Document:

EXHIBIT
4.2

 

 

Consolidated Financial
Statements

Years ended October
31, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    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.

 

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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.

 

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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.

 

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    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 

    versabank 
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

 

 

 

 

 

 

 

 

 

 

 

    48Exhibit 4.3

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

	FORWARD-LOOKING STATEMENTS	2
	OVERVIEW	2
	SELECTED FINANCIAL AND OTHER HIGHLIGHTS	5
	OVERVIEW OF PERFORMANCE	6
	2020 FINANCIAL RESULTS	7
	TOTAL REVENUE	7
	PROVISIONS FOR (RECOVERY OF) CREDIT LOSSES	8
	NON-INTEREST EXPENSES	9
	CORE CASH EARNINGS	9
	CORPORATE INCOME TAXES	10
	COMPREHENSIVE INCOME	10
	FINANCIAL CONDITION	11
	LIQUIDITY	17
	OFF-BALANCE SHEET ARRANGEMENTS	17
	RELATED PARTY TRANSACTIONS	18
	CAPITAL MANAGEMENT AND CAPITAL RESOURCES	18
	SUMMARY OF QUARTERLY RESULTS AND FOURTH QUARTER REVIEW	22
	FOURTH QUARTER REVIEW	22
	OUTLOOK FOR 2021	24
	CRITICAL ACCOUNTING POLICIES AND ESTIMATES	26
	ENTERPRISE RISK MANAGEMENT	33
	FACTORS THAT MAY AFFECT FUTURE RESULTS	42
	CONTROLS AND PROCEDURES	44
	SUBSEQUENT EVENT	45
	BASIS OF PRESENTATION – NON-GAAP AND ADDITIONAL GAAP MEASURES	45

 

 

     

     

    

FORWARD-LOOKING STATEMENTS

 

The statements in this Management’s Discussion
and Analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent
risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking
statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of
important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed
in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and
the strength of the local economies within Canada in which we conduct operations; the impact of COVID-19 and the Bank’s anticipation
of and success in managing the risks implicated by the foregoing; the effects of changes in monetary and fiscal policy, including changes
in interest rate policies of the Bank of Canada; changing global commodity prices; the effects of competition in the markets in which
we operate; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the
impact of changes in the laws and regulations pertaining to financial services; changes in tax laws; technological changes; unexpected
judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; and our anticipation of and success in
managing the risks resulting from the foregoing.

 

The foregoing list of important factors is not
exhaustive. When relying on forward-looking statements to make decisions, investors and others should carefully consider the foregoing
factors and other uncertainties and potential events. Except as required by securities law, we do not undertake to update any forward-looking
statement that is contained in this Management’s Discussion and Analysis or made from time to time by VersaBank.

 

OVERVIEW

 

VersaBank (the “Bank”) adopted an electronic
branchless model in 1993, becoming the world’s first branchless financial institution. It holds a Canadian Schedule I chartered
bank license and obtains its deposits, and the majority of its loans and leases, electronically. VersaBank’s Common Shares trade
on the Toronto Stock Exchange under the symbol VB and its Series 1 Preferred Shares and Series 3 Preferred Shares trade under the symbols
VB.PR.A and VB.PR.B, respectively.

 

VersaBank celebrated its 40th anniversary this
year, starting out as Pacific Western Trust Corporation (often known as Pacific & Western Trust) in Saskatoon, SK which received its
certificate of incorporation on June 11, 1979, and further, was granted a licence to operate on October 12, 1979.

 

In the early 1990s, recognizing the potential for
technology to transform the way Canadian small and medium-size businesses do banking, VersaBank founder, President and CEO David Taylor
had a vision to create a new kind of financial institution, a branchless bank. In less than a year, Mr. Taylor had established the world’s
first branchless financial institution – and the foundation for Canada’s “Bank of the Future” – continually
evolving its proprietary technology to efficiently and profitably address unmet needs in the Canadian financial market. In 2002, the now
well-established financial institution was granted a Schedule 1 bank licence, the first in Canada in over 18 years, at the time, becoming
one of just 9 Canadian financial institutions with such a licence, significantly enhancing its competitive advantage and enabling it to
expand its business throughout Canada. As the Bank grew and evolved, its name was rebranded to VersaBank, reflecting its versatility as
a branchless financial institution and one able to quickly adapt to an ever-changing environment. In 2013, public investors were able
to participate in the future success of VersaBank when it was listed on the TSX.

 

    2 

     

    

David Taylor’s vision continues to be realized
decades later as VersaBank develops and launches innovative, high value-add offerings to meet unmet demand, including a customized banking
solution for insolvency professionals that integrates with that industry’s most commonly used administrative software as well as
a technology-based solution that provides efficient access to capital for point-of-sale loan and lease partners, allowing them to drive
growth of their own businesses. In the words of our founder, “The model has evolved and changed to deal with market conditions over
the years, but we’re still providing innovative financial solutions to profitably address underserved segments of the Canadian banking
market.”

 

Strategy

 

VersaBank’s strategy is to utilize established,
non-branch financial product distribution channels to deliver innovative commercial and consumer lending and deposit products to select
clients operating in niche markets across Canada.

 

Impact of COVID-19 pandemic

 

The impact of the COVID-19 pandemic (“COVID-19”)
has been far reaching and the Bank, along with all financial institutions in Canada have been affected by the resulting deterioration
in the Canadian economy. Despite the unprecedented challenges brought upon by COVID-19, the Bank has been able to navigate efficiently
and effectively through the ensuing, challenging operating environment while remaining focused on the safety and wellness of both our
employees and clients as well as on the prudent management and mitigation of elevated credit and liquidity risks, all of which was enabled
by our fully functional Work-From-Home solution which was a natural and seamless evolution of the Bank’s branchless, technology-driven
model.

 

COVID-19 has been a remarkably disruptive influence
on the Canadian economy initially causing annualized GDP to contract 39% in the second quarter, which, partially as a result of unprecedented
stimulus programs initiated at the time by governments, regulators and the Bank of Canada, (“BoC”), is now being followed
by what is expected to be an annualized expansion of 36% in the third quarter. However, the initially prominent V-shaped recovery is anticipated
to potentially evolve into a more protracted W-shaped recovery as GDP is expected to slow again in the late fall as a result of the second
wave of the virus, combined with the now diminishing impact of already provided stimulus programs, particularly to small businesses, further
challenges imposed on the hospitality industry as a result of the arrival of winter, the slowing of the US economy and a potential deterioration
in credit quality.

 

COVID-19 has resulted in the Bank experiencing
moderate volatility in its own financial performance over the course of the year, most notably in the measurement of expected credit losses.
As a result of the increase in inherent credit risk exposure at the onset of COVID-19, management enhanced as well as expanded the depth
and scope of its analysis supporting the assessment of impairment to include additional sensitivity analytics performed on its estimated
expected credit losses, (“ECL”). Forward-looking macroeconomic and industry data continues to change at a reasonably high
frequency and as a result, the Bank anticipates that estimated ECL amounts will continue to exhibit volatility well into fiscal 2021.
However, the Bank further expects that the magnitude of the volatility exhibited in its forward ECL amounts will continue to be mitigated
by the lower risk profile of the Bank’s lending portfolio which remains a function of the Bank’s prudent underwriting practices
and its strict adherence to niche financing markets within which it has a wealth of experience.

 

    3 

     

    

The Bank also undertook appreciable precautionary
measures to strengthen its liquidity position in response to the impact of COVID-19 and has maintained measurably higher than normal liquidity
levels. Further, the Bank expects to maintain elevated liquidity levels into at least the first half fiscal 2021.

 

Despite the challenges associated with the current
operating environment, the Bank has been able to remain active in niche markets that support modestly better pricing for its products,
and by continuing to expand and leverage its diverse deposit gathering network which provides efficient access to a range of low-cost
deposit sources. In addition, the Bank remains highly committed to, and focused on further developing and enhancing its technology advantage,
a key component of its value proposition that not only provides efficient access to the Bank’s chosen niche markets, but also delivers
superior financial products and better customer service to its clients.

 

The underlying drivers of the Bank’s performance
trends for the fiscal 2020 period, along with comparative performance trends are set out in the following sections of this MD&A.

 

    4 

     

    

SELECTED FINANCIAL AND OTHER HIGHLIGHTS

 

	(thousands of Canadian dollars	October 31	 	October 31	 	October 31
	except per share amounts)	2020	 	2019	 	2018
	Interest income	$	86,094	 	$	88,305	 	$	80,914
	Net interest income	 	54,125	 	 	53,897	 	 	51,499
	Non-interest income	 	60	 	 	22	 	 	186
	Total revenue	 	54,185	 	 	53,919	 	 	51,685
	Provision for (recovery of) credit losses	 	(344)		 	(298)		 	334
	Non-interest expenses	 	27,777	 	 	26,396	 	 	26,338
	Core cash earnings*	 	26,752	 	 	27,821	 	 	25,361
	Core cash earnings per common share*	 	1.27	 	 	1.32	 	 	1.19
	Net income	$	19,405	 	$	20,196	 	$	18,074
	Income per common share:	 	 	 	 	 	 	 	 
	Basic	$	0.82	 	$	0.85	 	$	0.75
	Diluted	$	0.82	 	$	0.85	 	$	0.75
	Dividends paid on preferred shares	$	2,168	 	$	2,201	 	$	2,201
	Dividends paid on common shares	$	2,112	 	$	1,477	 	$	843
	Yield*	 	4.62%	 	 	4.91%	 	 	4.58%
	Cost of funds*	 	1.71%	 	 	1.91%	 	 	1.66%
	Net interest margin*	 	2.90%	 	 	3.00%	 	 	2.91%
	Provision for (recovery of) credit losses as	 	 	 	 	 	 	 	 
	a % of average total loans*	 	(0.02%)		 	(0.02%)		 	0.02%
	Gross impaired loans as a % of total loans*	 	0.00%	 	 	0.39%	 	 	0.04%
	Return on average common equity*	 	7.89%	 	 	8.89%	 	 	8.50%
	Core cash return on average common equity*	 	11.26%	 	 	12.65%	 	 	12.40%
	Return on average total assets*	 	0.92%	 	 	1.00%	 	 	0.90%
	Book value per common share*	$	10.70	 	$	9.98	 	$	9.19
	Efficiency ratio*	 	51.26%	 	 	48.95%	 	 	50.96%
	Full time employees	 	98	 	 	92	 	 	86
	Financial Condition:	 	 	 	 	 	 	 	 
	Cash and securities	$	257,644	 	$	149,206	 	$	139,798
	Loans, net of allowance for credit losses	 	1,654,910	 	 	1,594,288	 	 	1,631,026
	Average loans	 	1,624,599	 	 	1,612,657	 	 	1,575,942
	Total assets	 	1,943,885	 	 	1,785,381	 	 	1,809,130
	Average assets	 	1,864,633	 	 	1,797,256	 	 	1,767,089
	Deposits	 	1,567,570	 	 	1,399,889	 	 	1,437,431
	Subordinated notes payable	 	4,889	 	 	4,881	 	 	9,844
	Shareholders' equity	 	255,288	 	 	240,163	 	 	223,567
	Capital Position and Ratios:	 	 	 	 	 	 	 	 
	Risk-weighted assets	$	1,580,939	 	$	1,501,435	 	$	1,502,549
	Common Equity Tier 1 capital	 	219,359	 	 	197,545	 	 	174,055
	Total regulatory capital	 	255,471	 	 	231,882	 	 	207,392
	Common Equity Tier 1 capital ratio	 	13.88%	 	 	13.16%	 	 	11.58%
	Tier 1 capital ratio	 	15.73%	 	 	15.11%	 	 	13.54%
	Total capital ratio	 	16.16%	 	 	15.44%	 	 	13.80%
	Leverage ratio	 	12.19%	 	 	11.99%	 	 	10.84%

 

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

 

    5 

     

    

OVERVIEW OF PERFORMANCE

 

 

 

Net income for the year was down 4% to $19.4 million
or $0.82 per common share (basic and diluted) from $20.2 million or $0.85 per common share (basic and diluted) in 2019. The year over
year trend was a function primarily of higher non-interest expenses partially offset by higher net interest income and higher recovery
of credit losses.

 

Core cash earnings for the year was down 4% to
$26.8 million or $1.27 per common share (basic and diluted) from $27.8 million or $1.32 per common share (basic and diluted) in 2019 as
a function primarily of the factors set out above.

 

Net interest margin or spread for the year was
down 10 bps to 2.90% from 3.00% in 2019. The year over year trend was a function of generally lower yields earned on lending assets and
elevated cash balances, partially offset by lower cost of funds.

 

The Bank recorded a recovery of credit losses in
the amount of $344,000 for the year compared to a recovery of credit losses in the amount of $298,000 in 2019. The year over year trend
was a function primarily of net remeasurements of expected credit losses attributable to the impact of planned refinements to specific
real estate asset loan and credit data inputs, offset partially by changes in the macroeconomic scenario data used as forward looking
information in the Bank’s credit risk models and higher lending asset balances.

 

    6 

     

    

 

The Bank’s efficiency ratio for the year
was 51% compared to 49% in 2019. The year over year trend was a result of non-interest expenses increasing at a modestly higher rate than
revenues for the same period as a function primarily of higher salary and benefits expenses incurred in the current year attributable
to an increase in staff complement and a general increase in staff related costs, including higher vacation expense accruals resulting
principally from employees taking less vacation time as a result of COVID-19 limiting travel and tourism opportunities.

 

At October 31, 2020 the Bank’s CET1 capital
ratio was up 72 bps to 13.88% from 13.16% in 2019.

 

2020 FINANCIAL RESULTS

 

TOTAL REVENUE

 

Total revenue, which consists of net interest income
and non-interest income was $54.2 million, up from $53.9 million in 2019. The year over year increase was a function primarily of higher
net interest income attributable to higher fees and lower cost of funds. Interest income was lower year over year as a function primarily
of generally lower yields earned on lending assets, largely due to the significant decrease in the prime rate and government bond yields,
and elevated cash balances, the latter being attributable to the Bank holding higher, low-yielding cash balances over the course of the
last three quarters of fiscal 2020 as a prudent liquidity management practice subsequent to the onset of COVID-19.

 

Net Interest Income and Margin

 

	(thousands of Canadian dollars)	2020	 	2019
	Interest income	$	86,094	 	$	88,305
	Interest expense	 	31,969	 	 	34,408
	Net interest income	 	54,125	 	 	53,897
	Average assets	$	1,864,633	 	$	1,797,256
	Net interest margin	 	2.90%	 	 	3.00%

 

Net interest income is the difference between interest
earned on assets and interest expense on deposits and other interest bearing liabilities, including subordinated notes payable. Net interest
margin or spread is net interest income as a percentage of average total assets (see Non-GAAP and Additional GAAP Measures). Net interest
income for the year was $54.1 million, up from $53.9 million in 2019. The year over year increase was a function of the underlying financial
variable trends set out in the total revenue section above.

 

Net interest margin or spread for the year was
down 10 bps to 2.90% from 3.00% in 2019. The year over year trend was a function primarily of lower interest income earned on lending
assets and elevated cash balances, offset partially by lower cost of funds.

 

    7 

     

    

PROVISIONS FOR (RECOVERY OF) CREDIT LOSSES

 

Under IFRS 9 the Bank recognizes provision for
credit losses on both performing loans, designated as stage 1 or stage 2 loans, and non-performing, or impaired loans, designated as stage
3 loans. Loans that have not experienced a significant increase in credit risk (“SICR”) since initial recognition are designated
as stage 1, while loans that have experienced a SICR since initial recognition are designated as stage 2, and loans that are determined
to be credit impaired are designated as stage 3.

 

The IFRS 9 standard requires consideration of past
events, current market conditions and reasonable, supportable information about future economic conditions, or forward-looking information
in the estimation of ECL for loans and lending assets. The Bank incorporates the impact of future economic conditions, or more specifically
forward-looking information into the estimation of ECL at the credit risk parameter level via its credit risk models that are used to
develop probability of default (“PD”) and loss given default (“LGD”) term structure forecasts for its lending
assets. The Bank utilizes macroeconomic indicator data derived from multiple macroeconomic forecast scenarios, those being baseline, upside,
and downside scenarios in order to mitigate volatility in the estimation of ECL amounts 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. Moody’s
Analytics provides the macroeconomic forecast data that the Bank utilizes as forward-looking information in its credit risk models.

 

Further, 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 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.

 

The base case forecast utilized by the Bank contemplates
unemployment leveling out at 9% by the end of 2020 and then improving to 8% over the course of 2021. The upside scenario contemplates
unemployment rates only modestly better over the course of 2021 relative to the base case scenario, while the downside scenario contemplates
unemployment increasing notably at the end of the year,, 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.

 

Forecast GDP is anticipated to moderate as a result
of the second wave of the virus, combined with 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. The base case scenario contemplates Canadian GDP contracting approximately 6.5% in 2020 and then recovering
and growing modestly over the course of 2021 and 2022. The upside scenario contemplates GDP contraction of approximately 6% in 2020 and
then moderately improved growth in 2021 and 2022 relative to the base case, while the downside scenario 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 scenarios for

 

    8 

     

    

both Canadian oil prices 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 scenario. 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 scenario. Under the base case 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 scenario contemplates the Bank of Canada, (“BoC”) accelerating overnight rate hikes into
late 2022 while the downside scenario considers the BoC holding interest rates at current levels until mid-2025.

 

Refer to Notes 3 and 7 of the Bank’s October
31, 2020 annual audited consolidated financial statements for additional information on the Bank’s prescribed ECL methodology and
Note 24 on the impact of the Bank’s adoption of IFRS 9 effective November 1, 2019.

 

During the year the Bank recorded a recovery of
credit losses in the amount of $344,000 compared to a recovery of credit losses in the amount of $298,000 in 2019. The year over year
trend was a function primarily of net remeasurements of expected credit losses attributable to the impact of planned refinements to specific
real estate asset loan and credit data inputs, offset partially by changes in the macroeconomic scenario data used as forward looking
information in the Bank’s credit risk models and higher lending asset balances.

 

NON-INTEREST EXPENSES

 

	(thousands of Canadian dollars)	2020	 	2019
	Salaries and employee benefits	$	16,964	 	$	15,174
	General and administrative	 	8,357	 	 	8,792
	Premises and equipment	 	2,456	 	 	2,430
	Total non-interest expenses	$	27,777	 	$	26,396

 

Non-interest expenses for the year were up 5% to
$27.8 million from $26.4 million in 2019. The year over year trend was a function primarily of higher salary and benefits expenses incurred
in the current year attributable to a general increase in staff related costs, including increased compensation amounts attributable to
a higher staff complement and higher vacation expense accruals resulting principally from employees taking less vacation time as a result
of COVID-19 limiting travel and tourism opportunities, offset partially by lower administrative expenses related to consulting fees and
the Bank’s general corporate functions.

 

CORE CASH EARNINGS

 

Core cash earnings for the year were down 4% to
$26.8 million from $27.8 million in 2019 as a function primarily of higher non-interest expenses, partially offset by higher net interest
income and higher recovery of credit losses over the course of the year. Core cash earnings is calculated as net income (as presented
in the Consolidated Statements of Comprehensive Income) adjusted for income taxes, restructuring charges, corporate projects and other
non-core operational expenses. The Bank did not pay cash taxes on its earnings in the current and comparative periods due to the utilization
of available tax loss carryforwards.

 

    9 

     

    

The table below presents a reconciliation of core
cash earnings to net income:

 

	(thousands of Canadian dollars)	2020	 	2019
	Net income	$	19,405	 	$	20,196
	Adjusted for:	 	 	 	 	 
	Income taxes	 	7,347	 	 	7,625
	Non-core general and administrative expense items	 	-	 	 	-
	 	 	 	 	 	 
	Core cash earnings	$	26,752	 	$	27,821

 

CORPORATE INCOME TAXES

 

The Bank’s statutory federal and provincial
income tax rate is approximately 27%, similar to that of previous years. The effective rate is affected by certain items not being taxable
or deductible for income tax purposes as well as an adjustment to the deferred income tax asset relating to the recognition of tax loss
carry forwards outlined below.

 

The Bank recognized an income tax provision of
$7.3 million for the year compared to an income tax provision of $7.6 million in 2019.

 

At October 31, 2020, the Bank’s deferred
income tax asset was $5.1 million compared to $11.6 million in 2019. The year over year decrease was due primarily to the utilization
of income tax loss carry forwards attributable to taxable income generated by the Bank over the period. At October 31, 2020 the Bank’s
income tax loss carry-forwards totalled approximately $16.0 million (2019 – $38.6 million), which, if unutilized are not scheduled
to begin to expire until 2034.

 

COMPREHENSIVE INCOME

 

Comprehensive income is comprised of net income
for the period and other comprehensive income which consists of unrealized gains and losses on fair value through other comprehensive
income securities. Comprehensive income for the year was $19.4 million compared to $20.2 million in 2019.

 

    10 

     

    

FINANCIAL CONDITION

 

Consolidated Balance Sheet

 

	(thousands of Canadian dollars)	 	2020	 	Mix	 	2019	 	Mix
	Assets	 	 	 	 	 	 	 	 
	Cash and securities	 	$	257,644	 	 	 	13.25	%	 	$	149,206	 	 	 	8.36	%
	Loans, net of allowance for credit losses	 	 	1,654,910	 	 	 	85.14	 	 	 	1,594,288	 	 	 	89.30	 
	Other assets	 	 	31,331	 	 	 	1.61	 	 	 	41,887	 	 	 	2.34	 
	Total assets	 	$	1,943,885	 	 	 	100.00	%	 	$	1,785,381	 	 	 	100.00	%
	Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Deposits	 	$	1,567,570	 	 	 	80.65	%	 	$	1,399,889	 	 	 	78.41	%
	Subordinated notes payable	 	 	4,889	 	 	 	0.25	 	 	 	4,881	 	 	 	0.27	 
	Securitization liabilities	 	 	8,745	 	 	 	0.45	 	 	 	33,366	 	 	 	1.87	 
	Other liabilities	 	 	107,393	 	 	 	5.52	 	 	 	107,082	 	 	 	6.00	 
	Total liabilities	 	$	1,688,597	 	 	 	86.87	%	 	$	1,545,218	 	 	 	86.55	%
	Shareholders' equity	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share capital	 	 	182,094	 	 	 	9.36	%	 	$	182,094	 	 	 	10.20	%
	Retained earnings	 	 	73,194	 	 	 	3.77	 	 	 	58,069	 	 	 	3.25	 
	Accumulated other comprehensive income	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 
	Total shareholders' equity	 	$	255,288	 	 	 	13.13	%	 	$	240,163	 	 	 	13.45	%
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities and shareholders' equity	 	$	1,943,885	 	 	 	100.00	%	 	$	1,785,381	 	 	 	100.00	%

 

Total Assets

 

Total assets for the year were $1.94 billion, up
from $1.79 billion in 2019. The year over year increase was a function primarily of higher cash balances, attributable to the Bank establishing
and maintaining notably higher liquidity levels subsequent to the onset of COVID-19 as well as higher commercial real estate loan balances,
partially offset by lower purchased receivable balances.

 

Cash and Securities

 

	(thousands of Canadian dollars)	2020	 	2019
	Cash and cash equivalents	$	257,644	 	$	139,145
	Securities	 	-	 	 	10,061
	Total cash and securities	$	257,644	 	$	149,206
	Total assets	$	1,943,885	 	$	1,785,381
	Cash and securities as a percentage of total assets	 	13.25%	 	 	8.36%
	Total deposits	$	1,567,570	 	$	1,399,889
	Cash and securities as a percentage of total deposits	 	16.44%	 	 	10.66%

 

Cash and securities for the current year consisted
primarily of deposits with Canadian financial institutions. Amounts held in cash and securities are determined based on liquidity requirements,
investment yield and capital management considerations. Cash and securities at October 31, 2020, which were held primarily for liquidity
purposes, were $258 million, up from $149 million in 2019. The year over year trend was a function primarily of management’s decision
to strengthen its liquidity position as a prudent liquidity practice in response to the unprecedented economic uncertainty precipitated
by COVID-19.

 

    11 

     

    

Loans

 

The Bank organizes its lending portfolio into four
asset categories, those being Commercial Real Estate, Non-Commercial Real Estate, Corporate and Public Sector Finance, and Structured
Finance. These categories have been established in the Bank’s proprietary, internally developed asset management system and have
been designed to catalogue individual loans as a function primarily of their key risk drivers, the nature of the underlying collateral,
and the applicable market segment.

 

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

 

The Non-Commercial Real Estate (“Non-CRE”)
asset category is comprised primarily of Condominium Corporation Financing loans and Insured Mortgages.

 

The Corporate and Public Sector Finance asset category
is comprised primarily of Public Sector Loans and Leases as well as a small balance of Corporate Loans and Leases. The Bank has pivoted
away from corporate lending and continues to monitor the public sector space in anticipation of more robust demand for Federal, Provincial
and Municipal infrastructure and other project financings, partially in response to additional Government policy measures that may be
established to support the recovery of the Canadian economy.

 

The Structured Finance asset category is comprised
of point of sale loan and lease receivables acquired from the Bank’s broad network of origination and servicing partners as well
as warehouse loans that provide bridge financing to the Bank’s origination and servicing partners for the purpose of accumulating
and seasoning practical volumes of individual loans and leases prior to the Bank purchasing the cashflow receivables derived from same.

 

Net loans at October 31, 2020 were $1.65 billion,
up from $1.59 billion in 2019. The year over year trend was a function primarily of higher CRE loan balances attributable to strong origination
activity by the Bank offset partially by lower origination activity by the Bank’s point of sale origination partners attributable
to the impact of COVID-19 on their respective markets, and the negotiated early repurchases of a series of portfolios of loan and lease
receivables by the Bank’s origination partners over the course of the current year.

 

Residential Mortgages and Exposure

 

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

 

Under OSFI’s definition, the Bank’s
exposure to residential mortgages at October 31, 2020 was $4.1 million, up from $305,000 in 2019. The Bank did not have any HELOCs outstanding
at October 31, 2020, or in 2019.

 

    12 

     

    

Credit
Quality

 

Gross impaired loans at October 31, 2020 were $nil,
compared to $6.3 million in 2019. The prior year’s balance was comprised of a single loan for which the value of the underlying
security exceeded the Bank’s total transaction exposure. The Bank continued to recognize revenue derived from this loan until it
was repaid in full in the fourth quarter of the current year.

 

The Bank’s allowance for expected credit
losses, or ECL at October 31, 2020 was $1.8 million, down from $2.1 million in 2019. The year over year trend was a function primarily
of net remeasurements of expected credit losses attributable to the impact of planned refinements to specific real estate asset loan and
credit data inputs, offset partially by changes in the macroeconomic scenario data used as forward looking information in the Bank’s
credit risk models and higher lending asset balances.

 

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 variables and 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.

 

Notwithstanding the above, and based on management’s
review of the loan and credit data comprising its lending portfolio, combined with our interpretation of the most recently available forecast
macroeconomic and industry data, management is of the view that its estimated ECL is a reasonable proxy for potential, future losses.

 

The table below presents the components of the
Bank’s allowance for credit losses at October 31, 2020 as well as for 2019:

 

	 	 	 	 	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%

 

Other Assets

 

Other assets include working capital items, funds
held for securitization liabilities, capital assets, right-of-use assets and the deferred income tax asset. Other assets at October 31,
2020 were $31.3 million, down from $41.9 million in 2019. The year over year trend was a function primarily of lower funds held for securitization
liabilities attributable to repayments in the Bank’s securitized mortgage portfolio and

 

    13 

     

    

accounts receivable combined with draw downs on
the deferred income tax asset derived from taxable income generated by the Bank, offset partially by higher prepaid expenses and by the
inclusion of right-of-use assets upon the adoption of IFRS 16 – Leases in the current year.

 

Deposits and Other Liabilities

 

The Bank has established three core funding channels,
those being personal deposits, commercial deposits, and holdbacks retained from the Bank’s receivable purchase program originator
partners that are classified as other liabilities.

 

The table below presents the Bank’s deposit
portfolio balances and mix at October 31, 2020 as well as for 2019:

 

	(thousands of Canadian dollars)	2020	 	Mix	 	 	2019	 	Mix	 
	Commercial deposits	$	508,370	 	 	32.43	%	 	$	439,455	 	 	31.39	%
	Personal deposits	 	1,059,200	 	 	67.57	 	 	 	960,434	 	 	68.61	 
	 	$	1,567,570	 	 	100.00	%	 	$	1,399,889	 	 	100.00	%

 

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

 

Commercial deposits are sourced primarily via specialized
operating accounts made available to insolvency professionals (“Trustees”) in the Canadian insolvency industry. The Bank developed
customized banking software for use by Trustees that integrates banking services with the market-leading software platform used in the
administration of consumer bankruptcy and proposal restructuring proceedings. Commercial deposits at October 31, 2020 were $508.4 million,
up from $439.5 million in 2019. The year over year increase was a function primarily of continued organic growth from existing Trustee
clients and the acquisition of new trustee clients over the course of the year. Commercial deposits also include guaranteed investment
certificates issued to Trustees and other commercial entities.

 

The Bank strives to diversify its deposit gathering
activities both geographically and across deposit broker sources and has established internal policies to monitor deposit broker concentrations.
These internal policies include targets related to the volume of new deposits sourced from a single deposit broker in a rolling 12 month
period, targets for the amount of new deposits sourced from its three largest deposit brokers in a rolling 12 month period and targets
for Trustees deposits as a percentage of total deposits.

 

    14 

     

    

The table below presents a summary of the Bank’s
deposit portfolio by maturity, excluding accrued interest at October 31, 2020 as well as for 2019:

 

	 	 	 	 	 	2020	 	 	 	 
	 	Within 3	 	3 months to	 	1 year to	 	2 years to	 	 
	(thousands of Canadian dollars)	months	 	1 year	 	2 years	 	5 years	 	Total
	Commercial deposits	$	498,370	 	$	10,000	 	$	-	 	$	-	 	$	508,370
	Personal deposits	 	145,595	 	 	257,486	 	 	283,782	 	 	357,937	 	 	1,044,800
	 	$	643,965	 	$	267,486	 	$	283,782	 	$	357,937	 	$	1,553,170

 

	 	 	 	 	 	2019	 	 	 	 
	 	Within 3	 	3 months to	 	1 year to	 	2 years to	 	 
	(thousands of Canadian dollars)	months	 	1 year	 	2 years	 	5 years	 	Total
	Commercial deposits	$	429,455	 	$	-	 	$	10,000	 	$	-	 	$	439,455
	Personal deposits	 	150,160	 	 	288,422	 	 	195,284	 	 	313,307	 	 	947,173
	 	$	579,615	 	$	288,422	 	$	205,284	 	$	313,307	 	$	1,386,628

 

Other liabilities consist primarily of cash holdbacks,
retained from the Bank’s point of sale origination partners, accounts payable, lease obligations and accruals. Other liabilities
at October 31, 2020 were $107.4 million, up from $107.1 million in 2019. The year over year trend was a function primarily of the recognition
of lease obligations in the amount of $3.3 million as a result of the Bank’s adoption of IFRS 16 – Leases (see Change
in Accounting Policies) during the current year and higher accounts payable offset partially by lower holdbacks payable balances and lower
cash collateral amounts held in escrow. Cash holdbacks at October 31, 2020 were $96.1 million, down from $97.0 million in 2019 due primarily
to lower purchased receivable portfolio balances.

 

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 that 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 rate of 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.

 

Subordinated Notes Payable

 

The Bank has the following subordinated notes payable outstanding:

 

	(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 2029.	$	4,889	 	$	4,881
	 	 	 	 	 	 
	 	$	4,889	 	$	4,881
	 	 	 	 	 	 

 

    15 

     

    

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 subordinated note payable in the principal amount of $5.0 million. Issue costs associated with the private placement were $125,000.

 

Shareholders’ Equity

 

Shareholders’ equity at
October 31, 2020 was $255.3 million, up from $240.2 million in 2019 as a function of retained earnings growth over the course of the year
offset partially by the payment of dividends.

 

Common shares outstanding at October 31, 2020 totalled
21,123,559, unchanged from 2019.

 

The Bank’s book value per common share at
October 31, 2020 was up 7% to $10.70 from $9.98 in 2019 due to retained earnings growth over the current year.

 

At October 31, 2020, the Bank had 1,461,460 Series
1 Preferred Shares and 1,681,320 Series 3 Preferred Shares outstanding, unchanged from 2019.

 

In accordance with the Short Form Prospectus (the
“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-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 by October 16, 2019, holders of Series 1 Preferred Shares retained their shares and no Series 2 Preferred Shares were
issued on the Series 1 conversion date.

 

Further, in accordance with the Prospectus for
the 5-year period commencing on November 1, 2019 the holders of the Series 1 Preferred Shares will be entitled to receive fixed non-cumulative
preferential cash dividends, as and when declared by the board of directors of the Bank payable quarterly on the last day of January,
April, July, and October in each year, in the amount per Series 1 Preferred Share per annum determined by multiplying the annual fixed
dividend rate for the 5-year period commencing on November 1, 2019 by $10.00. The annual fixed dividend rate applicable to the 5-year
period commencing on November 1, 2019 was determined by the Bank to be 6.772%, which is equal to the five year Government of Canada Bond
Yield quoted on October 2, 2019, plus 543 bps.

 

See Note 14 to the Consolidated Financial Statements
for additional information relating to share capital.

 

Stock-Based Compensation

 

Stock options are accounted for using the fair
value method which recognizes the fair value of the stock option over the applicable vesting period as an increase in salaries and benefits
expense with the same amount being recorded in share capital. During the year ended October 31, 2020, the Bank recognized $nil (2019 -
$nil) of compensation expense relating to the estimated fair value of stock options granted in previous years. There were no stock options
granted in the current year. See Note 15 to the Consolidated Financial Statements for more information related to stock options.

 

    16 

     

    

Updated Share Information

 

As at November 24, 2020, there were no changes
in the number of outstanding common shares, Series 1 and Series 3 Preferred Shares since October 31, 2020. As at November 24, 2020,
there were 42,017 common share options outstanding, unchanged since October 31, 2020.

 

LIQUIDITY

 

The Consolidated Statement of Cash Flows for the
year ended October 31, 2020 shows cash provided by operations of $139.6 million compared to cash provided by operations of $19.8 million
in 2019. The net increase in cash from operations for the current year was a function primarily of inflows from deposits raised as the
Bank strengthened its liquidity position as a prudent liquidity practice in response to the economic uncertainty resulting from the onset
of COVID-19, a reduction in restricted cash balances used to offset the payment of the maturing securitization liabilities and from annual
earnings, offset partially by funding of new loan originations. Based on factors such as liquidity requirements and opportunities for
investment in loans and securities, the Bank may manage the amount of deposits it receives and lend its funds in ways that result in the
balances of these items giving rise to either negative or positive cash flow from operations. The Bank will continue to fund its operations
and meet contractual obligations as they become due using cash on hand and by managing its flow of deposits.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As at October 31, 2020, the Bank did not have any
significant off-balance sheet arrangements other than undrawn loan commitments, and letters of credit resulting from normal course business
activities. See Note 22 to the Consolidated Financial Statements for more information.

 

Commitments and Contingencies

 

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 secured arrangements are contracted for a limited period of time 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

 

 

    17 

     

    

Contractual Obligations

 

At October 31, 2020 the Bank had the following
scheduled principal repayments of financial liabilities and off- balance sheet obligations:

 

	 	 	 	 	 	2020	 	 	 	 
	 	 	 	Less than	 	 	 	 	 	Over
	(thousands of Canadian dollars)	Total	 	1 Year	 	1-2 Years	 	2-5 Years	 	5 Years
	Deposits	$	1,553,170	 	$	911,451	 	$	283,782	 	$	357,937	 	$	-
	Holdbacks	 	96,064	 	 	96,064	 	 	-	 	 	-	 	 	-
	Subordinated notes payable	 	4,889	 	 	-	 	 	-	 	 	-	 	 	4,889
	Securitization liabilities	 	8,745	 	 	8,745	 	 	-	 	 	-	 	 	-
	Accounts payable	 	8,245	 	 	8,245	 	 	-	 	 	-	 	 	-
	Lease obligations	 	3,084	 	 	419	 	 	831	 	 	807	 	 	1,027
	 	$	1,674,197	 	$	1,024,924	 	$	284,613	 	$	358,744	 	$	5,916

 

RELATED PARTY TRANSACTIONS

 

The Bank’s Board of Directors and Senior
Executive Officers represent key management personnel. See Note 21 to the Consolidated Financial Statements for more information on transactions
with personnel and compensation of key management.

 

CAPITAL MANAGEMENT AND CAPITAL RESOURCES

 

Capital Management

 

The Bank’s policy is to maintain a strong
capital base so as to maintain investor, creditor and market confidence as well as to support future development of the business. The
impact of the level of capital 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 afforded by a more robust
capital position.

 

The Bank operates as a Schedule 1 bank under the
Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI). Capital is managed
in accordance with policies and plans that are regularly reviewed and approved by the Bank’s Board of Directors. The Bank’s
objective, in this context, 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. Regulatory capital is comprised of
the qualifying amount of subordinated notes, share capital, retained earnings and net after-tax unrealized gains and losses on fair value
through other comprehensive income securities. Consistent with capital adequacy guidelines issued by OSFI, the Bank has implemented an
internal capital adequacy assessment process (ICAAP) with the objective of ensuring that capital levels remain adequate in relation to
current and future risks.

 

OSFI requires banks to measure capital adequacy
in accordance with its guidelines for determining risk-adjusted capital and risk-weighted assets including off-balance sheet credit instruments.
The Bank currently uses the Standardized Approach to calculate risk-weighted assets for both credit and operational risk. Under the Standardized
Approach for credit risk, each asset type is assigned a risk

 

    18 

     

    

weight ranging between 0% and 150% to determine
the risk-weighted equivalent, or risk-weighted asset amounts for use in calculating the Bank’s risk-based capital ratios. Off-balance
sheet assets, such as undrawn credit commitments, are included in the calculation of risk-weighted assets, and further, both the credit
risk equivalent and the risk-weighted calculations are prescribed by OSFI. The Standardized Approach, as defined by Basel III, may require
the Bank to carry more capital for certain credit exposures compared to requirements under the Advanced Internal Ratings-Based (“AIRB”)
methodology. As a result, regulatory capital ratios of banks that utilize the Standardized Approach may not be directly comparable with
the large Canadian banks that utilize the AIRB methodology.

 

The tables below present the Bank’s risk-weighted
assets as at October 31, 2020 as well as for 2019:

 

	As at October 31, 2020	 	 	Notional/drawn amount	 	 	 	
	 	 	 	 	 	 	 	 	 	 	 	Risk
	 	 	Cash/	 	 	 	 	 	 	 	 	Off -balance	 	 	 	 	Weighted
	(thousands of Canadian dollars)	 	Securities	 	 	Loans	 	 	Other	 	 	sheet items	 	 	Total	 	 	Balance
	Corporate	$	-	 	$	671,466	 	$	-	 	$	-	 	$	671,466	 	$	669,414
	Sovereign	 	-	 	 	11,411	 	 	-	 	 	-	 	 	11,411	 	 	2,282
	Bank	 	257,644	 	 	17,648	 	 	-	 	 	-	 	 	275,292	 	 	55,058
	Retail residential mortgages	 	-	 	 	12,054	 	 	-	 	 	-	 	 	12,054	 	 	4,902
	Other retail	 	-	 	 	942,331	 	 	-	 	 	-	 	 	942,331	 	 	636,254
	Other items	 	-	 	 	-	 	 	31,331	 	 	50,284	 	 	81,615	 	 	40,875
	Undrawn commitments	 	-	 	 	-	 	 	-	 	 	238,724	 	 	238,724	 	 	72,553
	Operational risk 1	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	99,601
	Total	$	257,644	 	$	1,654,910	 	$	31,331	 	$	289,008	 	$	2,232,893	 	$	1,580,939

 

	As at October 31, 2019	 	 	Notional/drawn amount	 	 	 	
	 	 	 	 	 	 	 	 	 	 	 	Risk
	 	 	Cash/	 	 	 	 	 	 	 	 	Off -balance	 	 	 	 	Weighted
	(thousands of Canadian dollars)	 	Securities	 	 	Loans	 	 	Other	 	 	sheet items	 	 	Total	 	 	Balance
	Corporate	$	-	 	$	624,593	 	$	-	 	$	-	 	$	624,593	 	$	622,420
	Sovereign	 	10,061	 	 	13,795	 	 	-	 	 	-	 	 	23,856	 	 	2,650
	Bank	 	139,145	 	 	17,673	 	 	-	 	 	-	 	 	156,818	 	 	31,364
	Retail residential mortgages	 	-	 	 	19,245	 	 	-	 	 	-	 	 	19,245	 	 	107
	Other retail	 	-	 	 	918,982	 	 	-	 	 	-	 	 	918,982	 	 	621,380
	Other items	 	-	 	 	-	 	 	41,887	 	 	48,074	 	 	89,961	 	 	35,367
	Undrawn commitments	 	-	 	 	-	 	 	-	 	 	261,366	 	 	261,366	 	 	90,762
	Operational risk 1	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	97,385
	Total	$	149,206	 	$	1,594,288	 	$	41,887	 	$	309,440	 	$	2,094,821	 	$	1,501,435

 

1 The charge for operational risk is determined using the
Basic Indicator Approach as prescribed by OSFI.

 

    19 

     

    

 

	As at October 31, 2020	 	 	 	 	 	Notional/drawn
    amount	 	 	 	 	 	Risk	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Weighted	 
	(thousands of Canadian dollars)	 	0%	 	20%	 	35%	 	75%	 	100%	 	150%	 	Total	 	Balance	 
	Corporate	$	2,054	$	-	$	-	$	-	$	669,412	$	-	$	671,466	$	669,414	 
	Sovereign	 	-	 	11,411	 	-	 	-	 	-	 	-	 	11,411	 	2,282	 
	Bank	 	-	 	275,292	 	-	 	-	 	-	 	-	 	275,292	 	55,058	 
	Retail residential mortgages	 	4,491	 	-	 	4,093	 	-	 	3,470	 	-	 	12,054	 	4,902	 
	Other retail	 	93,344	 	1,400	 	-	 	846,457	 	1,130	 	-	 	942,331	 	636,254	 
	Other items	 	15,297	 	713	 	-	 	-	 	65,605	 	-	 	81,615	 	40,875	 
	Undrawn commitments	 	-	 	-	 	-	 	229	 	238,495	 	-	 	238,724	 	72,553	 
	Operational
    risk 1	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	99,601	 
	Total	$	115,186	$	288,816	$	4,093	$	846,686	$	978,112	$	-	$	2,232,893	$	1,580,939	 

 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As at October 31, 2019	 	 	 	 	 	Notional/drawn
    amount	 	 	 	 	 	Risk	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Weighted	 
	(thousands of Canadian dollars)	 	0%	 	20%	 	35%	 	75%	 	100%	 	150%	 	Total	 	Balance	 
	Corporate	$	5,315	$	-	$	-	$	-	$	612,994	$	6,284	$	624,593	$	622,420	 
	Sovereign	 	10,607	 	13,249	 	-	 	-	 	-	 	-	 	23,856	 	2,650	 
	Bank	 	-	 	156,818	 	-	 	-	 	-	 	-	 	156,818	 	31,364	 
	Retail residential mortgages	 	18,939	 	-	 	306	 	-	 	-	 	-	 	19,245	 	107	 
	Other retail	 	88,702	 	3,700	 	-	 	823,758	 	2,822	 	-	 	918,982	 	621,380	 
	Other items	 	-	 	713	 	-	 	-	 	89,248	 	-	 	89,961	 	35,367	 
	Undrawn commitments	 	-	 	-	 	-	 	25	 	261,341	 	-	 	261,366	 	90,762	 
	Operational
    risk 1	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	97,385	 
	Total	$	123,563	$	174,480	$	306	$	823,783	$	966,405	$	6,284	$	2,094,821	$	1,501,435	 

 

1 The charge for operational
risk is determined using the Basic Indicator Approach as prescribed by OSFI.

 

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

 

As the Bank makes use of the Standardized Approach
for credit risk as prescribed by OSFI, it 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 associated with same, OSFI introduced guidance over the course of the previous quarter that set out transitional
arrangements pertaining to the capital treatment of expected loss provisioning which allows for a portion of eligible ECL allowances 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 ECL allowances 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 in the current quarter 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.

 

At October 31, 2020 the Bank exceeded all of the
minimum Basel III regulatory capital requirements set out above.

 

    20 

     

    

The table below presents the calculation of the
Bank’s regulatory capital and risk-based capital ratios as at October 31, 2020 as well as for 2019:

 

 

(thousands of Canadian dollars, except capital ratios)

 

 

	 	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)
	Total 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 capital 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%

 

Leverage Ratio

 

The leverage ratio is a supplementary measure that
is prescribed under the Basel III Accord and is defined as the ratio of Tier 1 capital to total exposures. OSFI requires all financial
institutions to maintain a leverage ratio of 3% or greater at all times. The Bank was in compliance with OSFI’s leverage ratio expectations
for the periods reported. The table below presents the Bank’s leverage ratio calculation at October 31, 2020 as well as for 2019:

 

 

(thousands of Canadian dollars, except leveraged
ratio)

 

 

	 	2020	 	2020	 	2019
	 	"Transitional"	 	"All in"	 	"All in"
	On-balance sheet assets	$	1,943,885	 	$	1,943,885	 	$	1,785,381
	Asset amounts deducted in determining 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 items	$	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
	Basel III leverage ratio	 	12.19%	 	 	12.19%	 	 	11.99%

 

    21 

     

    

Capital Resources

 

The operations of the Bank are not dependent upon
significant amounts of capital assets to generate revenue. Currently, the Bank does not have any commitments for capital expenditures
or for significant additions to its level of capital assets.

 

SUMMARY OF QUARTERLY RESULTS AND FOURTH QUARTER
REVIEW

 

Quarterly Financial Highlights

 

	(thousands of Canadian dollars	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	except per share amounts)	 	 	 	2020	 	 	 	 	 	 	2019	 	 	 
	 	 	Q4	 	Q3	 	Q2	 	Q1	 	Q4	 	Q3	 	Q2	 	Q1
	Results of operations:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Interest income	$	21,068	$	20,172	$	22,688	$	22,166	$	22,263	$	22,958	$	21,125	$	21,959
	Yield on assets (%)	 	4.33%	 	4.12%	 	4.83%	 	4.84%	 	4.96%	 	5.10%	 	4.89%	 	4.90%
	Interest expense	 	7,360	 	7,788	 	8,212	 	8,609	 	8,608	 	8,899	 	8,382	 	8,519
	Cost of funds (%)	 	1.51%	 	1.59%	 	1.75%	 	1.88%	 	1.92%	 	1.98%	 	1.94%	 	1.90%
	Net interest income	 	13,708	 	12,384	 	14,476	 	13,557	 	13,655	 	14,059	 	12,743	 	13,440
	Net interest margin (%)	 	2.82%	 	2.53%	 	3.08%	 	2.96%	 	3.04%	 	3.12%	 	2.95%	 	3.00%
	Total revenue	 	13,726	 	12,392	 	14,485	 	13,582	 	13,635	 	14,078	 	12,747	 	13,459
	Provision for (recovery of) credit losses	 	(582)	 	(44)	 	490	 	(208)	 	21	 	381	 	(411)	 	(289)
	Non-interest expenses	 	7,763	 	6,410	 	6,899	 	6,705	 	6,171	 	6,860	 	6,411	 	6,954
	Efficiency ratio	 	57%	 	52%	 	48%	 	49%	 	45%	 	49%	 	50%	 	52%
	Core cash earnings	 	6,545	 	6,026	 	7,096	 	7,085	 	7,443	 	6,837	 	6,747	 	6,794
	Core cash earnings per common share	$	0.31	$	0.29	$	0.34	$	0.34	$	0.36	$	0.32	$	0.32	$	0.32
	Income before income taxes	 	6,545	 	6,026	 	7,096	 	7,085	 	7,443	 	6,837	 	6,747	 	6,794
	Income tax provision	 	1,799	 	1,657	 	1,947	 	1,944	 	2,038	 	1,874	 	1,851	 	1,862
	Net income	$	4,746	$	4,369	$	5,149	$	5,141	$	5,405	$	4,963	$	4,896	$	4,932
	Income per share	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic	$	0.20	$	0.18	$	0.22	$	0.22	$	0.23	$	0.21	$	0.21	$	0.21
	Diluted	$	0.20	$	0.18	$	0.22	$	0.22	$	0.23	$	0.21	$	0.21	$	0.21
	Return on average common equity	 	7.46%	 	6.90%	 	8.64%	 	8.60%	 	9.23%	 	8.56%	 	8.89%	 	8.86%
	Core cash return	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	on average common equity	 	10.66%	 	9.89%	 	12.29%	 	12.23%	 	13.11%	 	12.20%	 	12.68%	 	12.62%
	Return on average total assets	 	0.86%	 	0.78%	 	0.98%	 	1.01%	 	1.08%	 	0.98%	 	1.01%	 	0.98%
	Gross impaired loans	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	to total loans	 	0.00%	 	0.43%	 	0.41%	 	0.38%	 	0.39%	 	1.58%	 	1.57%	 	1.22%

 

The Bank’s financial results for each of
the last eight quarters are summarized above. Net interest income in the current quarter was up measurably quarter over quarter as a function
of strong origination activity across each of the Bank’s lending lines, higher fees and lower cost of funds. Net income and core
cash earnings in the current quarter were also up quarter over quarter as a function of higher net interest income and a higher recovery
of credit losses, offset partially by generally higher staff related costs, including higher vacation expense accruals resulting principally
from employees taking less vacation time as a result of COVID-19.

 

The provision for income taxes in each of the quarters
reflects the effective statutory income tax rate of 27% applied to earnings of the Bank.

 

FOURTH QUARTER REVIEW

 

Net income for the quarter was $4.7 million or
$0.20 per common share (basic and diluted), compared to $4.4 million or $0.18 per common share (basic and diluted) last quarter and $5.4
million or $0.23 per common share (basic and diluted) for the same period a year ago. The quarter over quarter trend was a function primarily
of higher net interest income and a higher recovery of credit losses offset partially by higher non-interest expenses. The year over year
trend was a function primarily of higher non-interest expenses offset partially by higher net interest income and a higher recovery of
credit losses.

 

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Core cash earnings for the quarter were $6.5 million
or $0.31 per common share (basic and diluted), compared to $6.0 million or $0.29 per common share (basic and diluted) last quarter and
$7.4 million or $0.36 per common share (basic and diluted) for the same period a year ago. The quarter over quarter and year over year
trends were a function primarily of the factors set out above.

 

Total Revenue

 

Total revenue for the quarter was $13.7 million
compared to $12.4 million last quarter and $13.6 million for the same period a year ago. The quarter over quarter trend was a function
of higher interest income and lower cost of funds. The year over year trend was a function of lower cost of funds offset partially by
lower interest income.

 

Net Interest Income

 

Net interest income for the quarter was $13.7 million
compared to $12.4 million last quarter and $13.7 million for the same period a year ago. The quarter over quarter trend was a function
primarily of higher interest income attributable to strong CRE origination activity, higher receivable purchase volumes, higher fees and
lower cost of funds. The year over year trend was a function primarily of lower cost of funds offset partially by lower interest income
attributable to lower yields earned on lending assets and elevated cash balances.

 

Net Interest Margin

 

Net interest margin or spread for the quarter was
2.82% compared to 2.53% last quarter and 3.04% for the same period a year ago. The quarter over quarter trend was a function primarily
of higher interest income attributable to higher fees and lower cost of funds. The year over year trend was a function of lower interest
income attributable to lower yields earned on lending assets and elevated cash balances offset partially by lower cost of funds.

 

Provision for Credit Losses

 

The Bank recorded a recovery of credit losses for
the quarter in the amount of $582,000 compared to a recovery of $44,000 last quarter and a provision for credit losses in the amount of
$21,000 for the same period a year ago. The quarter over quarter trend was a function primarily of the partial, early repayment and restructuring
of multiple commercial real estate loans with exposure to the travel and tourism industry, improved key macroeconomic indicator trends
included in the macroeconomic scenario data used as forward looking information in the Bank’s credit risk models, and net remeasurements
of expected credit losses attributable to the impact of planned refinements to specific real estate asset loan and credit data inputs.
The year over year trend was a function primarily of net remeasurements of expected credit losses attributable to the impact of planned
refinements to specific real estate asset loan and credit data inputs, offset partially by changes in the macroeconomic scenario data
used as forward looking information in the Bank’s credit risk models and higher lending asset balances.

 

Non-Interest Expenses

 

Non-interest expenses of the Bank for the quarter
were $7.8 million compared to $6.4 million last quarter and $6.2 million for the same period a year ago. The quarter over quarter trend
was a function primarily of higher salary and benefits expenses incurred in the current quarter attributable to an

 

    23 

     

    

increase in staff complement and a general increase
in staff related costs including higher vacation expense accruals resulting principally from employees taking less vacation time as a
result of COVID-19 limiting travel and tourism opportunities as well as higher professional fees and facility costs. The year over year
trend was a function primarily of an increase in staff complement and higher salary and benefits expenses incurred in the current quarter
attributable to a general increase in staff related costs, including higher vacation expense accruals, partially offset by lower administrative
expenses related to consulting fees and the Bank’s general corporate functions.

 

Income Taxes

 

For the three months ended October 31, 2020, the
provision for income taxes was $1.8 million compared to $1.7 million for the previous quarter and $2.0 million for the same period a year
ago.

 

OUTLOOK FOR 2021

 

The impact of COVID-19 has resulted in significant,
personal and economic disruption globally. While the Canadian economy has showed modest recovery over the course of the second half of
fiscal 2020, and further, there have been announcements of progress made related to the development and testing of a number of vaccine
candidates that may become available to the public in the medium term, there remains significant uncertainty related to whether the impact
of COVID-19 can be mitigated sufficiently to support an eventual full recovery of the Canadian economy.

 

Business re-openings late in the second quarter
supported economic recovery and growth to the point where the unemployment rate fell to 10.2% in August from a peak of 13.7% in May, attributable
to the economy adding more than 1.6 million jobs over the period ranging from June through August inclusive, resulting in a recovery of
nearly 2/3 of jobs lost attributable to the initial lockdown. The Canadian unemployment rate is anticipated to level out at 9% by the
end of 2020 and forecast to improve to 8% over the course of 2021. Further, the Bank of Canada has taken, and continues to take extraordinary
steps to support the broader economy as well as credit markets in the form of aggressive monetary policy, as well as making available
multiple liquidity facilities and commencing various asset purchase programs. As a result of these efforts and activities annualized GDP
is expected to expand 36% in the third quarter, which follows an unprecedented, annualized contraction of 39% in the second quarter. Notwithstanding
the above, forecast GDP is anticipated to moderate as a result of the second wave of the virus, combined with 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. Common inflation targets in the US and Canada,
combined with interest rates at historical lows and an expected, marginal increase in oil prices will result in the Canadian dollar appreciating
modestly, which will have the effect of moderating demand for Canadian exports and contribute to further moderation of GDP. The base case
scenario contemplates Canadian GDP contracting approximately 6.5% in 2020 and then recovering and growing modestly over the course of
2021 and 2022.

 

The Canadian federal government anticipates a budget
deficit of $343 billion at March 31, 2021 as a function 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, which is anticipated to drive inflation to exceed the BoC’s 2% target by the midpoint of 2021, but
will not exceed 2.5% for the foreseeable future as a result primarily of the material slack that currently exists in the labour market.

 

    24 

     

    

Current strong household consumption is expected
to temper somewhat in the latter portion of the current year, which will support already elevated savings rates, implying that Canadians
will further increase their spending power, and subsequently employ same in the form of more robust consumption levels over the second
half of 2021. While a general reduction in household spending has the potential to negatively impact the Bank’s point of sale loan
and lease receivable purchase program, the fact that consumers have limited opportunities to spend their savings due to the impact of
COVID-19 on industry segments such as travel and tourism, consumer spending is currently, and expected to remain robust in the area of
home improvements, for which a number of the Bank’s point of sale loan and lease origination partners provide financing.

 

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 BoC’s position on monetary policy is anticipated to generate opportunity for the Bank’s commercial real
estate business line due to the attractive mortgage rates that are, and will remain available to firms who are still in a position to
deploy capital in the commercial real estate market. This is especially true in the multi-unit residential rental sector which is considered
one of the most stable and low-risk sectors in the real estate market. The Bank benefits from having excellent relationships with numerous
originators and brokers in the multi-unit residential rental sector which is expected to result in a solid flow of new opportunities in
the near to medium term. Over the course of the fourth quarter of the 2020 fiscal period, the Bank experienced exceptionally strong deal
flow in the commercial mortgage space, comprised of transactions that not only were well within the Bank’s risk appetite but also
priced such that the Bank was more than adequately compensated for the associated credit risk exposure. Further, due to the negative impact
that COVID-19 has had on other small and medium sized Canadian financial institutions since the onset of the pandemic in the second quarter,
the Bank expects to continue to see strong, high quality deal flow in the commercial mortgage space over the course of fiscal 2021.

 

Further, the BoC’s position on monetary policy
is also anticipated to keep deposit rates low for the foreseeable future, and certainly through 2021. The Bank will continue to leverage
its expansive, diverse term deposit broker network to mitigate the impact of any forward rate volatility that may eventuate, even in the
current and foreseeable interest rate environment, as well as continue to build out its commercial deposit base, which is comprised primarily
of funds controlled by Canadian insolvency professionals as the Bank endeavors to maintain its low cost of funds. The Bank anticipates
that the impact of COVID-19 on household finances has the potential to increase the rate at which it is able to grow its commercial deposit
base as a function of an anticipated increase in the volume of consumer bankruptcy and proposal restructuring proceedings which will be
administered by Canadian insolvency professionals over the course of fiscal 2021.

 

    25 

     

    

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Significant accounting policies are detailed in
Note 3 of the Bank’s 2020 Audited Consolidated Financial Statements. There has been no change in accounting policies nor any significant
new policies adopted during the current period, except for changes to accounting policies resulting from the adoption of IFRS 16 –
Leases noted in Changes in Accounting Policies below.

 

In preparing the consolidated financial statements,
management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts of assets and
liabilities at the date of the financial statements and income and expenses during the reporting periods. Areas where significant judgment
was applied were in the assessments of impairment of financial instruments. Estimates were developed in the calculation of the allowance
for expected credit losses 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 measurement of these estimates. This could result in material adjustments to the
carrying amounts of assets and/or liabilities affected in the future.

 

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

 

The policies discussed below are considered to
be particularly significant as they require management to make estimates or judgements, some of which may relate to matters that are inherently
uncertain.

 

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 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.

 

    26 

     

    

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”).

 

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.

 

    27 

     

    

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. 

 

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.

 

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Allowance for Expected 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 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 significant increase in credit risk since initial recognition are designated as stage 1, while
loans or financial instruments that have experienced a significant increase in credit risk 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 (“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.

 

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.

 

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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.

 

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.

 

    30 

     

    

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.

 

Corporate Income Taxes

 

Current income taxes are calculated based on taxable
income at the reporting period end. 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
Bank’s 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.

 

Leases

 

Effective November 1, 2019, the Bank adopted IFRS
16, which sets out prescribed methodology related to the recognition, measurement, presentation and disclosure of operational 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

 

    31 

     

    

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 depreciation of the
right-of-use assets) and an increase in finance costs (due to accretion of the lease obligations).

 

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.

 

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.

 

    32 

     

    

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 obligation. 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 its lease payments
at its incremental borrowing rate, applicable to the asset class(es) at November 1, 2019. The weighted-average rate applied is 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.

 

Additional information on the Bank’s adoption
of IFRS 16 is reflected in note 3 of the Bank’s October 31, 2020 Consolidated Financial Statements.

 

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:

 

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

 

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

 

		·	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. The Bank will monitor the IBOR reform, however management does not expect this change to have a significant impact to the
Bank’s financial results.

 

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

 

ENTERPRISE RISK MANAGEMENT

 

The Bank recognizes that risk is present in all
business activities and that the successful management of risk is a critical factor in maximizing shareholder value. As such, the Bank
has developed and continues to enhance an Enterprise Risk Management (“ERM”) Program to identify, evaluate, treat, report
on, and monitor the risks that impact the Bank.

 

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The Bank will maintain a robust ERM program to:

 

		·	Ensure significant current and emerging risks
are identified, understood and managed appropriately;

 

		·	Support the Board’s corporate governance
needs; and, 

 

		·	Strengthen the Bank’s risk management practices
in a manner demonstrable to external stakeholders.

 

The goal of risk management is not to eliminate
risks but to identify and control risks within the context of the Bank’s Risk Appetite Statement. The ERM program enhances the effectiveness,
efficiency and understanding of risk and risk management at an individual and enterprise level.

 

GUIDING PRINCIPLES OF THE BANK’S ENTERPRISE
RISK MANAGEMENT PROGRAM

 

		·	Risk management is everyone’s responsibility,
from the Board of Directors to individual employees. Everyone is expected to understand the risks that fall within their areas of responsibility
and to manage these risks within approved risk tolerances;

 

		·	Risk management is a comprehensive, structured
and continuous process in which risks are identified, evaluated and consciously accepted or mitigated within approved risk tolerances;

 

		·	Risk management is based on open communication
of the best available information, both quantitative and qualitative, from a range of sources, including historical data, experience,
stakeholder feedback, observation, forecasts and expert judgment;

 

		·	Enterprise Risk Management is integrated with
Bank processes such as strategic planning, business planning, operational management, and investment decisions to ensure consistent consideration
of risks in all decision-making;

 

		·	Risk owners will be identified through the risk
management process and will be responsible to address and implement risk mitigation/avoidance/transfer strategies to minimize the risk
impact to the Bank. 

 

RISK APPETITE STATEMENT

 

Risk appetite is the measurement of capital, liquidity,
earnings and operational variability that the Bank is prepared to put at risk while in pursuit of the Bank’s strategic objectives.
Risk appetite provides for a common understanding of the boundaries of acceptable and unacceptable risks established with management and
approved by the Board, as the Bank works toward achieving its strategic objectives. The risk appetite statement includes a set of risk
tolerances to communicate specific capacities for risk within each significant risk category.

 

Consideration will be given to all risks, however;
the Bank has identified the following seven significant risk categories from which it will measure and establish tolerances in the pursuit
of the Bank’s strategic objectives:

 

		·	Liquidity Risk

 

		·	Operational Risk

 

		·	Market Risk

 

		·	Credit Risk

 

		·	Regulatory Risk

 

		·	Strategic Risk

 

		·	Reputational Risk

 

    34 

     

    

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.

 

Liquidity risk is managed primarily by the Treasurer,
the SVP, Deposit Services, and the Chief Financial Officer.

 

Treasury policies are developed and controlled
by the Treasury Department as a function of the Bank’s business objectives, liquidity risk appetite, and regulatory requirements
as determined by senior and executive management, and the Board of Directors.

 

Deposit raising activities are overseen by the
Senior Vice President, Deposit Services.

 

LIQUDITY RISK AND THE RISK APPETITE STATEMENT

 

The Bank’s risk appetite statement defines
liquidity risk tolerances that the Bank will adhere to in the execution of its business objectives. Liquidity risk tolerances are administered
as follows:

 

		1.	Liquidity

 

Through Bank policy, the risk appetite
statement mirrors Bank comfort with the level of liquidity that is to be maintained in order to ensure that all funding obligations are
met.

 

		2.	Deposit Sources

 

The monitoring of deposit sources establishes
Bank comfort with the origination and concentration of deposit inflows such that the Bank can monitor trends in improvements in diversifying
its deposit sources.

 

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. The Bank maintains a conservative investment profile by ensuring:

 

		·	All Bank investments are high quality and include
government debt securities, bankers acceptances and Canadian bank debt; 

 

		·	specific investment criteria and procedures are
in place to manage the Bank's securities portfolio;

 

		·	Regular review, monitoring and approval of the
Bank's investment policies by the Risk Oversight Committee of the Board of Directors; and,

 

		·	Quarterly reporting to the Risk Oversight Committee
on the composition of the Bank's securities portfolio. 

 

Liquidity management is further supported by processes,
which include but are not limited to:

 

		·	Monitoring of liquidity levels;

 

		·	Monitoring of liquidity trends and key risk indicators;

 

		·	Scenario stress testing;

 

		·	Monitoring the credit profile of the liquidity
portfolio; and,

 

		·	Monitoring deposit concentration.

 

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In order to manage its liquidity needs, the Bank
has a liquidity risk management program that is comprised specifically of the following policies and procedures:

 

		·	Holding sufficient liquid assets which, based
on certain stress assumptions, results in positive cumulative cash flow for a period of 61 to 90 days;

 

		·	Holding high quality liquid securities at levels
that represent no less than 5% of total assets; High quality liquid securities include: Canadian federal, provincial and municipal debt;
debt of federally regulated Canadian financial institutions; widely distributed debt instruments, (all of which are to be rated investment
grade); cash on deposit; and banker’s acceptances;

 

		·	On a weekly basis, monitoring its cash flow requirements
using a liquidity forecasting template under a stressed scenario;

 

		·	On a monthly basis, testing liquidity using three
specific disruption scenarios; i) industry specific disruption scenario, ii) company specific liquidity disruption scenario, and iii)
a systematic disruption scenario;

 

		·	Managing liquidity in accordance with guidelines
specified by OSFI.

 

Operational Risk

 

Operational risk is the risk of loss resulting
from people, inadequate or failed internal processes and systems, or from external events. Operational risk includes legal risk but excludes
strategic and reputational risk.

 

Operational risk differs from other banking risks
in that, typically, it is not directly accepted in return for an expected reward but exists in the natural course of corporate activity.

 

The Bank recognizes that operational risk is present
in all business activities and that the successful management of operational risk is a key factor in the sustained success of the Bank.
Sound operational risk management is a reflection of the effectiveness of the Board and senior management in administering its portfolio
of products, activities, processes and systems. As such, the Bank has developed and will continuously enhance an Operational Risk Management
(“ORM”) Program to identify, evaluate, treat, report and monitor operational risks to which the Bank is exposed.

 

OPERATIONAL RISK AND THE RISK APPETITE STATEMENT

 

The Bank has segmented operational risk into five
operational risk pillars:

 

		1.	Employment Practices and Workplace Safety

 

The risk resulting from the inappropriate
hiring of employees, unjust compensation, or mistreatment of employees, producing consequences such as litigation or resignation. Moreover,
it includes risk stemming from the enforcement of safety regulations and the inability to control the environment in working conditions,
causing detrimental effects on employees’ health such as illness or accidents while working.

 

		2.	Information Technology (“IT”) and Cybersecurity

 

As the Bank’s operations are largely
dependent on data and information processing, much emphasis is placed on information technology security to ensure an uninterrupted, secure
and undisturbed use of information and communication systems. Business disruption may occur if risks are realized such as system failures
or anomalies, defects in the Bank’s computer systems or network infrastructure, or the employment of outdated or substandard technology
tools.

 

    36 

     

    

		3.	Fraud and Errors

 

This operational risk pillar
includes three sub-groups:

 

		I.	Internal Fraud:

 

Employees, by themselves or in collusion
with others, intentionally violating internal policy, or laws and directly benefiting from the action to the detriment of the business
and/or the client.

 

		II.	External Fraud:

 

Acts undertaken by external parties
intended to defraud or misappropriate financial, information or physical assets or create financial loss for the company.

 

		III.	Errors:

 

Risk resulting from errors in the operational
process or methodology, lack of a procedure or policy documentation, and control failures.

 

		4.	Outsourcing and Business Continuity

 

This operational risk pillar
includes two sub-groups:

 

		I.	Outsourcing:

 

Outsourcing arrangements require careful
management if they are to yield benefits, and where they are not managed adequately, the Bank’s operational risk exposure may increase.
The risk increases when there is a failure of the availability of the people or public/third-party infrastructure that the Bank depends
on.

 

		II.	Business Continuity:

 

The risk of damage to physical assets
and/or disruptive events from various accidents such as fire, natural disaster, riots, terrorism, etc. The Bank will assess the potential
risk for such events to occur and maintain a recovery plan to ensure continuity of business activity.

 

		5.	Client, Product and Business Practices

 

The risk resulting from business practices,
the introduction of a product, and the accessing of a customer’s information that is inappropriate or non-compliant with regulations
or rules, such as unauthorized transactions, unapproved dealings, money laundering activities or the misuse of confidential customer information.

 

Operational risk impacts can be financial loss,
loss of competitive position or reputational. The Bank employs the following strategies in its efforts to monitor and manage operational
risk exposures to acceptable levels:

 

		·	Comprehensive operational policies which provide
clear direction to all areas of its business and employees and establish accountability and responsibilities to identify, assess, appropriately
mitigate and control operational risk;

 

		·	Hiring of banking professionals with many years
of related experience;

 

		·	Use of technology through automated systems with
built in controls;

 

 

    37 

     

    

		·	Maintenance of a compliance monitoring program;

 

		·	Continual review and upgrade of systems and procedures.

 

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.

 

Market risk is managed primarily by the Treasurer
and the Chief Financial Officer. Treasury policies, which set out the management of market risk and document the risk limits, include
the Bank’s interest rate risk management policies and securities portfolio management policies.

 

Treasury policies are developed, maintained, and
administered by the Treasury Department as a function of the Bank’s business objectives, market risk appetite, and regulatory requirements
as determined by senior and executive management, and the Board of Directors.

 

MARKET RISK AND THE RISK APPETITE STATEMENT

 

The Bank’s risk appetite statement defines
market risk tolerances that the Bank will adhere to in the execution of its business objectives. Market risk tolerances are administered
as follows:

 

		1.	Interest Rate Volatility:

 

Interest rate risk is the risk of a
negative impact on the balance sheet or income statement resulting from a change in interest rates. Tolerances are defined and used to
assist in measuring the Bank’s ability and effort to manage changes to the Bank’s capital position as a result of an increase/decrease
in both short-term and long-term interest rates.

 

		2.	Equity Risk:

 

Equity risk is the risk of loss resulting
from changes or volatility in equity or financial instrument prices. Tolerances are defined and used to assist in measuring the Bank’s
ability and effort to manage changes to the Bank’s capital position as a result of changes in the value of the Bank’s treasury
portfolio investments.

 

The Bank’s principal market risk
arises from interest rate risk as the Bank does not undertake any material foreign exchange or trading activities. In addition, the Bank
is subject to market price volatility with respect to available-for-sale securities due to the resulting impact on regulatory capital.

 

The Risk Oversight Committee of the
Bank is charged with recommending policies that govern market risk to the Board of Directors for approval and with reviewing the policies
on an ongoing basis. Additionally, 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

 

    38 

     

    

interest rate risk position. Further,
the Bank’s Asset Liability Committee reviews the results of these analyses on a monthly basis and monitors compliance with limits
set out in corporate policy. The Bank’s policies include the matching of its cash inflows and outflows so that:

 

		i.	in any 12 month period, a 100 basis point change in rates across the entire yield curve would not result
in a decline greater than 4% of regulatory capital on the Bank’s earnings; and,

 

		ii.	in any 60 month period, a 100 basis point change in rates across the entire yield curve would not result
in a decline greater than 6% of regulatory capital on the Bank’s equity.

 

As well, the policy indicates that at
no time shall the duration difference between the Bank’s assets and liabilities exceed four months. The interest rate risk position
and results of the Bank’s duration analysis at October 31, 2020 as well as for 2019 are presented in the table below.

 

Interest Rate Position

 

	 	2020	 	2019
	 	Increase	 	Decrease	 	Increase	 	Decrease
	(thousands of Canadian dollars)	100 bps	 	100 bps	 	100 bps	 	100 bps
	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	 	 	 

 

The Bank’s sensitivity to changes in interest
rates and its duration difference between assets and liabilities at October 31, 2020 has changed modestly since October 31, 2019.
As presented in the table above, the impact on net interest income during a 12 month period of a 100 basis point increase would
be approximately $2.6 million, while the impact on net interest income of a 100 basis point decrease would be approximately ($2.1 million).
Similarly, at October 31, 2020, the impact on equity during a 60 month period of a 100 basis point increase would be approximately ($2.5
million) while the impact on equity of a 100 basis point decrease would be approximately $1.6 million. At October 31, 2020 the duration
difference between assets and liabilities was 0.6 months compared to 1.3 months at October 31, 2019, indicating that the Bank’s
assets and liabilities would reprice at approximately the same time in the event of a change in interest rates.

 

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

 

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 accepts certain risks in order to generate
revenue. In managing these risks, the Bank has developed an enterprise-wide risk management framework designed to achieve an appropriate
balance between credit risk and reward in order to maximize shareholder return.

 

    39 

     

    

Credit risk is managed by the Chief Credit Officer
who administers the Bank’s established credit policies that set out the roles of the credit department and the lending business
units related to risk management, and further, establishes risk tolerances for same. Credit policies exist for the credit department and
for each lending business unit. Credit policies are developed, maintained, and administered by the Credit Department as a function of
the Bank’s business objectives, credit risk appetite, and regulatory requirements as determined by senior management, and the Board
of Directors.

 

To supplement the Bank’s credit policies,
the individual lending business units have developed and compiled comprehensive procedures that describe the processes, systems and methods
employed in the operation of their businesses while operating within the credit framework set out by the credit policies.

 

CREDIT RISK AND THE RISK APPETITE STATEMENT

 

The Bank’s risk appetite statement defines
credit risk tolerances that the Bank will adhere to in the execution of its business objectives. The risk appetite statement defines the
credit risk tolerances for the entire Bank as well as for each of the following business lines that accept credit risk:

 

		1.	Real estate;

 

		2.	Structured finance;

 

		3.	Treasury.

 

The Bank manages its credit risk using policies
that have been recommended by management to the Risk Oversight Committee, which then recommends the policies to the Board of Directors
of the Bank for approval. These policies consist of approval procedures and limits on loan amounts, portfolio concentration, geographic
concentration, industry concentration, asset categories, 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 action plans for each account.
The Risk Oversight Committee of the Bank reviews these policies on an ongoing basis.

 

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

 

		·	Recommends policies governing management of credit
risk to the Bank’s 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;

 

		·	Reviews and 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.

 

    40 

     

    

Regulatory Risk

 

Regulatory risk is the risk that a regulatory agency
will make changes in the current rules (or will impose new rules) that will increase the costs of operating the Bank, reduce the attractiveness
of the Bank as an investment, result in financial loss, and/or change the competitive landscape. Regulatory risk also includes the risk
of adverse outcomes due to non-compliance to rules, regulations, standards or other legal requirements.

 

The Bank has a Regulatory Compliance Management
Program that includes a three lines of defence model and essentially establishes the controls and processes through which the Bank manages
regulatory compliance risk. The Chief Compliance Officer is responsible for regulatory compliance oversight.

 

REGULATORY RISK AND THE RISK APPETITE STATEMENT

 

The Bank’s risk appetite statement defines
regulatory risk tolerances that the Bank will adhere to in the execution of its business objectives. Regulatory risk tolerances are administered
as follows:

 

		1.	Regulatory Compliance

 

Bank’s conformance with laws,
rules, and regulations and prescribed practices in all jurisdictions in which it operates.

 

		2.	Regulatory Capital

 

Capital is a key regulatory requirement.
The quality of capital and the leverage of the Bank’s capital is a key indicator of health by regulators.

 

Strategic Risk

Strategic risk is defined as the losses or forgone revenues resulting from improper or ineffective business strategies, resource allocation
and/or decision-making or from an inability to adapt to changes in the business environment.

 

STRATEGIC RISK AND THE RISK APPETITE STATEMENT

 

The Bank’s risk appetite statement defines
the strategic risk tolerances that the Bank and each business unit will adhere to in the execution of their respective business objectives.
Strategic risk tolerances are established as a function of the Bank’s financial performance.

 

Financial metric tolerances are defined for the
Bank and its lending business units.

 

The Bank manages strategic risk through a Board
approved, robust, annual business planning process which includes the development of a comprehensive business plan, operating budget,
and capital plan that exhibit planning horizons ranging from twelve to sixty months. The Bank augments its annual enterprise business
planning process with the development of rigorous economic forecasts, risk and operational impact assessments related to any new business
initiatives being contemplated as well as through the performance of an annual ICAAP for the Bank. The ICAAP is employed to determine
if the Bank’s budgeted capital amounts provide adequate capital buffers against the occurrence of its identified business objective
risks under both expected and stressed operating conditions.

 

    41 

     

    

Reputational Risk

 

Reputational risk is the risk that an activity undertaken by the Bank
or its representatives will impair its image in the community or lower public confidence in it, resulting in the loss of business, legal
action or increased regulatory oversight.

 

Reputational risk is the outcome of a risk occurrence; it is not a risk
event in and of itself. To manage against reputational risk, the Enterprise Risk Management program focuses on the risks of the Bank through
the other six pillars of risk:

 

		1.	Liquidity Risk

 

		2.	Operational Risk

 

		3.	Market Risk

 

		4.	Credit Risk

 

		5.	Regulatory Risk

 

		6.	Strategic Risk

 

The management of the risks identified in these six pillars of risk
and the measurement of the Bank in achieving its objectives and remaining within the bounds of the Bank’s risk appetite statement
assist the Bank in managing reputational risk.

 

REPUTATIONAL RISK AND THE RISK APPETITE STATEMENT

 

The Bank’s risk appetite statement defines
the reputational risk tolerances that the Bank will adhere to in the execution of its business objectives.

 

An institution’s reputation is a valuable
business asset in its own right that is essential to optimizing shareholder value, and as such is constantly at risk. Reputation risk
cannot be managed in isolation from other forms of risk since all risks can have an impact on reputation, which in turn can impact the
Bank’s brand, earnings and capital. Credit, market, operational, strategic and liquidity risks must all be managed effectively in
order to safeguard the Bank’s reputation.

 

Ultimate responsibility for the Bank’s reputation
lies with senior and executive management, and the Board of Directors and related committees which examine reputation risk as part of
their ongoing duties. In addition, every employee and representative of the Bank has a responsibility to contribute in a positive way
to the Bank’s reputation by ensuring that ethical practices are followed at all times.

 

FACTORS THAT MAY AFFECT FUTURE RESULTS

 

As noted in the section
“Forward-looking Statements”, the Bank is subject to inherent risks and uncertainties which may cause its actual results to
differ materially from its expectations. Some of these risks are discussed below.

 

    42 

     

    

Impact of COVID-19 Pandemic

 

The impact of COVID-19 has resulted in significant,
personal and economic disruption globally. While the Canadian economy has showed modest recovery over the course of the second half of
fiscal 2020, and further, there have been announcements of progress made related to the development and testing of a number of vaccine
candidates that may become available to the public in the medium term, there remains significant uncertainty related to whether the impact
of COVID-19 can be mitigated sufficiently to support an eventual full recovery of the Canadian economy. Should the COVID-19 pandemic continue
to worsen, in terms of higher infection and/or mortality rates, and further, negatively impact the Canadian economy, the Bank’s
revenue and earnings could be adversely affected.

 

Execution of Strategic Plans

 

The Bank’s financial performance is influenced
by its ability to execute strategic plans developed by management. If these strategic plans do not meet with success or there is a change
in the Bank’s strategic plans, the Bank’s earnings could grow at a slower pace or decline.

 

Changes in Laws and Regulations

 

Laws and regulations are in place to protect clients,
investors and the public. Changes in laws and regulations, including how they are interpreted and enforced, could adversely affect the
Bank’s earnings by allowing more competition in the marketplace and by increasing the costs of compliance. In addition, any failure
to comply with laws and regulations could adversely affect the Bank’s reputation and earnings.

 

Changes in Accounting Standards and Accounting Policies and Estimates

 

The International Accounting Standards Board continues
to change the financial accounting and reporting standards that govern the preparation of the Bank’s financial statements. These
changes can be significant and may materially impact how the Bank records its financial position and its results of operations. Where
the Bank is required to retroactively apply a new or revised standard, it may be required to restate prior period financial results.

 

Level of Competition

 

The level of competition among financial institutions
is high and non-financial companies and government entities are increasingly offering services typically provided by banks. This could
have an effect on the pricing of the Bank’s deposits and its lending products and together with loss of market share, could adversely
affect the Bank’s earnings.

 

General Economic Conditions

 

The Bank conducts
its business in various regions within Canada. Factors such as financial market stability, interest rates, foreign exchange rates, changing
global commodity prices, business investment, government spending and stimulation initiatives, consumer spending, and the rate of inflation
can affect the business and economic environments in each geographic region in which the Bank operates. Therefore, the amount of business
that the Bank conducts in a specific geographic region may have an effect on the Bank’s overall revenues and earnings.

 

    43 

     

    

Monetary Policy

 

Financial markets’ expectations about inflation
and central bank monetary policy have an impact on the level of interest rates. Fluctuations in interest rates that result from these
changes could have an impact on the regions in which the Bank operates, and further, could have an impact on the Bank’s earnings.

 

Reliance on Deposit Brokers

 

The Bank raises its deposits primarily through
a network of independent deposit brokers across Canada. The failure by the Bank to secure sufficient deposits from its broker network
could negatively impact its financial condition and operating results. The Bank mitigates this risk by establishing and maintaining good
working and mutually beneficial relationships with a diverse group of deposit brokers so as not to become overly reliant on any single
deposit broker.

 

Technology Risk

 

Technology risk is related to the operational performance,
confidentiality, integrity and availability of information systems and infrastructure. The Bank is highly dependent upon information technology
and supporting infrastructure such as data and network access. Disruptions in information technology and infrastructure, whether attributed
to internal or external factors, and including potential disruptions in services provided by various third parties, could adversely affect
the ability of the Bank to conduct regular business and/or to deliver products and services to its clients.

 

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed
to provide reasonable assurance that all material information is gathered and reported to senior management, including the Chief Executive
Officer and the Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure.

 

As at October 31, 2020, an evaluation was carried
out by management of the effectiveness of the Bank’s disclosure controls and procedures. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer will file a certificate that the design and operating effectiveness of those disclosure controls and
procedures were effective.

 

Internal Control over Financial Reporting

 

Internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance
with International Financial Reporting Standards. Management is responsible for establishing and maintaining adequate internal control
over financial reporting for the Bank.

 

At October 31, 2020, an evaluation was carried
out by management related to the effectiveness of internal controls over financial reporting to provide reasonable assurance regarding
the reliability of financial reporting and financial statement compliance with International Financial Reporting Standards. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer will file a certificate that the design and operating effectiveness
of internal control over financial reporting is effective. These

 

    44 

     

    

evaluations were conducted in accordance with the
standards of the 2013 Internal Control - Integrated Framework of the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and the requirements of National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings
of the Canadian Securities Administrators.

 

A Disclosure Committee, consisting of members of
senior management, assists the Chief Executive Officer and the Chief Financial Officer in their responsibilities related to evaluating
the effectiveness of the Bank’s internal control systems and processes. Management’s evaluation of controls can only provide
reasonable, not absolute, assurance that all internal control issues that may result in material misstatement, if any, have been detected.

 

There were no changes in the Bank’s internal
controls over financial reporting that occurred during the year ended October 31, 2020 that have materially affected, or are reasonably
likely to materially affect, internal controls over financial reporting.

 

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.

 

BASIS OF PRESENTATION – NON-GAAP AND
ADDITIONAL GAAP MEASURES

 

Management assesses performance on a GAAP basis
and on an adjusted basis and considers both sets of measures to be useful in assessing the Bank’s underlying ongoing business performance.
Presenting results on a GAAP basis and on an adjusted basis provides readers with a better understanding of how management assesses the
Bank’s results. This approach also allows readers to assess the impact of certain specified items on results for the periods presented
and to allow readers to better assess results by excluding those items that may not be reflective of ongoing results.

 

Core Cash Earnings

 

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

 

    45 

     

    

Core Cash Earnings per Common Share

 

Core cash earnings per common share is defined
as core cash earnings divided by the number of common shares outstanding.

 

Yield

 

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

 

Cost of Funds

 

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

 

Net Interest Margin or Spread

 

Net interest margin or spread is defined as net
interest income as a percentage of average total assets. Net interest margin or spread does not have a standardized meaning prescribed
by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions.

 

Provision for (Recovery of) Credit Losses as a Percentage of Average
Total Loans 

 

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

 

Gross Impaired Loans to Total Loans 

 

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

 

Return on Average Common Equity

 

Return on average common equity for the Bank is
defined as annualized net income of the Bank less amounts relating to preferred share dividends, divided by average common shareholders’
equity which is average shareholders’ equity less amounts relating to preferred shares recorded in equity. Return on average common
equity does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by
other financial institutions.

 

 

    46 

     

    

Core Cash Return on Average Common Equity

 

Core cash return on average common equity is defined
as annualized core cash earnings less amounts relating to preferred share dividends, divided by the weighted average common shareholders’
equity which is average shareholders’ equity less amounts relating to preferred shares recorded in equity.

 

Return on Average Total Assets

 

Return on average total assets for the Bank is
defined as annualized net income of the Bank less amounts relating to preferred share dividends, divided by average total assets. Return
on average total assets does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures
presented by other financial institutions.

 

Book Value per Common Share

 

Book value per common share is defined as Shareholders’
Equity less amounts relating to preferred shares recorded in equity, divided by the number of common shares outstanding. Book value per
common share does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented
by other financial institutions.

 

Efficiency Ratio 

 

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

 

Basel III Common Equity Tier 1, Tier 1 and Total Capital Adequacy
Ratios and Leverage Ratio

 

Basel III Common Equity Tier 1, Tier 1 and Total
Capital adequacy ratios and the Leverage ratio are determined in accordance with guidelines issued by OSFI.

 

 

Additional information relating to the Bank, including
the Bank’s Annual Information Form, can be found on SEDAR at www.sedar.com.

 

Dated: November 24, 2020

 

 

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