, the Bank purchased Government of Canada Treasury Bills for $88.8 million (face value $90.0 million, weighted average yield 2.60%) and a U.S. Government Treasury Bill for USD $34.9 million (CAD $45.3 million) (face value USD $35 million, yield 2.15%)[19] - The total carrying value of securities at July 31, 2022, was $133,682 thousand, measured at amortized cost, which approximates fair value[3][19] 5. Loans This section details VersaBank's lending portfolio, categorized into Point-of-Sale Loans and Leases, Commercial Real Estate Mortgages, Commercial Real Estate Loans, and Public Sector and Other Financing. The total loan portfolio, net of allowance for credit losses, significantly increased to $2.81 billion as of July 31, 2022. The Bank maintains an allowance for expected credit losses (ECL) based on IFRS 9 methodology, incorporating forward-looking macroeconomic information - The Bank organizes its lending portfolio into four broad asset categories: Point of Sale Loans and Leases, Commercial Real Estate Mortgages, Commercial Real Estate Loans, and Public Sector and Other Financing[20] Total Loans, Net of Allowance for Credit Losses (thousands of Canadian dollars) | As at | July 31, 2022 | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | :--- | | Total loans, net | $2,814,121 | $2,103,050 | $1,952,154 | - The Bank's ECL is estimated using the IFRS 9 expected credit loss methodology, recognizing expected credit losses on both performing and non-performing loans[26] a) Summary of loans and allowance for credit losses%20Summary%20of%20loans%20and%20allowance%20for%20credit%20losses) This subsection provides a detailed breakdown of the loan portfolio by category and the associated allowance for credit losses (ECL) and expected loss rates. Point-of-Sale loans and leases saw a substantial increase, contributing significantly to the overall loan growth Loan Portfolio and ECL Allowance (thousands of Canadian dollars) | Category | July 31, 2022 | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | :--- | | Point-of-sale loans and leases | $1,998,993 | $1,279,576 | $1,144,902 | | Commercial real estate mortgages | $755,042 | $757,576 | $738,063 | | Commercial real estate loans | $13,510 | $26,569 | $30,044 | | Public sector and other financing | $35,605 | $32,587 | $33,201 | | Total loans | $2,803,150 | $2,096,308 | $1,946,210 | | Allowance for credit losses | $(1,699) | $(1,453) | $(1,732) | | Total loans, net of allowance for credit losses | $2,814,121 | $2,103,050 | $1,952,154 | - Point-of-sale loans and leases increased by 56.2% from October 31, 2021, to July 31, 2022[25] - The total Expected Credit Loss (ECL) allowance increased to $1,699 thousand at July 31, 2022, from $1,453 thousand at October 31, 2021[25] Assessment of significant increase in credit risk ("SICR")%20Assessment%20of%20significant%20increase%20in%20credit%20risk%20(%22SICR%22)) The Bank assesses significant increases in credit risk (SICR) by comparing the risk of default at the reporting date against the risk at initial recognition. This assessment considers internal risk ratings, watchlist status, loan review status, delinquency, and qualitative factors such as macroeconomic and market conditions - SICR is assessed by comparing the risk of default over the remaining expected life against the risk of default at initial recognition[28] - Factors considered for SICR include internal risk rating, internal watchlist status, loan review status, delinquency status, and qualitative factors like macroeconomic trends and portfolio composition[29][31] Expected credit loss model - Estimation of expected credit losses%20Expected%20credit%20loss%20model%20-%20Estimation%20of%20expected%20credit%20losses) The Bank estimates expected credit losses (ECL) as the discounted difference between contractual and expected cash flows. It incorporates forward-looking macroeconomic information, utilizing third-party modeling systems from Moody's Analytics to develop probability of default (PD) and loss given default (LGD) forecasts under multiple scenarios - Expected credit losses are estimated as the discounted difference between contractual and expected cash flows[32] - The Bank incorporates forward-looking information into ECL estimation using credit risk parameter models and proxy datasets to develop PD and LGD term structure forecasts[33] - Third-party service provider Moody's Analytics is used for credit risk modeling systems and forecast macroeconomic scenario data to compute forward-looking credit risk parameters[33] Expected Credit Loss Sensitivity%20Expected%20Credit%20Loss%20Sensitivity) This section presents the sensitivity of the Bank's estimated Expected Credit Loss (ECL) to various macroeconomic scenarios (upside, baseline, downside). The reported ECL of $1,699k at July 31, 2022, shows sensitivity, with a downside scenario increasing ECL by 18% and an upside scenario decreasing it by 34% Expected Credit Loss Sensitivity (thousands of Canadian dollars) | Scenario | ECL Reported | Upside (100%) | Baseline (100%) | Downside (100%) | | :--- | :--- | :--- | :--- | :--- | | Allowance for expected credit losses | $1,699 | $1,129 | $1,436 | $2,000 | | Variance from reported ECL | - | $(570) | $(263) | $301 | | Variance from reported ECL (%) | - | (34%) | (15%) | 18% | - The ECL model recognizes 12 months of expected losses for Stage 1 (performing loans) and lifetime expected losses for Stage 2 (significant increase in credit risk) and Stage 3 (impaired loans)[40] Reconciliation of ECL Allowance (Three Months Ended July 31, 2022)%20Reconciliation%20of%20ECL%20Allowance%20(Three%20Months%20Ended%20July%2031,%202022)) This table reconciles the Expected Credit Loss (ECL) allowance by lending asset category for the three months ended July 31, 2022. The total provision for credit losses for the period was $166k, with Point-of-Sale loans and leases contributing $109k - Total provision for (recovery of) credit losses for the three months ended July 31, 2022, was $166 thousand[5] - Point-of-sale loans and leases had a provision for credit losses of $109 thousand, while Commercial real estate mortgages had $47 thousand[43] Reconciliation of ECL Allowance (Three Months Ended July 31, 2021)%20Reconciliation%20of%20ECL%20Allowance%20(Three%20Months%20Ended%20July%2031,%202021)) This table reconciles the Expected Credit Loss (ECL) allowance by lending asset category for the three months ended July 31, 2021. The total provision for credit losses for the period was $96k, with Commercial real estate mortgages being the largest contributor - Total provision for (recovery of) credit losses for the three months ended July 31, 2021, was $96 thousand[5] - Commercial real estate mortgages had a provision for credit losses of $93 thousand, while Point-of-sale loans and leases had $21 thousand[45] Reconciliation of ECL Allowance (Nine Months Ended July 31, 2022)%20Reconciliation%20of%20ECL%20Allowance%20(Nine%20Months%20Ended%20July%2031,%202022)) This table reconciles the Expected Credit Loss (ECL) allowance by lending asset category for the nine months ended July 31, 2022. The total provision for credit losses for the period was $246k, with Point-of-Sale loans and leases accounting for the majority - Total provision for (recovery of) credit losses for the nine months ended July 31, 2022, was $246 thousand[5] - Point-of-sale loans and leases had a provision for credit losses of $253 thousand, while Commercial real estate mortgages had a recovery of $(18) thousand[47] Reconciliation of ECL Allowance (Nine Months Ended July 31, 2021)%20Reconciliation%20of%20ECL%20Allowance%20(Nine%20Months%20Ended%20July%2031,%202021)) This table reconciles the Expected Credit Loss (ECL) allowance by lending asset category for the nine months ended July 31, 2021. The period saw a net recovery of credit losses of $(159)k, primarily driven by recoveries in Public sector and other financing and Commercial real estate loans - Total provision for (recovery of) credit losses for the nine months ended July 31, 2021, was a recovery of $(159) thousand[5] - Public sector and other financing had a recovery of $(153) thousand, and Commercial real estate loans had a recovery of $(85) thousand[49] b) Impaired loans%20Impaired%20loans) As of July 31, 2022, the Bank held three impaired loans totaling $1.4 million. Two of these loans, amounting to $1.0 million, were subsequently repaid in early August 2022, and the remaining $400,000 loan is well secured and scheduled for repayment in September 2022 - At July 31, 2022, the Bank held three impaired loans totaling $1.4 million (October 31, 2021 - $nil)[51] - Two impaired loans totaling $1.0 million were fully repaid on August 2, 2022[51] - The remaining impaired loan of $400,000 is well secured and scheduled for repayment in early September 2022[51] 6. Other Assets This note provides a breakdown of other assets, which totaled $43.3 million at July 31, 2022. Key components include prepaid expenses and other, property and equipment, goodwill, and intangible assets Other Assets (thousands of Canadian dollars) | As at | July 31, 2022 | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | :--- | | Accounts receivable | $3,744 | $2,643 | $1,279 | | Prepaid expenses and other | $16,067 | $12,699 | $10,699 | | Property and equipment | $6,965 | $7,075 | $7,272 | | Goodwill | $5,754 | $5,754 | $5,754 | | Intangible assets | $3,299 | $3,641 | $3,722 | | Total Other Assets | $43,326 | $40,513 | $36,612 | - Total other assets increased by $2,813 thousand (6.94%) from October 31, 2021, to July 31, 2022[52] 7. Subordinated Notes Payable The Bank's subordinated notes payable consist of two unsecured, non-viability contingent capital compliant terms, totaling $98.7 million at July 31, 2022. These notes include a $5.0 million Canadian dollar term and a USD $75.0 million term, with varying effective interest rates and maturities Subordinated Notes Payable (thousands of Canadian dollars) | Description | July 31, 2022 | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | :--- | | $5.0M term (10.41% eff. rate, maturing Mar 2029) | $4,906 | $4,898 | $4,896 | | USD $75.0M term (5.38% eff. rate, maturing May 2031) | $93,800 | $90,374 | $90,787 | | Total Subordinated Notes Payable | $98,706 | $95,272 | $95,683 | - Subordinated notes payable increased by $3,434 thousand (3.6%) from October 31, 2021, to July 31, 2022[53] - A $500,000 portion of the $5.0 million subordinated notes payable is held by a related party[53][67] 8. Other Liabilities Other liabilities totaled $154.9 million at July 31, 2022, representing an increase from previous periods. Significant components include cash reserves on loan and lease receivables, accounts payable, and cash collateral held in escrow Other Liabilities (thousands of Canadian dollars) | As at | July 31, 2022 | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | :--- | | Accounts payable and other | $8,317 | $6,893 | $6,328 | | Cash collateral and amounts held in escrow | $10,992 | $7,887 | $3,182 | | Cash reserves on loan and lease receivables | $127,047 | $110,764 | $102,631 | | Total Other Liabilities | $154,926 | $134,504 | $120,310 | - Total other liabilities increased by $20,422 thousand (15.18%) from October 31, 2021, to July 31, 2022[54] - Cash reserves on loan and lease receivables, a significant component, increased by $16,283 thousand (14.7%) from October 31, 2021, to July 31, 2022[54] 9. Share Capital This note details the Bank's share capital, including common shares, preferred shares, and stock options. The number of common shares outstanding remained stable, while the Bank redeemed all Series 3 preferred shares in April 2021. Stock options saw a significant increase in grants during the nine months ended July 31, 2022, leading to recognized compensation expense Share Capital Overview (thousands of Canadian dollars) | Metric | July 31, 2022 | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | :--- | | Common shares outstanding | 27,441,082 | 27,441,082 | 21,123,559 | | Series 1 preferred shares outstanding | 1,461,460 | 1,461,460 | 1,461,460 | | Series 3 preferred shares outstanding | 0 | 0 | 0 | | Total share capital | $242,510 | $241,466 | $166,404 | a) Common shares%20Common%20shares) As of July 31, 2022, the number of common shares outstanding remained stable compared to October 31, 2021 - As of July 31, 2022, there were 27,441,082 common shares outstanding, consistent with October 31, 2021[55] b) Preferred shares%20Preferred%20shares) The Bank had 1,461,460 Series 1 preferred shares outstanding at July 31, 2022, which qualify as Additional Tier 1 Capital, following the redemption of all Series 3 preferred shares in April 2021 - At July 31, 2022, 1,461,460 Series 1 preferred shares were outstanding, which are Basel III compliant and qualify as Additional Tier 1 Capital[56] - On April 30, 2021, the Bank redeemed all 1,681,320 outstanding Non-Cumulative Series 3 preferred shares for $16.8 million[57] c) Stock options%20Stock%20options) The Bank's stock option plan allows for grants of common share options with a five-year term and three-year vesting. As of July 31, 2022, 953,730 options were outstanding, with 913,730 granted during the nine-month period, resulting in $1.0 million in compensation expense Stock Option Activity | Metric | 9 Months Ended July 31, 2022 | 9 Months Ended July 31, 2021 | | :--- | :--- | :--- | | Options outstanding, beginning of period | 40,000 | 42,017 | | Granted | 913,730 | - | | Options outstanding, end of period | 953,730 | 42,017 | | Weighted average exercise price (granted) | $15.90 | - | | Compensation expense recognized | $1.0 million | $nil | - The fair value of the 913,730 stock options granted was estimated at $3.10 per share using the Black-Scholes valuation model[61] 10. Income Tax Provision The income tax provision for the three and nine months ended July 31, 2022, was $2.1 million and $6.0 million, respectively. The Bank's combined statutory federal and provincial income tax rate is approximately 27%, with the effective rate influenced by non-taxable or non-deductible items Income Tax Provision (thousands of Canadian dollars) | Period | July 31, 2022 | July 31, 2021 | | :--- | :--- | :--- | | 3 Months Ended | $2,137 | $1,997 | | 9 Months Ended | $6,046 | $6,181 | - The Bank's combined statutory federal and provincial income tax rate is approximately 27% for both 2022 and 2021[62] 11. Income Per Common Share This note details the calculation of basic and diluted income per common share. For the nine months ended July 31, 2022, income per common share decreased to $0.56 from $0.72 in the prior year, primarily due to a higher weighted average number of common shares outstanding Income Per Common Share (thousands of Canadian dollars, except per share amounts) | Metric | 3 Months Ended July 31, 2022 | 3 Months Ended July 31, 2021 | 9 Months Ended July 31, 2022 | 9 Months Ended July 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income | $5,720 | $5,436 | $16,229 | $16,470 | | Less: dividends on preferred shares | $(247) | $(247) | $(741) | $(1,331) | | Income available to common shareholders | $5,473 | $5,189 | $15,488 | $15,139 | | Weighted average number of common shares outstanding | 27,441,082 | 21,123,559 | 27,441,082 | 21,123,559 | | Income per common share | $0.20 | $0.25 | $0.56 | $0.72 | - Income per common share for the nine months ended July 31, 2022, decreased by 22.22% year-over-year, despite an increase in income available to common shareholders, due to a 29.91% increase in the weighted average number of common shares outstanding[63] 12. Commitments and Contingencies This note outlines the Bank's credit-related commitments, which represent the maximum additional credit the Bank could be obligated to extend. Total commitments, including loan commitments and letters of credit, increased to $374.5 million at July 31, 2022 Credit Related Commitments (thousands of Canadian dollars) | As at | July 31, 2022 | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | :--- | | Loan commitments | $315,757 | $296,248 | $280,086 | | Letters of credit | $58,732 | $46,462 | $51,418 | | Total Commitments | $374,489 | $342,710 | $331,504 | - Total credit related commitments increased by $31,779 thousand (9.27%) from October 31, 2021, to July 31, 2022[66] 13. Related Party Transactions Related party transactions primarily involve key management personnel (Board of Directors and Senior Executive Officers) and a controlled corporation. Amounts due from these related parties totaled $3.7 million at July 31, 2022, with interest income earned on these loans. A portion of the Bank's subordinated notes payable is also held by a related party - Amounts due from key management personnel totaled $1.3 million at July 31, 2022[67] - Amounts due from a corporation controlled by key management personnel totaled $2.4 million at July 31, 2022[67] - Interest income earned on related party loans for the nine months ended July 31, 2022, was $71,000[67] - $500,000 of the Bank's $5.0 million subordinated notes payable are held by a related party[67] 14. Capital Management VersaBank's capital management strategy focuses on maintaining a strong capital base to support growth, protect deposits, and comply with OSFI's Basel III requirements. The Bank consistently exceeds all minimum regulatory capital ratios, including CET1, Tier 1, and Total Capital, and maintains a healthy leverage ratio - The Bank's policy is to maintain a strong capital base to retain investor confidence, support future growth, and comply with OSFI regulations[68] - Regulatory capital is comprised of Common Equity Tier 1 (CET1), Additional Tier 1, and Tier 2 capital[71] - The Bank exceeded all of the minimum Basel III regulatory capital requirements prescribed by OSFI as at July 31, 2022, and October 31, 2021[77] a) Overview%20Overview) The Bank actively monitors its capital adequacy and related ratios daily, adhering to OSFI's transitional arrangements for expected credit loss provisioning in CET1 capital - The Bank monitors its capital adequacy and related capital ratios (leverage ratio and risk-based capital ratios) on a daily basis[72] - OSFI introduced transitional arrangements for the capital treatment of expected credit loss provisioning, allowing 25% of eligible ECL allowance amounts to be included in CET1 capital on a transitional basis for fiscal 2022[73] b) Risk-Based Capital Ratios%20Risk-Based%20Capital%20Ratios) The Bank's risk-based capital ratios demonstrate strong capital adequacy, significantly exceeding OSFI's minimum Basel III requirements. As of July 31, 2022, the CET1 ratio was 12.51%, Tier 1 ratio was 13.04%, and Total capital ratio was 17.05% Risk-Based Capital Ratios | Capital Ratio | July 31, 2022 | October 31, 2021 | OSFI Minimum | | :--- | :--- | :--- | :--- | | CET1 capital ratio | 12.51% | 15.18% | 7.0% | | Tier 1 capital ratio | 13.04% | 15.86% | 8.5% | | Total capital ratio | 17.05% | 20.80% | 10.5% | - Total risk-weighted assets increased to $2,568,678 thousand at July 31, 2022, from $2,013,544 thousand at October 31, 2021[77] c) Leverage Ratio%20Leverage%20Ratio) The Bank's leverage ratio, a supplementary measure to risk-based capital, was 10.38% at July 31, 2022, well above the Basel III minimum of 3.0%. This indicates a strong capital position relative to total exposures Leverage Ratio (thousands of Canadian dollars) | Metric | July 31, 2022 | October 31, 2021 | | :--- | :--- | :--- | | Tier 1 capital | $335,033 | $319,355 | | Total exposures | $3,227,650 | $2,534,980 | | Leverage ratio | 10.38% | 12.60% | | Basel III minimum leverage ratio | 3.0% | 3.0% | - The Bank was in compliance with the OSFI-prescribed leverage ratio as at July 31, 2022, and October 31, 2021[80] 15. Interest Rate Risk Position This note assesses the Bank's exposure to interest rate risk, which could impact net interest margin, net interest income, and shareholders' equity. A 100 basis point increase in interest rates is projected to increase net interest income by $5.877 million over 12 months, while decreasing reported equity by $1.694 million over 60 months - The Bank is subject to interest rate risk, which can negatively impact net interest margin, net interest income, and the economic value of assets, liabilities, and shareholders' equity[82] Impact of 100 bps Interest Rate Shift (thousands of Canadian dollars) | Impact | July 31, 2022 (Increase 100 bps) | July 31, 2022 (Decrease 100 bps) | | :--- | :--- | :--- | | On projected net interest income (12 months) | $5,877 | $(5,823) | | On reported equity (60 months) | $(1,694) | $1,890 | | Duration difference between assets and liabilities (months) | 0.8 | 0.8 | 16. Fair Value of Financial Instruments This note provides the book and fair values of the Bank's financial instruments. While fair values are management's best estimates, they are subjective. For July 31, 2022, the fair value of loans was slightly higher than their book value, while deposits' fair value was lower than their book value - Fair values are management's best estimates and are subjective, involving assumptions and judgments[84] Fair Value of Financial Instruments (thousands of Canadian dollars) | Instrument | July 31, 2022 (Book Value) | July 31, 2022 (Fair Value) | October 31, 2021 (Book Value) | October 31, 2021 (Fair Value) | | :--- | :--- | :--- | :--- | :--- | | Cash | $84,214 | $84,214 | $271,523 | $271,523 | | Securities | $133,682 | $133,602 | - | - | | Loans | $2,814,121 | $2,849,584 | $2,103,050 | $2,118,636 | | Deposits | $2,475,063 | $2,390,055 | $1,853,204 | $1,860,332 | | Subordinated notes payable | $98,706 | $101,180 | $95,272 | $97,910 | 17. Operating Segmentation VersaBank operates through two reportable segments: Digital Banking and DRTC (cybersecurity services). Digital Banking focuses on B2B lending and deposit solutions, while DRTC leverages IT security software for cybersecurity and financial technology development. Performance is measured by segment net income, with Digital Banking being the primary contributor to net income and assets - The two reportable operating segments are Digital Banking and DRTC (cybersecurity services and banking and financial technology development)[86] - Digital Banking employs a business-to-business model for lending and deposit solutions in Canadian and U.S. banking markets[86] - DRTC focuses on cybersecurity services and developing innovative solutions for cyber threats[87] Segment Net Income (thousands of Canadian dollars) | Segment | 3 Months Ended July 31, 2022 | 3 Months Ended July 31, 2021 | 9 Months Ended July 31, 2022 | 9 Months Ended July 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Digital Banking | $6,382 | $5,240 | $17,216 | $16,252 | | DRTC | $(662) | $196 | $(987) | $218 | | Consolidated Net Income | $5,720 | $5,436 | $16,229 | $16,470 | 18. Acquisition On June 14, 2022, VersaBank signed an agreement to acquire Minnesota-based Stearns Bank Holdingford, N.A. (SBH) for an estimated USD $13.5 million. This acquisition is expected to add approximately USD $60 million in total assets and provide access to U.S. deposits, supporting the growth of VersaBank's Receivable Purchase Program in the U.S. The transaction is anticipated to close before December 31, 2022, pending regulatory approvals - VersaBank signed a definitive agreement to acquire Stearns Bank Holdingford, N.A. (SBH) for an estimated USD $13.5 million (CAD $17.4 million)[91] - SBH is expected to add approximately USD $60 million in total assets to VersaBank's balance sheet[91] - The acquisition aims to provide VersaBank with access to U.S. deposits to expand its Receivable Purchase Program business[91] - The transaction is anticipated to close before December 31, 2022, subject to regulatory approval by the OCC and OSFI[91] 19. Comparative Balances Certain comparative balances in the financial statements have been reclassified to align with the presentation adopted in the current period - Certain comparative balances have been reclassified to conform with the financial statement presentation adopted in the current period[92] 20. Subsequent Event On August 5, 2022, VersaBank received approval from the Toronto Stock Exchange (TSX) for a Normal Course Issuer Bid (NCIB). Under this bid, the Bank may purchase for cancellation up to 1,700,000 common shares, representing approximately 9.54% of its public float, believing the market price does not reflect the business's true value - On August 5, 2022, the Bank received TSX approval for a Normal Course Issuer Bid (NCIB) for its common shares[93] - Under the NCIB, VersaBank may purchase for cancellation up to 1,700,000 common shares, representing approximately 9.54% of its public float[93] - The Bank's management believes the market price of its common shares reflects a material discount to book value, making the NCIB a prudent corporate measure and an attractive investment[93] - Purchases may commence on August 17, 2022, and will terminate on August 16, 2023, with daily purchases limited to 25% of the average daily trading volume (1,182 common shares)[94][95]