Exhibit 4.6


 





 


Management’s Discussion and
Analysis


 


This management’s discussion and analysis
(“MD&A”) of operations and financial condition for the third quarter of Fiscal 2021, dated August 30, 2021, should be
read in conjunction with the unaudited interim consolidated financial statements for the period ended July 31, 2021, which have been prepared
in accordance with International Financial Reporting Standards (“IFRS”). This MD&A should also be read in conjunction
with VersaBank’s MD&A and Audited Consolidated Financial Statements for the year ended October 31, 2020, which are available
on VersaBank’s website at www.versabank.com and SEDAR at www.sedar.com. Except as discussed below, all other factors discussed and
referred to in the MD&A for the year ended October 31, 2020, remain substantially unchanged. All currency amounts in this document
are in Canadian dollars unless otherwise indicated.


 





 






 


	Cautionary Note Regarding Forward-Looking Statements	2
	Overview	3
	Update on impact of COVID-19 pandemic	3
	Overview of Performance	4
	Selected Financial Highlights	6
	Business Outlook	7
	Financial Review - Earnings	10
	Financial Review - Balance Sheet	15
	Off-Balance Sheet Arrangements	27
	Related Party Transactions	27
	Capital Management and Capital Resources	28
	Summary of Quarterly Results	31
	Basis of Presentation	31
	Significant Accounting Policies and Use of Estimates and Judgments	33
	Future Changes in Accounting Policies	35
	Controls and Procedures	35





 




     


     


    

Cautionary Note Regarding Forward-Looking
Statements


 


The statements in this management’s discussion
and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent
risks and uncertainties, both general and specific, many of which are out of the Bank’s control. Risks exist that predictions, forecasts,
projections and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking
statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of
the Canadian economy in general and the strength of the local economies within Canada in which the Bank conducts operations; the effects
of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada; global commodity prices;
the effects of competition in the markets in which the Bank operates; inflation; capital market fluctuations; the timely development and
introduction of new products in receptive markets; the impact of changes in the laws and regulations regulating financial services; changes
in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings
habits; the impact of COVID-19 and the Bank’s anticipation of and success in managing the risks implicated by the foregoing. For
a detailed discussion of certain key factors that may affect our future results, please see our annual MD&A for the year ended October
31, 2020.


 


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


 




    	 	VersaBank – Q3 2021 MD&A	2



     


    

Overview


 


VersaBank (the “Bank”) adopted an electronic
branchless model in 1993, becoming the world’s first branchless financial institution. It holds a Canadian Schedule 1 chartered
bank licence and obtains its deposits, and the majority of its loans and leases, electronically. VersaBank’s Common Shares trade
on the Toronto Stock Exchange under the symbol VB and its Series 1 Preferred Shares trade under the symbol VB.PR.A.


 


Update on impact of COVID-19
pandemic


 


The impact of COVID-19 on communities, businesses
and the Canadian economy has abated somewhat over the course of the quarter with the rapid distribution and adoption of the vaccines,
which has allowed for a progressive reopening of the economy and improved consumer confidence. As a digital bank with a low-risk business-to-business,
partner-based model, VersaBank continues to remain well insulated from many of the enduring negative influences of COVID-19 and our staff
continues to work remotely leveraging our fully functional Work-From-Home solution which was a natural and seamless evolution of the Bank’s
branchless, technology-driven model. Notwithstanding the above, management is working to finalize the Bank’s return-to-work strategy,
which is anticipated to begin to roll out, in stages, in the fall.


 


We continue to have no loans on our balance sheet
that are subject to payment deferrals, no impaired loans and no loans in arrears, however, at the same time, we continue to operate at
a heightened level of awareness to ensure that our origination and underwriting practices remain highly disciplined and focused. The Bank
continues to maintain excess liquidity levels that are somewhat higher than normal, or more specifically higher than pre-COVID-19 levels;
however, management expects that liquidity will moderate somewhat prior to the end of fiscal 2021.


 


The velocity of the distribution of the vaccines
as well as the rate of spread of the virus, including the new variants remain, in our view, the key drivers of the recovery of the Canadian
economy in the short to medium term. Forward-looking macroeconomic and industry data continues to change at a reasonably high frequency
and as a result, management anticipates that the Bank’s estimated expected credit loss (“ECL”) amounts will continue
to exhibit some volatility over the course of the coming quarters. Management further anticipates that the magnitude of this volatility
will continue to be mitigated by the lower risk profile of the Bank’s lending portfolio which remains a function of the Bank’s
conservative underwriting practices and its strict adherence to low-risk niche financing markets within which it has a wealth of experience.


 


Despite the business and operational challenges
imposed by the pandemic, the Bank continues to focus on increasing Core Cash Earnings by concentrating on niche markets that support modestly
better pricing for its products and by leveraging its diverse deposit gathering network that provides efficient access to a range of low-cost
deposit sources in order to maintain a lower cost of funds.


 


The underlying drivers of the Bank’s performance
trends for the current and comparative periods are set out in the following sections of this MD&A.


 




    	 	VersaBank – Q3 2021 MD&A	3



     


    

Overview of Performance


 





 





 


* This is a non-GAAP measure. See definition in
"Non-GAAP and Additional GAAP Measures" in the Basis of Presentation section below.


 


Q3 2021 vs Q2 2021


 


		Ø	Loans were up 7% to $1.95 billion attributable
to strong growth in the Bank’s commercial real estate, (“CRE”) and point of sale (“POS”) loan and lease
receivable portfolios;



 


		Ø	Net income was down 5% to $5.4 million and EPS
was unchanged at $0.25 per share;



 


		Ø	Total revenue was down 2% to $15.7 million, comprised
of net interest income in the amount of $14.5 million and non-interest income in the amount of $1.2 million, the latter derived primarily
from the Bank’s technology and cybersecurity operations (See Acquisition of DBG in the Financial Review – Balance
Sheet); 



 


		Ø	Net interest margin (NIM) was down 35 bps to 2.61%
as a function primarily of higher cost of funds resulting from the impact of the additional interest expense attributable to the April
30, 2021 issuance of 5% fixed to floating rate subordinated notes payable (“the Notes”) in the principal amount of USD $75.0
million, which added to the Bank’s total regulatory capital; 



 


		Ø	Provision for credit losses were $96,000 compared
to a recovery of credit losses in the amount of $312,000. 



 




    	 	VersaBank – Q3 2021 MD&A	4



     


    

Q3 2021 vs Q3 2020


 


		Ø	Loans were up 26% as a function of strong growth
in the Bank’s CRE and POS loan and lease receivable portfolios;



 


		Ø	Net income and EPS were up 24% and 39%, respectively;




 


		Ø	Total revenue was up 27% attributable to a 17%
increase in net interest income and a $1.2 million contribution from the Bank’s technology and cybersecurity operations; 



 


		Ø	NIM was up 8 bps attributable to lower cost of
funds offset partially by lower yields earned on assets; 



 


		Ø	Provision for credit losses were $96,000 compared
to a recovery of credit losses in the amount of $44,000. 



 


Q3 YTD 2021 vs Q3 YTD 2020


 


		Ø	Net income and EPS were up 12% and 16% to $16.5
million and $0.72 per share, respectively; 



 


		Ø	NIM was down 13 bps attributable to lower yields
earned on assets offset partially by lower cost of funds; 



 


		Ø	Recovery of credit losses were $159,000 compared
to a provision for credit losses in the amount of $238,000. 



 


Items of note


 


Q3 2021


 


		Ø	There were no material items of note in the current
quarter.



 


Q2 2021


 


		Ø	On April 30, 2021, the Bank completed a private
placement with U.S. institutional investors of non-viability contingent capital (“NVCC”) compliant fixed to floating rate
subordinated notes payable (“the Notes”), in the principal amount of USD $75.0 million, equivalent to CAD $92.1 million as
at April 30, 2021. The Notes will pay interest semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1,
2021, at a fixed rate of 5.00% per year, until May 1, 2026. Thereafter, if not redeemed by VersaBank, the Notes will have a floating interest
rate payable at the 3-month Bankers’ Acceptance Rate plus 361 basis points, payable quarterly in arrears, on February 1, May 1,
August 1 and November 1 of each year, commencing August 1, 2026, until the maturity in April 2031. Proceeds of the Notes are currently
held in US dollar denominated cash;



 


		Ø	On April 30, 2021, the Bank redeemed all of its
outstanding Non-Cumulative Series 3 preferred shares (NVCC) using cash on hand. The amount paid on redemption for each share was $10.00,
and in aggregate $16.8 million.



 


Q3 2020


 


		Ø	There were no material items of note in the quarter.




 




    	 	VersaBank – Q3 2021 MD&A	5



     


    

Selected Financial Highlights


 


	 (unaudited)	for the three months ended	for the nine months ended
	($CDN thousands except per share amounts)	July 31

2021	July 31

2020	July 31

2021	July 31

2020
	Results of operations	 	 	 	 
	Interest income	$22,400	$20,172	$65,564	$65,026
	Net interest income	14,542	12,384	44,011	40,417
	Non-interest income	1,187	8	3,110	42
	Total revenue	15,729	12,392	47,121	40,459
	Provision for (recovery of) credit losses	96	(44)	(159)	238
	Non-interest expenses	8,200	6,410	24,629	20,014
	Core cash earnings*	7,433	6,026	22,651	20,207
	Core cash earnings per common share*	$0.35	$0.29	$1.07	$0.96
	Net income	5,436	4,369	16,470	14,659
	Income per common share:	 	 	 	 
	Basic	$0.25	$0.18	$0.72	$0.62
	Diluted	$0.25	$0.18	$0.72	$0.62
	Dividends paid on preferred shares	$247	$542	$1,331	$1,626
	Dividends paid on common shares	$528	$528	$1,584	$1,584
	Yield*	4.02%	4.12%	4.14%	4.68%
	Cost of funds*	1.41%	1.59%	1.36%	1.77%
	Net interest margin*	2.61%	2.53%	2.78%	2.91%
	Return on average common equity*	8.72%	6.90%	8.72%	8.04%
	Core cash return on average common equity*	12.08%	9.89%	12.28%	11.46%
	Book value per common share*	$11.29	$10.52	$11.29	$10.52
	Efficiency ratio*	52.13%	51.73%	52.27%	49.47%
	Return on average total assets*	0.93%	0.78%	0.96%	0.94%
	Gross impaired loans to total loans*	0.00%	0.43%	0.00%	0.43%
	Provision (recovery) for credit losses as a % of average loans*	0.02%	(0.01%)	(0.01%)	0.02%
	 	as at
	Balance Sheet Summary	 	 	 	 
	Cash and securities	$297,005	$353,794	$297,005	$353,794
	Loans, net of allowance for credit losses	1,952,154	1,547,761	1,952,154	1,547,761
	Average loans*	1,890,965	1,571,365	1,803,532	1,571,025
	Total assets	2,285,771	1,930,256	2,285,771	1,930,256
	Average assets*	2,212,764	1,948,313	2,114,828	1,857,819
	Deposits	1,817,746	1,565,334	1,817,746	1,565,334
	Subordinated notes payable	95,683	4,887	95,683	4,887
	Shareholders' equity	252,032	251,612	252,032	251,612
	Capital ratios*	 	 	 	 
	Risk-weighted assets	$ 1,897,695	$ 1,518,918	$ 1,897,695	$ 1,518,918
	Common Equity Tier 1 capital	226,516	214,272	226,516	214,272
	Total regulatory capital	340,270	250,739	340,270	250,739
	Common Equity Tier 1 (CET1) ratio	11.94%	14.11%	11.94%	14.11%
	Tier 1 capital ratio	12.66%	16.04%	12.66%	16.04%
	Total capital ratio	17.93%	16.51%	17.93%	16.51%
	Leverage ratio	9.99%	11.99%	9.99%	11.99%
	* A non-GAAP measure. See definition in "Non-GAAP and Additional GAAP Measures" in the Basis of Presentation section below.




    	 	VersaBank – Q3 2021 MD&A	6



     


    

Business Outlook


 


The Bank remains active in niche markets that support
more attractive pricing for its lending products, and further, continues to develop and expand its diverse deposit gathering network that
provides efficient access to a range of low-cost deposit sources. In addition, the Bank remains highly committed to, and focused on further
developing and enhancing its technology advantage, a key component of its value proposition that not only provides efficient access to
the Bank’s chosen niche lending and deposit markets, but also delivers superior financial products and better customer service to
its clients.


 


While the Bank does not provide guidance on specific
performance metrics, we provide commentary below related to aspects of our business and certain expected trends related to same that could
potentially impact future performance.


 


Lending Assets


 


		Ø	The Bank expects high quality
deal flow in the commercial mortgage space to continue over the remainder of fiscal 2021 and into fiscal 2022 as a function of the strong
relationships that its CRE lending team has fostered with numerous originators and brokers in the multi-unit residential rental sector
and the continued availability of attractive mortgage rates. Management maintains its expectation that the Bank will continue to see a
high volume of opportunities in the multi-unit residential rental sector, which is considered one of the most stable and low-risk sectors
in the real estate market and in which the Bank has deep lending knowledge and experience. Further, management is pursuing opportunities
to develop more meaningful balance sheet exposure to the B20 compliant conventional, uninsured mortgage financing space.



 


		Ø	Robust household savings established as a function
of consumers’ general inability to spend over the course of the last 15 months, and in some cases the impact of federal emergency
stimulus programs, combined with improved consumer confidence and a low, stable interest rate environment has precipitated favourable
conditions for strong consumer spending in the short to medium term, including spending on home improvements, as well as home purchases
for which the Bank’s POS loan and lease origination partners provide financing. This, combined with the anticipated addition of
new origination partners, continues to support management’s expectation of higher purchase volumes for the Bank’s POS receivable
financing business over the course of the remainder of fiscal 2021 and into fiscal 2022.



 


Credit Quality


 


		Ø	The Bank lends to niche markets that support more
attractive pricing for its lending products but typically exhibit a lower than average risk profile as a function of the lower inherent
risk associated with the underlying collateral assets and/or the structure of the Bank’s offered financing arrangements; 



 


		Ø	We currently have no loans on our balance sheet
that are subject to payment deferrals, no impaired loans and no loans in arrears, however, we continue to monitor our lending portfolio
and the underlying borrowers as well as our origination partners closely to ensure that management has good visibility on any credit trends
that could provide an early warning indication of the emergence of any elevated risk in our lending portfolio;



 




    	 	VersaBank – Q3 2021 MD&A	7



     


    

		Ø	Forward-looking macroeconomic and industry data
remains somewhat volatile and as a result, management anticipates that estimated ECL amounts will also continue to exhibit volatility
over the remainder of fiscal 2021 and into fiscal 2022. Notwithstanding the above, the Bank also expects that the magnitude of the volatility
exhibited in its forward ECL amounts will continue to be mitigated by the lower risk profile of the Bank’s lending portfolio that
remains a function of the Bank’s prudent underwriting practices and its focus on niche financing markets within which it has a wealth
of experience; 



 


		Ø	The Bank has sourced credit risk modeling systems
and forecast macroeconomic scenario data from Moody’s Analytics for the purpose of computing forward-looking credit risk parameters
under multiple macroeconomic scenarios that consider both market-wide and idiosyncratic factors and influences. These credit risk modeling
systems are integrated with the Bank’s internally developed ECL models. We continue to see improving trends in the macroeconomic
data used as forward-looking information in our credit risk models. These models are used in estimating our ECL. Depending on the growth
trajectory and composition of our lending portfolio, these improved trends could result in the Bank recognizing lower provisions for credit
losses, or potentially even recognizing further recoveries in the coming quarters. However, if the performance of the Canadian economy
is not aligned with the current forecast macroeconomic trends and begins to deteriorate, our borrowers could be exposed to credit risk
that could result in loan deferrals and/or loan defaults and have an unfavourable impact on our estimated ECL. 



 


Funding and Liquidity


 


		Ø	Funding costs were down again year over year but
were up compared to last quarter as a function of changes in our funding mix attributable to the issuance of the Notes on April 30, 2021.
The incremental interest expense attributable to the Notes over the course of the quarter ended July 31, 2021, added 16 bps to the Bank’s
cost of funds over the same timeframe. Adjusting for this amount, the Bank’s cost of funds for the three months ended July 31, 2021,
would have been 1.25%, down 3 bps compared to the last quarter. Management expects that the impact of the interest expense on the Notes
will be mitigated over the course of the remainder of fiscal 2021 and into fiscal 2022 as the Bank continues to deploy cash into higher
yielding assets, and further, through continued, anticipated growth in our commercial deposit base combined with the expectation of a
sustained low interest rate environment through fiscal 2022. Government of Canada Bond yield trends, which affect loan yields, are expected
to remain compressed for the remainder of fiscal 2021 and into fiscal 2022, which may result in some modest yield compression for the
Bank;



 


		Ø	The Bank continues to maintain liquidity levels
that are higher than normal, or more specifically higher than pre-pandemic levels attributable to the Bank strengthening its liquidity
position in Spring 2020 in response to the economic uncertainty resulting from the onset of COVID-19 as well as in anticipation of a high
volume of loan fundings in the coming quarter. Management expects that excess liquidity will moderate somewhat by the end of fiscal 2021;



 


		Ø	The Bank continues to develop and expand its diverse
deposit gathering network that provides efficient access to a range of low-cost deposit sources that drives its low cost of funds. Management
continues 



 




    	 	VersaBank – Q3 2021 MD&A	8



     


    

to expect that
the impact of COVID-19 on household finances has the potential to increase the rate at which it is able to grow its commercial deposit
base as a function of an anticipated increase in the volume of consumer bankruptcy and proposal restructuring proceedings that will be
administered by Canadian insolvency professionals over the course of fiscal 2022.


 


Earnings and Capital


 


		Ø	Earnings growth in fiscal 2021 will be realized
as a function primarily of anticipated organic balance sheet growth and incremental earnings contributions from the Bank’s technology
and cybersecurity operations;



 


		Ø	Net interest income is expected to be up year
over year as a function primarily of the expansion of both of our core business lines across key lending asset categories, the redeployment
of excess liquidity into higher yielding lending assets and the expectation that the Bank will be able to continue to moderate its cost
of funds over the course of the year;



 


		Ø	Non-interest expense has grown year over year
as a function primarily of the consolidation of the operating expenses of DBG, which was acquired by the Bank’s wholly owned subsidiary
DRTC on November 30, 2020 (see Acquisition of DBG in the Financial Review – Balance Sheet section below), as well
as some additional investment in support of expanding the Bank’s technology and cybersecurity operations; 



 


		Ø	The Bank’s capital ratios are currently
comfortably in excess of regulatory minimums. With the April 30, 2021, issuance of the Notes that qualify as Tier 2 capital of the Bank
pursuant to the Office of the Superintendent of Financial Institutions (“OSFI”) Capital Adequacy Requirements (CAR) Guideline,
management is of the view that the Bank’s current capital levels are sufficient to accommodate anticipated medium term balance sheet
growth. Notwithstanding this, management will continue to closely monitor the capital markets to identify opportunities for the Bank to
raise additional regulatory capital on attractive terms in order to position the Bank to support a more robust growth profile; 



 


		Ø	The Bank does not anticipate that it will increase
its dividend rate until, at the earliest, OSFI has lifted its current restriction on increasing distributions to shareholders which was
originally announced on March 13, 2020, as one of the measures OSFI was undertaking to mitigate the various financial stresses imposed
on Federally Regulated Deposit-Taking Institutions derived from the onset of COVID-19. 



 


There is potential that the Bank may not realize
or achieve the expected or anticipated performance trends set out above as a function of a number of factors and variables including,
but not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which the
Bank conducts operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank
of Canada; global commodity prices; the effects of competition in the markets in which the Bank operates; inflation; capital market fluctuations;
the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations regulating
financial services; and the impact of COVID-19 on the Canadian economy. Please see “Cautionary Note Regarding Forward-Looking Statements”
on page 2 of this MD&A.


 




    	 	VersaBank – Q3 2021 MD&A	9



     


    

Financial Review - Earnings


 


Total Revenue


 


Total revenue, which consists of net interest income
and non-interest income, for the quarter was down 2% to $15.7 million compared to last quarter and was up 27% compared to the same period
a year ago. Total revenue for the nine months ended July 31, 2021 was up 16% to $47.1 million compared to the same period a year ago.


 


Net Interest Income 


 


	(thousands  of Canadian dollars)	 
	 	For the three months ended:	For the nine months ended:
	 	July 31

2021	April 30

2021	Change	July 31

2020	Change	July 31

2021	July 31

2020	Change
	Interest income	 	 	 	 	 	 	 	
	Commercial real estate mortgages	$9,575	$9,330	3%	$8,002	20%	$28,015	$24,558	14%
	Commercial real estate loans	352	362	(3%)	250	41%	1,056	889	19%
	Point of sale loans and leases	12,024	11,484	5%	11,091	8%	35,009	36,601	(4%)
	Public sector and other financing	127	125	2%	141	(10%)	385	648	(41%)
	Other	322	348	(7%)	688	(53%)	1,099	2,330	(53%)
	Interest income	$22,400	$21,649	3%	$20,172	11%	$65,564	$65,026	1%
	Interest expense	 	 	 	 	 	 	 	 
	Deposit and other	$6,539	$6,414	2%	$7,661	(15%)	$19,967	$24,228	(18%)
	Subordinated notes	1,319	140	842%	127	939%	1,586	381	316%
	Interest expense	$7,858	$6,554	20%	$7,788	1%	$21,553	$24,609	(12%)
	Net interest income	$14,542	$15,095	(4%)	$12,384	17%	$44,011	$40,417	
    


    9%

     



 


Q3 2021 vs Q2 2021


 


Net interest income was down 4% to $14.5 million
as a function primarily of:


 


		Ø	Higher interest expense attributable to the Notes;
and,



 


		Ø	Lower yields earned on higher cash balances;



 


Offset partially by:


 


		Ø	Higher interest income earned on the Bank’s
CRE and POS loan and lease receivable portfolios attributable primarily to lending asset growth; and,



 


		Ø	Lower interest expense on commercial deposits
attributable to growth in operating accounts that the Bank makes available to Canadian insolvency professionals.



 


Q3 2021 vs Q3 2020


 


Net interest income was up 17% as a function primarily
of:


 


		Ø	Higher interest income earned on the Bank’s
CRE and POS loan and lease receivable portfolios attributable primarily to lending asset growth; 



 


		Ø	Redeployment of cash into higher yielding lending
assets; and,



 


		Ø	Lower interest expense on commercial deposits
attributable to growth in operating accounts that the Bank makes available to Canadian insolvency professionals;



 




    	 	VersaBank – Q3 2021 MD&A	10



     


    

Offset partially by:


 


		Ø	Higher interest expense attributable to the Notes;



 


		Ø	Higher fees recognized in the comparative quarter
resulting from the negotiated, early repurchase of a portfolio of loan and lease receivables by one of the Bank’s POS origination
partners.



 


Q3 YTD 2021 vs Q3 YTD 2020


 


Net interest income was up 9% to $44.0 million
as a function primarily of:


 


		Ø	Higher interest income earned on the Bank’s
CRE portfolios attributable primarily to lending asset growth; 



 


		Ø	Redeployment of cash into higher yielding lending
assets;



 


		Ø	Lower interest expense on commercial deposits
attributable to growth in operating accounts that the Bank makes available to Canadian insolvency professionals; and,



 


		Ø	Lower interest expense on personal deposits attributable
primarily to the accommodative monetary policy established by the Bank of Canada early in the spring of 2020; 



 


Offset partially by:


 


		Ø	Higher interest expense attributable to the Notes;
and,



 


		Ø	Higher fees recognized in the comparative second
quarter attributable to the negotiated, early repurchase of a portfolio of loan and lease receivables by one of the Bank’s POS origination
partners.



 


Net Interest Margin


 


	(thousands  of Canadian dollars)	 
	 	For the three months ended:	For the nine months ended:
	 	July 31

2021	April 30

2021	Change	July 31

2020	Change	July 31

2021	July 31

2020	Change
	Interest income	$22,400	$21,649	     3%	$20,172	11%	$65,564	$65,026	1%
	Interest expense	7,858	6,554	20%	7,788	1%	21,553	24,609	(12%)
	Net interest income	14,542	15,095	(4%)	12,384	17%	44,011	40,417	9%
	 	 	 	 	 	 	 	 	 
	Average assets	$2,212,764	$2,092,367	6%	$ 1,948,313	14%	$2,114,828	$1,857,819	
    

    14%


	Yield	4.02%	4.24%	(5%)	4.12%	(2%)	4.14%	4.68%	(12%)
	Cost of funds	1.41%	1.28%	10%	1.59%	(11%)	1.36%	1.77%	(23%)
	Net interest margin	2.61%	2.96%	(12%)	2.53%	3%	2.78%	2.91%	(4%)


 


Q3 2021 vs Q2 2021


 


Net interest margin was down 35 bps as a function
primarily of:


 


		Ø	Higher interest expense attributable to the Notes.
Adjusting for the interest expense on the Notes for the three months ended July 31, 2021, the Bank’s net interest margin increases
to 2.94% for the same period, which is in line with the recent, historical net interest margin trends reported by the Bank; and,



 


		Ø	Lower yields earned on higher cash balances.





 






    	 	VersaBank – Q3 2021 MD&A	11



     


    

 


Q3 2021 vs Q3 2020


 


Net interest margin was up 8 bps as a function
primarily of:


 


		Ø	Lower cost of funds attributable primarily to
growth in operating accounts that the Bank makes available to Canadian insolvency professionals;



 


Offset partially by:


 


		Ø	Lower yields earned on elevated cash balances;
and,



 


		Ø	Higher interest expense attributable to the Notes.




 


Q3 YTD 2021 vs Q3 YTD 2020


 


Net interest margin was down 13 bps as a function
primarily of:


 


		Ø	Higher yields earned in the comparative period
attributable primarily to higher fees recognized on the negotiated, early repurchase of a portfolio of loan and lease receivables by one
of the Bank’s POS origination partners; and,



 


		Ø	Lower yields earned on floating rate lending assets
attributable primarily to the accommodative monetary policy established by the Bank of Canada early in the spring of 2020;



 


Offset partially by:


 


		Ø	Lower cost of funds attributable to growth in
operating accounts that the Bank makes available to Canadian insolvency professionals, and lower interest expense on personal deposits
attributable primarily to the accommodative monetary policy established by the Bank of Canada early in the spring of 2020.



 


Non-Interest Income


 


Non-interest income reflects the consolidation
of the gross profit of DBG and income derived from miscellaneous transaction fees not directly attributable to lending assets. For further
details on the Bank’s acquisition of DBG see Acquisition of DBG in the Financial Review – Balance Sheet section
below.


 


Non-interest income for the quarter was $1.2 million
compared to $875,000 last quarter and $8,000 for the same period a year ago. The quarter over quarter trend was a function of DBG’s
normal course seasonality, as well as client engagements that were deferred earlier in the year due to the impact of COVID-19 beginning
to materialize in the current quarter. The current quarter reflects the consolidation of the gross profit of DBG in the amount of $1.2
million realized on sales of $2.0 million over the same period. Non-interest income from a year ago reflects income derived from miscellaneous
transaction fees not directly attributable to lending assets.


 


Non-interest income for the nine months ended July
31, 2021, was $3.1 million compared to $42,000 for the same period a year ago. Non-interest income recognized in the current period reflects
the consolidation of the gross profit of DBG in the amount of $3.1 million realized on sales of $5.4 million over the same period.


 




    	 	VersaBank – Q3 2021 MD&A	12



     


    

Provision for Credit Losses


 


	(thousands  of Canadian
    dollars)
	 	For
    the three months ended:	For
    the nine months ended:
	 	July
    31

    2021	April
    30

    2021	July
    31

    2020	July
    31

    2021	July
    31

    2020
	Provision for (recovery of) credit
    losses:	 	 	 	 	 
	Commercial real estate mortgages	$93	$(205)	$(4)	$35	$94
	Commercial real estate loans	3	(23)	40	(85)	94
	Point of sale loans and leases	21	31	(75)	44	(8)
	Public
    sector and other financing	(21)	(115)	(5)	(153)	58
	Provision for (recovery
    of) credit losses	$96	$(312)	$(44)	$(159)	$238



 


Q3 2021 vs Q2 2021


 


The Bank recorded a provision for credit losses
in the amount of $96,000 compared to a recovery of credit loss provisions in the amount of $312,000 as a function primarily of:


 


		Ø	Higher lending asset balances; and,



 


		Ø	The impact of a recovery of a prior period write-off
in the amount of $116,000 last quarter;



 


Offset partially by:


 


		Ø	Changes in the forward-looking information used
by the Bank in its credit risk models in the current quarter.



 


Q3 2021 vs Q3 2020


 


The Bank recorded a provision for credit losses
in the amount of $96,000 compared to a recovery of credit loss provisions in the amount of $44,000 as a function primarily of:


 


		Ø	Higher lending asset balances;



 


Offset partially by:


 


		Ø	Changes in the forward-looking information used
by the Bank in its credit risk models in the current quarter. 



 


Q3 YTD 2021 vs Q3 YTD 2020


 


The Bank recorded a recovery of credit loss provisions
in the amount of $159,000 compared to a provision for credit losses in the amount of $238,000 as a function primarily of:


 


		Ø	Changes in the forward-looking information used
by the Bank in its credit risk models in the current period; 



 


		Ø	Recovery of a prior period write off in the amount
of $116,000 last quarter; and, 



 


		Ø	Net remeasurements of expected credit losses attributable
to the impact of planned refinements to specific real estate asset loan and credit data inputs introduced in the third quarter of fiscal
2020;



 


Offset partially by:


 


		Ø	Higher lending asset balances.



 




    	 	VersaBank – Q3 2021 MD&A	13



     


    

Non-Interest Expenses


 


	(thousands  of Canadian dollars)	 
	 	For the three months ended:	For the nine months ended:
	 	July 31

2021	April 30

2021	Change	July 31

2020	Change	July 31

2021	July 31

2020	Change
	 	 	 	 	 	 	 	 	 
	Salaries and benefits	$4,853	$4,953	(2%)	$3,959	23%	$14,836	$11,796	26%
	General and administrative	2,414	2,383	1%	1,853	30%	7,136	6,392	12%
	Premises and equipment	933	1,006	(7%)	598	56%	2,657	1,826	46%
	Total non-interest equipment	$8,200	$8,342	(2%)	$6,410	28%	$24,629	$20,014	23%
	Efficiency Ratio	52.13%	52.24%	0%	51.73%	  1%	52.27%	49.47%	  6%


 


Q3 2021 vs Q2 2021


 


Non-interest expenses were down 2% to $8.2 million
as a function primarily of:


 


		Ø	Timing of general operating expense items;



 


Offset partially by:


 


		Ø	Lower salary and benefits expense in the current
period attributable to the timing of the recognition of staff related costs and compensation amounts; and,



 


		Ø	Lower facility related costs.



 


Q3 2021 vs Q3 2020


 


Non-interest expenses were up 28% as a function
primarily of:


 


		Ø	Consolidation of the operating expenses of DBG;



 


		Ø	Increased salary and benefits expense attributable
to increased staff levels to support expanded business activity across the Bank; and, 



 


		Ø	Investments in the Bank’s corporate development
initiatives.



 


Q3 YTD 2021 vs Q3 YTD 2020


 


Non-interest expenses were up 23% as a function
primarily of:


 


		Ø	Consolidation of the operating expenses of DBG
in the amount of $2.1 million;



 


		Ø	Increased salary and benefits expense attributable
to increased staff levels to support expanded business activity across the Bank; and, 



 


		Ø	Investments in the Bank’s corporate development
initiatives.



 


Tax Provision


 


The Bank’s tax rate is approximately 27%,
similar to that of previous periods. The tax rate is impacted by certain items not being taxable or deductible for income tax purposes.
Provision for income taxes for the current quarter was $2.0 million compared to $2.2 million last quarter and $1.7 million for the same
period a year ago.


 


Provision for income taxes for the nine months
ended July 31, 2021, was $6.2 million compared to $5.5 million for the same period a year ago.


 




    	 	VersaBank – Q3 2021 MD&A	14



     


    

Financial Review - Balance Sheet


 


	(thousands of Canadian dollars)	 
	 	July 31

2021	April 30

2021	Change	July 31

2020	Change
	Total assets	$2,285,771	$2,139,757	7%	$1,930,256	18%
	Cash and securities	297,005	272,428	9%	353,794	(16%)
	Loans, net of allowance for credit losses	1,952,154	1,829,776	7%	1,547,761	26%
	Deposits	1,817,746	1,679,273	8%	1,565,334	16%


 


Total Assets


 





 


Total assets at July 31, 2021, were $2.29 billion
compared to $2.14 billion last quarter and $1.93 billion a year ago. The quarter over quarter and year over year trends were a function
primarily of growth in the Bank’s CRE and POS loan and lease receivable portfolios as well as the consolidation of the assets of
DBG which was acquired by the Bank’s wholly owned subsidiary DRTC on November 30, 2020.


 




    	 	VersaBank – Q3 2021 MD&A	15



     


    

Acquisition of DBG


 


On November 30, 2020, the Bank through its wholly
owned subsidiary DRT Cyber Inc. (“DRTC”), acquired 100% of the shares of 2021945 Ontario Inc., operating as Digital Boundary
Group (“DBG”), in exchange for $8.5 million in cash and a deferred payment obligation in the amount of $1.4 million, for total
consideration of $9.9 million. The acquisition was accounted for in accordance with IFRS 3 Business Combinations and DBG’s
financial results, since closing, have been included in the Bank’s interim consolidated financial statements.


 


DBG is one of North America’s premier information
technology (IT) security assurance services firms with offices in London, Ontario and Dallas, Texas. DBG provides corporate and government
clients with a suite of IT security assurance services, that range from external network, web and mobile application penetration testing
through to physical social engineering engagements along with supervisory control and data acquisition (SCADA) system assessments, as
well as various aspects of training.


 


The following table summarizes the preliminary
fair value of the assets acquired and liabilities assumed on acquisition:


 


	(thousands of Canadian dollars)	 
	Assets and liabilities acquired at fair value	November 30 2020
	Cash	$1,057
	Accounts receivable	1,451
	Right-of-use assets	2,473
	Other assets	1,194
	Intangible assets	3,940
	Goodwill	5,754
	Deferred income tax liability	(898)
	Lease obligations	(2,650)
	Other liabilities	(2,381)
	 	$9,940


 


Intangible assets include customer relationships,
brands, non-compete agreements and operational software. Goodwill primarily reflects the value of an assembled workforce and the value
of future growth prospects and expected business synergies realized as a result of combining the acquired business with the Bank’s
existing technology and cybersecurity operations. The goodwill as well as portions of the intangible assets are not deductible for income
tax purposes. See note 4 to the unaudited interim consolidated financial statements for additional information relating to the acquisition
of DBG.


 




    	 	VersaBank – Q3 2021 MD&A	16



     


    

Cash


 


Cash, which is held primarily for liquidity purposes,
was $297.0 million or 13% of total assets at July 31, 2021, compared to $272.4 million or 13% of total assets last quarter and $353.8
million or 18% of total assets a year ago. The quarter over quarter trend was a function primarily of the Bank increasing its liquidity
position in anticipation of a high volume of loan fundings in the coming quarter. The year over year trend was a function of the ongoing
redeployment of cash into higher yielding lending assets in an effort to reduce the Bank’s liquidity levels to be more in line with
normal operating levels and the redemption of all of the Bank’s outstanding Non-Cumulative Series 3 preferred shares in the amount
of $16.8 million on April 30, 2021 offset partially by the completion of a private placement of NVCC compliant fixed to floating rate
subordinated notes payable in the principal amount of USD $75.0 million on April 30, 2021. Proceeds of the Notes are currently held in
US dollar denominated cash.


 


Loans


 


	(thousands of Canadian dollars)	 
	 	July 31

2021	April 30

2021	Change	July 31

2020 

Recast	Change
	Commercial real estate mortgages	$738,063	$686,909	7%	$576,390	28%
	Commercial real estate loans	30,044	34,897	(14%)	19,466	54%
	Point of sale loans and leases	1,144,902	1,067,135	7%	909,804	26%
	Public sector and other financing	33,201	35,362	(6%)	38,424	(14%)
	 	$1,946,210	$1,824,303	7%	$1,544,084	26%


 


Commencing fiscal 2021, the Bank re-organized its
lending portfolio into the following four broad asset categories: Commercial Real Estate Mortgages, Commercial Real Estate Loans, Point
of Sale Loans & Leases, 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 July 31, 2020 comparative balances
have been recast to reflect the current broad asset categories.


 


The Commercial Real Estate Mortgages (“CRE
Mortgages”) asset category is comprised of Commercial and Residential Construction Mortgages, Commercial Term Mortgages, Commercial
Insured Mortgages and Land Mortgages. While all of these loans would be considered commercial loans or business-to-business loans, the
underlying credit risk exposure is diversified across both the commercial and retail market segments, and further, the portfolio benefits
from diversity in its underlying security in the form of a broad range of collateral properties.


 


The Commercial Real Estate Loans (“CRE
Loans”) asset category is comprised primarily of Condominium Corporation Financing loans and loans to Mortgage Investment companies.


 




    	 	VersaBank – Q3 2021 MD&A	17



     


    

The Point of Sale Loans and Leases (“POS”)
asset category is comprised of Point of Sale Loan and Lease Receivables acquired from the Bank’s broad 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.


 


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. The Bank has de-emphasized Corporate lending and continues to monitor the public sector
space in anticipation of more robust demand for Federal, Provincial and Municipal infrastructure and other project financings, partially
in response to additional Government policy measures that may be established to support the recovery of the Canadian economy.


 


Q3 2021 vs Q2 2021


 


Loans were up 7% to $1.95 billion as a function
primarily of:


 


		Ø	Higher POS balances attributable to increased
home finance, auto and home improvement/HVAC receivable financing; and,



 


		Ø	Higher CRE Mortgage balances attributable primarily
to increased seasonal origination and funding activity in the residential construction space.



 


Q3 2021 vs Q3 2020


 


Loans were up 26% attributable primarily to:


 


		Ø	Higher CRE Mortgage balances derived from increased
origination activity in our land and construction loan portfolios as well as loans to mortgage investment companies; and,



 


		Ø	Higher POS receivable balances as a function primarily
of increased home finance, auto and home improvement/HVAC receivable financing.



 


Residential Mortgage Exposures


 


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


 


Under OSFI’s definition, the Bank’s
exposure to residential mortgages at July 31, 2021, was $2.7 million compared to $3.8 million last quarter and $4.1 million a year ago.
The Bank did not have any HELOC’s outstanding at July 31, 2021, last quarter or a year ago.


 




    	 	VersaBank – Q3 2021 MD&A	18



     


    

Credit Quality and Allowance for Credit Losses


 


As discussed previously, we currently have no loans
on our balance sheet that are subject to payment deferrals, no impaired loans and no loans in arrears, but we continue to monitor our
lending portfolio, as well as the underlying borrowers and our origination partners very closely to ensure that we have good visibility
on any credit trends that could provide an early warning indication of the emergence of any elevated risk in our lending portfolio.


 


Allowance for Credit Losses


 


The Bank must maintain an allowance for expected
credit losses or ECL allowance that is adequate, in management’s opinion, to absorb all credit related losses in the Bank’s
lending and treasury portfolios. Under IFRS 9 the Bank’s ECL allowance is estimated using the expected credit loss methodology and
is comprised of expected credit losses recognized on both performing loans, and non-performing, or impaired loans even if no actual loss
event has occurred.


 


	(thousands of Canadian dollars)	 
	 	July 31

2021	April 30

2021	Change	July 31

2020	Change
	ECL allowance by lending asset:	 	 	 	 	 
	Commercial real estate mortgages	$1,401	$1,308	7%	$1,866	(25%)
	Commercial real estate loans	52	49	6%	172	(70%)
	Point of sale loans and leases	259	238	9%	221	17%
	Public sector and other financing	20	41	(51%)	98	(80%)
	Total ECL allowance	$1,732	$1,636	6%	$2,357	(27%)



 


 

	(thousands of Canadian dollars)	 
	 	July 31

2021	April 30

2021	Change	July 31

2020	Change
	ECL allowance by stage:	 	 	 	 	 
	ECL allowance stage 1	$1,544	$1,407	10%	$2,060	(25%)
	ECL allowance stage 2	188	229	(18%)	297	(37%)
	ECL allowance stage 3	-	-	 	-	 
	Total ECL allowance	$1,732	$1,636	6%	$2,357	(27%)


 


The Bank’s ECL allowance at July 31, 2021
was $1.7 million compared to $1.6 million last quarter and $2.4 million a year ago. The quarter over quarter trend was a function primarily
of higher lending asset balances offset partially by changes in the forward-looking information used by the Bank in its credit risk models
in the current quarter. The year over year trend was a function of changes in the forward-looking information used by the Bank in its
credit risk models in the current quarter, offset partially by higher lending asset balances.


 


The Bank’s gross impaired loans at July 31,
2021 were $nil compared to $nil last quarter and $6.7 million a year ago. The year over year trend was a function of the repayment in
full of an impaired commercial real estate loan in the fourth quarter of fiscal 2020.


 




    	 	VersaBank – Q3 2021 MD&A	19



     


    

Assessment of significant
increase in credit risk (“SICR”)


 


At each reporting date, the Bank assesses whether
there has been a SICR for loans since initial recognition by comparing, at the reporting date, the risk of default occurring over the
remaining expected life against the risk of default at initial recognition.


 


Since the onset of COVID-19, management undertook
to continuously review and assess the Bank’s SICR methodology in the context of the material deterioration in macroeconomic conditions
precipitated by COVID-19 with specific focus on the potential impact of deferrals, concessions or restructuring of principal and interest
payments and has determined that such arrangements on their own do not qualify as a SICR. Further, and as a result of its review and assessment
process, management has concluded that the determination of a SICR remains a function of the loan’s internal risk rating assignment,
internal watchlist status, loan review status and delinquency status which are updated as necessary in response to changes including,
but not limited to, changes in macroeconomic and/or market conditions, changes in a borrower’s credit risk profile, and changes
in the strength of the underlying security, including guarantor status, if a guarantor exists.


 


Quantitative models may not always be able to capture
all reasonable and supportable information that may indicate a SICR. As a result, qualitative factors may be considered to supplement
such a gap. Examples include changes in adjudication criteria for a particular group of borrowers or asset categories or changes in portfolio
composition, and more specifically changes attributable to the continued impact of COVID-19 on the Canadian economy and the Bank’s
business.


 


Forward-Looking Information


 


The Bank incorporates the impact of future economic
conditions, or more specifically forward-looking information into the estimation of expected credit losses at the credit risk parameter
level. This is accomplished via the credit risk parameter models and proxy datasets that the Bank utilizes to develop probability of default
(“PD”) and loss given default (“LGD”) term structure forecasts for its loans. The Bank has sourced credit risk
modeling systems and forecast macroeconomic scenario data from Moody’s Analytics for the purpose of computing forward-looking credit
risk parameters under multiple macroeconomic scenarios that consider both market-wide and idiosyncratic factors and influences. These
credit risk modeling systems are integrated with the Bank’s internally developed ECL models. Given that the Bank has experienced
very limited historical losses and, therefore, does not have available statistically significant loss data inventory for use in developing
forward looking expected credit loss trends, the integration of unbiased, third-party forward-looking risk parameter modeling systems
is particularly important for the Bank in the context of the estimation of expected credit losses.


 


The Bank utilizes macroeconomic indicator data
derived from multiple macroeconomic scenarios in order to mitigate volatility in the estimation of expected credit losses, as well as
to satisfy the IFRS 9 requirement that future economic conditions are to be based on an unbiased, probability-weighted assessment of possible
future outcomes. More specifically, the macroeconomic indicators set out in the macroeconomic scenarios are used as inputs for the credit
risk parameter models utilized by the Bank to sensitize the individual PD and LGD term structure forecasts to the respective macroeconomic
trajectory set out in each of the scenarios (see Expected Credit Loss Sensitivity below). Currently the Bank utilizes upside, downside
and baseline forecast macroeconomic scenarios, and assigns discrete weights to each for use in the


 




    	 	VersaBank – Q3 2021 MD&A	20



     


    

estimation of its reported ECL. The Bank has also
applied expert credit judgment, where appropriate, to reflect the impact of the highly uncertain macroeconomic environment attributable
to the impact of COVID-19.


 


The macroeconomic indicator data utilized by the
Bank for the purpose of sensitizing PD and LGD 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 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.


 


The forecast macroeconomic scenario data utilized
by the Bank in the current quarter continues to trend positively compared to previous quarters. Key assumptions driving the macroeconomic
forecast trends this quarter include the velocity of the distribution of the vaccines and the rate of spread of the virus, including that
of the new variants, the recovery of the labour market, most specifically in the travel and entertainment segments, trends in household
incomes and consumer confidence, the timing of the Bank of Canada’s anticipated tightening of monetary policy, most specifically
increases in the overnight rate and tapering of quantitative easing, the status of the federal government’s current emergency stimulus
programs and the roll out of the proposed $100 billion stimulus package as a function of the outcome of the Federal election in September.


 


Further, management developed ECL estimates using
credit risk parameter term structure forecasts sensitized to individual baseline, upside, downside, and severe 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, 2021,
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).


 




    	 	VersaBank – Q3 2021 MD&A	21



     


    

A summary of the key forecast macroeconomic indicator
data trends utilized by the Bank for the purpose of sensitizing lending asset credit risk parameter term structure forecasts to forward
looking information, which in turn are used in the estimation of the Bank’s reported ECL, as well as in the assessment of same are
presented in charts below.


 





 





 


Expected Credit Loss Sensitivity:


 


The following table presents the sensitivity of
the Bank’s estimated ECL to a range of individual forecast 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, 2021:


 


	(thousands of Canadian dollars)	 
	 	Reported ECL	100%



	100%



	100%



	100%

Severe Downside
	 	Upside	Baseline	downside
	Allowance for expected credit losses	$1,732	$1,030	$1,382	$1,960	$2,402
	Variance from reported ECL	 	(702)	(350)	228	670
	Variance from reported ECL (%)	 	(41%)	(20%)	13%	39%




    	 	VersaBank – Q3 2021 MD&A	22



     


    

Management remains of the view that despite indications
of economic recovery, forward-looking macroeconomic and industry data will remain somewhat volatile, specifically related to the economy’s
anticipated recovery trajectory. Our view is a function of the uncertainty related to the impact of the new variants, the timeline for
the vaccination of children under the age of twelve, and the sustainability of positively trending consumer confidence, and as a result,
expects that the Bank’s estimated ECL amounts will continue to exhibit some volatility over the course of fiscal 2021 and into fiscal
2022.


 


Considering the analysis set out above and based
on management’s review of the loan and credit data comprising the Bank’s lending portfolio, combined with our interpretation
of the available forecast macroeconomic and industry data, management is of the view that its reported ECL allowance represents a reasonable
proxy for potential, future losses.


 


Deposits


 


The Bank has established three core funding channels,
those being personal deposits, commercial deposits, and cash holdbacks retained from the Bank’s POS loans and leases origination
partners that are classified as other liabilities, which are discussed in the Other Assets and Liabilities section below.


 


	(thousands of Canadian dollars)	 
	 	July 31

2021	April 30

2021	Change	July 31

2020	Change
	Commercial deposits	$597,754	$558,973	7%	$486,486	23%
	Personal deposits	1,219,992	1,120,300	9%	1,078,848	13%
	Total deposits	$1,817,746	$1,679,273	8%	$1,565,334	16%


 


Personal deposits, consisting principally of guaranteed
investment certificates, are sourced primarily through a well-established and well-diversified deposit broker network that the Bank continues
to grow and expand across Canada.


 


Commercial deposits are sourced primarily via specialized
operating accounts made available to insolvency professionals (“Trustees”) in the Canadian insolvency industry. The Bank developed
customized banking software for use by Trustees that integrates banking services with the market-leading software platform used in the
administration of consumer bankruptcy and proposal restructuring proceedings.


 


Q3 2021 vs Q2 2021


 


Deposits were up 8% to $1.8 billion as a function primarily of:


 


		Ø	Higher personal deposits attributable to the Bank
increasing activity in its broker market network to fund balance sheet growth; and,



 


		Ø	Higher commercial deposits attributable to continued
organic growth in the Bank’s Trustee Integrated Banking (“TIB”) program.



 




    	 	VersaBank – Q3 2021 MD&A	23



     


    

Q3 2021 vs Q3 2020


 


Deposits were up 16% as a function primarily of:


 


		Ø	Higher personal deposits attributable to the Bank
increasing activity in its broker market network to fund balance sheet growth; and,



 


		Ø	Higher commercial deposits attributable to continued
organic growth in the Bank’s TIB program.



 


Subordinated Notes Payable


 


	(thousands of Canadian dollars)	 
	 	July 31

2021	April 30

2021	July 31

2020
	Ten year term, unsecured, non-viability contingent capital compliant, subordinated notes payable, principal amount of $5.0 million, effective interest rate of 10.41%, maturing March 2029.	$4,896	$4,894	$4,887
	Ten year term, unsecured, non-viability contingent capital compliant, subordinated notes payable, principal amount of USD $75.0 million, effective interest rate of 5.38%, maturing April 2031.	$90,787	$89,498	$-
	 	$95,683	$94,392	$4,887
	 	 	 	 	 


Subordinated notes payable, net
of issue costs, were $95.7 million at July 31, 2021, compared to $94.4 million last quarter and $4.9 million a year ago.


 


On April 30, 2021, the Bank completed
a private placement with U.S institutional investors of NVCC compliant fixed to floating rate subordinated notes payable in the principal
amount of USD $75.0 million, equivalent to CAD $92.1 million as at April 30, 2021. Interest will be paid on the Notes semi-annually in
arrears on May 1 and November 1 of each year, beginning on November 1, 2021, at a fixed rate of 5.00% per year, until May 1, 2026. Thereafter,
if not redeemed by the Bank, the Notes will have a floating interest rate payable at the 3-month Bankers’ Acceptance Rate plus 361
basis points, payable quarterly in arrears, on February 1, May 1, August 1 and November 1 of each year, commencing August 1, 2026, until
the maturity date. The Notes will mature on May 1, 2031, unless earlier repurchased or redeemed in accordance with their terms. On or
after May 1, 2026, the Bank may, at its option, with the prior approval of the Superintendent of Financial Institutions (Canada), redeem
the Notes, in whole at any time or in part from time to time on not less than 30 nor more than 60 days’ prior notice, at a redemption
price which is equal to par, plus accrued and unpaid interest. Issue costs associated with the Notes were approximately CAD $2.6 million.
Egan-Jones Ratings Company assigned the Notes and the Bank an “A-” and “A” rating respectively. Proceeds of the
Notes are currently held in US dollar denominated cash.


 


$500,000 of the Bank’s
$5.0 million subordinated notes payable, issued in March 2019, are held by a related party (see note 14 to the unaudited interim consolidated
financial statements for additional information on related party transactions and balances).


 




    	 	VersaBank – Q3 2021 MD&A	24



     


    

Other Assets and Liabilities


 


Other Assets


 


	(thousands of Canadian dollars)	 	 	 	 	 
	 	
    July 31


    2021

     
	April 30

2021	Change	July 31 

2020	Change
	Accounts receivable	$1,279	$1,044	23%	$504	  154%
	Funds held for securitization liabilities	-	-	 	3,295	(100%)
	Prepaid expenses and other	10,699	10,431	3%	7,626	   40%
	Deferred income tax asset	1,943	2,941	(34%)	6,727	 (71%)
	Property and equipment	7,272	7,462	(3%)	7,608	   (4%)
	Right-of-use assets	4,990	5,164	(3%)	2,941	    70%
	Investment	953	953	0%	-	 
	Goodwill	5,754	5,754	0%	-	 
	Intangible assets	3,722	3,804	(2%)	-	 
	Total other assets	$36,612	$37,553	(3%)	$28,701	28%


 


Q3 2021 vs Q2 2021


 


Other assets were down 3% to $36.6 million as a function primarily of:


 


		Ø	Lower capitalized assets due to amortization;
and, 



 


		Ø	Draw downs on the deferred income tax asset derived
from taxable income generated by the Bank;



 


Offset partially by:


 


		Ø	Higher prepaid expenses and other attributable
primarily to the capitalization of various costs; and,



 


		Ø	Higher accounts receivable attributable primarily
to the normal course timing of general corporate receivables.



 


Q3 2021 vs Q3 2020


 


Other assets were up 28% as a function primarily of:


 


		Ø	The consolidation of the assets of DBG which was
acquired by the Bank’s wholly owned subsidiary DRTC on November 30, 2020 comprised of $5.1 million of tangible assets as well as
$3.9 million of intangible assets and $5.8 million of goodwill;



 


		Ø	The Bank’s 11% investment in Canada Stablecorp
Inc. (“Stablecorp”) for cash consideration of $953,000 in February 2021. This was a strategic investment made by the Bank
to bring together the necessary financial and technology expertise that will facilitate the development and future issuance of a new,
highly encrypted digital deposit receipt which the Bank will brand as VCAD; and,



 


		Ø	Higher prepaid expenses and other attributable
primarily to the capitalization of various costs;



 


Offset partially by:


 


		Ø	Funds paid to offset the redemption of maturing
securitization liabilities; and, 



 


		Ø	Draw downs on the deferred income tax asset derived
from taxable income generated by the Bank.



 




    	 	VersaBank – Q3 2021 MD&A	25



     


    

Other Liabilities


 


	(thousands of Canadian dollars)	 
	 	
    July 31


    2021

	April 30

2021	Change	July 31

2020	Change
	Accounts payable and other	$6,328	$5,506	15%	$2,640	140%
	Current income tax liability	2,053	1,449	42%	-	
    

    

    

     

	Deferred income tax liability	840	862	(3%)	-	
	Lease obligations	5,276	5,438	(3%)	2,980	77%
	Cash collateral and amounts held in escrow	3,182	3,261	(2%)	4,207	(24%)
	Holdbacks payable on loan and lease receivables	102,631	102,210	0%	89,543	15%
	Total other liabilities	$120,310	$118,726	1%	$99,370	21%


 


Q3 2021 vs Q2 2021


 


Other liabilities were up 1% to $120.3 million as a function primarily
of:


 


		Ø	Higher holdbacks payable balances attributable
to higher POS receivable balances; and,



 


		Ø	General increase in accounts payable and income
tax payable amounts attributable to increased earnings activity;



 


Offset partially by:


 


		Ø	Lower cash collateral and amounts held in escrow.



 


Q3 2021 vs Q3 2020


 


Other liabilities were up 21% attributable primarily to:


 


		Ø	The consolidation of the assumed liabilities of
DBG which was acquired by the Bank’s wholly owned subsidiary DRTC on November 30, 2020 in the amount of $5.9 million;



 


		Ø	The Bank recognizing income tax payable after
fully utilizing the income tax loss carryforward in the current fiscal year; and,



 


		Ø	Higher holdbacks payable balances attributable
to higher POS receivable balances;



 


Offset partially by:


 


		Ø	Lower cash collateral and amounts held in escrow.



 


Shareholders’ Equity


 


Shareholders’ equity was
$252.0 million at July 31, 2021 compared to $247.4 million last quarter and $251.6 million a year ago. The quarter over quarter and year
over year trends were a function primarily of higher retained earnings attributable to net income earned in each of the periods offset
partially by the Bank’s redemption of its outstanding Non-Cumulative Series 3 preferred shares (NVCC) and the payment of dividends.


 




    	 	VersaBank – Q3 2021 MD&A	26



     


    

On April 30, 2021, the Bank redeemed all of its
1,681,320 (October 31, 2020 – 1,681,320) outstanding Non-Cumulative Series 3 preferred shares (NVCC) using cash on hand. The amount
paid on redemption for each share was $10.00, and in aggregate $16.8 million. The initial capitalized transaction costs in the amount
of $1.1 million were applied against retained earnings.


 


The Bank’s book value per common share at
July 31, 2021 was $11.29 compared to $11.06 last quarter and $10.52 a year ago, with the increase being a function primarily of higher
retained earnings attributable to net income earned in each of the periods offset partially by the payment of dividends over the respective
periods.


 


See note 10 to the unaudited interim consolidated
financial statements for additional information relating to share capital.


 


Updated Share Information


 


As at August 30, 2021, there were no changes since
July 31, 2021 in the number of common shares, Series 1 preferred shares, and common share options outstanding.


 


Off-Balance Sheet Arrangements


 


As at July 31, 2021, the Bank did not have any
significant off-balance sheet arrangements other than loan commitments and letters of credit resulting from normal course business activities.
See note 13 to the unaudited interim consolidated financial statements for more information.


 


Related Party Transactions


 


The Bank’s Board of Directors and senior
executive officers represent key management personnel. See note 14 to the unaudited interim consolidated financial statements for additional
information on related party transactions and balances.


 




    	 	VersaBank – Q3 2021 MD&A	27



     


    

Capital Management and Capital
Resources


 


The table below presents the Bank’s regulatory
capital position, risk-weighted assets and regulatory capital and leverage ratios for the current and comparative periods.


 


	(thousands of Canadian dollars)	 
	 	
    July 31


    2021
	April 30

2021	Change	July 31

2020	Change
	Common Equity Tier 1 capital	$226,516	$220,740	3%	$214,272	6%
	 	 	 
	Total Tier 1 capital	$240,163	$234,387	2%	$243,609	(1%)
	 	 	 
	Total Tier 2 capital	$100,107	$98,774	1%	$7,130	1304%
	 	 	 
	Total regulatory capital	$340,270	$333,161	2%	$250,739	36%
	 	 	 
	Total risk-weighted assets	$1,897,695	$1,763,424	8%	$1,518,918	25%
	Capital ratios	 	 	 	 	 
	CET1 capital ratio	11.94%	12.52%	(5%)	14.11%	(15%)
	Tier 1 capital ratio	12.66%	13.29%	(5%)	16.04%	(21%)
	Total capital ratio	17.93%	18.89%	(5%)	16.51%	9%
	Leverage ratio	9.99%	10.46%	(4%)	11.99%	(17%)


 


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


 


OSFI requires that all Canadian banks must comply
with the Basel III standards on an “all-in” basis for purposes of determining their risk-based capital ratios. Required minimum
regulatory capital ratios are a 7.0% Common Equity Tier 1 (“CET1”) capital ratio, an 8.5% Tier 1 capital ratio and a 10.5%
total capital ratio, all of which include a 2.5% capital conservation buffer.


 


On April 30, 2021, the Bank redeemed all of its
1,681,320 (October 31, 2020 – 1,681,320) outstanding Non-Cumulative Series 3 preferred shares (NVCC) using cash on hand. The amount
paid on redemption for each share was $10.00, and in aggregate $16.8 million. Transaction costs, incurred at issuance in the amount of
$1.1 million were applied against retained earnings.


 


On April 30, 2021, the Bank completed a private
placement of NVCC compliant fixed to floating rate subordinated notes in the principal amount of USD $75.0 million, equivalent to CAD
$92.1 million as at April 30, 2021. The Notes will pay interest semi-annually in arrears on May 1 and November 1 of each year, beginning
on November 1, 2021, at a fixed rate of 5.00% per year, until May 1, 2026. Thereafter, if not redeemed by VersaBank, the Notes will have
a floating interest rate payable at the 3-month Bankers’


 




    	 	VersaBank – Q3 2021 MD&A	28



     


    

Acceptance Rate plus 361 basis points, payable
quarterly in arrears, on February 1, May 1, August 1 and November 1 of each year, commencing August 1, 2026, until the maturity date.
Egan-Jones Ratings Company assigned the Notes and the Bank an “A-” and “A” rating respectively. Proceeds of the
Notes are currently held in US dollar denominated cash.


 


Upon issuance of the Notes the Bank received confirmation
from OSFI that the Notes qualify as Tier 2 capital of the Bank pursuant to OSFI’s Capital Adequacy Requirements (CAR) Guideline,
including the NVCC Requirements specified in section 2.2 of the CAR Guideline.


 


The quarter over quarter trends exhibited by the
Bank’s reported regulatory capital levels, regulatory capital ratios and leverage ratios were a function of: retained earnings growth,
tax provision recoveries related to the Bank’s deferred tax asset and changes to the Bank’s risk-weighted asset balances and
composition.


 


The year over year trends exhibited by the Bank’s
reported regulatory capital levels, regulatory capital ratios and leverage ratios were a function of: the redemption of the Bank’s
outstanding Non-cumulative Series 3 Preferred Shares on April 30, 2021, the completion of a private placement of 5% NVCC compliant fixed
to floating rate subordinated notes in the principal amount of USD $75.0 million on April 30, 2021, retained earnings growth, tax provision
recoveries related to the Bank’s deferred tax asset, the addition of goodwill and intangible assets acquired via the purchase of
DBG on November 30, 2021, the inclusion of eligible ECL allowance amounts related to the transitional arrangements pertaining to the capital
treatment of expected loss provisioning as set out by OSFI and changes to the Bank’s risk-weighted asset balances and composition.


 


For more information regarding capital management,
please see note 15 to the Bank’s July 31, 2021, interim Consolidated Financial Statements as well as the Capital Management and
Capital Resources section of the Bank’s MD&A for the year ended October 31, 2020.


 


Liquidity


 


The unaudited Consolidated Statement of Cash Flows
for the nine months ended July 31, 2021, shows cash used in operations in the amount of $10.2 million compared to cash provided by operations
in the amount of $234.2 million for the same period last year. The current period trend was a function primarily of cash outflows to fund
loans exceeding cash inflows from deposits raised and the use of existing liquidity to fund loans. The comparative period trend was a
function primarily of inflows from deposits raised as the Bank strengthened its liquidity position as a prudent liquidity practice in
response to the economic uncertainty resulting from the onset of COVID-19, increased loan repayments and a reduction in restricted cash
balances used to offset the payment of the maturing securitization liabilities. Based on factors such as liquidity requirements and opportunities
for investment in loans and securities, the Bank may manage the amount of deposits it raises and loans it funds in ways that result in
the balances of these items giving rise to either negative or positive cash flow from operations. The Bank will continue to fund its operations
and meet contractual obligations as they become due using cash on hand and by closely managing its flow of deposits.


 




    	 	VersaBank – Q3 2021 MD&A	29



     


    

Interest Rate Sensitivity


 


The table below presents the duration difference
between the Bank’s assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the
Bank’s earnings during a 12 month period and the potential after-tax impact of a 100 basis point shift in interest rates on the
Bank’s shareholders’ equity over a 60 month period if no remedial actions are taken. At July 31, 2021, the duration difference
between assets and liabilities was 3.0 months compared to 0.6 months at October 31, 2020, which indicates that the Bank’s assets
would reprice faster than liabilities in the event of a future change in interest rates.


 


	(thousands of Canadian dollars)	 	 
	 	July 31, 2021	October 31, 2020
	Increase (decrease):	Increase 100 bps	Decrease 100 bps	Increase 100 bps	Decrease 100 bps
	Impact on projected net interest income during a 12 month period	$4,318	$(3,127)	$2,569	$(2,099)
	Impact on reported equity during a 60 month period	$4,132	$(4,447)	$(2,527)	$1,604
	Duration difference between assets and liabilities (months)	3.0	0.6



 


 


Contractual Obligations


 


Contractual obligations as disclosed in the Bank’s
MD&A and Audited Consolidated Financial Statements for the year ended October 31, 2020, have not changed significantly as at July
31, 2021.


 




    	 	VersaBank – Q3 2021 MD&A	30



     


    

Summary of Quarterly Results


 


	(thousands of Canadian dollars

                                                                                except per share amounts)
	2021	2020	2019
	 	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4	Q3
	Results of operations:	 	 	 	 	 	 	 	 	
	Interest income	$22,400	$21,649	$21,515	$21,068	$20,172	$22,688	$22,166	$22,263	$22,958
	Yield on assets (%)	4.02%	4.24%	4.28%	4.33%	4.12%	4.83%	4.84%	4.96%	5.10%
	Interest expense	7,858	6,554	7,141	7,360	7,788	8,212	8,609	8,608	8,899
	Cost of funds (%)	1.41%	1.28%	1.42%	1.51%	1.59%	1.75%	1.88%	1.92%	1.98%
	Net interest income	14,542	15,095	14,374	13,708	12,384	14,476	13,557	13,655	14,059
	Net interest margin (%)	2.61%	2.96%	2.86%	2.82%	2.53%	3.08%	2.96%	3.04%	3.12%
	Non-interest income	1,187	875	1,048	18	8	9	25	(20)	19
	Total revenue	15,729	15,970	15,422	13,726	12,392	14,485	13,582	13,635	14,078
	Provision for (recovery of) credit losses	96	(312)	57	(582)	(44)	490	(208)	21	381
	Non-interest expenses	8,200	8,342	8,087	7,763	6,410	6,899	6,705	6,171	6,860
	Efficiency ratio	52%	52%	52%	57%	52%	48%	49%	45%	49%
	Core cash earnings	7,433	7,940	7,278	6,545	6,026	7,096	7,085	7,443	6,837
	Core cash earnings per common share	$0.35	$0.38	$0.34	$0.31	$0.29	$0.34	$0.34	$0.36	$0.32
	Income before income taxes	7,433	7,940	7,278	6,545	6,026	7,096	7,085	7,443	6,837
	Tax provision	1,997	2,196	1,988	1,799	1,657	1,947	1,944	2,038	1,874
	Net income	$5,436	$5,744	$5,290	$4,746	$4,369	$5,149	$5,141	$5,405	$4,963
	Income per share	 	 	 	 	 	 	 	 	
	Basic	$0.25	$0.25	$0.22	$0.20	$0.18	$0.22	$0.22	$0.23	$0.21
	Diluted	$0.25	$0.25	$0.22	$0.20	$0.18	$0.22	$0.22	$0.23	$0.21
	Return on average common equity	8.72%	9.20%	8.26%	7.46%	6.90%	8.64%	8.60%	9.23%	8.56%
	Core cash return	 	 	 	 	 	 	 	 	
	on average common equity	12.08%	13.08%	11.72%	10.66%	9.89%	12.29%	12.23%	13.11%	12.20%
	Return on average total assets	0.93%	1.02%	0.94%	0.86%	0.78%	0.98%	1.01%	1.08%	0.98%
	Gross impaired loans	 	 	 	 	 	 	 	 	
	to total loans	0.00%	0.00%	0.00%	0.00%	0.43%	0.41%	0.38%	0.39%	1.58%



 



 


The financial results for each of the last eight
quarters are summarized above. Key drivers of the quarter over quarter performance trends for the current reporting period were: lending
asset growth, lower NIM attributable to lower yields earned on higher cash balances and higher cost of funds and increased ECL attributable
primarily to lending asset growth. Results for the current fiscal year reflect the consolidation of the balance sheet and the associated
financial performance of DBG which was acquired by the Bank’s wholly owned subsidiary DRTC on November 30, 2020.


 


Basis of Presentation


 


Non-GAAP and Additional GAAP Measures


 


Core Cash Earnings reflects the Bank’s
core operational performance and earnings capacity, is calculated as net income (as presented in the Consolidated Statements of Comprehensive
Income) adjusted for income taxes, restructuring charges, corporate projects and other non-core operational expenses. Core cash earnings
does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial
institutions.


 


Core Cash Earnings per Common Share is
defined as core cash earnings divided by the number of common shares outstanding.


 


Yield is calculated as interest income
(as presented in the Consolidated Statements of Comprehensive Income) divided by average total assets. Yield does not have a standardized
meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions.


 




    	 	VersaBank – Q3 2021 MD&A	31



     


    

Cost of Funds is calculated as interest
expense (as presented in the Consolidated Statements of Comprehensive Income) divided by average total assets. Cost of funds does not
have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial
institutions.


 


Net Interest Income and Net Interest Margin
or Spread is calculated as net interest income divided by average total assets. Net interest margin or spread does not have a
standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions.


 


Return on Average Common Equity is
defined as annualized net income less amounts relating to preferred share dividends, divided by average common shareholders’ equity
which is average shareholders’ equity less amounts relating to preferred shares recorded in equity.


 


Core Cash Return on Average Common Equity
is defined as annualized core cash earnings less amounts relating to preferred share dividends, divided by average common shareholders’
equity which is average shareholders’ equity less amounts relating to preferred shares recorded in equity.


 


Book Value per Common Share is defined as Shareholders’
Equity less amounts relating to preferred shares recorded in equity, divided by the number of common shares outstanding.


 


Efficiency Ratio is calculated as
non-interest expenses as a percentage of total revenue (as presented in the interim Consolidated Statements of Comprehensive Income).
This ratio does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented
by other financial institutions.


 


Return on Average Total Assets is
defined as annualized net income less amounts relating to preferred share dividends, divided by average total assets.


 


Gross Impaired Loans to Total Loans
captures gross impaired loan balances as a percentage of the Bank’s loans, net of allowance for credit losses. This percentage does
not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial
institutions.


 


Provision for (Recovery of) Credit Losses
as a Percentage of Average Total Loans captures the provision for (recovery of) credit losses (as presented in the interim Consolidated
Statements of Comprehensive Income) as a percentage of the Bank’s average loans, net of allowance for credit losses. This percentage
does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial
institutions.


 


Basel III Common Equity Tier 1, Tier 1, Total
Capital Adequacy and Leverage Ratios are determined in accordance with guidelines issued by the Office of the Superintendent of
Financial Institutions (Canada) (OSFI).


 




    	 	VersaBank – Q3 2021 MD&A	32



     


    

Significant Accounting Policies
and Use of Estimates and Judgments


 


Significant accounting policies and use of estimates
and judgements are detailed in note 2 and note 3 of the Bank’s 2020 Audited Consolidated Financial Statements. There have been no
material changes in accounting policies since October 31, 2020, except as noted below.


 


During the current quarter the Bank updated or
incorporated the following significant accounting policies:


 


Principles of consolidation


 


The Bank holds 100% of the common shares of DRT
Cyber Inc., VersaVault Inc., 11409891 Canada Inc. and VersaJet Inc. DRT Cyber Inc. holds 100% of the common shares of 2021945 Ontario
Inc. (see note 4 – Acquisition). The Consolidated Financial Statements include the accounts of these subsidiaries. All significant
intercompany accounts and transactions have been eliminated.


 


Business Combinations


 


The Bank applied IFRS 3 Business Combinations in
accounting for an acquisition as described in note 4 – Acquisition using the acquisition method. The cost of an acquisition is measured
at the fair value of the consideration, including contingent consideration if applicable, given at the acquisition date. Contingent consideration
is a financial instrument and, as such, is remeasured each period thereafter with the adjustment recorded to acquisition-related fair
value changes in the consolidated statements of comprehensive income. Acquisition-related costs are recognized as an expense in the income
statement in the period in which they are incurred. The acquired identifiable assets, liabilities and contingent liabilities are measured
at their fair values at the date of acquisition. Goodwill is measured as the excess of the aggregate of the consideration transferred,
including, if applicable, any amount of any non-controlling interest in the acquiree, over the net of the recognized amounts of the identifiable
assets acquired and the liabilities assumed.


 


Goodwill and Intangible Assets


 


Goodwill is the residual amount that results when
the purchase price of an acquired business exceeds the value allocated to the tangible and intangible assets, less liabilities assumed,
based on their fair values. Goodwill is not amortized but rather tested for impairment annually or more frequently if events or change
in circumstances indicate that the asset might be impaired. Impairment is determined for goodwill by assessing if the carrying value of
cash generating units (“CGUs”) which comprise the CGU segment, including goodwill, exceeds its recoverable amount determined
as the greater of the estimated fair value less costs to sell and the value in use. Impairment losses recognized in respect of the CGUs
are first allocated to the carrying value of goodwill and any excess is allocated to the carrying amount of assets in the CGUs. Any goodwill
impairment is recorded in income in the reporting year in which the impairment is identified. Impairment losses on goodwill are not subsequently
reversed.


 


Intangible assets acquired in a business acquisition
are recorded at their fair value. In subsequent reporting periods, intangible assets are stated at cost less accumulated amortization
and accumulated impairment losses. Amortization is recorded on a straight-line basis over the expected useful life of the intangible asset.
At each reporting date, the carrying value of intangible assets are reviewed for indicators of impairment. If


 




    	 	VersaBank – Q3 2021 MD&A	33



     


    

such an indication exists, the recoverable amount
of the asset is estimated in order to determine the extent of the impairment, if any. For purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest group of assets that generate cash flows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets (CGU). If the recoverable amount of an asset or CGU is estimated to
be less than its carrying amount, the carrying amount is reduced to its recoverable amount and the impairment loss is recognized in profit
or loss. The recoverable amount of an asset or CGU is the higher of fair value less costs to sell and value in use. In assessing value
in use, the estimated future cash flows are discounted at a rate that reflects current market assessments of the time value of money and
the risks specific to the assets. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable
amount. When an impairment loss is subsequently reversed, the carrying amount of the asset is increased to the revised estimate of its
recoverable amount so that the increased carrying amount does not exceed the carrying amount that would have been recorded had no impairment
losses been recognized for the asset in prior years.


 


Revenue recognition


 


The acquisition of 2021945 Ontario Inc. and its
wholly owned subsidiary, operating as Digital Boundary Group (see note 4 – Acquisition), generates a new non-interest revenue stream
for the Bank. Digital Boundary Group generates professional services revenue primarily from fees charged for IT security assurance services,
data acquisition (SCADA) system assessments, as well as IT security training. Revenue is recognized when service is rendered and performance
obligations have been satisfied and no material uncertainties remain as to the collection of receivables.


 


Foreign currency translation


 


Transactions in foreign currencies are translated
into the respective functional currencies of the Bank and its subsidiaries at the exchange rate at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate at the reporting date.
Foreign currency differences are recognized in profit and loss. Investments classified as fair value through other comprehensive income
(FVOCI) denominated in a foreign currency is translated into Canadian dollars at the exchange rate at the reporting date. All resulting
changes are recognized in other comprehensive income (loss).


 


Foreign operations


 


The assets and liabilities of the Bank’s
US operations, Digital Boundary Group Inc., which has a functional currency other than the Canadian dollar, are translated into Canadian
dollars at the exchange rate at the reporting date. The income and expenses of this operation are translated into Canadian dollars at
the exchange rate at the date of transaction and the foreign currency differences are recognized in other comprehensive income (loss).


 


Other accounting standard
pronouncements adopted in fiscal 2021


 


The following accounting standard amendments issued
by the IASB became effective for the Bank’s fiscal year beginning on November 1, 2020:


 




    	 	VersaBank – Q3 2021 MD&A	34



     


    

i) Changes to the Conceptual Framework, seeking
to provide improvements to concepts surrounding various financial reporting considerations and existing IFRS standards.


 


ii) Amendments to IAS 1, Presentation of Financial
Statements and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, clarifying the definition of “material”.


 


iii) Amendments to IFRS 9, Financial Instruments
and IFRS 7, Financial Instruments: Disclosures, Interest Rate Benchmark Reform, detailing the fundamental reform of major interest rate
benchmarks being undertaken globally to replace or redefine Inter-Bank Offered Rates (“IBORS”) with alternative nearly risk-free
benchmark rates (referred to as “IBOR reform”).


 


In preparing the consolidated financial statements,
management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts of assets and
liabilities at the date of the financial statements and income and expenses during the reporting periods. An area where significant judgment
and related developed estimates were applied was in the assessments of impairment of financial instruments and detailed in note 7 of the
Bank’s 2020 Audited Consolidated Financial Statements.


 


Future Changes in Accounting
Policies


 


The Bank monitors the potential changes proposed
by the IASB and assesses the impact that change in accounting standards may have on the Bank’s financial reporting and accounting
policies. Future accounting policies that may impact the Bank can be found on page 33 of the Bank’s 2020 annual MD&A and note
4 of the Bank’s 2020 annual consolidated financial statements.


 


Controls and Procedures


 


During the quarter ended July 31, 2021, there were
no changes in the Bank’s internal controls over financial reporting, that have materially affected, or are reasonably likely to
materially affect, the Bank’s internal controls over financial reporting.


 


FOR FURTHER INFORMATION PLEASE CONTACT:


 


LodeRock Advisors: Lawrence Chamberlain (416) 519-4196,





lawrence.chamberlain@loderockadvisors.com


 


Visit our website at: www.versabank.com


 



    	 	VersaBank – Q3 2021 MD&A	35