EXHIBIT
4.2


 


 





Consolidated Financial
Statements


Years ended October
31, 2020 and 2019


 


 






     


     


    







 


KPMG LLP





140 Fullarton Street Suite 1400 


London ON N6A 5P2





Canada 


Tel 519 672-4880





Fax 519 672-5684


 


INDEPENDENT AUDITORS’ REPORT


 


To the Shareholders of VersaBank


 


Opinion


 


We have audited the consolidated financial statements of VersaBank
(the “Entity”), which comprise:


 


		·	the consolidated balance sheets
as at October 31, 2020 and 2019 



 


		·	the consolidated statements of
comprehensive income for the years then ended 



 


		·	the consolidated statements of
changes in shareholders’ equity for the years then ended 



 


		·	the consolidated statements of
cash flows for the years then ended 



 


		·	and notes to the consolidated
financial statements, including a summary of significant accounting policies 



 


(Hereinafter referred to as the “financial statements”).


 


In our opinion, the accompanying financial
statements present fairly, in all material respects, the consolidated financial position of the Entity as at October 31, 2020 and 2019
and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial
Reporting Standards (IFRS).


 


Basis for Opinion


 


We conducted our audit in accordance with
Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’
Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.


 


We are independent of the Entity in accordance
with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical
responsibilities in accordance with these requirements.


 


We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.


 


 


 


© 2020 KPMG
LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated
with KPMG International Limited, a private English company limited by guarantee. All rights reserved.


 




     


     


    

 


 


Page 2


 


Other Information


 


Management is responsible for the other information.
Other information comprises the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities
Commissions.


 


Our opinion on the financial statements does not
cover the other information and we do not and will not express any form of assurance conclusion thereon.


 


In connection with our audit of the financial statements,
our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information
appears to be materially misstated.


 


We obtained the information included in Management’s
Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditors’ report. If, based
on the work we have performed on this other information, we conclude that there is a material misstatement of this other information,
we are required to report that fact in the auditors’ report.


 


We have nothing to report in this regard.


 


Responsibilities of Management and Those Charged with
Governance for the Financial Statements


 


Management is responsible for the preparation and
fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal
control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.


 


In preparing the financial statements, management
is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations,
or has no realistic alternative but to do so.


 


Those charged with governance are responsible for
overseeing the Entity’s financial reporting process.


 


Auditors’ Responsibilities for the Audit of the Financial
Statements


 


Our objectives are to obtain reasonable assurance
about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an
auditors’ report that includes our opinion.


 


Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a
material misstatement when it exists.


 




     


     


    

 


 


Page 3


 


Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.


 


As part of an audit in accordance with Canadian
generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.


 


We also:


 


		·	Identify and assess the risks
of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. 



 


The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.


 


		·	Obtain an understanding of internal
control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Entity's internal control. 



 


		·	Evaluate the appropriateness
of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. 



 


		·	Conclude on the appropriateness
of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditors’ report. However, future events or conditions may cause the Entity to cease to continue as a going
concern. 



 


		·	Evaluate the overall presentation,
structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation. 



 


		·	Communicate with those charged
with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit. 



 




     


     


    

 


 


Page 4


 


		·	Provide those charged with governance
with a statement that we have complied with relevant ethical requirements regarding independence and communicate with them all relationships
and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 



 





 


Chartered Professional Accountants, Licensed Public Accountants


 


The engagement partner on the audit resulting in this auditors’
report is Jim Cassidy. London, Canada


 


November 24, 2020


  






    1 


     


    







VERSABANK





Consolidated Balance Sheets





As at October 31, 2020 and 2019


 


(thousands of Canadian dollars)





	 	 	2020	 	2019
	Assets	 	 	 	 
	Cash and cash equivalents (note 5)	 	$	257,644	 	 	$	139,145	 
	Securities (note 6)	 	 	-  	 	 	 	10,061	 
	Loans, net of allowance for credit losses (note 7)	 	 	1,654,910	 	 	 	1,594,288	 
	Other assets (note 8)	 	 	31,331	 	 	 	41,887	 
	 	 	 	 	 	 	 	 	 
	 	 	$	1,943,885	 	 	$	1,785,381	 
	Liabilities and Shareholders' Equity	 	 	 	 	 	 	 	 
	Deposits (note 10)	 	$	1,567,570	 	 	$	1,399,889	 
	Subordinated notes payable (note 11)	 	 	4,889	 	 	 	4,881	 
	Securitization liabilities (note 12)	 	 	8,745	 	 	 	33,366	 
	Other liabilities (note 13)	 	 	107,393	 	 	 	107,082	 
	 	 	 	1,688,597	 	 	 	1,545,218	 
	Shareholders' equity:	 	 	 	 	 	 	 	 
	Share capital (note 14)	 	 	182,094	 	 	 	182,094	 
	Retained earnings	 	 	73,194	 	 	 	58,069	 
	 	 	 	255,288	 	 	 	240,163	 
	Subsequent event (note 25)	 	 	 	 	 	 	 	 
	 	 	$	1,943,885	 	 	$	1,785,381	 







 


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


 


On behalf of the Board:


 





 


	 

         
/s/ David R. Taylor	

         

         

        /s/ Hon. Thomas A. Hockin 

	David R. Taylor	Hon. Thomas A. Hockin
	President and Chief Executive Officer	Chairman of the Board



 


 


 


 


 


 



    2 


     


    




VERSABANK







Consolidated Statements of Comprehensive
Income





Years ended October 31, 2020 and 2019


 


(thousands
of Canadian dollars, except per share amounts) 


	 	 	2020	 	2019
	Interest income:	 	 	 	 
	 	Loans	 	$	83,232	 	 	$	84,875	 
	 	Cash and securities	 	 	2,862	 	 	 	3,430	 
	 	 	 	86,094	 	 	 	88,305	 
	Interest expense:	 	 	 	 	 	 	 	 
	 	Deposits and other	 	 	31,461	 	 	 	33,653	 
	 	Subordinated notes	 	 	508	 	 	 	755	 
	 	 	 	31,969	 	 	 	34,408	 
	 	 	 	 	 	 	 	 	 
	Net interest income	 	 	54,125	 	 	 	53,897	 
	Non-interest income	 	 	60	 	 	 	22	 
	Total revenue	 	 	54,185	 	 	 	53,919	 
	Recovery of credit losses (note 7(b))	 	 	(344	)	 	 	(298	)
	 	 	 	54,529	 	 	 	54,217	 
	Non-interest expenses:	 	 	 	 	 	 	 	 
	 	Salaries and benefits	 	 	16,964	 	 	 	15,174	 
	 	General and administrative	 	 	8,357	 	 	 	8,792	 
	 	Premises and equipment	 	 	2,456	 	 	 	2,430	 
	 	 	 	27,777	 	 	 	26,396	 
	 	 	 	 	 	 	 	 	 
	Income before income taxes	 	 	26,752	 	 	 	27,821	 
	Tax provision (note 16)	 	 	7,347	 	 	 	7,625	 
	 	 	 	 	 	 	 	 	 
	Net income and comprehensive income	 	$	19,405	 	 	$	20,196	 
	Basic and diluted income per common share (note 17)	 	$	0.82	 	 	$	0.85	 
	Weighted average number of	 	 	 	 	 	 	 	 
	common shares outstanding	 	 	21,123,559	 	 	 	21,123,559	 







 


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


 




    3 


     


    




versabank





Consolidated Statements of Changes in Shareholders’
Equity





Years ended October 31, 2020 and 2019


 





(thousands of Canadian dollars)


	 	 	2020	 	2019
	Common shares (note 14):	 	 	 	 
	 	 	 	 	 
	Balance, beginning and end of the year	 	$	152,612	 	 	$	152,612	 
	Preferred shares (note 14):	 	 	 	 	 	 	 	 
	Series 1 preferred shares	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Balance, beginning and end of the year	 	$	13,647	 	 	$	13,647	 
	Series 3 preferred shares	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Balance, beginning and end of the year	 	$	15,690	 	 	$	15,690	 
	Contributed surplus (note 14):	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Balance, beginning and end of the year	 	$	145	 	 	$	145	 
	 	 	 	 	 	 	 	 	 
	Total share capital	 	$	182,094	 	 	$	182,094	 
	Retained earnings:	 	 	 	 	 	 	 	 
	Balance, beginning of the year	 	$	58,069	 	 	$	41,473	 
	Impact of adopting IFRS 9 (note 24)	 	 	-  	 	 	 	78	 
	Net income	 	 	19,405	 	 	 	20,196	 
	Dividends paid on common and preferred shares	 	 	(4,280	)	 	 	(3,678	)
	 	 	 	 	 	 	 	 	 
	Balance, end of the year	 	$	73,194	 	 	$	58,069	 
	 	 	 	 	 	 	 	 	 
	Total shareholders' equity	 	$	255,288	 	 	$	240,163	 




 





 


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


 




    4 


     


    




versabank







Consolidated Statements of Cash Flows





Years ended October 31, 2020 and 2019


 


(thousands of Canadian dollars)





	 	 	2020	 	2019
	Cash provided by (used in):	 	 	 	 
	Operations:	 	 	 	 
	 	Net income	 	$	19,405	 	 	$	20,196	 
	 	Adjustments to determine net cash flows:	 	 	 	 	 	 	 	 
	 	Items not involving cash:	 	 	 	 	 	 	 	 
	 	Recovery of credit losses	 	 	(344	)	 	 	(298	)
	 	Income tax provision	 	 	7,347	 	 	 	7,625	 
	 	Interest income	 	 	(86,094	)	 	 	(88,305	)
	 	Interest expense	 	 	31,969	 	 	 	34,408	 
	 	Amortization	 	 	1,149	 	 	 	721	 
	 	Interest received	 	 	83,363	 	 	 	85,143	 
	 	Interest paid	 	 	(30,913	)	 	 	(33,675	)
	 	Change in operating assets and liabilities:	 	 	 	 	 	 	 	 
	 	Loans	 	 	(57,398	)	 	 	40,328	 
	 	Deposits	 	 	166,542	 	 	 	(38,125	)
	 	Change in other assets and liabilities	 	 	4,569	 	 	 	(8,238	)
	 	 	 	139,595	 	 	 	19,780	 
	Investing:	 	 	 	 	 	 	 	 
	 	Proceeds from sale and maturity of securities	 	 	10,000	 	 	 	-  	 
	 	Purchase of property and equipment	 	 	(245	)	 	 	(242	)
	 	 	 	9,755	 	 	 	(242	)
	Financing:	 	 	 	 	 	 	 	 
	 	Repayment of subordinated notes	 	 	-  	 	 	 	(10,000	)
	 	Issuance of subordinated notes	 	 	-  	 	 	 	4,875	 
	 	Redemption of securitization liability (note 12)	 	 	(24,530	)	 	 	-  	 
	 	Dividends paid	 	 	(4,280	)	 	 	(3,678	)
	 	Repayment of lease obligations	 	 	(355	)	 	 	-  	 
	 	Income taxes paid	 	 	(1,686	)	 	 	(1,371	)
	 	 	 	(30,851	)	 	 	(10,174	)
	 	 	 	 	 	 	 	 	 
	Change in cash and cash equivalents	 	 	118,499	 	 	 	9,364	 
	Cash and cash equivalents, beginning of year	 	 	139,145	 	 	 	129,781	 
	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents, end of year (note 5)	 	$	257,644	 	 	$	139,145	 




 





 


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


 




    5 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    




		1.	Reporting entity:



 


VersaBank (the “Bank”) operates
as a Schedule I bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions
(“OSFI”). The Bank, whose shares trade on the Toronto Stock Exchange, provides commercial lending services to select niche
markets in Canada.


 


The Bank is incorporated and domiciled
in Canada, and maintains its registered office at Suite 2002, 140 Fullarton Street, London, Ontario, Canada, N6A 5P2.


 


		2.	Basis of preparation:



 


These Consolidated Financial Statements
have been prepared in accordance with the Bank Act (Canada). The Superintendent of Financial Institutions Canada (the “Superintendent”
or “OSFI”), has instructed that the financial statements are to be prepared in accordance with International Financial Reporting
Standards (“IFRS”). The significant accounting policies used in the preparation of these consolidated financial statements,
including the accounting requirements of the Superintendent, are summarized below. These accounting policies conform, in all material
respects, to IFRS.


 


		a)	Statement of compliance:



 


These Consolidated Financial Statements
have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”).


 


		b)	Date authorized for issuance:



 


These Consolidated Financial Statements
were approved and authorized for issue by the Board of Directors of the Bank on November 24, 2020.


 


		c)	Basis of measurement:



 


These Consolidated Financial Statements
have been prepared on the historical cost basis except for securities designated as fair value through other comprehensive income which
are measured at fair value in the Consolidated Balance Sheets.


 


		d)	Functional and presentation currency:



 


These Consolidated Financial Statements
are presented in Canadian dollars which is the Bank’s functional currency.


 




    6 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		2.	Basis of preparation – continued:



 


		e)	Use of estimates and judgments:



 


In preparing these Consolidated Financial
Statements, management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts
of assets and liabilities at the date of the financial statements and income and expenses during the reporting periods. Areas where significant
judgement was applied include assessing significant increases in credit risk on financial assets and in the selection of relevant forward
looking information as described in note 3 – Financial instruments. Estimates are applied in the determination of the allowance
for losses on financial assets and the measurement of deferred income taxes. It is reasonably possible, on the basis of existing knowledge,
that actual results may vary from that expected in the development of these estimates. This could result in material adjustments to the
carrying amounts of assets and/or liabilities affected in the future.


 


Estimates and assumptions made by the
Bank, in particular as they relate to the Bank’s expected credit losses and capital management attempt to incorporate the anticipated
impact of the COVID-19 pandemic, (“COVID-19”). Notwithstanding the above, the extent of the impact of COVID-19 on the Canadian
economy and on the Bank’s business, including the impact of government and/or regulatory responses to same, remains highly uncertain
and difficult to predict with any reasonable level of precision. Expanded discussion on the Bank’s interpretation of the impact
of COVID-19 on expected credit losses and capital management is included in note 7 – Loans, and note 23 – Capital management,
respectively.


 


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


 


		3.	Significant accounting policies:



 


The significant accounting policies
used in the preparation of these Consolidated Financial Statements were applied consistently to all years presented, except for changes
to accounting policies resulting from the adoption of IFRS 16 (Leases), and are summarized below:


 


		a)	Principles of consolidation:



 


The Bank holds 100% of the common shares
of DRT Cyber Inc., VersaVault Inc., 11409891 Canada Inc. and VersaJet Inc. The Consolidated Financial Statements include the accounts
of these subsidiaries.


 


All significant intercompany accounts
and transactions have been eliminated.


 


		b)	Revenue recognition:



 


Interest income on securities and loans
is recognized in net interest income using the effective interest rate method over the expected life of the instrument. Interest income
earned but not yet collected on securities and loans is
included in the respective securities and loans categories on the Consolidated Balance Sheets.


 




    7 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		b)	Revenue recognition – continued:



 








Interest income is recognized on impaired
loans and is accrued using the rate of interest used to discount the future cash flows for purposes of measuring the impairment loss.
Loan fees integral to the yield on the loan are amortized to interest income using the effective interest method; otherwise, the fees
are recorded in non-interest income.


 


		c)	Financial instruments:



 


The Bank adopted IFRS 9 – Financial
instruments (“IFRS 9”) in the fiscal year ended October 31, 2019, replacing IAS 39 – Financial instruments – Recognition
and Measurement. This resulted in changes to accounting policies related to the classification and measurement and impairment of financial
assets, which includes the introduction of an expected credit loss (“ECL”) impairment methodology and associated model for
all financial assets and certain off-balance sheet loan commitments and guarantees. There were no significant changes to accounting policies
for financial liabilities, derivative instruments and derecognition of financial assets and liabilities. The referenced change to accounting
policy was adopted retrospectively, with no restatement of comparatives. Refer to note 24 – Transition to IFRS 9 for the impact
to the opening balance sheet as at November 1, 2018.


 


Classification and Measurement 


 


Under IFRS 9, all financial assets must
be classified at initial recognition as a function of the financial asset’s contractual cash flow characteristics and the business
model under which the financial asset is managed. All financial assets are initially measured at fair value, and are classified and subsequently
measured at amortized cost, fair value through profit or loss or fair value through other comprehensive income. Financial assets are required
to be reclassified when the business model under which they are managed has changed. Any reclassifications are applied prospectively from
the reclassification date. All financial liabilities are measured at amortized cost unless elected otherwise.


 


Debt instruments


 


Financial assets that are debt instruments
are categorized into one of the following measurement categories:


 


		•	amortized cost;



 


		•	fair value through other comprehensive income (“FVOCI”);



 


		•	fair value through profit and loss (“FVTPL”).



 




    8 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		c)	Financial instruments – continued:



 


The characterization of a debt instrument’s
cashflows is determined through a solely payment of principal and interest (“SPPI”) test. The SPPI test is conducted to identify
whether the contractual cash flows of a debt instrument are in fact solely payments of principal and interest and are consistent with
a basic lending arrangement. In the context of the SPPI test, “Principal” is defined as the fair value of the debt instrument
at origination or initial recognition, which may change over the life of the instrument as a function of a number of variables including
principal repayments, prepayments, or amortization of a premium/discount. In the context of the SPPI test “Interest” is defined
as the consideration for the time value of money and credit risk. The rationale for the SPPI test is to ensure that debt instruments that
include structural features that are incongruent with a basic lending arrangement, such as conversion options, are classified as, and
measured at FVTPL.


 


Debt instruments measured at amortized
cost


 


Debt instruments with contractual cash
flows that meet the SPPI test and are managed on a hold to collect basis are measured at amortized cost. These financial instruments are
recognized initially at fair value plus direct and incremental transaction costs, and are subsequently measured at amortized cost, using
the effective interest rate method, net of an allowance for credit losses. The effective interest rate is the rate that discounts estimated
future cashflows through the expected life of the instrument to the gross carrying amount of the instrument. Amortized cost is calculated
as a function of the effective interest rate, taking into account any discount or premium on acquisition, transaction costs and fees.
Amortization of these costs is included in interest income in the consolidated statement of income.


 


Debt instruments measured at FVOCI



 


Debt instruments measured at FVOCI have
contractual cash flows that meet the SPPI test and are managed on a hold to collect and for sale basis. FVOCI debt instruments are measured
initially at fair value, plus direct and incremental transaction costs. Subsequent to initial recognition, unrealized gains and losses
on debt instruments measured at FVOCI are recorded in other comprehensive income (“OCI”). Premiums, discounts and related
transaction costs are amortized over the expected life of the instrument to interest income in the consolidated statement of income using
the effective interest rate method.


 


Impairment of debt instruments measured
at FVOCI is calculated using the expected credit loss approach. The allowance does not reduce the carrying amount of the asset in the
consolidated balance sheet, which remains at its fair value. Instead, an amount equal to the allowance that would arise if the assets
were measured at amortized cost is recognized in OCI with a corresponding charge to net provision for credit losses in the consolidated
statement of income.


 


Cumulative gains and losses previously
recognized in OCI, including accumulated allowances, are transferred from AOCI to the consolidated statement of income when the debt instrument
is sold.


 




    9 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		c)	Financial instruments – continued:



 


Debt instruments measured at FVTPL


 


Trading financial instruments are mandatorily
measured at FVTPL as they are held for trading purposes or are part of a managed portfolio with a pattern of short-term profit taking.
Non-trading financial instruments are also mandatorily measured at fair value if their contractual cash flow characteristics do not meet
the SPPI test or if they are managed together with other financial instruments on a fair value basis. Trading and non-trading financial
instruments mandatorily measured at FVTPL are re-measured at fair value as at the consolidated balance sheet date. Gains and losses realized
on disposition and unrealized gains and losses from changes in fair value are included in non-interest income as gains (losses) from financial
instruments measured/designated at FVTPL. Interest income and dividends earned on trading and non-trading financial instruments are included
in interest income.


 


Equity instruments 


 


Equity instruments are measured at FVTPL
unless an irrevocable designation is made, at initial recognition to measure them at FVOCI. Gains or losses from changes in the fair value
of equity financial instruments designated at FVOCI, including any related foreign exchange gains or losses, are recognized in OCI. In
contrast to asset-for-sale equity securities under IAS 39, amounts recognized in OCI will not be subsequently recycled to profit or loss,
with the exception of dividends. Dividends received are recorded in interest income in the consolidated statement of income. Cumulative
gains or losses upon derecognition of the equity instrument will be transferred within equity from AOCI to retained earnings.


 


Financial assets and liabilities designated
at FVTPL


 


Financial assets and financial liabilities
classified in this category are those that have been designated at FVTPL by the Bank on initial recognition.


 


Financial assets are designated at FVTPL
if doing so eliminates or significantly reduces an accounting mismatch which would otherwise arise.


 


Financial liabilities are designated
at FVTPL when one of the following criteria is met:


 


		•	The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise;
or



 


		•	The financial liability contains one or more embedded derivatives which significantly modifies the cash
flows otherwise required.



 




    10 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		c)	Financial instruments – continued:



 


Financial assets and financial liabilities
designated at FVTPL are recorded in the consolidated balance sheet at fair value. For assets designated at FVTPL, changes in fair value
are recognized as other income in the consolidated statement of income. For liabilities designated at fair value through profit or loss,
all changes in fair value are recognized as other income in the consolidated statement of income, except for changes in fair value arising
from changes in the Bank’s own credit risk which are recognized in OCI. Amounts recognized in OCI are not subsequently reclassified
to the consolidated statement of income upon derecognition of the liabilities.


 


Impairment – Allowance for Credit
Losses


 


The Bank must maintain an allowance for
expected credit losses that is adequate, in management’s opinion, to absorb all credit related losses in the Bank’s lending
and treasury portfolios. The Bank’s allowance for expected credit losses is estimated using the ECL methodology and is comprised
of expected credit losses recognized on all financial assets that are debt instruments, classified either as amortized cost or as FVOCI,
and on all loan commitments and financial guarantees that are not measured at FVTPL.


 


Expected credit losses represent unbiased
and probability-weighted estimates that are modeled as a function of a range of possible outcomes as well as the time value of money,
and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions, or more
specifically forward-looking information (“FLI”) (see Forward-Looking Information below).


 


The Bank’s ECL or impairment model
estimates 12 months of expected credit losses, (“TMECL”) for performing loans that have not experienced a significant increase
in credit risk, (“SICR”) since initial recognition. Additionally, the ECL impairment model estimates lifetime expected credit
losses, (“LTECL”) on performing loans that have experienced a SICR since initial recognition. Further, individual allowances
are estimated for loans that are determined to be credit impaired.


 


Under the ECL methodology, loans or other
financial instruments that have not experienced a SICR since initial recognition are designated as stage 1, while loans or financial instruments
that have experienced a SICR since initial recognition are designated as stage 2, and loans or financial instruments that are determined
to be credit impaired are designated as stage 3.


 


Assessment of significant increase
in credit risk 


 


At each reporting date, the Bank assesses
whether or not 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.


 




    11 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		c)	Financial instruments – continued:



 


The determination of a SICR is 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.


 


With regards to delinquency and monitoring,
there is a rebuttable presumption that the credit risk of a loan or other financial instrument has increased since initial recognition
when contractual payments are more than 60 days delinquent. The Bank chose to use 60 days delinquency as an appropriate indicator of increased
credit risk as it serves as a stable early warning indicator that the cashflows associated with the loan or other financial instrument
under consideration may be in jeopardy and may not be realized by the Bank under the contractual repayment terms.


 


Expected credit loss model - Estimation
of expected credit losses


 


Expected credit losses are an estimate
of a loan’s expected cash shortfalls discounted at the effective interest rate, where a cash shortfall is the difference between
the contractual cash flows that are due to the Bank and the cash flows that the Bank actually expects to receive. The ECL calculation
is a function of the credit risk parameters; probability of default, loss given default, and exposure at default associated with each
loan, sensitized to future market and macroeconomic conditions through the incorporation of FLI derived from multiple economic forecast
scenarios, including baseline, upside, and downside scenarios.


 


For clarity:


 


		•	The probability of default (“PD”) for a loan or a financial instrument is an estimate of the
likelihood of default of that instrument over a given time horizon;



 


		•	The loss given default (“LGD”) for a loan or financial instrument is an estimate of the loss
arising in the case where a default of that instrument occurs at a given time or over a given period; and,



 


		•	The exposure at default (“EAD”) for a loan or financial instrument is an estimate of the Bank’s
exposure derived from that instrument at a future default date.



 




    12 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		c)	Financial instruments – continued:



 


The Bank’s ECL model develops contractual
cashflow profiles for loans as a function of a number of underlying assumptions and a broad range of input variables. The expected cashflow
schedules are subsequently derived from the contractual cashflow schedules, adjusted for incremental default amounts, forgone interest,
and recovery amounts.


 


The finalized contractual and expected
cashflow schedules are subsequently discounted at the effective interest rate to determine the expected cash shortfall or expected credit
losses for each individual loan or financial instrument.


 


Individual allowances are estimated for
loans and other financial instruments that are determined to be credit impaired and that have been designated as stage 3. A loan is classified
as credit impaired when the Bank becomes aware that all of, or a portion of the contractual cashflows associated with the loan may be
in jeopardy and as a result may not be realized by the Bank under the repayment schedule set out in the contractual terms associated with
the loan.


 


Forward-Looking Information


 


The IFRS 9 standard requires consideration
of past events, current market conditions and reasonable, supportable information about future economic conditions that is available without
undue cost and effort in the estimation of the expected credit losses for loans. More specifically, under IFRS 9 expected credit losses
represent an unbiased, probability-weighted estimate of the present value of cash shortfalls (i.e., the weighted average of credit losses,
with the respective risks of a default occurring in a given time period used as the weights). Additionally, IFRS 9 stipulates that future
economic conditions are to be based on an unbiased, probability-weighted assessment of possible future outcomes. The estimation and application
of forward-looking information in an attempt to capture the impact of future economic conditions requires significant judgement.


 


The Bank incorporated 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 PD and
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 risk parameters under multiple macroeconomic scenarios that
consider both market-wide and idiosyncratic factors and influences. These 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
credit risk parameter modeling systems is particularly important for the Bank in the context of the estimation of expected credit losses.


 




    13 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		c)	Financial instruments – continued:



 


The Bank utilizes macroeconomic indicator
data derived from three macroeconomic scenarios, those being a baseline scenario, an upside scenario, and a downside scenario 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 three 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. The weighted average
of the individual, sensitized PD and LGD values that comprise each individual term structure forecast is subsequently computed to define
unbiased PD and LGD term structure forecasts, which in turn are applied as inputs to the Bank’s internal ECL model in the estimation
of expected credit losses for the Bank’s loans. Macroeconomic indicator data derived from the baseline, upside and downside scenarios
referenced above is also utilized in the development of credit risk parameter proxy datasets and applied to the Bank’s consumer
loan and small and medium enterprise (SME) loan portfolios.


 


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, 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.


 


Modified Financial Instruments 


 


If the terms of a financial instrument
are modified or an existing financial instrument is replaced with a new one, an assessment is made to determine if the financial instrument
should be derecognized. Where the modification does not result in derecognition, the date of origination continues to be used to determine
SICR. Where modification results in derecognition, the modified financial instrument is considered to be a new instrument.


 


Fair value of financial instruments


 


Estimates of fair value are developed
using a variety of valuation methods and assumptions. The Bank follows a fair value hierarchy to categorize the inputs used to measure
fair value for its financial instruments. The fair value hierarchy is based on quoted prices in active markets (Level 1), models using
inputs other than quoted prices but with observable market data (Level 2), or models using inputs that are not based on observable market
data (Level 3).


 




    14 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		c)	Financial instruments – continued:



 


Valuation models may require the use
of inputs, transaction values derived from models and input assumptions sourced from pricing services. Valuation inputs are either observable
or unobservable. The Bank looks to external, readily observable market inputs when available and may include certain prices and rates
for shorter-dated Canadian yield curves and banker’s acceptances. Unobservable inputs may include credit spreads, probability of
default and recovery rates.  


 


Transfer of financial assets:


 


The Bank may enter into transactions
in which it transfers assets to a third party to obtain alternate sources of funding. The Bank assesses whether substantially all of the
risks and rewards of the asset have been transferred to determine if they qualify for derecognition. In the event that the Bank continues
to be exposed to substantially all of the repayment, interest rate and/or credit risk associated with the asset, the asset(s) would not
qualify for derecognition and would be reflected on the Bank’s Consolidated Balance Sheet.


 


Derivatives and embedded derivatives:


 


Derivatives are measured at FVTPL under
IFRS 9, except to the extent that they are designated in a hedging relationship.


 


Certain derivatives embedded in other
financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to the
host contract and the combined contract is not carried at fair value. Identified embedded derivatives are separated from the host contract
and are recorded at fair value.


 


		d)	Property and equipment:



 


Property and equipment is carried at
cost less accumulated amortization and impairment. Amortization on property and equipment is calculated primarily using the straight-line
method over the useful life of the equipment which typically ranges between 5 and 20 years.


 


Property and equipment is subject to
an impairment review if there are events or changes in circumstances which indicate that the carrying amounts may not be recoverable.
Amortization expense and impairment write-downs are included in premises and equipment expense in the Consolidated Statements of Comprehensive
Income.


 




    15 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		e)	Income taxes:



 


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


 


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


 


Deferred income tax assets are recognized
in the Consolidated Financial Statements to the extent that it is probable that the Bank will have sufficient taxable income to enable
the benefit of the deferred income tax asset to be realized. Unrecognized deferred income tax assets are reassessed for recoverability
at each reporting period end.


 


Current and deferred income taxes are
recorded in income for the period, except to the extent that the tax arose from a transaction that is recorded either in Other Comprehensive
Income or Equity, in which case the income tax on the transaction will also be recorded either in Other Comprehensive Income or Equity.
Accordingly, current and deferred income taxes are presented in the Consolidated Financial Statements as a component of income, or as
a component of Other Comprehensive Income.


 


		f)	Employee benefits:



 


		i)	Short-term benefits:



 


Short-term employee benefit obligations
are recognized as employees render their services and are measured on an undiscounted basis.


 


A liability is recognized for the amount
expected to be paid under a short-term cash bonus plan if the Bank has an obligation to make such payments as a result of past service
provided by the employee and the obligation can be estimated reliably.


 




    16 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		f)	Employee benefits – continued:



 


		ii)	Share-based payment transactions:



 


Equity-settled stock options


 


Employee stock options are measured
using the Black-Scholes pricing model which is used to estimate the fair value of the options at the date of grant. Inputs to the Black-Scholes
model include the closing share price on the grant date, the exercise price, the expected option life, the expected dividend yield, the
expected volatility and the risk-free interest rate. Once the expected option life is determined, it is used in formulating the estimates
of expected volatility and the risk-free rate. Expected future volatility is estimated using a historical volatility look-back period
that is consistent with the expected life of the option.


 


The fair value of options which vest
immediately are recognized in full as of the grant date, whereas the fair value of options which vest over time are recognized over the
vesting period using the graded method which incorporates management’s estimates of the options which are not expected to vest.
The effect of a change in the estimated number of options expected to vest is a change in estimate and the cumulative effect of the change
is recognized prospectively once the estimate is revised.


 


The fair value of stock options granted
is recorded in salaries and benefits expense in the Consolidated Statements of Income and in Share Capital as a component of Contributed
Surplus in the Consolidated Balance Sheets. When options are exercised, the consideration received and the estimated fair value previously
recorded in Contributed Surplus is recorded as Share Capital.


 


The Bank’s stock option plan is
described in note 15.


 


		g)	Share capital:



 


The Bank’s share capital consists
of common shares, preferred shares and contributed surplus.


 


		i)	Share issuance costs:



 


Costs directly incurred with raising
new share capital are charged against equity. Other costs are expensed as incurred.


 


		ii)	Contributed surplus:



 


Contributed surplus consists of the
fair value of stock options granted since inception, less amounts reversed for exercised stock options. If granted options vest and then
subsequently expire or are forfeited, no reversal of contributed surplus is recognized.


 




    17 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		h)	Segment reporting:



 


The Bank does not present segmented information
in its Consolidated Financial Statements as it has determined that its operations fall into one segment, Banking, and further, that it
operates primarily in one geographic region, Canada.


 


		i)	Leases:



 


Effective November 1, 2019, the Bank
adopted IFRS 16 which sets out prescribed methodology related to the recognition, measurement, presentation and disclosure of operating
leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all major leases.
IFRS 16 supersedes previous accounting standards for leases, including IAS 17, Leases and IFRIC 4 – Determining whether
an arrangement contains a lease. As a result of adopting IFRS 16, the Bank recognized an increase to both assets and liabilities on
the Consolidated Balance Sheet, as well as a decrease in rent expense, with a corresponding increase in amortization expense (due to amortization
of the right-of-use assets) and an increase in finance costs (due to accretion of the lease obligation).


 


The Bank’s accounting policy
under IFRS 16 is set out below:


 


At inception of a contract, the Bank
assesses whether a contract is, or contains, a lease arrangement based on whether the contract conveys the right to control the use of
an identified asset for a period of time in exchange for consideration.


 


The Bank recognizes a right-of-use asset
and a lease obligation at the lease commencement date. The right-of-use asset is initially measured based on the initial amount of the
lease obligation adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an
estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset and/or the site on which it is located,
less any lease incentives received. The assets are depreciated to the earlier of the end of useful life of the right-of-use asset or the
lease term using the straight-line method as this methodology most closely reflects the expected pattern of consumption of the associated
future economic benefits. The lease term includes periods covered by an option to extend if there is reasonable certainty that the Bank
will exercise that option. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for
certain remeasurements of the lease obligation.


 


The lease obligation is initially measured
at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in
the lease or, if that rate cannot be readily determined, the incremental borrowing rate that is a function of the asset type or class
and the credit quality of the borrower. Generally, the Bank will use its incremental borrowing rate as the discount rate. Variable lease
payments that do not depend on an index or rate are not included in the measurement of the lease obligation.


 




    18 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		3.	Significant accounting policies – continued:



 


		i)	Leases – continued:



 


The lease obligation is measured at amortized
cost using the effective interest rate method. It is remeasured when there is a change in future lease payments arising from a change
in an index or rate, if there is a change in the Bank’s estimate of the amount expected to be payable under a residual value guarantee,
or if the Bank changes its assessment of whether it will exercise a purchase, extension or termination option.


 


When the lease obligation is remeasured
in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or the remeasured amount is recorded
in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.


 


Impact of adoption of IFRS 16


 


Effective November 1, 2019, the Bank
adopted IFRS 16 using the modified retrospective approach and accordingly the information presented for Fiscal 2019 has not been restated.
It remains as previously reported under IAS 17 and related interpretations.


 


Prior to the adoption of IFRS 16 the
Bank’s total minimum operating lease commitments as at October 31, 2019 were $6.8 million. On initial application, the Bank has
elected to record right-of-use assets based on the corresponding lease obligations. Right-of-use assets and lease obligations of $3.3
million were recorded as of November 1, 2019, with no net impact on retained earnings. When measuring its lease liabilities, the Bank
discounted lease payments at its incremental borrowing rate, applicable to the asset class at November 1, 2019. The weighted-average rate
applied was 4.4%.


 


The Bank elected to apply the practical
expedient to account for leases for which the lease term ends within 12 months of the date of initial application as short-term leases.


 


The following table reconciles the Bank’s
operating lease commitments at October 31, 2019, as previously disclosed in the Bank’s 2019 audited Consolidated Financial Statements,
to the lease obligations recognized on initial application of IFRS 16 at November 1, 2019:





 


(thousands of Canadian dollars)





	Operating lease commitments as at October 31, 2019	 	$	6,808	 
	Discounted using the incremental borrowing rate as at November 1, 2019	 	 	5,557	 
	Non-lease components included within operating lease commitments	 	 	(2,268	)
	Recognition exemption for short term leases	 	 	(35	)
	Lease obligations recognized as at November 1, 2019	 	$	3,254	 




 





 




    19 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		4.	Future accounting standard pronouncements:



 


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


 


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



 


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



 


		c)	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 August, 2020, the IASB issued IBOR reform – Phase 2 amendments. The amendments introduce a practical expedient
to account for a change in the basis for determining the contractual cash flows of financial instruments that are impacted by IBOR reform.
Under the practical expedient, the Bank will update the effective interest rate of the financial instrument. The practical expedient will
be applied when the modification is required as a direct consequence of IBOR reform, and the new basis for determining the contractual
cash flows is economically equivalent to the previous basis. Under the amendments, additional disclosures are required in the financial
statements to outline the effect of the reform on the financial instruments and risk management strategy. The Bank will continue to monitor
IBOR reform, however management does not expect this change to have a significant impact on the Bank’s financial results.



 


These amendments are not expected to
have a material impact on the Bank’s financial results.


 


		5.	Cash and cash equivalents:



 


Cash and cash equivalents
are comprised of deposits with regulated financial institutions.


 


		6.	Securities:



 


As at October 31, 2020, the Bank held
no securities (2019 - $10 million). In November 2019, a $5 million bond guaranteed by the province of Manitoba matured and in December
2019, a $5 million bond guaranteed by the Government of Canada matured. Both bonds were classified as FVOCI and deemed a Level 1 fair
value hierarchy.


 




    20 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		7.	Loans, net of allowance for credit losses:



 


a)        Portfolio
analysis:


 


(thousands of Canadian dollars)





	 	 	2020	 	2019
	 	 	 	 	 
	Commercial real estate	 	$	598,368	 	 	$	509,564	 
	Non-commercial real estate	 	 	37,592	 	 	 	44,608	 
	Corporate and public sector	 	 	33,509	 	 	 	40,670	 
	Structured finance	 	 	980,677	 	 	 	994,842	 
	 	 	 	1,650,146	 	 	 	1,589,684	 
	Allowance for credit losses	 	 	(1,775	)	 	 	(2,119	)
	Accrued interest	 	 	6,539	 	 	 	6,723	 
	 	 	 	 	 	 	 	 	 
	Total loans, net of allowance for credit losses	 	$	1,654,910	 	 	$	1,594,288	 







 


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


 


	 	 	 	 	As at October 31, 2020	 	 	 	As at October 31, 2019
	(thousands of Canadian dollars)	 	Stage 1	 	Stage 2	 	Stage 3	 	Total	 	Stage 1	 	Stage 2	 	Stage 3	 	Total
	Commercial real estate	 	$	522,231	 	 	$	76,137	 	 	$	-  	 	 	$	598,368	 	 	$	448,322	 	 	$	54,989	 	 	$	6,253	 	 	$	509,564	 
	ECL allowance	 	 	1,167	 	 	 	192	 	 	 	-  	 	 	 	1,359	 	 	 	1,557	 	 	 	209	 	 	 	-  	 	 	 	1,766	 
	EL %	 	 	0.22	%	 	 	0.25	%	 	 	0.00	%	 	 	0.23	%	 	 	0.35	%	 	 	0.38	%	 	 	0.00	%	 	 	0.35	%
	Non-commercial real estate	 	$	37,592	 	 	$	-  	 	 	$	-  	 	 	$	37,592	 	 	$	44,608	 	 	$	-  	 	 	$	-  	 	 	$	44,608	 
	ECL allowance	 	 	175	 	 	 	-  	 	 	 	-  	 	 	 	175	 	 	 	86	 	 	 	-  	 	 	 	-  	 	 	 	86	 
	EL %	 	 	0.47	%	 	 	0.00	%	 	 	0.00	%	 	 	0.47	%	 	 	0.19	%	 	 	0.00	%	 	 	0.00	%	 	 	0.19	%
	Corporate and public sector	 	$	33,509	 	 	$	-  	 	 	$	-  	 	 	$	33,509	 	 	$	40,670	 	 	$	-  	 	 	$	-  	 	 	$	40,670	 
	ECL allowance	 	 	26	 	 	 	-  	 	 	 	-  	 	 	 	26	 	 	 	38	 	 	 	-  	 	 	 	-  	 	 	 	38	 
	EL %	 	 	0.08	%	 	 	0.00	%	 	 	0.00	%	 	 	0.08	%	 	 	0.09	%	 	 	0.00	%	 	 	0.00	%	 	 	0.09	%
	Structured finance	 	$	974,104	 	 	$	6,573	 	 	$	-  	 	 	$	980,677	 	 	$	991,735	 	 	$	3,092	 	 	$	15	 	 	$	994,842	 
	ECL allowance	 	 	215	 	 	 	-  	 	 	 	-  	 	 	 	215	 	 	 	229	 	 	 	-  	 	 	 	-  	 	 	 	229	 
	EL %	 	 	0.02	%	 	 	0.00	%	 	 	0.00	%	 	 	0.02	%	 	 	0.02	%	 	 	0.00	%	 	 	0.00	%	 	 	0.02	%
	Loans	 	$	1,567,436	 	 	$	82,710	 	 	$	-  	 	 	$	1,650,146	 	 	$	1,525,335	 	 	$	58,081	 	 	$	6,268	 	 	$	1,589,684	 
	Total ECL allowance	 	 	1,583	 	 	 	192	 	 	 	-  	 	 	 	1,775	 	 	 	1,910	 	 	 	209	 	 	 	-  	 	 	 	2,119	 
	Total EL %	 	 	0.10	%	 	 	0.23	%	 	 	0.00	%	 	 	0.11	%	 	 	0.13	%	 	 	0.36	%	 	 	0.00	%	 	 	0.13	%








 


The Bank holds security against the
majority of its loans in the form of either mortgage interests over property, other registered securities over assets, guarantees and
holdbacks on loan and lease receivables included in the structured finance portfolio (note 13).


 


The Bank applied accounting policies
as detailed in note 3 for Financial Instruments. However, since the onset of COVID-19 in March 2020, the Bank has expanded the depth and
scope of its analysis supporting its assessment of impairment to include additional sensitivity analytics performed on its estimated expected
credit losses as a result of the material deterioration in Canadian macroeconomic conditions precipitated by the onset of the COVID-19.


 




    21 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		7.	Loans – continued:



 


Impairment – Allowance
for Credit Losses


 


As set out previously, the Bank must
maintain an allowance for expected credit losses that is adequate, in management’s opinion, to absorb all credit related losses
in the Bank’s lending and treasury portfolios. Under IFRS 9 the Bank’s allowance for expected credit losses 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.


 


For performing loans, the allowance
for expected credit losses is an estimate of the expected cash shortfalls discounted at the effective interest rate, where a cash shortfall
is the difference between the contractual cash flows that are due to the Bank and the cash flows that the Bank actually expects to receive.
The ECL calculation is a function of the credit risk parameters PD, LDG, and EAD associated with each loan, sensitized to future market
and macroeconomic conditions through the incorporation of FLI derived from multiple economic forecast scenarios. (see Forward-Looking
Information below).


 


Individual allowances are estimated
for non-performing loans that are determined to be credit impaired. A loan or financial instrument is classified as credit impaired when
the Bank becomes aware that all, or a portion of the contractual cashflows associated with the loan may be in jeopardy and as a result
may not be realized by the Bank under the repayment schedule set out in the contractual terms associated with the loan.


 


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


 


At each reporting date, the Bank assesses
whether or not 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, early in
the Bank’s second quarter 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


 




    22 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		7.	Loans – continued:



 


of COVID-19 on the Canadian economy
and the Bank’s business such as more restrictive measures imposed by the government related to public activity, as well as the potential
closure of schools and non-essential businesses.


 


Expected credit loss model
- Estimation of expected credit losses


 


Expected credit losses are an estimate
of a loan’s expected cash shortfalls discounted at the effective interest rate, where a cash shortfall is the difference between
the contractual cash flows that are due to the Bank and the cash flows that the Bank actually expects to receive. Concurrent with the
review and assessment of the Bank’s SICR methodology, management also reviewed its ECL model in the context of the material deterioration
in macroeconomic conditions precipitated by COVID-19 and the impact of same on the FLI applied to the model, and further, remains of the
view that both the model, and the associated methodology are capable of effectively interpreting and incorporating an economic shock of
this nature, as well as the residual effects of same into the estimation of expected credit losses on the Bank’s lending portfolio.


 


Forward-Looking Information


 


The IFRS 9 standard requires consideration
of past events, current market conditions and reasonable, supportable information about future economic conditions that is available without
undue cost and effort in the estimation of expected credit losses for loans.


 


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 PD
and 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 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 credit 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, most often comprised of baseline, upside, and downside 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 three 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.


 




    23 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		7.	Loans – continued:



 


As a result of the deterioration of
the Canadian economy resulting from the onset of COVID-19 in March 2020 the Bank started utilizing a broader range of alternative macroeconomic
scenarios as forward-looking information in its estimation and assessment of its ECL. More specifically, while the Bank continues to utilize
base case, upside and downside macroeconomic forecast scenario data in the development of its estimated ECL for reporting purposes, the
Bank also makes use of a series of more conservative downside macroeconomic forecast scenarios to further sensitize ECL associated with
its consumer and small and medium enterprise (SME) loan exposures in order to better assess the scope, depth and ultimate effectiveness
of the risk mitigation processes and structure that the Bank has applied to these portfolios and ultimately evaluate the appropriateness
of its reported ECL for same.


 


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.


 


As a result of the deterioration of
the Canadian economy resulting from the onset of COVID-19 the Bank started utilizing a broader range of alternative macroeconomic scenarios
as forward-looking information in its estimation and assessment of its ECL in the second quarter of fiscal 2020. More specifically, while
the Bank continues to utilize base case, upside and downside macroeconomic forecast scenario data in the actual measurement of its ECL,
the Bank also makes use of a series of more conservative downside macroeconomic forecast scenarios to further sensitize its ECL measurements
associated with its consumer and small and medium enterprise (SME) loan exposures in order to better assess the scope, depth and ultimate
effectiveness of the risk mitigation processes and structure that the Bank has applied to these portfolios.


 


The forecast macroeconomic scenarios
utilized by the Bank have demonstrated measurable volatility since the onset of COVID-19 in March 2020; however, over the course of the
second half of the year the majority of the macroeconomic indicators considered by the Bank have indicated moderately more favourable
forecast trends. The most recent base case forecast data contemplates unemployment leveling out at 9% by the end of 2020 and then improving
to 8% over the course of 2021. The upside case contemplates unemployment rates only modestly better over the course of 2021 relative to
the base case, while the downside contemplates unemployment increasing notably by the end of 2020, as a result of a higher volume of anticipated
non-essential business closures, and subsequently recovering to moderately better than current levels by the end of 2023.


 


The second quarter saw an unprecedented,
annualized GDP contraction of 39%, which is being followed up by what is now expected to be an annualized expansion of 36% in the third
quarter. Forecast GDP is anticipated to moderate as a result of the second wave of the virus, combined with


 




    24 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		7.	Loans – continued:



 


the diminishing impact of already provided
stimulus, particularly to small businesses, further challenges imposed on the hospitality industry as a result of the arrival of winter,
slowing of the US economy and a potential deterioration in credit quality/performance. The base case forecast contemplates Canadian GDP
contracting approximately 6.5% in 2020 and then recovering and growing modestly over the course of 2021 and 2022. The upside case contemplates
GDP contraction of approximately 6% in 2020 and then moderately improved growth in 2021 and 2022 relative the base case, while the downside
case contemplates the onset of a recession as a function primarily of a higher volume of anticipated non-essential business closures and
increased unemployment resulting from same, followed by a protracted recovery to more normalized growth levels in early 2022. Baseline
and upside forecast scenarios for both Oil and the S&P index contemplate parallel, reasonably stable growth trends through 2022 with
the upside scenario trending moderately more favourably than the base case. The downside scenario for both of these macroeconomic indicators
contemplates a steep declining trend through the remainder of 2020 and through the majority of 2021 followed by reasonably rapid recovery
trends over the course of 2022 and 2023, but still remaining measurably depressed relative to the base case. Under the base case forecast
scenario monetary policy makers are not expected to raise interest rates until a sustainable economic recovery has crystalized, which
is not anticipated until 2023, contributing to 10-year government bond yields and mortgage rates descending to below 60 bps and 3% respectively,
with neither expected to increase meaningfully until at least mid-2021. The upside case contemplates the Bank of Canada, (“BoC”)
accelerating overnight rate hikes into late 2022 while the downside forecast scenario considers the BoC holding interest rates at current
levels until mid-2025.


 


Management remains of the view that
forward looking macroeconomic and industry data will continue to change as COVID-19 cases trend upward across Canada and as more information
becomes available related to understanding the correlation, if any, between loan deferrals granted by banks and future loan defaults,
as well as the impact of expanded unemployment benefits, wage subsidies, temporary payroll reductions, support for banks in accommodating
mortgage deferrals, and unemployed workers benefiting from CERB payments transitioning to the traditional employment insurance program
is realized. As a function of these listed influences, along with numerous others, the Bank expects that its estimated ECL amounts will
continue to exhibit some volatility in the coming year and as a result actual results may differ from estimated ECL amounts.


 




    25 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		7.	Loans – continued:



 


		b)	Allowance for credit losses:



 


The following table provides a reconciliation
of the Bank’s ECL allowance by lending asset category for the year ended October 31, 2020:


 


	(thousands of Canadian dollars)	 	Stage 1	 	Stage 2	 	Stage 3	 	Total
	Commercial real estate	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	$	1,557	 	 	$	209	 	 	$	-  	 	 	$	1,766	 
	Transfer in (out) to Stage 1	 	 	26	 	 	 	(26	)	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 2	 	 	(262	)	 	 	262	 	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 3	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Net remeasurement of loss allowance	 	 	(518	)	 	 	(253	)	 	 	-  	 	 	 	(771	)
	Loan originations	 	 	398	 	 	 	-  	 	 	 	-  	 	 	 	398	 
	Derecognitions and maturities	 	 	(34	)	 	 	-  	 	 	 	-  	 	 	 	(34	)
	Provision for (recovery of) credit losses	 	 	(390	)	 	 	(17	)	 	 	-  	 	 	 	(407	)
	Write-offs	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Recoveries	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Balance at end of year	 	$	1,167	 	 	$	192	 	 	$	-  	 	 	$	1,359	 
	Non-commercial real estate	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	$	86	 	 	$	-  	 	 	$	-  	 	 	$	86	 
	Transfer in (out) to Stage 1	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 2	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 3	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Net remeasurement of loss allowance	 	 	47	 	 	 	-  	 	 	 	-  	 	 	 	47	 
	Loan originations	 	 	45	 	 	 	-  	 	 	 	-  	 	 	 	45	 
	Derecognitions and maturities	 	 	(3	)	 	 	-  	 	 	 	-  	 	 	 	(3	)
	Provision for (recovery of) credit losses	 	 	89	 	 	 	-  	 	 	 	-  	 	 	 	89	 
	Write-offs	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Recoveries	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Balance at end of year	 	$	175	 	 	$	-  	 	 	$	-  	 	 	$	175	 
	Corporate and public sector	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	$	38	 	 	$	-  	 	 	$	-  	 	 	$	38	 
	Transfer in (out) to Stage 1	 	 	1	 	 	 	(1	)	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 2	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 3	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Net remeasurement of loss allowance	 	 	(8	)	 	 	1	 	 	 	-  	 	 	 	(7	)
	Loan originations	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Derecognitions and maturities	 	 	(5	)	 	 	-  	 	 	 	-  	 	 	 	(5	)
	Provision for (recovery of) credit losses	 	 	(12	)	 	 	-  	 	 	 	-  	 	 	 	(12	)
	Write-offs	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Recoveries	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Balance at end of year	 	$	26	 	 	$	-  	 	 	$	-  	 	 	$	26	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Structured finance	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	$	229	 	 	$	-  	 	 	$	-  	 	 	$	229	 
	Transfer in (out) to Stage 1	 	 	127	 	 	 	(119	)	 	 	(8	)	 	 	-  	 
	Transfer in (out) to Stage 2	 	 	(230	)	 	 	230	 	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 3	 	 	(5	)	 	 	-  	 	 	 	5	 	 	 	-  	 
	Net remeasurement of loss allowance	 	 	(5,441	)	 	 	(57	)	 	 	5	 	 	 	(5,493	)
	Loan originations	 	 	7,528	 	 	 	-  	 	 	 	-  	 	 	 	7,528	 
	Derecognitions and maturities	 	 	(1,993	)	 	 	(54	)	 	 	(2	)	 	 	(2,049	)
	Provision for (recovery of) credit losses	 	 	(14	)	 	 	-  	 	 	 	-  	 	 	 	(14	)
	Write-offs	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Recoveries	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Balance at end of year	 	$	215	 	 	$	-  	 	 	$	-  	 	 	$	215	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total balance at end of year	 	$	1,583	 	 	$	192	 	 	$	-  	 	 	$	1,775	 




 


 




    26 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		7.	Loans – continued:



 


		b)	Allowance for credit losses (continued):



 


The following table provides a reconciliation
of the Bank’s ECL allowance by lending asset category for the year ended October 31, 2019:


 


	(thousands of Canadian dollars)	 	Stage 1	 	Stage 2	 	Stage 3	 	Total
	Commercial real estate	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	$	1,257	 	 	$	348	 	 	$	-  	 	 	$	1,605	 
	Transfer in (out) to Stage 1	 	 	56	 	 	 	(56	)	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 2	 	 	(65	)	 	 	70	 	 	 	(5	)	 	 	-  	 
	Transfer in (out) to Stage 3	 	 	-  	 	 	 	(177	)	 	 	177	 	 	 	-  	 
	Net remeasurement of loss allowance	 	 	(131	)	 	 	48	 	 	 	(563	)	 	 	(646	)
	Loan originations	 	 	624	 	 	 	-  	 	 	 	-  	 	 	 	624	 
	Derecognitions and maturities	 	 	(184	)	 	 	(24	)	 	 	-  	 	 	 	(208	)
	Provision for (recovery of) credit losses	 	 	300	 	 	 	(139	)	 	 	(391	)	 	 	(230	)
	Write-offs	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Recoveries	 	 	-  	 	 	 	-  	 	 	 	391	 	 	 	391	 
	Balance at end of year	 	$	1,557	 	 	$	209	 	 	$	-  	 	 	$	1,766	 
	Non-commercial real estate	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	$	151	 	 	$	-  	 	 	$	-  	 	 	$	151	 
	Transfer in (out) to Stage 1	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 2	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 3	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Net remeasurement of loss allowance	 	 	(78	)	 	 	-  	 	 	 	-  	 	 	 	(78	)
	Loan originations	 	 	14	 	 	 	-  	 	 	 	-  	 	 	 	14	 
	Derecognitions and maturities	 	 	(1	)	 	 	-  	 	 	 	-  	 	 	 	(1	)
	Provision for (recovery of) credit losses	 	 	(65	)	 	 	-  	 	 	 	-  	 	 	 	(65	)
	Write-offs	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Recoveries	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Balance at end of year	 	$	86	 	 	$	-  	 	 	$	-  	 	 	$	86	 
	Corporate and public sector	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	$	81	 	 	$	-  	 	 	$	400	 	 	$	481	 
	Transfer in (out) to Stage 1	 	 	2	 	 	 	(2	)	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 2	 	 	(1	)	 	 	1	 	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 3	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Net remeasurement of loss allowance	 	 	(46	)	 	 	1	 	 	 	227	 	 	 	182	 
	Loan originations	 	 	2	 	 	 	-  	 	 	 	-  	 	 	 	2	 
	Derecognitions and maturities	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Provision for (recovery of) credit losses	 	 	(43	)	 	 	-  	 	 	 	227	 	 	 	184	 
	Write-offs	 	 	-  	 	 	 	-  	 	 	 	(627	)	 	 	(627	)
	Recoveries	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Balance at end of year	 	$	38	 	 	$	-  	 	 	$	-  	 	 	$	38	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Structured finance	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	$	415	 	 	$	1	 	 	$	-  	 	 	$	416	 
	Transfer in (out) to Stage 1	 	 	68	 	 	 	(68	)	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 2	 	 	(161	)	 	 	161	 	 	 	-  	 	 	 	-  	 
	Transfer in (out) to Stage 3	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Net remeasurement of loss allowance	 	 	(4,651	)	 	 	(47	)	 	 	-  	 	 	 	(4,698	)
	Loan originations	 	 	5,919	 	 	 	-  	 	 	 	-  	 	 	 	5,919	 
	Derecognitions and maturities	 	 	(1,361	)	 	 	(47	)	 	 	-  	 	 	 	(1,408	)
	Provision for (recovery of) credit losses	 	 	(186	)	 	 	(1	)	 	 	-  	 	 	 	(187	)
	Write-offs	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Recoveries	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Balance at end of year	 	$	229	 	 	$	-  	 	 	$	-  	 	 	$	229	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total balance at end of year	 	$	1,910	 	 	$	209	 	 	$	-  	 	 	$	2,119	 







 




    27 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		7.	Loans – continued:



 


		c)	Maturities and yields:



 


(thousands of Canadian dollars)





	 	 	 	 	Within	 	3 months to	 	1 year to	 	2 years to	 	Over	 	2020	 	2019
	 	 	Floating	 	3 months	 	1 year	 	2 years	 	5 years	 	5 years	 	Total	 	Total
	Total loans	 	$	505,550	 	 	$	33,691	 	 	$	94,455	 	 	$	153,153	 	 	$	709,732	 	 	$	153,565	 	 	$	1,650,146	 	 	$	1,589,684	 
	Average	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	effective yield	 	 	5.43	%	 	 	5.08	%	 	 	4.67	%	 	 	4.80	%	 	 	4.81	%	 	 	4.22	%	 	 	4.94	%	 	 	5.19	%




 





 


Average effective yields are based on
book values and contractual interest rates, adjusted for the amortization of any deferred income and expenses.


 


		d)	Impaired loans:



 


At October 31, 2020,
impaired loans were $nil (October 31, 2019 - $6.3 million).


 


		8.	Other assets:



  


	(thousands of Canadian dollars)	 	 	 	 
	 	 	2020	 	 	2019	 
	Accounts receivable	 	$	268	 	 	$	437	 
	Funds held for securitization liabilities (note 12)	 	 	8,629	 	 	 	17,073	 
	Prepaid expenses and other	 	 	6,843	 	 	 	4,840	 
	Property and equipment (note 9)	 	 	7,431	 	 	 	7,911	 
	Right-of-use assets (notes 3 and 13)	 	 	3,015	 	 	 	-  	 
	Deferred income tax asset (note 16)	 	 	5,145	 	 	 	11,626	 
	 	 	 	 	 	 	 	 	 
	 	 	$	31,331	 	 	$	41,887	 





 


 


		9.	Property and equipment:



 


(thousands of Canadian dollars)





	 	 	2020	 	2019
	Cost	 	$	16,505	 	 	$	16,380	 
	Accumulated amortization	 	 	(9,074	)	 	 	(8,469	)
	 	 	 	 	 	 	 	 	 
	 	 	$	7,431	 	 	$	7,911	 







 


None of the Bank’s property and
equipment is subject to title restrictions, nor is any pledged as security for any of the Bank’s liabilities. Total amortization
expense recorded for property and equipment for the year ended October 31, 2020 totalled $1.1 million (2019 - $721,000).


 




    28 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		10.	Deposits:






 


(thousands of Canadian dollars)


	Maturity 	 	Demand/	 	Within	 	3 months to	 	1 year to	 	2 years to	 	Accrued	 	2020	 	2019
	period	 	Floating	 	3 months	 	1 year	 	2 years	 	5 years	 	Interest	 	Total	 	Total
	Total deposits	 	$	454,171	 	 	$	189,794	 	 	$	267,486	 	 	$	283,782	 	 	$	357,937	 	 	$	14,400	 	 	$	1,567,570	 	 	$	1,399,889	 
	Average effective interest rate	 	 	0.00	%	 	 	1.91	%	 	 	1.99	%	 	 	2.37	%	 	 	2.39	%	 	 	 	 	 	 	1.55	%	 	 	2.00	%







 


Average effective interest rates are
based on book values and contractual interest rates.


 


		11.	Subordinated notes payable:



 





(thousands of Canadian dollars)


	 	 	2020	 	2019
	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.	 	$	4,889	 	 	$	4,881	 
	 	 	 	 	 	 	 	 	 
	 	 	$	4,889	 	 	$	4,881	 







 


In March 2019, the Bank redeemed a $10.0
million subordinate note payable. In the same month the Bank completed a private placement of non-viability contingent capital (“NVCC”)
compliant note payable in the principal amount of $5.0 million, of which $500,000 was issued to a related party (see note 21). Issue costs
associated with the private placement were $125,000.


 


		12.	Securitization liabilities:



 


Securitization liabilities include amounts
payable to counterparties for cash received upon initiation of securitization transactions, accrued interest on amounts payable to counterparties,
and the unamortized balance of deferred costs and discounts which arose upon initiation of the securitization transactions. During the
quarter ended April 30, 2020, the Bank redeemed $24.5 million of maturing securitization liabilities. The amounts payable to counterparties
bear interest at 3.55% and mature in December 2020. Other assets, and in the prior year securitized insured mortgages, with a carrying
value of $8.6 million (2019 - $33.1 million) are pledged as collateral for these liabilities.


 




    29 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		13.	Other liabilities:



 





(thousands of Canadian dollars)


	 	 	2020	 	2019
	Accounts payable and other	 	$	4,233	 	 	$	3,983	 
	Lease obligations	 	 	3,084	 	 	 	-  	 
	Cash collateral and amounts held in escrow	 	 	4,012	 	 	 	6,098	 
	Holdbacks payable on loan and lease receivables	 	 	96,064	 	 	 	97,001	 
	 	 	 	 	 	 	 	 	 
	 	 	$	107,393	 	 	$	107,082	 







 


Lease obligations reflect the Bank’s
liabilities under IFRS 16 that were adopted for the year ended October 31, 2020 (note 3). Upon initial recognition of the lease obligations
the Bank also recognized right-of use assets (note 8) corresponding to the lease obligations. The lease obligations are related to the
Bank’s multiple leased premises. Effective November 1, 2019, the Bank adopted IFRS 16. Prior to the adoption of IFRS 16 the Bank’s
total minimum operating lease commitments as at October 31, 2019 were $6.8 million. The portion of the Bank’s current leasing obligations
that were not captured as part of the right-of-use asset continue to be expensed in premises and equipment.


 


The current leasing arrangements associated
with these lease obligations expires between October 2025 and December 2045 with options to renew the leases after the initial lease period.
Lease payments are adjusted every three to five years to reflect market rates.


 


		14.	Share Capital:



 


		a)	Authorized:



 


Common shares:


 


The Bank is authorized to issue an unlimited
number of voting common shares with no par value.


 


Series 1 Preferred shares:


 


The Bank is authorized to issue an unlimited
number of Series 1 preferred shares with a par value of $10.00.  These preferred shares are Basel III-compliant, non-cumulative five-year
rate reset preferred shares which includes non-viability contingent capital (“NVCC”) provisions which would require the preferred
shares to be converted to common shares upon a trigger event (as defined by OSFI).


 


The holders of the Series 1 preferred
shares were entitled to receive a non-cumulative fixed dividend in the amount of $0.70 annually per share, payable quarterly, as and when
declared by the Board of Directors for the initial period ending October 31, 2019. In accordance with the Short Form Prospectus dated
October 22, 2014 holders of the Series 1 preferred shares had the right, at their option, to convert any or all of their Series 1 preferred
shares into an equal number of non-


 




    30 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		14.	Share capital – continued:



 


cumulative floating rate Series 2 preferred
shares of the Bank, subject to certain conditions on October 31, 2019. Based on the number of Series 1 preferred shares tendered for conversion
into Series 2 preferred shares, holders of Series 1 preferred shares retained their shares and no Series 2 preferred shares were issued
on the Series 1 conversion date. For the five-year period commencing on November 1, 2019, the annual fixed dividend rate is 6.772%, which
is equal to the five-year Government of Canada Bond Yield quoted on October 2, 2019, plus 543 bps.


 


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


 


Upon the occurrence of a trigger event
(as defined by OSFI), each Series 1 or 2 preferred shares will be automatically converted, without the consent of the holders, into common
shares of the Bank.  Conversion to common shares will be determined by dividing the preferred share conversion value ($10.00 per
share plus any declared but unpaid dividends) by the common share value (the greater of (i) the floor price of $0.75 and (ii) the current
market value price calculated as the volume weighted average trading price for the ten consecutive trading days ending on the day immediately
prior to the date of the conversion).


 


Series 3 Preferred shares:


 


The Bank is authorized to issue an unlimited
number of preferred shares, including Series 3 preferred shares with a par value of $10.00. These preferred shares are Basel III-compliant,
non-cumulative six year rate reset preferred shares which includes non-viability contingent capital (“NVCC”) provisions which
would require the preferred shares to be converted to common shares upon a trigger event (as defined by OSFI).


 


The holders of the Series 3 preferred
shares are entitled to receive a non-cumulative fixed dividend in the amount of $0.70 annually per share, payable quarterly, as and when
declared by the Board of Directors for the initial period ending April 30, 2021. Thereafter, the dividend rate will reset every five years
at a level of 569 basis points over the then five-year Government of Canada bond yield.


 


The Bank maintains the right to redeem,
subject to the approval of OSFI, up to all of the outstanding Series 3 preferred shares on April 30, 2021 and on April 30 every five years
thereafter at a price of $10.00 per share. Should the Bank choose not to exercise its right to redeem the Series 3 preferred


 




    31 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		14.	Share capital – continued:



 


shares, holders of these shares will
have the right to convert their shares into an equal number of non-cumulative, floating rate Series 4 preferred shares. Holders of Series
4 preferred shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors, equal to
the 90-day Government of Canada Treasury bill rate plus 569 basis points.


 


Upon the occurrence of a trigger event
(as defined by OSFI), each Series 3 or 4 preferred shares will be automatically converted, without the consent of the holders, into common
shares of the Bank. Conversion to common shares will be determined by dividing the preferred share conversion value ($10.00 per share
plus any declared but unpaid dividends) by the common share value (the greater of (i) the floor price of $0.75 and (ii) the current market
value price calculated as the volume weighted average trading price for the ten consecutive trading days ending on the day immediately
prior to the date of the conversion).


 


		b)	Issued and outstanding:



 


(thousands of Canadian dollars)


	 	 	2020	 	2019
	 	 	Shares	 	Amount	 	Shares	 	Amount
	Common shares:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Outstanding, beginning and	 	 	 	 	 	 	 	 
	end of year	 	 	21,123,559	 	 	 	152,612	 	 	 	21,123,559	 	 	$	152,612	 
	Series 1 preferred shares:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Outstanding, beginning and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	end of year	 	 	1,461,460	 	 	 	13,647	 	 	 	1,461,460	 	 	$	13,647	 
	Series 3 preferred shares:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Outstanding, beginning and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	end of year	 	 	1,681,320	 	 	 	15,690	 	 	 	1,681,320	 	 	$	15,690	 
	Contributed surplus:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, beginning and end of year	 	 	 	 	 	$	145	 	 	 	 	 	 	$	145	 
	Total share capital	 	 	 	 	 	$	182,094	 	 	 	 	 	 	$	182,094	 







 


		15.	Stock-based compensation:



 


Equity-settled stock options:


 


The Bank has a stock option plan for
its employees and officers. Options are granted at an exercise price set at the closing market price of the Bank’s common shares
on the day preceding the date on


 




    32 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		15.	Stock-based compensation – continued:



 


which the option is granted and are
exercisable within ten years of issue. Options are usually granted with graded vesting terms. One third of the grant vests immediately,
one third vests on the first anniversary of the grant date, and one third vests on the second anniversary of the grant date. In limited
cases, some options are granted with immediate vesting terms.


 


For the year ended October 31, 2020, the
Bank recognized stock-based compensation expense of $nil (2019 - $nil). As at October 31, 2020, the outstanding options totaled 42,017
compared to 42,934 a year ago. The options are fully exercisable into common shares at approximately $7.00 per share and expire between
2020 and 2023. No stock options were granted during the year ended October 31, 2020 or October 31, 2019.


 


		16.	Income taxes:



 


Income taxes, including both the current
and deferred portions, vary from the amounts that would be computed by applying the aggregated statutory federal and provincial tax rate
of 27% (2019 – 27%) to income before income taxes. Income taxes have been computed as follows:


 


(thousands of Canadian dollars)


	 	 	2020	 	2019
	Income before income taxes	 	$	26,752	 	 	$	27,821	 
	Income tax rate	 	 	27	%	 	 	27	%
	Expected income tax provision	 	 	7,223	 	 	 	7,512	 
	Tax rate differential	 	 	(83	)	 	 	(53	)
	Unrecognized deferred tax asset	 	 	109	 	 	 	-  	 
	Other permanent differences	 	 	98	 	 	 	166	 
	 	 	 	 	 	 	 	 	 
	Income taxes	 	$	7,347	 	 	$	7,625	 







 


Income taxes is comprised solely of
a deferred income tax provision.


 




    33 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		16.	Income taxes – continued:



 


The components of the recognized deferred
income tax assets and related changes, as recognized in net income, equity or accumulated comprehensive income, are as follows:


 


	(thousands of Canadian dollars)	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Recognized	 	Recognized	 	Recognized	 	 
	 	 	November 1,	 	in net	 	directly to	 	on transition	 	October 31,
	 	 	2019	 	income	 	equity	 	to IFRS 9	 	2020
	Allowance for credit losses	 	$	566	 	 	$	(92	)	 	$	-  	 	 	$	-  	 	 	$	474	 
	Loss carry forwards	 	 	10,294	 	 	 	(6,994	)	 	 	866	 	 	 	-  	 	 	 	4,166	 
	Share issue and financing costs	 	 	162	 	 	 	(75	)	 	 	-  	 	 	 	-  	 	 	 	87	 
	Deposit commissions	 	 	(757	)	 	 	(108	)	 	 	-  	 	 	 	-  	 	 	 	(865	)
	Other	 	 	1,361	 	 	 	(78	)	 	 	-  	 	 	 	-  	 	 	 	1,283	 
	Total deferred income tax assets	 	$	11,626	 	 	$	(7,347	)	 	$	866	 	 	$	-  	 	 	$	5,145	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	(thousands of Canadian dollars)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Recognized	 	 	Recognized	 	 	Recognized	 	 	 	 	 
	 	 	 	November 1,	 	 	 	in net	 	 	 	directly to	 	 	 	on transition	 	 	 	October 31,	 
	 	 	 	2018	 	 	 	income	 	 	 	equity	 	 	 	to IFRS 9	 	 	 	2019	 
	Allowance for credit losses	 	$	640	 	 	$	(46	)	 	$	-  	 	 	$	(28	)	 	$	566	 
	Loss carry forwards	 	 	16,958	 	 	 	(7,543	)	 	 	879	 	 	 	-  	 	 	 	10,294	 
	Share issue and financing costs	 	 	289	 	 	 	(127	)	 	 	-  	 	 	 	-  	 	 	 	162	 
	Deposit commissions	 	 	(782	)	 	 	25	 	 	 	-  	 	 	 	-  	 	 	 	(757	)
	Other	 	 	1,295	 	 	 	66	 	 	 	-  	 	 	 	-  	 	 	 	1,361	 
	Total deferred income tax assets	 	$	18,400	 	 	$	(7,625	)	 	$	879	 	 	$	(28	)	 	$	11,626	 







 


The Bank is subject to Part VI.1 tax
which is a 40% tax on dividends paid on taxable preferred shares under the Income Tax Act (Canada). The Part VI.1 tax of $866,000 (2019
- $879,000) and related deferred tax recovery is recorded through equity.


 


At October 31, 2020, the Bank had income
tax losses which can be carried forward to reduce taxable income in future years. These loss carry forwards of the Bank will expire, if
unused, as follows:


 


	 	 	Canadian	 	United States	 	 
	(thousands of Canadian dollars)	 	Tax Losses	 	Tax Losses	 	Total
	2034	 	$	5,200	 	 	$	-  	 	 	$	5,200	 
	2035	 	 	9,145	 	 	 	-  	 	 	 	9,145	 
	2036	 	 	-  	 	 	 	-  	 	 	 	-  	 
	2037	 	 	-  	 	 	 	-  	 	 	 	-  	 
	2038	 	 	82	 	 	 	-  	 	 	 	82	 
	2039	 	 	549	 	 	 	-  	 	 	 	549	 
	2040	 	 	631	 	 	 	-  	 	 	 	631	 
	No expiry	 	 	-  	 	 	 	396	 	 	 	396	 
	 	 	$	15,607	 	 	$	396	 	 	$	16,003	 







 




    34 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		16.	Income taxes – continued:



 


The deferred tax asset of $109,000 (2019
- $nil) relating to the United States tax losses has not been recognized in these statements.


 


In addition the Bank has approximately
$9.5 million (2019 - $9.5 million) of capital loss carry forwards which may be applied against future capital gains and for which the
deferred tax asset of $1.3 million (2019 - $1.3 million) has not been recognized.


 


At October 31, 2020, the Bank had income
tax losses which can be carried forward to reduce taxable income in future years. These loss carry forwards of the Bank will expire, if
unused, as follows:


 


	 	 	Canadian	 	United States	 	 
	(thousands of Canadian dollars)	 	Tax Losses	 	Tax Losses	 	Total
	2034	 	$	5,200	 	 	$	-  	 	 	$	5,200	 
	2035	 	 	9,145	 	 	 	-  	 	 	 	9,145	 
	2036	 	 	-  	 	 	 	-  	 	 	 	-  	 
	2037	 	 	-  	 	 	 	-  	 	 	 	-  	 
	2038	 	 	82	 	 	 	-  	 	 	 	82	 
	2039	 	 	549	 	 	 	-  	 	 	 	549	 
	2040	 	 	631	 	 	 	-  	 	 	 	631	 
	No expiry	 	 	-  	 	 	 	396	 	 	 	396	 
	 	 	$	15,607	 	 	$	396	 	 	$	16,003	 




  


The deferred tax asset of $109,000 (2019
- $nil) relating to the United States tax losses has not been recognized in these statements.


 


In addition the Bank has approximately
$9.5 million (2019 - $9.5 million) of capital loss carry forwards which may be applied against future capital gains and for which the
deferred tax asset of $1.3 million (2019 - $1.3 million) has not been recognized.


 


		17.	Per share amounts:



 


Basic and diluted income
per common share


 


 


(thousands of Canadian dollars)










	 	 	2020	 	2019
	Net income	 	$	19,405	 	 	$	20,196	 
	Preferred share dividends paid	 	 	(2,168	)	 	 	(2,201	)
	Net income available to common shareholders	 	 	17,237	 	 	 	17,995	 
	Weighted average number of common shares outstanding	 	 	21,123,559	 	 	 	21,123,559	 
	 	 	 	 	 	 	 	 	 
	Basic and diluted income per common share:	 	$	0.82	 	 	$	0.85	 






 


Employee stock options do not have a
dilutive impact. The Series 1 and Series 3 NVCC preferred shares are contingently issuable shares and do not have a dilutive impact.


 




    35 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		18.	Nature and extent of risks arising from financial instruments:



 


Risk management involves the identification,
ongoing assessment, managing and monitoring of material risks that could adversely affect the Bank. The Bank is exposed to credit risk,
liquidity risk, and market risks.


 


Senior management is responsible for
establishing the framework for identifying risks and developing appropriate risk management policies and procedures. The Bank’s
Board of Directors, either directly or indirectly through its committees, reviews and approves corporate policies, including specific
reporting procedures. This enables them to monitor ongoing compliance with policies, delegate limits and review management’s assessment
of risk in its material risk taking activities. The Bank’s Chief Internal Auditor provides a periodic review of policies and procedures
to ensure that they are appropriate, effective and being followed and that adequate controls are in place in order to mitigate risk to
acceptable levels. The Chief Internal Auditor reports directly to the Audit Committee of the Board of Directors. In addition, the Bank
has an ongoing risk and compliance management program with the Chief Compliance Officer, who reports directly to the Board of Directors,
and the Chief Risk Officer, who reports directly to the Risk Oversight Committee.


 


Credit Risk


 


Credit risk is the risk of loss associated
with a borrower, guarantor, or counterparty’s inability or unwillingness to fulfill its contractual obligations. The Bank is exposed
to credit risk primarily as a result of its lending activities but also as a result of investing in securities. The Bank manages its lending
activity credit risk using policies that have been recommended by the Chief Credit Officer and the Chief Risk Officer to the Risk Oversight
Committee, who then recommend the policies to the Board of Directors for approval. These policies consist of approval procedures and limits
on loan amounts, portfolio concentration, geographic concentration, industry concentration, asset category, loans to any one entity and
associated groups, a risk rating policy that provides for risk rating each asset in its total asset portfolio, and early recognition of
problem accounts with an action plan for each account. The Risk Oversight Committee reviews these policies on an ongoing basis.


 


As a result of the material deterioration
in the Canadian economy precipitated by COVID-19, the Bank’s credit risk department has taken a number of steps to increase the
frequency and comprehensiveness of its review and assessment of the Bank’s credit risk profile as well as in its monitoring of the
general activity within each of the Bank’s lending portfolios, including annual and interim reviews, risk rating adjustments, new
credit volumes, funding requirements, requests for deferrals, concessions or restructurings and any risk rating adjustments precipitating
from same. Further, the Bank’s credit risk department maintains a rigorous review of adherence to the Bank’s credit adjudication
policies. Commencing in March 2020, management expanded the nature and scope of available data and information contemplated in its interpretation
of current and expected macroeconomic conditions and, ultimately, in its assessment of the credit risk profile of the Bank’s lending
portfolio, including the expected duration, scope and impact of active monetary and fiscal policy stimulus programs, and available industry
and market data specifically related to credit performance trends across a range of asset categories.


 




    36 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		18.	Nature and extent of risks arising from financial instruments – continued:



 


The Bank manages credit risk associated
with securities included in its Treasury portfolio by applying policies that have been recommended by the Chief Credit Officer to the
Risk Oversight Committee, which then recommends the policies to the Board of Directors for approval. These policies consist of approval
procedures and restrictions in the selection of security dealers, restrictions in the nature of securities selected, and in setting securities
portfolio concentration limits. The Risk Oversight Committee reviews these policies on an ongoing basis.


 


The Risk Oversight Committee, comprised
entirely of independent directors, performs the following functions related to credit risk:


 


		·	Recommends policies governing management of credit risks to the Board of Directors for approval and reviews
credit risk policies on an ongoing basis to ensure they are prudent and appropriate given possible changes in market conditions and corporate
strategy.



 


		·	Concurs with credits exceeding the levels delegated to management, prior to commitment.



 


		·	Reviews, on a regular basis, watchlist accounts, impaired loans and accounts that have gone into arrears
and expected credit loss analysis on a quarterly basis.



 


See note 6 for information relating
to credit risk associated with securities and note 7 for information relating to credit risk associated with loans.


 


There was no material change in the
Bank’s processes for managing credit risk during the year.


 


Liquidity Risk


 


Liquidity risk is the risk that the
Bank is unable to meet the demand for cash to fund obligations as they come due. The Bank is exposed to liquidity risk as a result of
timing differences in the cash flows of its lending activities, security investment activities and deposit taking activities. The Bank
has established policies to ensure that its cash outflows and inflows are closely matched and that its sources of deposits are diversified
between funding sources and over a wide geographic area. With the onset of COVID-19, management considered the general activity and trends
in its key deposit markets, the expected duration, scope and impact of active monetary and fiscal policy stimulus programs and the anticipated
impact of same on its future cashflow requirements in its assessment of the Bank’s liquidity risk profile. Since the second quarter
of fiscal 2020, the Bank has maintained elevated liquidity levels as a prudent liquidity practice in response to the persisting economic
uncertainty attributable to the impact of COVID-19.


 


The Risk Oversight Committee recommends
policies governing management of liquidity risk to the Board for approval and reviews liquidity policies on an ongoing basis. It receives
and reviews quarterly securities portfolio reports and liquidity risk reports from management relating to its liquidity position. Additionally,
an Asset Liability Committee, consisting of members of senior management, monitors liquidity risk, reviews compliance with policies and
discusses strategies in this area.


 




    37 


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Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		18.	Nature and extent of risks arising from financial instruments – continued:



 


See note 19 for information relating
to liquidity risk associated with the Bank’s asset and liability gaps in maturities. There was no material change in the Bank’s
processes for managing liquidity risk during the year.


 


Market Risk


 


Market risk is the risk of a negative
impact on the balance sheet and/or income statement resulting from changes or volatility in market factors such as interest rates or market
prices. The Bank’s principal market risk arises from interest rate risk as the Bank does not undertake any material foreign exchange
or trading activities. The Risk Oversight Committee is charged with recommending policies that govern market risk to its Board of Directors
for approval and with reviewing the policies on an ongoing basis.


 


Interest rate risk is the risk that
a movement in interest rates could negatively impact spread, net interest income and the economic value of assets, liabilities and shareholders’
equity. The Bank manages interest rate risk by employing a number of methods including income simulation analysis and interest rate sensitivity
gap and duration analysis. Management prepares regular reports to the Board to allow for ongoing monitoring of the Bank’s interest
rate risk position. The Asset Liability Committee reviews the results of these analyses on a monthly basis and monitors compliance with
limits set by corporate policy.


 


The management of interest rate risk
also includes stress testing the Bank’s financial assets and liabilities to various standard and non-standard interest rate scenarios.
Standard scenarios that are considered include a 100 basis point (bps) parallel upward and downward shift in all yield curves applicable
to the Bank.


 


The results of an analysis of the Bank’s
sensitivity to an increase or decrease in market interest rates, assuming no asymmetrical movement in yield curves and a static balance
sheet are set out below:


 


Interest Rate Position


 


(thousands of Canadian dollars)







	 	 	2020	 	2019	 	 
	 	 	Increase	 	Decrease	 	Increase	 	Decrease
	 	 	100 bps	 	100 bps	 	100 bps	 	100 bps
	Increase (decrease):	 	 	 	 	 	 	 	 
	Sensitivity of projected net interest	 	 	 	 	 	 	 	 
	income during a 12 month period	 	$	2,569	 	 	$	(2,099	)	 	$	1,621	 	 	$	(1,613	)
	Sensitivity of reported equity	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	during a 60 month period	 	 	(2,527	)	 	 	1,604	 	 	 	(3,669	)	 	 	3,780	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Duration difference between assets and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	liabilities (months)	 	 	0.6	 	 	 	 	 	 	 	1.3	 	 	 	 	 






 


There was no material change in the
Bank’s processes for managing interest rate risk during the year.


 




    38 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		18.	Nature and extent of risks arising from financial instruments – continued:



 


As at October 31, 2020 and October 31,
2019 the Bank did not have any outstanding contracts to hedge fair value exposure attributed to interest rate risk. The Bank uses on-balance
sheet strategies to manage its interest rate risk.


 


		19.	Interest rate risk and liquidity risk:



 


The Bank is exposed to interest rate
risk as a consequence of the mismatch, or gap, between assets and liabilities scheduled to mature or reset on particular dates. The gaps,
which existed at October 31, 2020 are set out below:


 


(thousands of Canadian dollars)


	 	 	Floating	 	Within	 	3 months to	 	1 year to	 	2 years to	 	Over	 	Non-interest	 	 
	 	 	rate	 	3 months	 	1 year	 	2 years	 	5 years	 	5 year		rate sensitive	 	Total
	Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	$	257,644	 	 	$	-  	 	 	$	-  	 	 	$	-  	 	 	$	-  	 	 	$	-  	 	 	$	-  	 	 	$	257,644	 
	Effective rate	 	 	0.68	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Securities	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 
	Effective rate	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loans	 	 	505,550	 	 	 	33,691	 	 	 	94,455	 	 	 	153,153	 	 	 	709,732	 	 	 	153,565	 	 	 	4,764	 	 	 	1,654,910	 
	Effective rate	 	 	5.43	%	 	 	5.08	%	 	 	4.67	%	 	 	4.80	%	 	 	4.81	%	 	 	4.22	%	 	 	 	 	 	 	 	 
	Other	 	 	-  	 	 	 	8,629	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	22,702	 	 	 	31,331	 
	Effective rate	 	 	 	 	 	 	0.20	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total Assets	 	$	763,194	 	 	$	42,320	 	 	$	94,455	 	 	$	153,153	 	 	$	709,732	 	 	$	153,565	 	 	$	27,466	 	 	$	1,943,885	 
	Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Deposits	 	$	454,171	 	 	$	189,794	 	 	$	267,486	 	 	$	283,782	 	 	$	357,937	 	 	$	-  	 	 	$	14,400	 	 	$	1,567,570	 
	Effective rate	 	 	 	 	 	 	1.91	%	 	 	1.99	%	 	 	2.37	%	 	 	2.39	%	 	 	 	 	 	 	 	 	 	 	 	 
	Subordinated notes	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	4,889	 	 	 	-  	 	 	 	4,889	 
	Effective rate	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	10.00	%	 	 	 	 	 	 	 	 
	Securitization liabilities	 	 	-  	 	 	 	8,745	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	8,745	 
	Effective rate	 	 	 	 	 	 	3.55	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Other	 	 	100,076	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	-  	 	 	 	7,317	 	 	 	107,393	 
	Effective rate	 	 	0.33	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Equity	 	 	-  	 	 	 	-  	 	 	 	15,690	 	 	 	-  	 	 	 	13,647	 	 	 	-  	 	 	 	225,951	 	 	 	255,288	 
	Effective rate	 	 	 	 	 	 	 	 	 	 	7.00	%	 	 	 	 	 	 	6.77	%	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities and equity	 	$	554,247	 	 	$	198,539	 	 	$	283,176	 	 	$	283,782	 	 	$	371,584	 	 	$	4,889	 	 	$	247,668	 	 	$	1,943,885	 
	October 31, 2020 gap	 	$	208,947	 	 	$	(156,219	)	 	$	(188,721	)	 	$	(130,629	)	 	$	338,148	 	 	$	148,676	 	 	$	(220,202	)	 	$	-  	 
	Cumulative	 	$	208,947	 	 	$	52,728	 	 	$	(135,993	)	 	$	(266,622	)	 	$	71,526	 	 	$	220,202	 	 	$	-  	 	 	$	-  	 
	October 31, 2019 gap	 	$	72,592	 	 	$	(138,472	)	 	$	(200,484	)	 	$	(67,789	)	 	$	385,216	 	 	$	147,548	 	 	$	(198,611	)	 	$	-  	 
	Cumulative	 	$	72,592	 	 	$	(65,880	)	 	$	(266,364	)	 	$	(334,153	)	 	$	51,063	 	 	$	198,611	 	 	$	-  	 	 	$	-  	 







 




    39 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		20.	Fair value of financial instruments:



 


The amounts set out
in the table below represent the fair value of the Bank’s financial instruments:


 





(thousands of Canadian dollars)


	 	 	2020	 	 	 	2019	 	 
	 	 	Book Value	 	Fair Value	 	Book Value	 	Fair Value
	Assets	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	$	257,644	 	 	$	257,644	 	 	$	139,145	 	 	$	139,145	 
	Securities	 	 	-  	 	 	 	-  	 	 	 	10,061	 	 	 	10,061	 
	Loans	 	 	1,654,910	 	 	 	1,665,473	 	 	 	1,594,288	 	 	 	1,593,277	 
	Other financial assets	 	 	8,897	 	 	 	8,897	 	 	 	17,510	 	 	 	17,510	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Deposits	 	$	1,567,570	 	 	$	1,607,495	 	 	$	1,399,889	 	 	$	1,403,816	 
	Subordinated notes payable	 	 	4,889	 	 	 	5,000	 	 	 	4,881	 	 	 	5,000	 
	Securitization liabilities	 	 	8,745	 	 	 	8,778	 	 	 	33,366	 	 	 	33,469	 
	Other financial liabilities	 	 	107,393	 	 	 	107,393	 	 	 	107,082	 	 	 	107,082	 







 


Fair values are based on management’s
best estimates of market conditions and valuation policies at a certain point in time. The estimates are subjective and involve particular
assumptions and matters of judgment and as such, may not be reflective of future fair values. The Bank’s loans and deposits lack
an available market as they are not typically exchanged. Therefore, they have been valued as described below and are not necessarily representative
of amounts realizable upon immediate settlement.


 


The fair value amounts have been determined
using the following valuation methods and assumptions:


 


		•	The fair values of securities are determined based on quoted market prices and internal and external valuation
models that incorporate observable market data such as interest rates and credit spreads.



 


		•	The fair value of loans is based on net discounted cash flows using market interest rates and applicable
credit spreads for borrowers.



 


		•	The fair value of deposits is determined based on discounted cash flows using market interest rates.



 


		•	The fair value of subordinated notes payable is determined by referring to current values for similar
debt instruments.



 


		•	The fair value of securitization liabilities is determined based on discounted cash flows using market
interest rates.



 


		•	The fair value of other financial assets and other financial liabilities is approximately equal to their
book value due to the short-term nature of the instruments.



 




    40 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		21.	Related party transactions:



 


The
Bank’s Board of Directors and Senior Executive Officers represent key management personnel. The Bank has issued loans to key management
personnel. At October 31, 2020, amounts due from related parties totalled $3.8 million (2019 - $1.4 million). The interest rates charged
on loans and advances to related parties are typically similar to those charged on an arms-length transaction. Interest income earned
on related party loans for the year ended October 31, 2020 totalled $62,000 (2019 - $48,000). There were no provisions for credit losses
related to loans issued to key management personnel (2019 - $nil), and all loans issued to key management personnel were current as at
October 31, 2020 and 2019.


 


In March 2019, the Bank issued a $500,000
subordinated note payable to key management personnel which bears an interest rate of 10% and matures in March 2029 (note 11).


 


Total compensation expense recognized
for key management personnel for the year was $5.4 million (2019 - $5.0 million).


 


		22.	Commitments and contingencies:



 


		a)	Credit commitments:



 


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


 


(thousands of Canadian dollars)





	 	 	2020	 	2019
	Loan commitments	 	$	238,724	 	 	$	261,366	 
	Letters of credit	 	 	50,284	 	 	 	48,074	 
	 	 	 	 	 	 	 	 	 
	 	 	$	289,008	 	 	$	309,440	 




 


 


		b)	Pledged assets:



 


In the ordinary course of business, assets
are pledged against the following off-balance sheet items:


 


(thousands of Canadian dollars)





	 	 	2020	 	2019
	Securitized contracts	 	$	1,318	 	 	$	4,130	 
	Letters of credit	 	 	3,914	 	 	 	4,438	 
	 	 	 	 	 	 	 	 	 
	 	 	$	5,232	 	 	$	8,568	 




 


 




    41 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		23.	Capital management:



 


		a)	Overview:



 


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


 


OSFI sets and monitors capital requirements
for the Bank. Capital is managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors
and take into account, amongst other items forecasted capital requirements and financial market conditions.


 


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


 


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


 


The Bank makes use of the Standardized
Approach for credit risk as prescribed by OSFI and, therefore, may include eligible ECL allowance amounts in its Tier 2 capital, up to
a maximum of 1.25% of its credit risk-weighted assets calculated under the Standardized Approach. Further to this, and as a result of
the onset of COVID-19 and the economic uncertainty precipitated by same, OSFI introduced guidance over the course of the second quarter
of fiscal 2020, that set out transitional arrangements pertaining to the capital treatment of expected loss provisioning which allows
for a portion of eligible ECL allowance amounts to be included in CET1 capital, on a transitional basis over the course of the period
ranging between 2020 and 2022 inclusive. The portion of the Bank’s ECL allowance that is eligible for inclusion in CET1 capital
is calculated as the increase in the sum of Stage 1 and Stage 2 ECL allowances estimated as at October 31, 2020 relative to the sum of
Stage 1 and Stage 2 ECL allowances estimated for the baseline period, which has been designated by OSFI to be the three months ended January
31, 2020, adjusted for tax effects and multiplied by a scaling factor. The scaling factor has been set by OSFI at 70% for fiscal 2020,
50% for fiscal 2021 and 25% for fiscal 2022. The impact of the capital treatment of expected loss provisioning on the Bank’s capital
levels and associated capital ratios is presented in the table below.


 




    42 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		23.	Capital management - continued:



 


During the year ended October 31, 2020,
there were no material changes in the Bank’s management of capital.


 


		b)	Risk-Based Capital Ratios:



 


The Basel Committee on Banking Supervision
has published the Basel III rules on capital adequacy and liquidity (“Basel III”). OSFI requires that all Canadian banks must
comply with the Basel III standards on an “all-in” basis for the purpose of determining their risk-based capital ratios. Required
minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 capital ratio (“CET1”), an 8.5% Tier 1 capital ratio and
a 10.5% total capital ratio, all of which include a 2.50% capital conservation buffer.


 


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


 


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


 


(thousands of Canadian dollars)


	 	 	2020	 	2020	 	2019
	 	 	"Transitional"	 	"All in"	 	"All in"
	Common Equity Tier 1 (CET1) capital	 	 	 	 	 	 
	Directly issued qualifying common share capital	 	$	152,757	 	 	$	152,757	 	 	$	152,757	 
	Retained earnings	 	 	73,194	 	 	 	73,194	 	 	 	58,069	 
	CET1 before regulatory adjustments	 	 	225,951	 	 	 	225,951	 	 	 	210,826	 
	Regulatory adjustments applied to CET1	 	 	(6,592	)	 	 	(6,592	)	 	 	(13,281	)
	Common Equity Tier 1 capital	 	$	219,359	 	 	$	219,359	 	 	$	197,545	 
	Additional Tier 1 capital	 	 	 	 	 	 	 	 	 	 	 	 
	Directly issued qualifying Additional Tier 1 instruments	 	$	29,337	 	 	$	29,337	 	 	$	29,337	 
	Total Tier 1 capital	 	$	248,696	 	 	$	248,696	 	 	$	226,882	 
	Tier 2 capital	 	 	 	 	 	 	 	 	 	 	 	 
	Directly issued capital instruments	 	$	5,000	 	 	$	5,000	 	 	$	5,000	 
	Tier 2 capital before regulatory adjustments	 	 	5,000	 	 	 	5,000	 	 	 	5,000	 
	Eligible stage 1 and stage 2 allowance	 	 	1,775	 	 	 	1,775	 	 	 	-  	 
	Total Tier 2 capital	 	$	6,775	 	 	$	6,775	 	 	$	5,000	 
	Total regulatory capital	 	$	255,471	 	 	$	255,471	 	 	$	231,882	 
	Total risk-weighted assets	 	$	1,580,939	 	 	$	1,580,939	 	 	$	1,501,435	 
	Capital ratios	 	 	 	 	 	 	 	 	 	 	 	 
	CET1 ratio	 	 	13.88	%	 	 	13.88	%	 	 	13.16	%
	Tier 1 capital ratio	 	 	15.73	%	 	 	15.73	%	 	 	15.11	%
	Total capital ratio	 	 	16.16	%	 	 	16.16	%	 	 	15.44	%




 


 




    43 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		23.	Capital management – continued:



 


		c)	Leverage ratio



 


The leverage ratio, which is prescribed
under the Basel III Accord, is a supplementary measure to the risk-based capital requirements and is defined as the ratio of Tier 1 capital
to the Bank’s total exposures. The Basel III minimum leverage ratio is 3.0%. The Bank’s leverage ratio is calculated as follows:


 


(thousands of Canadian dollars)


	 	 	2020	 	2020	 	2019
	 	 	"Transitional"	 	"All-in"	 	 
	On-balance sheet assets	 	$	1,943,885	 	 	$	1,943,885	 	 	$	1,785,381	 
	Assets amounts adjusted in determining the Basel III	 	 	 	 	 	 	 	 	 	 	 	 
	Tier 1 capital	 	 	(6,592	)	 	 	(6,592	)	 	 	(13,281	)
	Total on-balance sheet exposures	 	 	1,937,293	 	 	 	1,937,293	 	 	 	1,772,100	 
	Off-balance sheet exposure at gross notional amount	 	$	289,008	 	 	$	289,008	 	 	$	309,440	 
	Adjustments for conversion to credit equivalent amount	 	 	(186,524	)	 	 	(186,524	)	 	 	(190,023	)
	Off-balance sheet exposures	 	 	102,484	 	 	 	102,484	 	 	 	119,417	 
	Tier 1 capital	 	 	248,696	 	 	 	248,696	 	 	 	226,882	 
	Total exposures	 	 	2,039,777	 	 	 	2,039,777	 	 	 	1,891,517	 
	Leverage ratio	 	 	12.19	%	 	 	12.19	%	 	 	11.99	%







 


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


 


		24.	Transition to IFRS 9:



 


Reconciliation
from IAS 39 to IFRS 9


 


The
following table provides the impact of the transition to IFRS 9 on the Bank’s Consolidated Balance Sheet at transition date, November
1, 2018. The impact is derived from the reclassification and remeasurement of the Bank’s financial instruments:


 


		·	Reclassification: These adjustments reflect the movement of balances
between categories on the Consolidated Balance Sheet with no impact to shareholders’ equity. There is no change to the carrying
value of the balances as a result of the reclassification.



 


		·	Remeasurement: These adjustments, which include expected credit losses,
reflect the changes to the carrying value of each item on the Consolidated Balance Sheet through shareholders’ equity.



 




    44 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		24.	Transition to IFRS 9 - continued:



 


The following table shows the transition
from IAS 39 to IFRS 9 classification and measurement as at November 1, 2018:


	(thousands of dollars)	 	IAS 39 Classification	 	IFRS 9 Classification	 	IAS 39 Carrying Amount	 	Reclassification	 	Remeasurement	 	IFRS 9 

Carrying 

Amount
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial assets	 	 	 	 	 	 	 	 	 	 	 	 
	Securities	 	Available-for- sale	 	FVOCI	 	$	10,017	 	 	$	—  	 	 	$	—  	 	 	$	10,017	 
	Loans	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Commercial real estate	 	Amortized Cost	 	Amortized Cost	 	 	595,263	 	 	 	—  	 	 	 	126	 	 	 	595,389	 
	Non-commercial real estate	 	Amortized Cost	 	Amortized Cost	 	 	91,891	 	 	 	—  	 	 	 	(61	)	 	 	91,830	 
	Corporate and public sector	 	Amortized Cost	 	Amortized Cost	 	 	50,960	 	 	 	—  	 	 	 	58	 	 	 	51,018	 
	Structured finance	 	Amortized Cost	 	Amortized Cost	 	 	892,912	 	 	 	—  	 	 	 	(17	)	 	 	892,895	 
	 	 	 	 	 	 	 	1,631,026	 	 	 	—  	 	 	 	106	 	 	 	1,631,132	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Remaining financial assets(1)	 	Amortized Cost	 	Amortized Cost	 	 	136,348	 	 	 	—  	 	 	 	—  	 	 	 	136,348	 
	Total financial assets	 	 	 	 	 	 	1,777,391	 	 	 	—  	 	 	 	106	 	 	 	1,777,497	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total share capital	 	 	 	 	 	$	182,094	 	 	$	—  	 	 	$	—  	 	 	$	182,094	 
	Accumulated other comprehensive income 	 	 	 	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 
	Retained earnings(2)	 	 	 	 	 	 	41,473	 	 	 	—  	 	 	 	78	 	 	 	41,551	 
	Total shareholders’ equity	 	 	 	 	 	$	223,567	 	 	$	—  	 	 	$	78	 	 	$	223,645	 







(1) Remaining financial assets
include cash and accounts receivable. 





(2) The adjustment to retained
earnings reflects the after-tax impact of the IFRS 9 remeasurement of allowance for credit losses (note 16). 


 




    45 


    versabank 
Notes to Consolidated Financial Statements

Years ended October 31, 2020 and 2019
 

 



    

		24.	Transition to IFRS 9 – continued:



 


Reconciliation of allowance for credit
losses balance from IAS 39 to IFRS 9


 


The following table reconciles the closing
allowance for credit losses for financial assets in accordance with IAS 39 as at October 31, 2018 to the opening allowance for credit
losses as at November 1, 2018. The amounts presented below are included in the figures presented in note 7.


 


	(thousands of dollars)	 	Allowance for credit losses under IAS 39 as at

 October 31,
    2018	 	Remeasurement	 	Allowance for credit losses under IFRS 9 as at 
 November 1, 2018
	 	 	 	 	 	 	 
	Commercial real estate	 	$	1,731	 	 	$	(126	)	 	$	1,605	 
	Non-commercial real estate	 	 	90	 	 	 	61	 	 	 	151	 
	Corporate and public sector	 	 	539	 	 	 	(58	)	 	 	481	 
	Structured finance	 	 	399	 	 	 	17	 	 	 	416	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total Allowance For Credit Losses	 	$	2,759	 	 	$	(106	)	 	$	2,653	 



 


		25.	Subsequent event:



 


Agreement to acquire Digital Boundary
Group


 


On November 23, 2020 the Bank through
its wholly owned subsidiary DRT Cyber Inc. (“DRTC”) entered into a share purchase agreement, (“the Agreement”)
to acquire 100% of the shares of 2021945 Ontario Inc., (“the Purchased Shares”) operating as Digital Boundary Group (“DBG”),
(“the Transaction”). Subject to the terms and conditions of the Agreement the aggregate consideration in respect of the Purchased
Shares shall be paid and satisfied, at the closing date, by DRTC, paying in cash, an amount equal to CAD $9.9 million. DBG is a professional
services company providing operational cybersecurity testing and related training with offices in London, Ontario and Dallas, Texas. The
Transaction is anticipated to close on or about November 30, 2020.


 






    46 


     


    

 



CORPORATE INFORMATION 




 


 







    	
    

    DIRECTORS

     

    The Honourable Thomas A. Hockin, P.C., B.A, M.P.A., Ph.D., ICD.D

    

    Chairman of the Board

    

    Retired, former Executive Director of the International Monetary Fund

     

    Gabrielle Bochynek, B.A. CHRL

    

    Principal, Human Resources and Labour Relations, The Osborne Group

     

    Robbert-Jan Brabander, M.Sc. and B.Sc. (Economics)

    

    Managing Director of Bells & Whistles Communications, Inc.

     

    David A. Bratton, B.A.(Hons), M.B.A., CHRL, FCMC

    

    Retired, former President of Bratton Consulting Inc.

     

    R.W. (Dick) Carter, FCPA, FCA, C. Dir

    

    Retired, former Chief Executive Officer of the Crown Investments Corporation
    of Saskatchewan

     

    Art Linton, JD

    

    Barrister and Solicitor

     

    Colin Litton, FCPA, FCA, ICD.D.

    

    Retired, former senior partner of KPMG LLP

     

    Susan T. McGovern, B.Sc.

    

    Vice-President, External Relations and Advancement

    

    Ontario Tech University

     

    Paul G. Oliver, FCPA, FCA, ICD.D.

    

    Retired, former senior partner of PricewaterhouseCoopers LLP

     

    David R. Taylor, B.Sc. (Hons), M.B.A., F.I.C.B.

    

    President & Chief Executive Officer, VersaBank

    













	
    OFFICERS AND SENIOR MANAGEMENT

     

    David R. Taylor, B.Sc. (Hons), M.B.A., F.I.C.B.

    

    President & Chief Executive Officer

     

    Shawn Clarke, M.Eng., P.Eng., M.B.A.

    

    Chief Financial Officer

     

    Michael Dixon, B.Comm., M.B.A.

    

    Senior Vice President, e-Commerce

     

    Ross P. Duggan

    

    Senior Vice President, Commercial Lending

     

    Nick Kristo, B.Comm., M.B.A.

    

    Chief Credit Officer

     

    Jonathan F.P. Taylor, B.B.A., CHRL

    

    Senior Vice President, Deposits & Chief HR Officer

     

    Jean-Paul Beker, B.A. (Economics), CFA

    

    Vice President, Commercial Lending

     

    Steve Creery, B.A. (Economics)

    

    Vice President, Credit

     

    Barbara Hale, LL.B.

    

    Chief Compliance Officer & Chief
    Anti-Money Laundering Officer

     

    Brent T. Hodge, HBA, JD, CIPP/C

    

    General Counsel & Corporate Secretary

     

    Joanne Johnston, B.Comm, CPA, CA, CIA

    

    Chief Internal Auditor

     

    Wooi Koay, B.Comm., B.Sc.

    

    Chief Information Officer

     

    Aly Lalani, B.A., M.B.A., CPA, CA

    

    Chief Risk Officer & Treasurer

     

    Tel Matrundola, Hons. B.A., M.A., Ph.D.

    

    Chief Strategist, Cyber Security

     

    Andy Min, B.A., CPA, CA

    

    Vice President, Finance & Corporate Accounting

     

    Scott A. Mizzen, B.A., LL.B.

    

    Vice President, Commercial Lending

     

    Gurpreet Sahota, CISSP, CCSP

    

    Chief Architect, Cyber Security

     

    David Thoms, B.A., M.B.A.

    

    Vice President,
Structured Finance
















	 



 


 


 


 


 


 



    47 


     


    

	
    SOLICITORS

    

    Stikeman Elliott LLP

    

    5300 Commerce Court West

    

    199 Bay Street

    

    Toronto, Ontario M5L 1B9

    
	
    AUDITORS

    

    KPMG LLP

    

    Suite 1400 - 140 Fullarton Street

    

    London, Ontario N6A 5P2



 


 


 


	TRANSFER AGENT	BANK
	Computershare Investor Services Inc.	Royal Bank of Canada
	100 University Avenue	Main Branch, 154 1st Avenue South
	Toronto, Ontario M5J 2Y1	Saskatoon, Saskatchewan S7K 1K2


 


 


 


STOCK EXCHANGE LISTING


 


Toronto Stock Exchange





Trading Symbol: VB


 


 


CORPORATE OFFICES


 


	London Office	Saskatoon Office
	Suite 2002 - 140 Fullarton Street	410 - 121 Research Drive
	London, Ontario N6A 5P2	Saskatoon, Saskatchewan  S7N 1K2
	Telephone: (519) 645-1919	Telephone: (306) 244-1868
	Toll-free: (866) 979-1919	Toll-free: (800) 213-4282
	Fax: (519) 645-2060	Fax: (306) 244-4649
	 	 


 


 


INVESTOR RELATIONS


 


Toll Free Telephone: (800) 244-1509





Email: InvestorRelations@versabank.com





Web site: www.versabank.com


 


 


 


 


 


 


 


 


 


 


 




    48