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6-K

VersaBank (VBNK)

6-K 2023-06-07 For: 2023-04-30
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Added on April 10, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

--10-31April 30, 2023

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of June 2023

Commission File Number: 001-40805

VersaBank

(Exact name of registrant as specified in its charter)

140 Fullarton Street, Suite 2002

London , Ontario N6A 5P2

Canada

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F ☐ Form 40-F ☒

On June 7, 2023, VersaBank issued Interim Consolidated Financial Statements for the three months ended April 30, 2023 and 2022, Management’s Discussion and Analysis of Operations and Financial Condition for the three months ended April 30, 2023, a press release, dated June 7, 2023, titled VERSABANK REPORTS CONTINUED STRONG RESULTS FOR SECOND QUARTER 2023, a press release, dated June 7, 2023, titled VersaBank Declares Dividends, Form 52-109F2 certificate of interim filings by CEO and Form 52-109F2 certificate of interim filings by CFO, copies of which are furnished as Exhibit 99.1, Exhibit 99.2, Exhibit 99.3, Exhibit 99.4, Exhibit 99.5 and Exhibit 99.6, respectively, to this Report of Foreign Private Issuer on Form 6-K

The information in this Form 6-K (including Exhibit 99.1, Exhibit 99.2, Exhibit 99.3, Exhibit 99.4, Exhibit 99.5 and Exhibit 99.6) shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

VERSABANK
Date: June 7, 2023 By: /s/ Shawn Clarke
Name: Shawn Clarke
Title: Chief Financial Officer

EXHIBIT INDEX

Exhibit<br><br> <br>No. Description
99.1 Interim Consolidated Financial Statements for the three & six month periods ended April 30, 2023 and 2022.
99.2 Management’s Discussion and Analysis of Operations and Financial Condition for the three & six month periods ended April 30, 2023.
99.3 Press Release, dated June 7, 2023, titled VERSABANK REPORTS CONTINUED STRONG RESULTS FOR SECOND QUARTER 2023.
99.4 Press Release, dated June 7, 2023, titled VersaBank Declares Dividends.
99.5 VersaBank—Form 52-109F2 certificate of interim filings by CEO.
99.6 VersaBank—Form 52-109F2 certificate of interim filings by CFO.

ex_528195.htm

Exhibit 99.1

ex_528195img001.jpg

Interim Consolidated Financial Statements

April 30, 2023

(Unaudited)

1

VERSABANK

Consolidated Balance Sheets

(Unaudited)

(thousands of Canadian dollars)
April 30 October 31 April 30
As at 2023 2022 2022
Assets **** **** **** **** **** ****
Cash $ 223,661 $ 88,581 $ 198,157
Securities (note 4) 39,652 141,564 -
Loans, net of allowance for credit losses (note 5) 3,419,455 2,992,678 2,450,276
Other assets (note 6) 46,625 43,175 43,713
$ 3,729,393 $ 3,265,998 $ 2,692,146
Liabilities and Shareholders' Equity **** **** **** **** **** ****
Deposits $ 3,108,218 $ 2,657,540 $ 2,124,916
Subordinated notes payable (note 7) 104,532 104,951 98,410
Other liabilities (note 8) 160,124 152,832 127,406
3,372,874 2,915,323 2,350,732
Shareholders' equity:
Share capital (note 9) 228,880 239,629 241,321
Contributed surplus 2,147 1,612 765
Retained earnings 125,398 109,335 99,285
Accumulated other comprehensive income 94 99 43
356,519 350,675 341,414
$ 3,729,393 $ 3,265,998 $ 2,692,146

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

2

VERSABANK

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

(thousands of Canadian dollars, except per share amounts)
for the three months ended for the six months ended
April 30 April 30 April 30 April 30
2023 2022 2023 2022
Interest income:
Loans $ 50,704 $ 25,472 $ 97,559 $ 49,986
Other 2,891 376 5,597 582
53,595 25,848 103,156 50,568
Interest expense:
Deposits and other 27,534 7,239 51,375 13,708
Subordinated notes 1,452 1,367 2,898 2,733
28,986 8,606 54,273 16,441
Net interest income 24,609 17,242 48,883 34,127
Non-interest income 2,076 1,393 3,720 2,774
Total revenue 26,685 18,635 52,603 36,901
Provision for credit losses (note 5) 237 78 622 80
26,448 18,557 51,981 36,821
Non-interest expenses:
Salaries and benefits 8,429 6,726 16,686 12,809
General and administrative 3,316 4,019 6,442 7,643
Premises and equipment 981 1,022 1,933 1,951
12,726 11,767 25,061 22,403
Income before income taxes 13,722 6,790 26,920 14,418
Income tax provision (note 10) 3,459 1,847 7,240 3,909
Net income $ 10,263 $ 4,943 $ 19,680 $ 10,509
Other comprehensive income (loss):
Items that may subsequently be reclassified to net income: Foreign exchange gain (loss) on translation of foreign operations 22 30 (5 ) 47
Comprehensive income $ 10,285 $ 4,973 $ 19,675 $ 10,556
Basic and diluted income per common share (note 11) $ 0.38 $ 0.17 $ 0.72 $ 0.36

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

3

VERSABANK

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(thousands of Canadian dollars)
for the three months ended for the six months ended
April 30 April 30 April 30 April 30
2023 2022 2023 2022
Common shares (note 9):
Balance, beginning of the period $ 218,865 $ 227,674 $ 225,982 $ 227,674
Purchased and cancelled during the period (3,632 ) - (10,749 ) -
Balance, end of the period $ 215,233 $ 227,674 $ 215,233 $ 227,674
Preferred shares (note 9):
Series 1 preferred shares
Balance, beginning and end of the period $ 13,647 $ 13,647 $ 13,647 $ 13,647
Total share capital $ 228,880 $ 241,321 $ 228,880 $ 241,321
Contributed surplus:
Balance, beginning of the period $ 1,955 $ 341 $ 1,612 $ 145
Stock-based compensation (note 9) 192 424 535 620
Balance, end of the period $ 2,147 $ 765 $ 2,147 $ 765
Retained earnings:
Balance, beginning of the period $ 116,638 $ 95,276 $ 109,335 $ 90,644
Adjustment for purchased and cancelled common shares (605 ) - (1,809 ) -
Net income 10,263 4,943 19,680 10,509
Dividends paid on common and preferred shares (898 ) (934 ) (1,808 ) (1,868 )
Balance, end of the period $ 125,398 $ 99,285 $ 125,398 $ 99,285
Accumulated other comprehensive income:
Balance, beginning of the period $ 72 $ 13 $ 99 $ (4 )
Other comprehensive income (loss) 22 30 (5 ) 47
Balance, end of the period $ 94 $ 43 $ 94 $ 43
Total shareholders' equity $ 356,519 $ 341,414 $ 356,519 $ 341,414

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

4

VERSABANK

Consolidated Statements of Cash Flows

(Unaudited)

(thousands of Canadian dollars)
for the six months ended
April 30 April 30
2023 2022
Cash provided by (used in):
Operations:
Net income $ 19,680 $ 10,509
Adjustments to determine net cash flows:
Items not involving cash:
Provision for credit losses 622 80
Stock-based compensation 535 620
Income tax provision 7,240 3,909
Interest income (103,156 ) (50,568 )
Interest expense 54,273 16,441
Amortization 917 973
Accretion of discount on securities (533 ) -
Foreign exchange rate change on assets and liabilities (998 ) 1,888
Interest received 99,251 47,681
Interest paid (40,680 ) (19,329 )
Income taxes paid (10,264 ) (4,182 )
Change in operating assets and liabilities:
Securities 101,768 -
Loans (423,843 ) (344,431 )
Deposits 437,199 274,708
Change in other assets and liabilities 13,364 (10,326 )
155,375 (72,027 )
Purchase of investment:
Purchase of property and equipment (338 ) (195 )
(338 ) (195 )
Financing:
Purchase and cancellation of common shares (12,558 ) -
Dividends paid (1,808 ) (1,868 )
Repayment of lease obligations (351 ) (448 )
(14,717 ) (2,316 )
Change in cash 140,320 (74,538 )
Effect of exchange rate changes on cash (5,240 ) 1,172
Cash, beginning of the period 88,581 271,523
Cash, end of the period $ 223,661 $ 198,157

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

5

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

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 Canada (“OSFI”). The Bank, whose shares trade on the Toronto Stock Exchange and Nasdaq Stock Exchange, provides commercial lending and banking services to select niche markets in Canada and the United States, as well as cybersecurity services and banking and financial technology development services through the operations of its wholly owned subsidiary DRT Cyber Inc. (“DRTC”). 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:

a) Statement of compliance:

These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and have been prepared in accordance with International Accounting Standard (“IAS”) 34 – Interim Financial Reporting and do not include all of the information required for full annual financial statements*.* These interim Consolidated Financial Statements should be read in conjunction with the Bank’s audited Consolidated Financial Statements for the year ended October 31, 2022.

The interim Consolidated Financial Statements for the three and six months ended April 30, 2023 and 2022 were approved by the Audit Committee of the Board of Directors on June 5, 2023.

b) Basis of measurement:

These interim Consolidated Financial Statements have been prepared on the historical cost basis except the investment in Canada Stablecorp Inc. (note 6) and an interest rate swap (note 12), which are measured at fair value in the Consolidated Balance Sheets.

c) Functional and presentation currency:

These interim **** Consolidated Financial Statements are presented in Canadian dollars, which is the Bank’s functional currency. Functional currency is also determined for each of the Bank’s subsidiaries, and items included in the interim financial statements of the subsidiaries are measured using their functional currency.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

d) Use of estimates and judgements:

In preparing these interim **** Consolidated Financial Statements, management has exercised judgement 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 judgement was applied include assessing significant changes in credit risk on financial assets and in the selection of relevant forward-looking information in assessing the Bank’s allowance for expected credit losses on its financial assets as described in note 5 – Loans. Estimates are applied in the determination of the allowance for expected credit losses on financial assets, the fair value of stock options granted as described in note 9, the fair value of the investment in Canada Stablecorp Inc. as described in note 6, and the measurement of deferred taxes. It is reasonably possible, on the basis of existing knowledge, that actual results may vary from those 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.

Available forward-looking information, including forecast macroeconomic indicator and industry performance trend data continues to be influenced by a number of factors, including, but not limited to, higher interest rates and inflation trends, consumer spending trends, the strength of household balance sheets, housing prices, the strength of the labour market as well as geo-political risk resulting from the crisis in Ukraine and the impact of the crisis on global supply chains. The dynamic nature of these macroeconomic factors and activities and their influence on the available forward looking information results in the assumptions, judgements and estimates made by management in the preparation of these interim Consolidated Financial Statements being subject to some uncertainty.

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 and future accounting changes:

The accounting policies applied by the Bank in these interim Consolidated Financial Statements are the same as those applied by the Bank as at and for the year ended October 31, 2022 and are detailed in note 3 of the Bank’s 2022 audited Consolidated Financial Statements. During the current fiscal year, the Bank updated or incorporated the following significant accounting policies:

Derivative instruments:

Derivatives are reported as other assets when they have a positive fair value and as other liabilities when they have a negative fair value. Derivatives may be embedded in other financial instruments. Derivatives embedded in other financial instruments are valued as separate derivatives when: the economic characteristics and risks associated are not clearly and closely related to those of the host contract; the terms of the embedded derivative would meet the definition of a derivative if it was a stand-alone, independent instrument; and the combined contract is not held for trading or designated at fair value through profit or loss. For financial statement disclosure purposes, embedded derivatives are combined with the host contract.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

Hedge accounting:

The Bank has elected, as permitted, to apply the hedge accounting requirements of IAS 39. Interest rate swap agreements are entered into for asset liability management (“ALM”) purposes. When hedge accounting criteria are met, derivative contracts are accounted for as described below.

To meet the criteria for hedge accounting, the Bank documents all relationships between hedging instruments and hedged items, how hedge effectiveness is assessed, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets or liabilities on the Consolidated Balance Sheet. The Bank also formally assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of the hedged items.

There are three main types of hedges: (i) fair value hedges, (ii) cash flow hedges and (iii) net investment hedges.

The Bank has only fair value hedges outstanding. In a fair value hedge, the change in the fair value of the hedging derivative is recognized in non-interest income in the Consolidated Statements of Income and Comprehensive Income. The change in the fair value of the hedged item attributable to hedge risk is recorded as part of the carrying value of the hedged item (basis adjustment) and is also recognized in non-interest income in the Consolidated Statements of Income and Comprehensive Income. The Bank utilizes fair value hedges primarily to convert fixed rate financial assets to floating rate financial assets. The primary financial instruments designated in fair value hedging relationships are loans. If the derivative expires or is sold, terminated, no longer meets the criteria for hedge accounting, or the designation is revoked, hedge accounting is discontinued. Any basis adjustment up to that point made to a hedged item for which the effective interest method is used is amortized to the Consolidated Statements of Income and Comprehensive Income as part of the recalculated effective interest rate of the item over its remaining term. If the hedged item is derecognized, the unamortized fair value is recognized immediately in the Consolidated Statements of Income and Comprehensive Income.

In fair value hedges, ineffectiveness arises to the extent that the change in fair value of the hedging items differs from the change in fair value of the hedge risk in the hedged item. Any hedge ineffectiveness is measured and recorded in non-interest income in the Consolidated Statements of Income and Comprehensive Income.

Derivative contracts which do not qualify for hedge accounting are marked-to-market and the resulting net gains or losses are recognized in non-interest income in the Consolidated Statement of Income and Comprehensive Income.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

4. Securities:

As at April 30, 2023, the Bank held securities totalling $39.7 million ( October 31, 2022 - $141.6 million), comprised of a Government of Canada Treasury Bill for $19.5 million with a face value of $20.0 million at maturity on May 25, 2023, yielding 2.81%, and a US Government Treasury Bill for US$14.4 million ($19.5 million) with a face value of US$14.5 million ($19.7 million) at maturity on May 2, 2023, yielding 4.70%.

5. Loans, net of allowance for credit losses:

The Bank organizes its lending portfolio into the following four broad asset categories: Point-of-Sale Loans and Leases, Commercial Real Estate Mortgages, Commercial Real Estate Loans, and Public Sector and Other Financing. These categories have been established in the Bank’s proprietary, internally developed asset management system and have been designed to catalogue individual lending assets as a function primarily of their key risk drivers, the nature of the underlying collateral, and the applicable market segment.

The Point-of-Sale Loans and Leases (“POS Financing”) asset category is comprised of Point of Sale Loan and Lease Receivables acquired from the Bank’s broad network of origination and servicing partners in Canada and the US as well as Warehouse Loans that provide bridge financing to the Bank’s origination and servicing partners for the purpose of accumulating and seasoning practical volumes of individual loans and leases prior to the Bank purchasing the cashflow receivables derived from same.

The Commercial Real Estate Mortgages (“CRE Mortgages”) asset category is comprised primarily of Residential; Construction, Term, Insured and Land Mortgages. All of these loans are business-to-business loans with the underlying credit risk exposure being primarily consumer in nature given that the vast majority of the loans are related to properties that are designated primarily for residential use. The portfolio benefits from diversity in its underlying security in the form of a broad range of such collateral properties.

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

The Public Sector and Other Financing (“PSOF”) asset category is comprised primarily of Public Sector Loans and Leases, a small balance of Corporate Loans and Leases and Single Family Residential Conventional and Insured Mortgages.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

Summary of loans and allowance for credit losses:

(thousands of Canadian dollars)
April 30 October 31 April 30
2023 2022 2022
Point-of-sale loans and leases $ 2,538,917 $ 2,220,894 $ 1,610,336
Commercial real estate mortgages 807,828 710,369 782,274
Commercial real estate loans 11,996 13,165 14,065
Public sector and other financing 46,350 35,452 35,529
3,405,091 2,979,880 2,442,204
Allowance for credit losses (2,526 ) (1,904 ) (1,533 )
Accrued interest 16,890 14,702 9,605
Total loans, net of allowance for credit losses $ 3,419,455 $ 2,992,678 $ 2,450,276

The following table provides a summary of loan amounts, expected credit loss allowance amounts, and expected loss rates by lending asset category:

As at April 30, 2023 As at October 31, 2022
(thousands of Canadian dollars) Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
Point-of-sale loans and leases $ 2,527,006 $ 7,481 $ 4,430 $ 2,538,917 $ 2,215,388 $ 5,227 $ 279 $ 2,220,894
ECL allowance 627 - - ****** 627 545 - - ****** 545
EL % 0.02 % 0.00 % 0.00 % **** 0.02 % 0.02 % 0.00 % 0.00 % **** 0.02 %
Commercial real estate mortgages $ 741,980 $ 50,937 $ 14,911 $ 807,828 $ 599,113 $ 111,256 $ - $ 710,369
ECL allowance 1,647 120 - ****** 1,767 1,150 137 - ****** 1,287
EL % 0.22 % 0.24 % 0.00 % **** 0.22 % 0.19 % 0.12 % 0.00 % **** 0.18 %
Commercial real estate loans $ 11,996 $ - $ - $ 11,996 $ 13,165 $ - $ - $ 13,165
ECL allowance 59 - - ****** 59 54 - - ****** 54
EL % 0.49 % 0.00 % 0.00 % **** 0.49 % 0.41 % 0.00 % 0.00 % **** 0.41 %
Public sector and other financing $ 46,178 $ 172 $ - $ 46,350 $ 35,273 $ 179 $ - $ 35,452
ECL allowance 70 3 - ****** 73 17 1 - ****** 18
EL % 0.15 % 1.74 % 0.00 % **** 0.16 % 0.05 % 0.56 % 0.00 % **** 0.05 %
Total loans $ 3,327,160 $ 58,590 $ 19,341 $ 3,405,091 $ 2,862,939 $ 116,662 $ 279 $ 2,979,880
Total ECL allowance 2,403 123 - ****** 2,526 1,766 138 - ****** 1,904
Total EL % 0.07 % 0.21 % 0.00 % **** 0.07 % 0.06 % 0.12 % 0.00 % **** 0.06 %

The Bank’s maximum exposure to credit risk is the carrying value of its financial assets. The Bank holds security against the majority of its loans in the form of mortgage interests over property, other registered securities over assets, guarantees or cash reserves on loan and lease receivables included in the POS Financing portfolio (see note 8).

Allowance for credit losses

The Bank must maintain an allowance for expected credit losses (“ECL”) that is adequate, in management’s opinion, to absorb all credit related losses in the Bank’s lending and treasury portfolios. Under IFRS 9, the Bank’s ECL 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.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

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.

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 as well as changes in Canadian and US macroeconomic trends attributable to changes in monetary policy, inflation, employment rates, consumer behaviour and geo-political risks.

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 forward-looking information derived from multiple economic forecast scenarios, including baseline, upside, and downside scenarios.

The Bank’s ECL or impairment 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.

The ECL model estimates 12 months of expected credit losses for performing loans that have not experienced a SICR since initial recognition and estimates lifetime expected credit losses 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.

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.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

Individual allowances are estimated for loans or financial instruments that are determined to be credit impaired and that have been designated as stage 3. A loan or financial instrument is classified as credit impaired when the Bank becomes aware that, before taking into consideration collateral or credit enhancements, all of, or a portion of the contractual cashflows associated with the loan or financial instrument 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 or financial instrument. Loans or financial instruments for which interest or principal is contractually past due 90 days are automatically recognized as stage 3, however in estimating expected credit losses for stage 3 loans or financial instruments, management takes into consideration whether the loan or financial instrument is fully secured or is in the process of collection and that the collection efforts are reasonably expected to result in repayment of the loan or financial instrument.

Forward-looking Information

The Bank incorporates the impact of future economic conditions, or more specifically forward-looking information into the estimation of expected credit losses at the credit risk parameter level. This is accomplished via the credit risk parameter models and proxy datasets that the Bank utilizes to develop probability of default (“PD”), and loss given default (“LGD”), term structure forecasts for its loans. The Bank has sourced credit risk modeling systems and forecast macroeconomic scenario data from Moody’s Analytics, a third-party service provider 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 used in conjunction with the Bank’s internally developed ECL models. Given that the Bank has experienced very limited historical loan losses and, therefore, does not have available statistically significant loss data inventory for use in developing internal, forward looking expected credit loss trends, the use 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 in order to mitigate volatility in the estimation of expected credit losses, as well as to satisfy the IFRS 9 requirement that future economic conditions are to be based on an unbiased, probability-weighted assessment of possible future outcomes. More specifically, the macroeconomic indicators set out in the macroeconomic scenarios are used as inputs for the credit risk parameter models utilized by the Bank to sensitize the individual PD and LGD term structure forecasts to the respective macroeconomic trajectory set out in each of the scenarios (see Expected Credit Loss Sensitivity below). Currently the Bank utilizes upside, downside and baseline forecast macroeconomic scenarios, and assigns discrete weights to each for use in the estimation of its reported ECL. The Bank has also applied expert credit judgement, where appropriate, to reflect, amongst other items, uncertainty in the Canadian and US macroeconomic environments.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

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: 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.

Key assumptions driving the base case macroeconomic forecast trends this quarter include: elevated inflation and interest rates strain household finances; rate-sensitive sectors such as housing are negatively impacted as sales and prices decline over the course of 2023 with the impact being felt throughout related industries of construction, finance and manufacturing; a small, technical recession, with rising unemployment, emerges around mid-2023 as investment contracts sharply and consumer spending remains mostly flat over the same timeline; the impact of the crisis in Ukraine on global commodity prices and trade continues to diminish; public health restrictions do not return even as new COVID-19 case counts occasionally spike through the winter; and supply-chain stress continues to ease as global vaccination rates improve and goods demand weakens.

Management developed ECL estimates using credit risk parameter term structure forecasts sensitized to individual baseline, upside and downside forecast macroeconomic scenarios, each weighted at 100%, and subsequently computed the variance of each to the Bank’s reported ECL as at April 30, 2023 in order to assess the alignment of the Bank’s reported ECL with the Bank’s credit risk profile, and further, to assess the scope, depth and ultimate effectiveness of the credit risk mitigation strategies that the Bank has applied to its lending portfolios.

Expected credit loss sensitivity:

The following table presents the sensitivity of the Bank’s estimated ECL to a range of individual macroeconomic scenarios, that in isolation may not reflect the Bank’s actual expected ECL exposure, as well as the variance of each to the Bank’s reported ECL as at April 30, 2023:

(thousands of Canadian dollars)
Reported 100% 100% 100%
ECL Upside Baseline Downside
Allowance for expected credit losses $ 2,526 $ 1,857 $ 2,428 $ 3,334
Variance from reported ECL (669 ) (98 ) 808
Variance from reported ECL (%) (26% ) (4% ) 32 %

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the three months ended April 30, 2023:

(thousands of Canadian dollars) Stage 1 Stage 2 Stage 3 Total
Point-of-sale loans and leases **** **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 583 $ - $ - $ 583
Transfer in (out) to Stage 1 32 (32 ) - -
Transfer in (out) to Stage 2 (118 ) 118 - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 130 (86 ) - 44
Loan originations - - - -
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 44 - - 44
Write-offs - - - -
Recoveies - - - -
Balance at end of period $ 627 $ - $ - $ 627
Commercial real estate mortgages **** **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 1,517 $ 74 $ - $ 1,591
Transfer in (out) to Stage 1 17 (17 ) - -
Transfer in (out) to Stage 2 (88 ) 88 - -
Transfer in (out) to Stage 3 - (13 ) 13 -
Net remeasurement of loss allowance 159 (7 ) (13 ) 139
Loan originations 63 - - 63
Derecognitions and maturities (21 ) (5 ) - (26 )
Provision for (recovery of) credit losses 130 46 - 176
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 1,647 $ 120 $ - $ 1,767
Commercial real estate loans **** **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 57 $ - $ - $ 57
Transfer in (out) to Stage 1 - - - -
Transfer in (out) to Stage 2 - - - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 2 - - 2
Loan originations - - - -
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 2 - - 2
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 59 $ - $ - $ 59
Public sector and other financing **** **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 55 $ 3 $ - $ 58
Transfer in (out) to Stage 1 - - - -
Transfer in (out) to Stage 2 - - - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance (1 ) - - (1 )
Loan originations 16 - - 16
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 15 - - 15
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 70 $ 3 $ - $ 73
Total balance at end of period $ 2,403 $ 123 $ - $ 2,526

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the three months ended April 30, 2022:

(thousands of Canadian dollars) Stage 1 Stage 2 Stage 3 Total
Point-of-sale loans and leases **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 370 $ - $ - $ 370
Transfer in (out) to Stage 1 14 (14 ) - -
Transfer in (out) to Stage 2 (27 ) 27 - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 62 (13 ) - 49
Loan originations - - - -
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 49 - - 49
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 419 $ - $ - $ 419
Commercial real estate mortgages **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 949 $ 96 $ - $ 1,045
Transfer in (out) to Stage 1 8 (8 ) - -
Transfer in (out) to Stage 2 - - - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance (69 ) 13 - (56 )
Loan originations 80 - - 80
Derecognitions and maturities (20 ) - - (20 )
Provision for (recovery of) credit losses (1 ) 5 - 4
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 948 $ 101 $ - $ 1,049
Commercial real estate loans **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 36 $ - $ - $ 36
Transfer in (out) to Stage 1 - - - -
Transfer in (out) to Stage 2 - - - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 4 - - 4
Loan originations - - - -
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 4 - - 4
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 40 $ - $ - $ 40
Public sector and other financing **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 4 $ - $ - $ 4
Transfer in (out) to Stage 1 - - - -
Transfer in (out) to Stage 2 - - - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 20 1 - 21
Loan originations - - - -
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 20 1 - 21
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 24 $ 1 $ - $ 25
Total balance at end of period $ 1,431 $ 102 $ - $ 1,533

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the three months ended April 30, 2022:

(thousands of Canadian dollars) Stage 1 Stage 2 Stage 3 Total
Point-of-sale loans and leases **** **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 545 $ - $ - $ 545
Transfer in (out) to Stage 1 70 (70 ) - -
Transfer in (out) to Stage 2 (172 ) 172 - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 184 (102 ) - 82
Loan originations - - - -
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 82 - - 82
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 627 $ - $ - $ 627
Commercial real estate mortgages **** **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 1,150 $ 137 $ - $ 1,287
Transfer in (out) to Stage 1 79 (79 ) - -
Transfer in (out) to Stage 2 (118 ) 118 - -
Transfer in (out) to Stage 3 - (13 ) 13 -
Net remeasurement of loss allowance 422 (38 ) (13 ) 371
Loan originations 149 - - 149
Derecognitions and maturities (35 ) (5 ) - (40 )
Provision for (recovery of) credit losses 497 (17 ) - 480
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 1,647 $ 120 $ - $ 1,767
Commercial real estate loans **** **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 54 $ - $ - $ 54
Transfer in (out) to Stage 1 - - - -
Transfer in (out) to Stage 2 - - - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 5 - - 5
Loan originations - - - -
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 5 - - 5
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 59 $ - $ - $ 59
Public sector and other financing **** **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 17 $ 1 $ - $ 18
Transfer in (out) to Stage 1 - - - -
Transfer in (out) to Stage 2 - - - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 10 2 - 12
Loan originations 43 - - 43
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 53 2 - 55
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 70 $ 3 $ - $ 73
Total balance at end of period $ 2,403 $ 123 $ - $ 2,526

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

The following table provides a reconciliation of the Bank’s ECL allowance by lending asset category for the six months ended April 30, 2022:

(thousands of Canadian dollars) Stage 1 Stage 2 Stage 3 Total
Point-of-sale loans and leases **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 275 $ - $ - $ 275
Transfer in (out) to Stage 1 52 (52 ) - -
Transfer in (out) to Stage 2 (85 ) 85 - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 177 (33 ) - 144
Loan originations - - - -
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses 144 - - 144
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 419 $ - $ - $ 419
Commercial real estate mortgages **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 980 $ 134 $ - $ 1,114
Transfer in (out) to Stage 1 22 (22 ) - -
Transfer in (out) to Stage 2 (4 ) 4 - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance (97 ) (11 ) - (108 )
Loan originations 160 - - 160
Derecognitions and maturities (113 ) (4 ) - (117 )
Provision for (recovery of) credit losses (32 ) (33 ) - (65 )
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 948 $ 101 $ - $ 1,049
Commercial real estate loans **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 45 $ - $ - $ 45
Transfer in (out) to Stage 1 - - - -
Transfer in (out) to Stage 2 - - - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance (5 ) - - (5 )
Loan originations - - - -
Derecognitions and maturities - - - -
Provision for (recovery of) credit losses (5 ) - - (5 )
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 40 $ - $ - $ 40
Public sector and other financing **** **** **** **** **** **** **** **** **** **** ****
Balance at beginning of period $ 16 $ 3 $ - $ 19
Transfer in (out) to Stage 1 - - - -
Transfer in (out) to Stage 2 - - - -
Transfer in (out) to Stage 3 - - - -
Net remeasurement of loss allowance 9 (2 ) - 7
Loan originations - - - -
Derecognitions and maturities (1 ) - - (1 )
Provision for (recovery of) credit losses 8 (2 ) - 6
Write-offs - - - -
Recoveries - - - -
Balance at end of period $ 24 $ 1 $ - $ 25
Total balance at end of period $ 1,431 $ 102 $ - $ 1,533

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

6. Other assets:
(thousands of Canadian dollars)
--- --- --- --- --- --- ---
April 30 October 31 April 30
2023 2022 2022
Accounts receivable $ 3,070 $ 3,774 $ 3,750
Prepaid expenses and other 13,593 10,213 10,448
Property and equipment 6,833 6,868 6,872
Right-of-use assets 3,775 4,122 4,470
Deferred tax asset 2,269 2,128 2,315
Interest rate swap 103 - -
Investment (note 6a) 953 953 953
Goodwill 5,754 5,754 5,754
Intangible assets (note 6b) 10,275 9,363 9,151
$ 46,625 $ 43,175 $ 43,713

a)     In February 2021, the Bank acquired an 11% investment in Canada Stablecorp Inc. (“Stablecorp”) for cash consideration of $953,000. The Bank has made an irrevocable election to designate this investment at fair value through other comprehensive income at initial recognition and any future changes in the fair value of the investment will be recognized in other comprehensive income (loss). Amounts recorded in other comprehensive income (loss) will not be reclassified to profit and loss at a later date.

b)     As at April 30, 2023, total intangible assets were $10.3 million ( October 31, 2022 - $9.4 million), which includes, $7.3 million ( October 31, 2022 - $6.2 million) in development costs that have been capitalized.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

7. Subordinated notes payable:
(thousands of Canadian dollars)
--- --- --- --- --- ---
October 31 April 30
2022 2022
Issued March 2019, unsecured, non-viability contingent capital compliant, subordinated notes payable, principal amount of 5.0 million, 500,000 is held by related party (note 14), effective interest rate of 10.41%, maturing March 2029. 4,913 $ 4,908 $ 4,903
Issued April 2021, unsecured, non-viability contingent capital compliant, subordinated notes payable, principal amount of US 75.0 million, effective interest rate of 5.38%, maturing May 2031. 99,619 100,043 93,507
104,532 $ 104,951 $ 98,410

All values are in US Dollars.

8. Other liabilities:
(thousands of Canadian dollars)
--- --- --- --- --- --- ---
April 30 October 31 April 30
2023 2022 2022
Accounts payable and other $ 4,045 $ 7,662 $ 5,738
Current income tax liability 2,773 5,797 2,126
Deferred tax liability 681 786 812
Lease obligations 4,120 4,471 4,776
Cash collateral and amounts held in escrow 6,746 8,006 5,833
Cash reserves on loan and lease receivables 141,759 126,110 108,121
$ 160,124 $ 152,832 $ 127,406
9. Share capital:
--- ---

a) Common shares:

At April 30, 2023, there were 26,003,986 ( October 31, 2022 - 27,245,782) common shares outstanding.

On August 5, 2022, the Bank received approval from the Toronto Stock Exchange (“TSX”) to proceed with a Normal Course Issuer Bid (“NCIB”) for its common shares. Further, on September 21, 2022, the Bank received approval from the Nasdaq to proceed with a NCIB for its common shares. Pursuant to the NCIB, the Bank may purchase for cancellation up to 1,700,000 of its common shares representing approximately 9.54% of its public float. The Bank’s directors and management believe that the market price of the Bank’s common shares does not reflect the value of the business and its future prospects, and further, reflects a material discount to book value; as such, the purchase of common shares for cancellation at such time is a prudent corporate measure and represents an attractive investment for the Bank.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

The Bank was eligible to make purchases commencing on August 17, 2022 and ending on August 16, 2023, or such earlier date as the Bank may complete its purchases pursuant to the NCIB. The purchases will be made by the Bank through the facilities of the TSX and alternate trading systems and in accordance with the rules of the TSX or such alternate trading systems, as applicable, and the prices that the Bank will pay for any common shares will be the market price of such shares at the time of purchase. The Bank will make no purchases of common shares other than open market purchases. All shares purchased under the NCIB will be cancelled.

For the quarter ended April 30, 2023, the Bank purchased and cancelled 419,500 common shares for $4.2 million, reducing the Bank’s Common Share capital value by $3.6 million and retained earnings by $0.6 million.

For the six month period ended April 30, 2023, the Bank purchased and cancelled 1,241,796 common shares for $12.6 million, reducing the Bank’s Common Share capital value by $10.7 million and retained earnings by $1.8 million.

b) Preferred shares:

At April 30, 2023, there were 1,461,460 ( October 31, 2022 - 1,461,460) Series 1 preferred shares outstanding. These shares are Basel III compliant, non-cumulative rate reset preferred shares and include NVCC provisions. As a result, these shares qualify as Additional Tier 1 Capital (see note 15).

c) Stock options

Stock option transactions during the three and six month periods ended April 30, 2023 and 2022:

for the three months ended for the six months ended
April 30, 2023 April 30, 2022 April 30, 2023 April 30, 2022
Weighted Weighted Weighted Weighted
Number of average Number of average Number of average Number of average
options exercise price options exercise price options exercise price options exercise price
Outstanding, beginning of period 963,276 $ 15.53 953,730 $ 15.53 965,766 $ 15.53 40,000 $ 7.00
Granted - - - - 1,500 15.90 913,730 15.90
Exercised - - - - - - - -
Forfeited/cancelled (10,500 ) 15.90 - - (14,490 ) 15.90 - -
Expired - - - - - - - -
Outstanding, end of period 952,776 $ 15.53 953,730 $ 15.53 952,776 $ 15.53 953,730 $ 15.53

For the three and six month periods ended April 30, 2023, the Bank recognized $192,000 ( April 30, 2022 - $424,000) and $535,000 ( April 30, 2022 - $620,000) in compensation expense related to the estimated fair value of options granted.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

10. Income tax provision:

Income tax provision for the three and six months ended April 30, 2023 was $3.5 million ( April 30, 2022 - $1.8 million) and $7.2 million ( April 30, 2022 - $3.9 million) respectively. The income tax provision reflects a $530,000 deferred tax asset, not previously recognized, associated with DRTC’s non-capital loss carryforwards which is anticipated to be applied to future taxable earnings. The Bank’s combined statutory federal and provincial income tax rate is approximately 27% (2022 - 27%). The effective rate is affected by certain items not being taxable or deductible for income tax purposes.

11. Income per common share:
(thousands of Canadian dollars)
--- --- --- --- --- --- --- --- --- --- --- --- ---
for the three months ended for the six months ended
April 30 April 30 April 30 April 30
2023 2022 2023 2022
Net income $ 10,263 $ 4,943 $ 19,680 $ 10,509
Less: dividends on preferred shares (247 ) (247 ) (494 ) (494 )
10,016 4,696 19,186 10,015
Weighted average number of common shares outstanding 26,170,621 27,441,082 26,605,052 27,441,082
Income per common share: $ 0.38 $ 0.17 $ 0.72 $ 0.36

Common shares associated with the Series 1 NVCC preferred shares are contingently issuable shares and would only have a dilutive impact upon issuance. There are 40,000 outstanding employee stock options that are dilutive; however, the impact on the Bank’s income per share calculation is de minimis.

12. Derivative instruments:

At April 30, 2023, the Bank had an outstanding contract established for asset liability management purposes to swap between floating and fixed interest rates with a notional amount totalling $11.8 million ( October 31, 2022 - $nil), of which $11.8 million ( October 31, 2022 - $nil) qualified for hedge accounting. The Bank enters into interest rate swap contracts for its own account exclusively and does not act as an intermediary in this market. As required under the accounting standard relating to hedges, at April 30, 2023, $103,000 ( October 31, 2022 - $nil) relating to this contract was included in other assets and the offsetting amount included in the carrying values of the assets to which they relate. Approved counterparties are limited to major Canadian chartered banks.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

13. Commitments and contingencies:

The amount of credit-related commitments represents the maximum amount of additional credit that the Bank could be obligated to extend.

(thousands of Canadian dollars)
April 30 October 31 April 30
2023 2022 2022
Loan commitments $ 378,309 $ 382,851 $ 312,125
Letters of credit 78,866 60,273 54,655
$ 457,175 $ 443,124 $ 366,780
14. Related party transactions:
--- ---

The Bank’s Board of Directors and Senior Executive Officers represent key management personnel and are related parties. At April 30, 2023, amounts due from these related parties totalled $1.5 million ( October 31, 2022 - $1.3 million) and an amount due from a corporation controlled by key management personnel totalled $2.7 million ( October 31, 2022 - $3.9 million). The interest rates charged on loans and advances to related parties are based on mutually agreed-upon terms. Interest income earned on the above loans for the three and six months ended April 30, 2023, was $25,000 ( April 30, 2022 - $23,000) and $49,000 ( April 30, 2022 - $48,000). There were no specific provisions for credit losses associated with loans issued to key management personnel ( October 31, 2022 - $nil), and all loans issued to key management personnel were current as at April 30, 2023. $500,000 of the Bank’s $5.0 million subordinated notes payable, issued in March 2019, are held by a related party (note 7).

15. 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 the future growth and 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 that take into account, amongst other items, forecasted capital requirements and current and anticipated financial market conditions.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

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 subordinated notes (Tier 2 capital).

The Bank monitors its capital adequacy and related capital ratios on a daily basis and has policies setting internal targets and thresholds 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.

During the period ended April 30, 2023, 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.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

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

(thousands of Canadian dollars)
April 30 October 31
2023 2022
Common Equity Tier 1 (CET1) capital
Directly issued qualifying common share capital $ 215,233 $ 225,982
Contributed surplus 2,147 1,612
Retained earnings 125,398 109,335
Accumulated other comprehensive income 94 99
CET1 before regulatory adjustments 342,872 337,028
Regulatory adjustments applied to CET1 (11,258 ) (11,371 )
Common Equity Tier 1 capital $ 331,614 $ 325,657
Additional Tier 1 capital
Directly issued qualifying Additional Tier 1 instruments $ 13,647 $ 13,647
Total Tier 1 capital $ 345,261 $ 339,304
Tier 2 capital
Directly issued Tier 2 capital instruments $ 106,835 $ 107,367
Tier 2 capital before regulatory adjustments 106,835 107,367
Eligible stage 1 and stage 2 allowance 2,526 1,904
Total Tier 2 capital $ 109,361 $ 109,271
Total regulatory capital $ 454,622 $ 448,575
Total risk-weighted assets $ 2,957,933 $ 2,714,902
Capital ratios
CET1 capital ratio 11.21 % 12.00 %
Tier 1 capital ratio 11.67 % 12.50 %
Total capital ratio 15.37 % 16.52 %

As at April 30, 2023 and October 31, 2022, the Bank exceeded all of the minimum Basel III regulatory capital requirements prescribed by OSFI.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

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)
April 30 October 31
2023 2022
On-balance sheet assets $ 3,729,393 $ 3,265,998
Assets amounts adjusted in determining the Basel III
Tier 1 capital (11,258 ) (11,371 )
Total on-balance sheet exposures 3,718,135 3,254,627
Total off-balance sheet exposure at gross notional amount $ 457,175 $ 443,124
Adjustments for conversion to credit equivalent amount (266,913 ) (251,101 )
Total off-balance sheet exposures 190,262 192,023
Tier 1 capital 345,261 339,304
Total exposures 3,908,397 3,446,650
Leverage ratio 8.83 % 9.84 %

As at April 30, 2023 and October 31, 2022, the Bank was in compliance with the leverage ratio prescribed by OSFI.

16. Interest rate risk position:

The Bank is subject to interest rate risk, which is the risk that a movement in interest rates could negatively impact net interest margin, net interest income and the economic value of assets, liabilities and shareholders’ equity. The following table provides the duration difference between the Bank’s assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s earnings during a 12 month period.

(thousands of Canadian dollars)
April 30, 2023 October 31, 2022
Increase 100 bps Decrease 100 bps Increase 100 bps Decrease 100 bps
Increase (decrease):
Impact on projected net interest income during a 12 month period $ 5,323 $ (5,334 ) $ 4,304 $ (4,261 )
Duration difference between assets and liabilities (months) 3.1 1.4

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

17. Fair value of financial instruments:

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 judgement 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 and, therefore, the book value of these instruments is not necessarily representative of amounts realizable upon immediate settlement. See note 18 of the October 31, 2022 audited Consolidated Financial Statements for more information on fair values.

(thousands of Canadian dollars)
As at April 30, 2023 October 31, 2022
Carrying Fair Carrying Fair
(thousands of Canadian dollars) Value Value Value Value
Assets
Cash $ 223,661 $ 223,661 $ 88,581 $ 88,581
Securities 39,652 39,652 141,564 141,564
Loans 3,419,455 3,409,081 2,992,678 2,963,676
Other 4,126 4,126 4,727 4,727
Liabilities
Deposits $ 3,108,218 $ 3,065,051 $ 2,657,540 $ 2,561,421
Subordinated notes payable 104,532 106,835 104,951 107,367
Other 156,670 156,670 146,249 146,249
18. Operating segmentation:
--- ---

The Bank has established two reportable operating segments, those being Digital Banking and DRTC (cybersecurity services). The two operating segments are strategic business operations providing distinct products and services to different markets and are separately managed as a function of the distinction in the nature of each business. The following summarizes the operations of each of the reportable segments:

Digital Banking – The Bank employs a branchless business-to-business model using its proprietary financial technology to address underserved segments in the Canadian and US banking markets. VersaBank obtains its deposits and provides the majority of its loans and leases electronically via innovative deposit and lending solutions for financial intermediaries.

DRTC (cybersecurity services and banking and financial technology development) – Leveraging its internally developed IT security software and capabilities, VersaBank established a wholly owned subsidiary, DRT Cyber Inc., to pursue significant large-market opportunities in cybersecurity and develop innovative solutions to address the rapidly growing volume of cyber threats challenging financial institutions, multi-national corporations and government entities.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

The basis for the determination of the reportable segments is a function primarily of the systematic, consistent process employed by the Bank’s chief operating decision maker, the Chief Executive Officer, and the Chief Financial Officer in reviewing and interpreting the operations and performance of each segment. The accounting policies applied to these segments are consistent with those employed in the preparation of the Bank’s Consolidated Financial Statements, as disclosed in note 3 of the Bank’s 2022 audited Consolidated Financial Statements.

Performance is measured based on segment net income, as included in the Bank’s internal management reporting. Management has determined that this measure is the most relevant in evaluating segment results and in the allocation of resources.

The following table sets out the results of each reportable operating segment as at and for the three and six months ended April 30, 2023 and 2022:

(thousands of Canadian dollars)

for the three months ended April 30, 2023 April 30, 2022
Digital DRTC Eliminations/ Consolidated Digital DRTC Eliminations/ Consolidated
Banking Adjustments Banking Adjustments
Net interest income $ 24,609 $ - $ - $ 24,609 $ 17,242 $ - $ - $ 17,242
Non-interest income 122 2,146 (192 ) 2,076 1 1,434 (42 ) 1,393
Total revenue 24,731 2,146 (192 ) 26,685 17,243 1,434 (42 ) 18,635
Provision for credit losses 237 - - 237 78 - - 78
24,494 2,146 (192 ) 26,448 17,165 1,434 (42 ) 18,557
Non-interest expenses:
Salaries and benefits 6,930 1,499 - 8,429 5,586 1,140 - 6,726
General and administrative 3,131 377 (192 ) 3,316 3,761 300 (42 ) 4,019
Premises and equipment 612 369 - 981 659 363 - 1,022
10,673 2,245 (192 ) 12,726 10,006 1,803 (42 ) 11,767
Income (loss) before income taxes 13,821 (99 ) - 13,722 7,159 (369 ) - 6,790
Income tax provision 3,991 (532 ) - 3,459 1,744 103 - 1,847
Net income (loss) $ 9,830 $ 433 $ - $ 10,263 $ 5,415 $ (472 ) $ - $ 4,943
Total assets $ 3,719,592 $ 25,559 $ (15,758 ) $ 3,729,393 $ 2,692,510 $ 21,386 $ (21,750 ) $ 2,692,146
Total liabilities $ 3,366,614 $ 29,057 $ (22,797 ) $ 3,372,874 $ 2,347,610 $ 23,727 $ (20,605 ) $ 2,350,732

(thousands of Canadian dollars)

for the six months ended April 30, 2023 April 30, 2022
Digital DRTC Eliminations/ Consolidated Digital DRTC Eliminations/ Consolidated
Banking Adjustments Banking Adjustments
Net interest income $ 48,883 $ - $ - $ 48,883 $ 34,127 $ - $ - $ 34,127
Non-interest income 124 3,979 (383 ) 3,720 2 2,855 (83 ) 2,774
Total revenue 49,007 3,979 (383 ) 52,603 34,129 2,855 (83 ) 36,901
Provision for (recovery of) credit losses 622 - - 622 80 - - 80
48,385 3,979 (383 ) 51,981 34,049 2,855 (83 ) 36,821
Non-interest expenses:
Salaries and benefits 13,614 3,072 - 16,686 11,025 1,784 - 12,809
General and administrative 5,993 832 (383 ) 6,442 7,243 483 (83 ) 7,643
Premises and equipment 1,235 698 - 1,933 1,241 710 - 1,951
20,842 4,602 (383 ) 25,061 19,509 2,977 (83 ) 22,403
Income (loss) before income taxes 27,543 (623 ) - 26,920 14,540 (122 ) - 14,418
Income tax provision 7,780 (540 ) - 7,240 3,706 203 - 3,909
Net income (loss) $ 19,763 $ (83 ) $ - $ 19,680 $ 10,834 $ (325 ) $ - $ 10,509
Total assets $ 3,719,592 $ 25,559 $ (15,758 ) $ 3,729,393 $ 2,692,510 $ 21,386 $ (21,750 ) $ 2,692,146
Total liabilities $ 3,366,614 $ 29,057 $ (22,797 ) $ 3,372,874 $ 2,347,610 $ 23,727 $ (20,605 ) $ 2,350,732

The Bank has operations in the US, through both its Digital Banking and DRTC businesses; however as at April 30, 2023, substantially all of the Bank’s earnings and assets are based in Canada.

VERSABANK

Notes to Interim Consolidated Financial Statements

(Unaudited)

Three month & six month periods ended April 30, 2023 and 2022

19. Comparative balances:

Certain comparative balances have been reclassified to conform with the financial statement presentation adopted in the current period.

28

ex_528437.htm

Exhibit 99.2

vblogo.jpg

Management’s Discussion and Analysis

This management’s discussion and analysis (“MD&A”) of operations and financial condition for the second quarter of fiscal 2023, dated June 5, 2023, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended April 30, 2023, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). This MD&A should also be read in conjunction with VersaBank’s MD&A and Audited Consolidated Financial Statements for the year ended October 31, 2022, which are available on VersaBank’s website at www.versabank.com, SEDAR at www.sedar.com and EDGAR at www.sec.gov/edgar.shtml. Except as discussed below, all other factors discussed and referred to in the MD&A for the year ended October 31, 2022, remain substantially unchanged. All currency amounts in this document are in Canadian dollars unless otherwise indicated.

Cautionary Note Regarding Forward-Looking Statements 2
About VersaBank 3
Overview of Performance 4
Selected Financial Highlights 7
Business Outlook 8
Financial Review – Earnings 12
Financial Review – Balance Sheet 17
Off-Balance Sheet Arrangements 28
Related Party Transactions 28
Capital Management and Capital Resources 29
Results of Operating Segments 31
Summary of Quarterly Results 33
Non-GAAP and Other Financial Measures 34
Significant Accounting Policies and Use of Estimates and Judgements 36
Controls and Procedures 37
VersaBank – Q2 2023 MD&A 1
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Cautionary Note Regarding Forward-Looking Statements

VersaBank’s public communications often include written or oral forward-looking statements. Statements of this type are included in this document and may be included in other filings and with Canadian securities regulators or the US Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the “safe harbor” provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. The statements in this management’s discussion and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, many of which are out of VersaBank’s control. Risks exist that predictions, forecasts, projections, and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian and US economy in general and the strength of the local economies within Canada and the US in which VersaBank conducts operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada and the US Federal Reserve; global commodity prices; the effects of competition in the markets in which VersaBank operates; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations pertaining to financial services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; the impact of wars or conflicts including the crisis in Ukraine and the impact of the crisis on global supply chains and markets; the impact of potential new variants of COVID-19; the possible effects on our business of terrorist activities; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; and VersaBank’s anticipation of and success in managing the risks implicated by the foregoing. For a detailed discussion of certain key factors that may affect VersaBank’s future results, please see VersaBank’s annual MD&A for the year ended October 31, 2022.

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

VersaBank – Q2 2023 MD&A 2

About VersaBank

VersaBank (the “Bank”) adopted an electronic branchless model in 1993, becoming the world’s first branchless financial institution and obtains its deposits and the majority of its loans and leases digitally. It holds a Canadian Schedule 1 chartered bank licence and is regulated by the Office of the Superintendent of Financial Institutions (“OSFI”). In addition to its core Digital Banking operations, VersaBank has established cybersecurity services and banking and financial technology development operations through its wholly owned subsidiary, DRT Cyber Inc. (“DRTC”). VersaBank’s Common Shares trade on the Toronto Stock Exchange and Nasdaq under the symbol VBNK. Its Series 1 Preferred Shares trade on the Toronto Stock Exchange under the symbol VBNK.PR.A.

VersaBank is focused on increasing earnings by concentrating on underserved markets that support more attractive pricing for its products, leveraging existing distribution channels to deliver its financial products to these chosen markets and expanding its diverse deposit gathering network that provides efficient access to a range of low-cost deposit sources in order to maintain a low cost of funds.

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

VersaBank – Q2 2023 MD&A 3

Overview of Performance

a01.jpg

* See definition in the "Non-GAAP and Other Financial Measures" section below.

Q2 2023 vs Q1 2023

Loans increased 6% to $3.42 billion, driven by continued strong growth in both the Bank’s Point-of-Sale Loans and Leases (“POS Financing”) portfolio (5% increase) and the Commercial Real Estate (“CRE”) portfolio (business-to-business loans with credit risk exposure predominantly related to residential properties) (7% increase);
Total revenue increased 3% to $26.7 million and was comprised of net interest income of $24.6 million and non-interest income of $2.1 million, the latter derived primarily from the revenue contribution of DRT Cyber Inc., (“DRTC”), which includes the gross margin generated by its cybersecurity component Digital Boundary Group’s cybersecurity services business;
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VersaBank – Q2 2023 MD&A 4
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Net interest margin (NIM) on loans decreased 4 basis points to 2.99% as a function primarily of higher cost of funds, offset partially by higher yields earned on the Bank’s lending assets. NIM decreased 5 basis points to 2.78%;
Provision for credit losses as a percentage of average loans was 0.03% compared to 0.05% last quarter, with the trend attributable primarily to changes in the forward-looking information used by VersaBank in its credit risk models, offset partially by higher lending asset balances and changes to the Bank’s lending asset mix;
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Non-interest expenses increased 3% to $12.7 million as a function primarily of higher salary and benefits amounts attributable to higher staffing levels to support expanded business activity across the Bank, higher general annual compensation adjustments and higher professional fees attributable to the continuing regulatory approval process associated with VersaBank’s acquisition of a US bank;
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Efficiency ratio for the Digital Banking operations (excluding DRTC) increased modestly to 43% as a function of higher non-interest expenses, offset substantially by higher revenue; and,
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Net income and earnings per share (“EPS”) increased 9% and 12% to $10.3 million and $0.38 per share, respectively, as a function primarily of higher revenue, which was driven by strong loan growth and higher contributions from DRTC, offset partially by higher non-interest expense. The increase in EPS also benefitted from a lower number of common shares outstanding as a result of the purchase and cancellation of common shares under the Bank’s Normal Course Issuer Bid (“NCIB”).
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Q2 2023 vs Q2 2022

Loans increased 40% to $3.42 billion, driven by strong growth in both the POS Financing and CRE lending portfolios, which increased 58% and 4% respectively;
Total revenue increased 43%, driven by higher net interest income attributable substantially to strong loan growth and higher non-interest income derived primarily from the revenue contribution of DRTC;
---
NIM on loans decreased 12 bps attributable primarily to a shift in the Bank’s funding mix, while NIM increased 1 bp due primarily to higher yields earned on the Bank’s lending and treasury assets, offset partially by higher cost of funds;
---
Provision for credit losses as a percentage of average loans was 0.03% compared to 0.01% last year with the trend attributable primarily to changes in the forward-looking information used by VersaBank in its credit risk models, lending asset growth and changes in the Bank’s lending asset mix**;**
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Non-interest expenses increased 8% as a function primarily of higher salary and benefits expense attributable to higher staffing levels to support expanded business activity across VersaBank as well as higher general annual compensation adjustments and higher costs attributable to the continuing regulatory approval process associated with VersaBank’s acquisition of a US bank, offset partially by lower insurance premiums relative to the premiums paid during the comparative period attributable to VersaBank’s listing on the Nasdaq in September 2021 and lower capital tax expense attributable to a shift in the provincial allocation of the Bank’s loan and deposit originations;
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Efficiency ratio for Digital Banking operations (excluding DRTC) improved to 43% attributable to revenue growth (43%) outpacing non-interest expense growth (8%) over the same period; and,
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VersaBank – Q2 2023 MD&A 5
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Net income and EPS increased 108% and 124% as a function primarily of higher revenue, offset partially by higher non-interest expenses. The EPS trend was also impacted by the common shares that were purchased and cancelled through the Bank’s NCIB.

Q2 YTD 2023 vs Q2 YTD 2022

Loans increased 40% to $3.42 billion, driven by strong growth in the POS Financing portfolio, which increased 58%, as well as 4% growth in the CRE lending portfolio;
Total revenue increased 43%, driven primarily by higher net interest income attributable substantially to strong loan growth and higher non-interest income derived primarily from the revenue contribution of DRTC as well as moderate NIM expansion;
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NIM on loans decreased 12 bps attributable primarily to a shift in the Bank’s funding mix, while NIM increased 13 bps due primarily to higher yields earned on the Bank’s lending and treasury assets, offset partially by higher cost of funds;
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Provision for credit losses as a percentage of average loans was 0.04% compared to 0.01% a year ago with the trend attributable primarily to changes in the forward-looking information used by VersaBank in its credit risk models, lending asset growth and changes in the Bank’s lending asset mix;
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Non-interest expenses increased 12% as a function primarily of higher salary and benefits amounts attributable to higher staffing levels to support expanded business activity across the Bank, higher general annual compensation adjustments and higher professional fees attributable to the continuing regulatory approval process associated with the Bank’s acquisition of a US bank, offset partially by lower capital tax expense;
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Efficiency ratio for Digital Banking operations (excluding DRTC) improved to 43% as a function of revenue growth (43%) outpacing non-interest expense growth (12%) over the same period; and,
---
Net income and EPS increased 87% and 100% respectively as a function primarily of higher revenue offset partially by higher non-interest expenses. The EPS trend was also impacted by the common shares that were purchased and cancelled through the Bank’s NCIB.
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VersaBank – Q2 2023 MD&A 6
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Selected Financial Highlights

(unaudited) for the three months ended for the six months ended
April 30 April 30 April 30 April 30
(thousands of Canadian dollars except per share amounts) 2023 2022 2023 2022
Results of operations **** **** **** **** **** **** **** **** **** **** **** ****
Interest income $ 53,595 $ 25,848 $ 103,156 $ 50,568
Net interest income 24,609 17,242 48,883 34,127
Non-interest income 2,076 1,393 3,720 2,774
Total revenue 26,685 18,635 52,603 36,901
Provision for credit losses 237 78 622 80
Non-interest expenses 12,726 11,767 25,061 22,403
Digital Banking 10,673 10,006 20,842 19,509
DRTC 2,245 1,803 4,602 2,977
Net income **** 10,263 **** 4,943 **** 19,680 **** 10,509
Income per common share:
Basic $ 0.38 $ 0.17 $ 0.72 $ 0.36
Diluted $ 0.38 $ 0.17 $ 0.72 $ 0.36
Dividends paid on preferred shares $ 247 $ 247 $ 494 $ 494
Dividends paid on common shares $ 651 $ 687 $ 1,314 $ 1,374
Yield* 6.05 % 4.15 % 5.95 % 3.99 %
Cost of funds* 3.27 % 1.38 % 3.13 % 1.30 %
Net interest margin* 2.78 % 2.77 % 2.82 % 2.69 %
Net interest margin on loans* 2.99 % 3.11 % 3.02 % 3.14 %
Return on average common equity* 12.07 % 5.92 % 11.38 % 6.25 %
Book value per common share* $ 13.19 $ 11.94 $ 13.19 $ 11.94
Efficiency ratio* 48 % 63 % 48 % 61 %
Efficiency ratio - Digital Banking* 43 % 58 % 43 % 57 %
Return on average total assets* 1.13 % 0.75 % 1.11 % 0.79 %
Provision for credit losses as a % of average loans* 0.03 % 0.01 % 0.04 % 0.01 %
as at
Balance Sheet Summary **** **** **** **** **** **** **** **** **** **** **** ****
Cash $ 223,661 $ 198,157 $ 223,661 $ 198,157
Securities 39,652 - 39,652 -
Loans, net of allowance for credit losses 3,419,455 2,450,276 3,419,455 2,450,276
Average loans 3,327,269 2,332,957 3,206,067 2,276,663
Total assets 3,729,393 2,692,146 3,729,393 2,692,146
Deposits 3,108,218 2,124,916 3,108,218 2,124,916
Subordinated notes payable 104,532 98,410 104,532 98,410
Shareholders' equity 356,519 341,414 356,519 341,414
Capital ratios** **** **** **** **** **** **** **** **** **** **** **** ****
Risk-weighted assets $ 2,957,933 $ 2,313,030 $ 2,957,933 $ 2,313,030
Common Equity Tier 1 capital 331,614 315,963 331,614 315,963
Total regulatory capital 454,622 432,083 454,622 432,083
Common Equity Tier 1 (CET1) ratio 11.21 % 13.66 % 11.21 % 13.66 %
Tier 1 capital ratio 11.67 % 14.25 % 11.67 % 14.25 %
Total capital ratio 15.37 % 18.68 % 15.37 % 18.68 %
Leverage ratio 8.83 % 11.63 % 8.83 % 11.63 %
* See definition in "Non-GAAP and Other Financial Measures" section below.
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** Capital management and leverage measures are in accordance with OSFI's Capital Adequacy Requirements and Basel III Accord.
VersaBank – Q2 2023 MD&A 7
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Business Outlook

VersaBank is active in underserved banking markets in Canada and the US in which its innovative, value added digital banking products command more attractive pricing for its lending products, and further, continues to develop and expand its diverse deposit gathering network that provides efficient access to a range of low-cost deposit sources. In addition, VersaBank 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 VersaBank’s chosen underserved lending and deposit markets, but also delivers superior financial products and better customer service to its clients.

Management continues to monitor the geo-political, economic and financial market risk precipitated by the conflict in Ukraine, as well as recent events in the US banking sector and the potential impact on VersaBank’s business. At this time, management has not identified any material direct or indirect risk exposure to VersaBank resulting from the conflict and will continue to assess available information and evaluate the situation as it evolves.

While VersaBank does not provide guidance on specific performance metrics, the commentary provided below discusses aspects of VersaBank’s business and certain anticipated trends related to same that, in management’s view, could potentially impact future performance.

Lending Assets

Canadian Point-of-Sale Financing: Although consumer spending and business investment in Canada are expected to slow during the second half of 2023 (due primarily to the impact of higher interest rates combined with elevated inflation), the economic slowdown is expected to be short lived, with modest layoffs and stable unemployment levels. As was the case during the first half of fiscal 2023, management expects any impact of a slower economy on the POS Financing portfolio in the second half of fiscal 2023 to be substantially outweighed by the Bank’s continued success in adding new origination partners and expanding business with existing partners.  Combined with what is seasonally stronger growth historically in the POS portfolio in the second half of the fiscal year, management expects growth in the POS portfolio for the second half of 2023 to be, at a minimum, consistent with that of the first half;
US Receivable Purchase Program (“RPP”): Despite higher interest rates, elevated inflation and high gas prices in the US, the labour market remains tight which management expects will continue to support consumer spending, and in turn will support stable demand for durable goods and agricultural products which is expected to continue to stimulate transportation and manufacturing equipment purchases. Additionally, despite a cooling of the residential home market in the US overall construction activity is expected to continue to expand modestly over the course of 2023 which is anticipated to support demand for construction equipment in the near term. Management believes that the anticipated US macroeconomic and industry trends described above will continue to support growth in the Bank’s RPP portfolio over the course of fiscal 2023; and,
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VersaBank – Q2 2023 MD&A 8
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Commercial Real Estate (Business-to-Business Loans with Credit Risk Exposure Predominantly Related to Residential Properties): Management anticipates continued moderate growth in the commercial mortgage sector related to financing for residential housing properties, which is expected to result in healthy demand for the Bank’s residential construction and term financing products for which the Bank is currently experiencing and expects to continue to experience high quality deal flow, throughout at least fiscal 2023. Notwithstanding the effective risk mitigation strategies that are employed in managing the Bank’s CRE portfolios, including working with well-established, well-capitalized partners and maintaining modest loan-to-value ratios on individual transactions, management continues to take a cautionary stance with respect to its broader CRE portfolios due to the anticipation of volatility in CRE asset valuations in the current and anticipated interest rate environment and the potential impact of same on borrowers’ ability to service debt, as well as due to concerns related to inflation and higher input costs, which continue to have the potential to drive higher construction costs. Additionally, management anticipates more meaningful participation in the OSFI B-20 compliant conventional, uninsured mortgage financing space. Management anticipates business generated from this initiative will have a positive balance sheet impact through fiscal 2024.

Credit Quality

VersaBank lends to underserved markets that support more attractive pricing for its lending products but typically exhibit a lower-than-average risk profile generally as a function of the lower inherent risk associated with the underlying collateral assets and/or the structure of VersaBank’s offered financing arrangements;
Based on available forward-looking macroeconomic and industry data as well as the Bank’s historical credit experience, current underwriting governance, and general expectations for credit performance management anticipates that credit risk in its portfolio may continue to increase modestly over the course of fiscal 2023 as a function of a prolonged, elevated interest rate environment in both Canada and the US, the ability of consumers and businesses to service debt in such an environment and the impact of high inflation in both Canada and the US. Notwithstanding the above, management anticipates that the resilient labour market, higher wages and remaining consumer savings will continue to mitigate the rate of deterioration of the Canadian and US economies and partially offset the broader impact of higher interest rates and inflation in the short term. Further, management expects that the lower risk profile of VersaBank’s lending portfolio, which is a function of VersaBank’s prudent underwriting practices, structured lending products and focus on underserved financing markets within which it has a wealth of experience, will mitigate any escalation in forward credit risk in the Bank’s lending portfolio; and,
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VersaBank has sourced credit risk modeling systems and forecast macroeconomic scenario data from Moody’s Analytics, a third-party service provider, for the purpose of computing forward-looking credit risk parameters under multiple macroeconomic scenarios that consider both market-wide and idiosyncratic factors and influences. These credit risk modeling systems are used in conjunction with VersaBank’s internally developed expected credit loss (“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 internal, forward looking expected credit loss trends, the use 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. As discussed, available macroeconomic data currently being used as forward-looking information in the Bank’s credit risk models continue to present deteriorating trends and, depending on the growth trajectory and composition of its lending portfolio, these trends could result in higher ECL amounts and the Bank recognizing higher provisions for credit losses in the coming quarters.
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VersaBank – Q2 2023 MD&A 9
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Funding and Liquidity

Management expects that commercial deposit volumes raised via VersaBank’s Trustee Integrated Banking (“TIB”) program will return to growth late in the second half of fiscal 2023 as a function of an increase in the volume of consumer and commercial bankruptcy and proposal restructuring proceedings over the same timeframe, attributable primarily to a more challenging current and forecasted economic environment as evidenced by increasing Canadian consumer bankruptcy filing volumes. Further, VersaBank continues to pursue a number of initiatives to grow and expand its well-established, diverse deposit broker network through which it sources personal deposits, consisting primarily of guaranteed investment certificates. The Bank’s current deposit channels remain an efficient, reliable and diversified source of funding providing ample access to reasonably priced deposits in volumes that comfortably support the Bank’s liquidity requirements. Substantially all of the Bank’s deposit volumes raised through these channels are eligible for CDIC insurance; and,
Management anticipates that liquidity levels will remain reasonably consistent over the second half of fiscal 2023 as the Bank continues to fund anticipated balance sheet growth across each of its lines of business. Further, management will continue to deploy cash into low risk, government securities with the objective of earning a more favourable yield on its available liquidity.
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Earnings and Capital

Earnings growth in the second half of fiscal 2023 is expected to be a function primarily of anticipated organic balance sheet growth from Digital Banking operations, specifically attributable to the Bank’s POS Financing and RPP businesses in Canada and the US respectively as well as incremental earnings contributions from DRTC, offset partially by elevated non-interest expenses over the second half of fiscal 2023 as a function primarily of costs attributable to the regulatory approval process associated with VersaBank’s acquisition of a US bank. Additionally, management expects to incur higher costs associated with the recruitment and retention of staff in what remains a highly competitive labour market;
Net interest income growth for fiscal 2023 is expected to be a function primarily of growth in VersaBank’s POS and RPP businesses in Canada and the US respectively, disciplined liquidity management and the expectation that growth in the TIB program later in the year and further expansion of the Bank’s diverse deposit broker network will have a favourable impact on cost of funds;
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VersaBank – Q2 2023 MD&A 10
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Non-interest income growth for fiscal 2023 is expected to be a function primarily of DRTC revenue growth derived from its suite of cybersecurity services;
VersaBank’s capital ratios remain comfortably in excess of regulatory minimums. Management is of the view that VersaBank’s current capital levels are sufficient to accommodate balance sheet growth contemplated for fiscal 2023. Notwithstanding the above, management will continue to closely monitor the capital markets to identify opportunities for VersaBank to raise additional regulatory capital on attractive terms in order to position VersaBank to support a potentially more robust growth profile in the future;
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Management does not anticipate increasing VersaBank’s dividend rate over the second half of fiscal 2023 to ensure that it continues to have adequate regulatory capital available to support contemplated balance sheet growth as well as specific business development initiatives for earnings growth currently contemplated over the same timeframe and remain in compliance with its established regulatory capital ratio targets and thresholds; and,
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During the fourth quarter of fiscal 2022, VersaBank received approval from the TSX and Nasdaq to proceed with a NCIB for its common shares through which the Bank may purchase for cancellation up to 1,700,000 of its common shares, representing approximately 9.54% of its public float. The Bank repurchased 1,437,096 shares under the NCIB as at April 30, 2023 and anticipates acquiring the remaining common share purchase capacity under the NCIB prior to the end of the second half of fiscal 2023. If fully executed, the impact of the NCIB will not have a material impact on the Bank’s regulatory capital levels and ratios.
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There is potential that VersaBank may not realize or achieve the anticipated performance trends set out above as a function of a number of factors and variables including, but not limited to, the strength of the Canadian and US economies in general and the strength of the local economies in which VersaBank conducts operations; the effects of changes in monetary and fiscal policy, including changes in the interest rate policies of the Bank of Canada and the US Federal Reserve; global commodity prices; the effects of competition in the markets in which VersaBank operates; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the ability of VersaBank to grow its business and execute its strategy in the US market; the impact of changes in the laws and regulations regulating financial services; the impact of wars or conflicts including the crisis in Ukraine; the recent events in the US banking sector; and the impact of potential new variants of COVID-19 or a new pandemic causing virus on the global economy. Please see “Cautionary Note Regarding Forward-Looking Statements” on page 2 of this MD&A.

VersaBank – Q2 2023 MD&A 11

Financial Review – Earnings

Total Revenue

Total revenue, which consists of net interest income and non-interest income, increased 3% to $26.7 million compared to the last quarter and increased 43% compared to the same period a year ago. Total revenue for the six months ended April 30, 2023 increased 43% to $52.6 million compared to the same period a year ago.

Net Interest Income

(thousands of Canadian dollars)
For the three months ended: For the six months ended:
April 30 January 31 April 30 April 30 April 30
2023 2023 Change 2022 Change 2023 2022 Change
Interest income
Point-of-sale loans and leases $ 34,257 $ 31,960 7 % $ 16,006 114 % $ 66,217 $ 30,461 117 %
Commercial real estate mortgages 15,958 14,410 11 % 9,171 74 % 30,368 18,924 60 %
Commercial real estate loans 166 176 (6 %) 179 (7 %) 342 371 (8 %)
Public sector and other financing 323 309 5 % 116 178 % 632 230 175 %
Other 2,891 2,706 7 % 376 669 % 5,597 582 862 %
Interest income $ 53,595 $ 49,561 8 % $ 25,848 107 % $ 103,156 $ 50,568 104 %
Interest expense
Deposit and other $ 27,534 $ 23,841 15 % $ 7,239 280 % $ 51,375 $ 13,708 275 %
Subordinated notes 1,452 1,446 0 % 1,367 6 % 2,898 2,733 6 %
Interest expense $ 28,986 $ 25,287 15 % $ 8,606 237 % $ 54,273 $ 16,441 230 %
Net interest income $ 24,609 $ 24,274 1 % $ 17,242 43 % $ 48,883 $ 34,127 43 %
Non-interest income $ 2,076 $ 1,644 26 % $ 1,393 49 % $ 3,720 $ 2,774 34 %
Total revenue $ 26,685 $ 25,918 3 % $ 18,635 43 % $ 52,603 $ 36,901 43 %

Q2 2023 vs Q1 2023

Net interest income increased 1% to $24.6 million as a function primarily of:

Higher interest income earned on higher lending asset balances; and,
Redeployment of available cash into higher yielding, low risk securities.
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Offset partially by:

Higher interest expense attributable to higher deposit balances.

Q2 2023 vs Q2 2022

Net interest income increased 43% as a function primarily of the variables and trends set out above.

Q2 YTD 2023 vs Q2 YTD 2022

Net interest income increased 43% to $48.9 million as a function primarily of:

Higher interest income earned on higher lending asset balances; and,
Redeployment of available cash into higher yielding, low risk securities.
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VersaBank – Q2 2023 MD&A 12
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Offset partially by:

Higher interest expense attributable to higher deposit balances.

Net Interest Margin

(thousands of Canadian dollars)
For the three months ended: For the six months ended:
April 30 January 31 April 30 April 30 April 30
2023 2023 Change 2022 Change 2023 2022 Change
Interest income $ 53,595 $ 49,561 8 % $ 25,848 107 % $ 103,156 $ 50,568 104 %
Interest expense 28,986 25,287 15 % 8,606 237 % 54,273 16,441 230 %
Net interest income 24,609 24,274 1 % 17,242 43 % 48,883 34,127 43 %
Average assets $ 3,630,542 $ 3,398,844 7 % $ 2,553,746 42 % $ 3,497,696 $ 2,553,616 37 %
Yield* 6.05 % 5.78 % 5 % 4.15 % 46 % 5.95 % 3.99 % 49 %
Cost of funds* 3.27 % 2.95 % 11 % 1.38 % 137 % 3.13 % 1.30 % 141 %
Net interest margin* 2.78 % 2.83 % (2 %) 2.77 % 0 % 2.82 % 2.69 % 5 %
Average gross loans $ 3,313,415 $ 3,100,809 7 % $ 2,325,331 42 % $ 3,192,486 $ 2,269,256 41 %
Net interest margin on loans* 2.99 % 3.03 % (1 %) 3.11 % (4 %) 3.02 % 3.14 % (4 %)
* See definition in "Non-GAAP and Other Financial Measures" section below.
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Q2 2023 vs Q1 2023

Net interest margin decreased 5 bps as a function primarily of:

Higher cost of funds attributable primarily to a shift in the Bank’s funding mix.

Offset partially by:

Higher yields earned on the Bank’s lending and treasury assets.

Q2 2023 vs Q2 2022

Net interest margin increased 1 bp as a function primarily of:

Higher yields earned on the Bank’s lending and treasury assets attributable primarily to a higher interest rate environment resulting from the Bank of Canada tightening increasing the policy interest rate over the course of the past year.

Offset partially by:

Higher cost of funds attributable primarily to a higher interest rate environment.

Q2 YTD 2023 vs Q2 YTD 2022

Net interest margin increased 13 bps as a function primarily of the variables and trends discussed above in the year over year analysis.

VersaBank – Q2 2023 MD&A 13

Non-Interest Income

Non-interest income is comprised of revenue generated by DRTC which includes the gross profit of Digital Boundary Group, (“DBG”) as well as income derived from miscellaneous transaction fees not directly attributable to lending assets.

Non-interest income for the quarter was $2.1 million compared to $1.6 million last quarter and $1.4 million for the same period a year ago. The quarter over quarter and year over year trends were a function primarily of higher client engagement and continued improvements in operational efficiency achieved by DBG over the course of the period.

Non-interest income for the six months ended April 30, 2023 was $3.7 million compared to $2.8 million for the same period a year ago. The year over year trend was a function primarily of the variables and trends set out above.

Provision for Credit Losses

(thousands of Canadian dollars)
For the three months ended: For the six months ended:
April 30 January 31 April 30 April 30 April 30
2023 2023 2022 2023 2022
Provision for (recovery of) credit losses:
Point-of-sale loans and leases $ 44 $ 38 $ 49 $ 82 $ 144
Commercial real estate mortgages 176 304 4 480 (65 )
Commercial real estate loans 2 3 4 5 (5 )
Public sector and other financing 15 40 21 55 6
Provision for (recovery of) credit losses $ 237 $ 385 $ 78 $ 622 $ 80

Q2 2023 vs Q1 2023

VersaBank recorded a provision for credit losses in the amount of $237,000 in the current quarter compared to a provision for credit losses in the amount of $385,000 last quarter as a function primarily of:

Changes in the forward-looking information used by VersaBank in its credit risk models.

Offset partially by:

Higher lending asset balances, and changes in the Bank’s lending asset mix.
VersaBank – Q2 2023 MD&A 14
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Q2 2023 vs Q2 2022

VersaBank recorded a provision for credit losses in the amount of $237,000 in the current quarter compared to a provision for credit losses in the amount of $78,000 last year as a function primarily of:

Changes in the forward-looking information used by VersaBank in its credit risk models;
Higher lending asset balances; and,
---
Changes in the Bank’s lending asset mix.
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Q2 YTD 2023 vs Q2 YTD 2022

VersaBank recorded a provision for credit losses in the amount of $622,000 in the current period compared to a provision for credit losses in the amount of $80,000 in the comparative period as a function primarily of the items discussed above in the year over year analysis.

Non-Interest Expenses

(thousands of Canadian dollars)
For the three months ended: For the six months ended:
April 30 January 31 April 30 April 30 April 30
2023 2023 Change 2022 Change 2023 2022 Change
Salaries and benefits $ 8,429 $ 8,257 2 % $ 6,726 25 % $ 16,686 $ 12,809 30 %
General and administrative 3,316 3,126 6 % 4,019 (17 %) 6,442 7,643 (16 %)
Premises and equipment 981 952 3 % 1,022 (4 %) 1,933 1,951 (1 %)
Total non-interest expenses $ 12,726 $ 12,335 3 % $ 11,767 8 % $ 25,061 $ 22,403 12 %
Efficiency Ratio 47.69 % 47.59 % 0 % 63.14 % (24 %) 47.64 % 60.71 % (22 %)

Q2 2023 vs Q1 2023

Non-interest expenses increased 3% to $12.7 million as a function primarily of:

Higher salary and benefits amounts attributable to higher staffing levels to support expanded business activity across the Bank, higher general, annual compensation adjustments and higher professional fees attributable to the continuing regulatory approval process associated with VersaBank’s acquisition of a US bank. Investments associated with the acquisition of the US bank are expected to continue over the course of fiscal 2023 in amounts similar to the current period and will be related primarily to the Bank ensuring that it is in compliance with all necessary US banking regulatory requirements.

Q2 2023 vs Q2 2022

Non-interest expenses increased 8% as a function primarily of:

Higher salary and benefits expense attributable to higher staffing levels to support expanded business activity across VersaBank as well as higher general, annual compensation adjustments; and,
Higher costs attributable to the continuing regulatory approval process associated with VersaBank’s acquisition of a US bank.
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VersaBank – Q2 2023 MD&A 15
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Offset partially by:

Lower insurance premiums relative to the premiums paid during the comparative period attributable to VersaBank’s listing on the Nasdaq in September 2021; and,
Lower capital tax expense attributable to a shift in the provincial allocation of the Bank’s loan and deposit originations.
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Q2 YTD 2023 vs Q2 YTD 2022

Non-interest expenses increased 12% as a function primarily of:

Higher salary and benefits expense attributable to higher staffing levels to support expanded business activity across VersaBank as well as higher general, annual compensation adjustments; and,
Higher costs related to VersaBank’s acquisition of a US bank, noted above.
---

Offset partially by:

Lower insurance premiums relative to the premiums paid during the comparative period attributable to VersaBank’s listing on the Nasdaq in September 2021; and,
Lower capital tax expense attributable to a shift in the provincial allocation of the Bank’s loan and deposit originations.
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Income Tax Provision

VersaBank’s effective tax rate is approximately 27% compared with 30% for fiscal 2022. The tax rate is impacted by certain items not being taxable or deductible for income tax purposes. The lower tax rate in the current period reflects the impact of a $530,000 deferred tax asset recognized in the current quarter associated with DRTC’s non-capital loss carryforwards which are anticipated to be applied to future taxable earnings. Provision for income taxes for the current quarter was $3.5 million compared to $3.8 million last quarter and $1.8 million for the same period a year ago.

Provision for income taxes for the six months ended April 30, 2023 was $7.2 million compared to $3.9 million for the same period a year ago.

VersaBank – Q2 2023 MD&A 16

Financial Review – Balance Sheet

(thousands of Canadian dollars)
April 30 January 31 April 30
2023 2023 Change 2022 Change
Total assets $ 3,729,393 $ 3,531,690 6 % $ 2,692,146 39 %
Cash and securities 263,313 251,219 5 % 198,157 33 %
Loans, net of allowance for credit losses 3,419,455 3,235,083 6 % 2,450,276 40 %
Deposits 3,108,218 2,925,452 6 % 2,124,916 46 %

Total Assets

a03.jpg

Total assets as at April 30, 2023, were $3.73 billion compared to $3.53 billion last quarter and $2.69 billion a year ago. The quarter over quarter and year over year trends were a function primarily of growth in VersaBank’s lending portfolios, in particular the POS Financing portfolio.

Cash and securities

Cash and securities, which are held primarily for liquidity purposes, were $263.3 million or 7% of total assets as at April 30, 2023, compared to $251.2 million or 7% of total assets last quarter and $198.2 million or 7% of total assets a year ago.

VersaBank – Q2 2023 MD&A 17

As at April 30, 2023, the Bank held securities totalling $39.7 million (October 31, 2022 - $141.6 million) which were comprised of:

Government of Canada Treasury Bill for $19.5 million with a face value totaling $20.0 million, yielding 2.81%, and which matured on May 25, 2023: and,
US Government Treasury Bill for US $14.4 million ($19.5 million) with a face value of US $14.5 million ($19.7 million), yielding 4.70% and which matured on May 2, 2023.
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Loans

(thousands of Canadian dollars)
April 30 January 31 April 30
2023 2023 Change 2022 Change
Point-of-sale loans and leases $ 2,538,917 $ 2,414,266 5 % $ 1,610,336 58 %
Commercial real estate mortgages 807,828 752,138 7 % 782,274 3 %
Commercial real estate loans 11,996 12,811 (6% ) 14,065 (15% )
Public sector and other financing 46,350 42,523 9 % 35,529 30 %
3,405,091 3,221,738 6 % 2,442,204 39 %
Allowance for credit losses (2,526 ) (2,289 ) (1,533 )
Accrued interest 16,890 15,634 9,605
Total loans, net of allowance for credit losses $ 3,419,455 $ 3,235,083 6 % $ 2,450,276 40 %

VersaBank organizes its lending portfolio into the following four broad asset categories: Point-of-Sale Loans & Leases, Commercial Real Estate Mortgages, Commercial Real Estate Loans, and Public Sector and Other Financing. These categories have been established in VersaBank’s proprietary, internally developed asset management system and have been designed to catalogue individual lending assets as a function primarily of their key risk drivers, the nature of the underlying collateral, and the applicable market segment.

The Point-of-Sale Loans and Leases (“POS Financing”) asset category is comprised of Point-of-Sale Loan and Lease Receivables acquired from VersaBank’s broad network of origination and servicing partners in Canada and the US as well as Warehouse Loans that provide bridge financing to VersaBank’s origination and servicing partners for the purpose of accumulating and seasoning practical volumes of individual loans and leases prior to VersaBank purchasing the cashflow receivables derived from same.

The Commercial Real Estate Mortgages (“CRE Mortgages”) asset category is comprised primarily of Residential; Construction, Term, Insured and Land Mortgages. All of these loans are business-to-business loans with the underlying credit risk exposure being primarily consumer in nature given that the vast majority (approximately 90% as at April 30, 2023) of the loans are related to properties that are designated primarily for residential use. The portfolio benefits from diversity in its underlying security in the form of a broad range of such collateral properties.

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

The Public Sector and Other Financing (“PSOF”) asset category is comprised primarily of Public Sector Loans and Leases, a small balance of Corporate Loans and Leases and Single Family Residential Conventional and Insured Mortgages. VersaBank has de-emphasized Corporate lending and continues to monitor the public sector space in anticipation of more robust demand for Federal, Provincial and Municipal infrastructure and other project financings.

VersaBank – Q2 2023 MD&A 18

Q2 2023 vs Q1 2023

Loans increased 6% to $3.42 billion as a function primarily of:

Growth of 5% in POS Financing portfolio balances attributable primarily to strong demand for home improvement/HVAC and transportation equipment receivable financing in the current period; and,
Growth of 7% in CRE Mortgage balances attributable primarily to healthy demand for the Bank’s residential construction and term financing products in the current period.
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Q2 2023 vs Q2 2022

Loans increased 40% as a function primarily of growth of 58% in the POS Financing and growth of 3% in the CRE Mortgage portfolios, as well as 30% growth in the PSOF portfolio in the current period.

Residential Mortgage Exposures

In accordance with the Office of the Superintendent of Financial Institutions (“OSFI”) Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures, additional information is provided regarding VersaBank’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).

The Bank’s exposure to residential mortgages as at April 30, 2023, was $3.7 million compared to $4.1 million last quarter and $2.4 million a year ago. The Bank did not have any HELOCs outstanding as at April 30, 2023, last quarter or a year ago.

Credit Quality and Allowance for Credit Losses

VersaBank closely monitors its lending portfolio, the portfolio’s underlying borrowers, as well as its origination partners in order to ensure that management has good visibility on credit trends that could provide an early warning indication of the emergence of any elevated risk in VersaBank’s lending portfolio.

VersaBank – Q2 2023 MD&A 19

Allowance for Credit Losses

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

(thousands of Canadian dollars)
April 30 January 31 April 30
2023 2023 Change 2022 Change
ECL allowance by lending asset: **** **** **** **** **** **** **** **** **** **** **** ****
Point-of-sale loans and leases $ 627 $ 583 8 % $ 419 50 %
Commercial real estate mortgages 1,767 1,591 11 % 1,051 68 %
Commercial real estate loans 59 57 4 % 40 48 %
Public sector and other financing 73 58 26 % 23 217 %
Total ECL allowance $ 2,526 $ 2,289 10 % $ 1,533 65 %
(thousands of Canadian dollars)
--- --- --- --- --- --- --- --- --- --- --- --- ---
April 30 January 31 April 30
2023 2023 Change 2022 Change
ECL allowance by stage: **** **** **** **** **** **** **** **** **** **** **** ****
ECL allowance stage 1 $ 2,403 $ 2,212 9 % $ 1,431 68 %
ECL allowance stage 2 123 77 60 % 102 21 %
ECL allowance stage 3 - - -
Total ECL allowance $ 2,526 $ 2,289 10 % $ 1,533 65 %

Q2 2023 vs Q1 2023

VersaBank’s ECL allowance as at April 30, 2023, was $2.53 million compared to $2.29 million last quarter as a function primarily of:

Changes in the forward-looking information used by VersaBank in its credit risk models;
Higher lending asset balances; and,
---
Changes in the Bank’s lending asset mix.
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Q2 2023 vs Q2 2022

VersaBank’s ECL allowance as at April 30, 2023, was $2.53 million compared to $1.53 million a year ago as a function primarily of:

Changes in the forward-looking information used by VersaBank in its credit risk models;
Higher lending asset balances; and,
---
Changes in the Bank’s lending asset mix.
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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.

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.

VersaBank – Q2 2023 MD&A 20

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 as well as changes in Canadian and US macroeconomic trends attributable to changes in monetary policy, inflation, employment rates, consumer behaviour and geo-political risks.

Forward-Looking Information

The Bank incorporates the impact of future economic conditions, or more specifically forward-looking information into the estimation of expected credit losses at the credit risk parameter level. This is accomplished via the credit risk parameter models and proxy datasets that the Bank utilizes to develop probability of default (“PD”), and loss given default (“LGD”), term structure forecasts for its loans. The Bank has sourced credit risk modeling systems and forecast macroeconomic scenario data from Moody’s Analytics, a third-party service provider 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 used in conjunction with the Bank’s internally developed ECL models. Given that the Bank has experienced very limited historical loan losses and, therefore, does not have available statistically significant loss data inventory for use in developing internal, forward looking expected credit loss trends, the use 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 in order to mitigate volatility in the estimation of expected credit losses, as well as to satisfy the IFRS 9 requirement that future economic conditions are to be based on an unbiased, probability-weighted assessment of possible future outcomes. More specifically, the macroeconomic indicators set out in the macroeconomic scenarios are used as inputs for the credit risk parameter models utilized by the Bank to sensitize the individual PD and LGD term structure forecasts to the respective macroeconomic trajectory set out in each of the scenarios (see Expected Credit Loss Sensitivity below). Currently the Bank utilizes upside, downside and baseline forecast macroeconomic scenarios, and assigns discrete weights to each for use in the estimation of its reported ECL. The Bank has also applied expert credit judgement, where appropriate, to reflect, amongst other items, uncertainty in the Canadian and US macroeconomic environments.

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: 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.

VersaBank – Q2 2023 MD&A 21

Key assumptions driving the base case macroeconomic forecast trends this quarter include: elevated inflation and interest rates straining household finances; rate-sensitive sectors such as housing are negatively impacted as sales and prices decline over course of 2023 with the impact being felt throughout related industries of construction, finance and manufacturing; a small, technical recession, with rising unemployment, emerges around mid-2023 as investment contracts sharply and consumer spending remains mostly flat over the same timeline; the impact of the crisis in Ukraine on global commodity prices and trade continues to diminish; public health restrictions do not return even as new COVID-19 case counts occasionally spike through the winter; and supply-chain stress continues to ease as global vaccination rates improve and goods demand weakens.

Management developed ECL estimates using credit risk parameter term structure forecasts sensitized to individual baseline, upside and downside forecast macroeconomic scenarios, each weighted at 100%, and subsequently computed the variance of each to the Bank’s reported ECL as at April 30, 2023 in order to assess the alignment of the Bank’s reported ECL with the Bank’s credit risk profile, and further, to assess the scope, depth and ultimate effectiveness of the credit risk mitigation strategies that the Bank has applied to its lending portfolios (see Expected Credit Loss Sensitivity below).

VersaBank – Q2 2023 MD&A 22

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

a04.jpg

Expected Credit Loss Sensitivity:

The following table presents the sensitivity of the Bank’s estimated ECL to a range of individual forecast macroeconomic scenarios, that in isolation may not reflect the Bank’s actual expected ECL exposure, as well as the variance of each to the Bank’s reported ECL as at April 30, 2023:

(thousands of Canadian dollars)
Reported 100 % 100 % 100 %
ECL Upside Baseline Downside
Allowance for expected credit losses $ 2,526 $ 1,857 $ 2,428 $ 3,334
Variance from reported ECL (669 ) (98 ) 808
Variance from reported ECL (%) (26 %) (4 %) 32 %

Management is of the view that forward industry and macroeconomic data will continue to trend toward the downside over the second half of 2023 as a function primarily of a prolonged, elevated interest rate environment in both Canada and the US and the ability of consumers and businesses to service debt in such an environment along with the impact of high inflation in both Canada and the US. As a result, management anticipates that VersaBank’s estimated ECL amounts will exhibit some volatility which may result in the Bank recognizing higher provisions for credit losses in the coming quarters.

VersaBank – Q2 2023 MD&A 23

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

Deposits

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

(thousands of Canadian dollars)
April 30 January 31 April 30
2023 2023 Change 2022 Change
Commercial deposits $ 583,622 $ 585,579 0 % $ 608,694 (4 %)
Personal deposits 2,524,596 2,339,873 8 % 1,516,222 67 %
Total deposits $ 3,108,218 $ 2,925,452 6 % $ 2,124,916 46 %

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.

Substantially all of the Bank’s Personal and Commercial deposits sourced through these channels are eligible for CDIC insurance.

Q2 2023 vs Q1 2023

Deposits increased 6% to $3.1 billion as a function primarily of:

Higher personal deposits attributable to VersaBank increasing activity in its broker market network to fund balance sheet growth.

Offset partially by:

Modestly lower commercial deposits attributable to withdrawals made by Trustees to fund normal course disbursements associated with insolvency restructurings.

Q2 2023 vs Q2 2022

Deposits increased 46% as a function primarily of the variables and trends set out above.

VersaBank – Q2 2023 MD&A 24

Subordinated Notes Payable

(thousands of Canadian dollars)
January 31 April 30
2023 2022
Issued March 2019, unsecured, non-viability contingent capital compliant, compliant, subordinated notes payable, principal amount of 5.0 million, effective interest rate of 10.41%, maturing March 2029. 4,913 $ 4,911 $ 4,903
Issued April 2021, unsecured, non-viability contingent capital compliant, subordinated notes payable, principal amount of US 75.0 million, effective interest rate of 5.38%, maturing May 2031. 99,619 97,854 93,507
104,532 $ 102,765 $ 98,410

All values are in US Dollars.

Subordinated notes payable, net of issue costs, were $104.5 million as at April 30, 2023, compared to $102.8 million last quarter and $98.4 million a year ago. The quarter over quarter and year over year trends were a function primarily of changes in the USD/CAD foreign exchange spot rate in the current quarter.

Other Assets and Liabilities

Other Assets

(thousands of Canadian dollars)
April 30 January 31 April 30
2023 2023 Change 2022 Change
Accounts receivable $ 3,070 $ 3,406 (10 %) $ 3,750 (18 %)
Prepaid expenses and other 13,593 12,950 5 % 10,448 30 %
Property and equipment 6,833 6,698 2 % 6,872 (1 %)
Right-of-use assets 3,775 3,948 (4 %) 4,470 (16 %)
Deferred tax asset 2,269 2,003 13 % 2,315 (2 %)
Interest rate swap 103 49 110 % -
Investment 953 953 0 % 953 0 %
Goodwill 5,754 5,754 0 % 5,754 0 %
Intangible assets 10,275 9,627 7 % 9,151 12 %
Total other assets $ 46,625 $ 45,388 3 % $ 43,713 7 %

Q2 2023 vs Q1 2023

Other assets increased 3% to $46.6 million as a function primarily of:

Higher prepaid expenses and other attributable primarily to normal course timing of general corporate prepaids expenses;
Higher intangible assets attributable primarily to the capitalization of compensation costs and various development costs directly related to the Bank’s business development initiatives; and,
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VersaBank – Q2 2023 MD&A 25
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Higher deferred tax asset attributable primarily to the Bank recognizing a $530,000 deferred tax asset associated with future non-capital loss carryforwards which are anticipated to be applied to future taxable earnings.

Offset partially by:

Lower accounts receivable attributable primarily to the normal course timing of general corporate receivables; and,
Lower capitalized assets attributable to amortization.
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Q2 2023 vs Q2 2022

Other assets increased 7% as a function primarily of:

Higher prepaid expenses and other attributable primarily to normal course timing of general corporate prepaids expenses; and,
Higher intangible assets attributable primarily to the capitalization of compensation costs and various development costs directly related to the Bank’s business development initiatives.
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Offset partially by:

Lower accounts receivable attributable primarily to the normal course timing of general corporate receivables;
Lower capitalized assets attributable to amortization; and,
---
Draw downs on the deferred tax asset derived from taxable income generated by VersaBank.
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Other Liabilities

(thousands of Canadian dollars)
April 30 January 31 April 30
2023 2023 Change 2022 Change
Accounts payable and other $ 4,045 $ 5,482 (26 %) $ 5,738 (30 %)
Current income tax liability 2,773 1,829 52 % 2,126 30 %
Deferred tax liability 681 704 (3 %) 812 (16 %)
Lease obligations 4,120 4,295 (4 %) 4,776 (14 %)
Cash collateral and amounts held in escrow 6,746 7,210 (6 %) 5,833 16 %
Cash reserves on loan and lease receivables 141,759 132,776 7 % 108,121 31 %
Total other liabilities $ 160,124 $ 152,296 5 % $ 127,406 26 %

Q2 2023 vs Q1 2023

Other liabilities increased 5% to $160.1 million as a function primarily of:

Higher cash reserve balances attributable to higher POS Financing portfolio balances; and,
Higher income tax payable amounts attributable primarily to the normal course payment of current year tax instalments.
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VersaBank – Q2 2023 MD&A 26
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Offset partially by:

Lower accounts payable attributable primarily to the normal course timing of general corporate payables; and,
Lower cash collateral and amounts held in escrow.
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Q2 2023 vs Q2 2022

Other liabilities increased 26% as a function primarily of:

Higher cash reserve balances attributable to higher POS Financing portfolio balances;
Higher cash collateral and amounts held in escrow; and,
---
Higher income tax payable amounts attributable primarily to the normal course payment of current year tax instalments.
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Offset partially by:

Lower accounts payable attributable primarily to the normal course timing of general corporate payables.

Shareholders’ Equity

Shareholders’ equity was $356.5 million as at April 30, 2023, compared to $351.2 million last quarter and $341.4 million a year ago.

Q2 2023 vs Q1 2023 vs Q2 2022

Shareholders’ equity increased 2% compared to last quarter and 4% compared to a year ago as a function primarily of:

Higher retained earnings attributable to net income earned over the period.

Offset partially by:

Purchase and cancellation of common shares through the Bank’s NCIB; and,
Payment of dividends.
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VersaBank’s book value per common share as at April 30, 2023 was $13.19 compared to $12.77 last quarter and $11.94 a year ago. The quarter over quarter and year over year trends were a function primarily of higher retained earnings attributable to net income earned in the current quarter and the purchase and cancellation of common shares below book value per share through the Bank’s NCIB, offset partially by the payment of dividends over the same period.

See note 9 to the unaudited interim consolidated financial statements for additional information relating to share capital.

VersaBank – Q2 2023 MD&A 27

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 contributed surplus. VersaBank recognized compensation expense for the current quarter totaling $192,000 compared to $343,000 last quarter and $424,000 for the same period a year ago, relating to the estimated fair value of stock options granted. The recognized compensation expense for the six-month period ended April 30, 2023, totaled $535,000 compared to $620,000 for the same period a year ago. See note 9 to the unaudited interim consolidated financial statements for additional information relating to stock options.

Updated Share Information

Subsequent to April 30, 2023, the Bank purchased and cancelled 59,562 common shares and as at June 5, 2023, the number of common shares outstanding totalled 25,944,424. There were no changes in the number of Series 1 preferred shares and common share options outstanding compared to April 30, 2023.

Off-Balance Sheet Arrangements

As at April 30, 2023, VersaBank had an outstanding derivative contract established for asset liability management purposes to swap between floating and fixed interest rates with a notional amount totalling $11.8 million that qualified for hedge accounting. The Bank enters into interest rate swap contracts for its own account exclusively and does not act as an intermediary in this market.

As at April 30, 2023, VersaBank did not have any significant off-balance sheet arrangements other than loan commitments and letters of credit attributable to normal course business activities. See notes 12 and 13 to the unaudited interim consolidated financial statements for more information.

Related Party Transactions

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

VersaBank – Q2 2023 MD&A 28

Capital Management and Capital Resources

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

(thousands of Canadian dollars)
April 30 January 31 April 30
2023 2023 Change 2022 Change
Common Equity Tier 1 capital $ 331,614 $ 326,411 2 % $ 315,963 5 %
Total Tier 1 capital $ 345,261 $ 340,058 2 % $ 329,610 5 %
Total Tier 2 capital $ 109,361 $ 107,414 2 % $ 102,473 7 %
Total regulatory capital $ 454,622 $ 447,472 2 % $ 432,083 5 %
Total risk-weighted assets $ 2,957,933 $ 2,917,048 1 % $ 2,313,030 28 %
Capital ratios
CET1 capital ratio 11.21 % 11.19 % 0 % 13.66 % (18 %)
Tier 1 capital ratio 11.67 % 11.66 % 0 % 14.25 % (18 %)
Total capital ratio 15.37 % 15.34 % 0 % 18.68 % (18 %)
Leverage ratio 8.83 % 9.21 % (4 %) 11.63 % (24 %)

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

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

The quarter over quarter and year over year trends exhibited by VersaBank’s reported regulatory capital levels, regulatory capital ratios and leverage ratios were a function primarily of retained earnings growth, the purchase and cancellation of common shares through the Bank’s NCIB, and changes to VersaBank’s risk-weighted asset balances and composition.

For more information regarding capital management, please see note 15 to VersaBank’s April 30, 2023, unaudited interim Consolidated Financial Statements as well as the Capital Management and Capital Resources section of VersaBank’s MD&A for the year ended October 31, 2022.

VersaBank – Q2 2023 MD&A 29

Liquidity

The unaudited Consolidated Statement of Cash Flows for the six months ended April 30, 2023, shows cash provided by operations in the amount of $155.4 million compared to cash used by operations in the amount of $72.0 million for the same period last year. The trend in the current quarter was a function primarily of inflows from deposits raised and timing of maturing of securities exceeding cash outflows to fund loans. The comparative period trend was a function primarily of the Bank using existing liquidity to fund loans. Based on factors such as liquidity requirements and opportunities for investment in loans and securities, VersaBank may manage the amount of deposits it raises and loans it funds in ways that result in the balances of these items giving rise to either negative or positive cash flow from operations. VersaBank will continue to fund its operations and meet contractual obligations as they become due using cash on hand and by closely managing its flow of deposits.

Interest Rate Sensitivity

The table below presents the duration difference between VersaBank’s assets and liabilities and the potential after-tax impact of a 100-basis point shift in interest rates on VersaBank’s earnings during a 12-month period if no remedial actions are taken. As at April 30, 2023, the duration difference between assets and liabilities was 3.1 months compared to 1.4 months as at October 31, 2022. As at April 30, 2023, VersaBank’s assets would reprice faster than its liabilities in the event of a future change in interest rates.

(thousands of Canadian dollars)
April 30, 2023 October 31, 2022
Increase<br><br> <br>100 bps Decrease<br><br> <br>100 bps Increase<br><br> <br>100 bps Decrease<br><br> <br>100 bps
Increase (decrease):
Impact on projected net interest income during a 12 month period $ 5,323 $ (5,334 ) $ 4,304 $ (4,261 )
Duration difference between assets and liabilities (months) 3.1 1.4

Contractual Obligations

As at April 30, 2023, VersaBank had an outstanding contract established for asset liability management purposes to swap between floating and fixed interest rates with a notional amount totalling $11.8 million which qualified for hedge accounting. There have been no other significant changes in contractual obligations as disclosed in VersaBank’s MD&A and Audited Consolidated Financial Statements for the year ended October 31, 2022.

VersaBank – Q2 2023 MD&A 30

Results of Operating Segments

(thousands of Canadian dollars)
for the three months ended April 30, 2023 January 31, 2023 April 30, 2022
Digital DRTC Eliminations/ Consolidated Digital DRTC Eliminations/ Consolidated Digital DRTC Eliminations/ Consolidated
Banking Adjustments Banking Adjustments Banking Adjustments
Net interest income $ 24,609 $ - $ - $ 24,609 $ 24,274 $ - $ - $ 24,274 $ 17,242 $ - $ - $ 17,242
Non-interest income 122 2,146 (192 ) 2,076 2 1,833 (191 ) 1,644 1 1,434 (42 ) 1,393
Total revenue 24,731 2,146 (192 ) 26,685 24,276 1,833 (191 ) 25,918 17,243 1,434 (42 ) 18,635
Provision for (recovery of) credit losses 237 - - 237 385 - - 385 78 - - 78
24,494 2,146 (192 ) 26,448 23,891 1,833 (191 ) 25,533 17,165 1,434 (42 ) 18,557
Non-interest expenses:
Salaries and benefits 6,930 1,499 - 8,429 6,684 1,573 - 8,257 5,586 1,140 - 6,726
General and administrative 3,131 377 (192 ) 3,316 2,862 455 (191 ) 3,126 3,761 300 (42 ) 4,019
Premises and equipment 612 369 - 981 623 329 - 952 659 363 - 1,022
10,673 2,245 (192 ) 12,726 10,169 2,357 (191 ) 12,335 10,006 1,803 (42 ) 11,767
Income (loss) before income taxes 13,821 (99 ) - 13,722 13,722 (524 ) - 13,198 7,159 (369 ) - 6,790
Income tax provision 3,991 (532 ) - 3,459 3,789 (8 ) - 3,781 1,744 103 - 1,847
Net income (loss) $ 9,830 $ 433 $ - $ 10,263 $ 9,933 $ (516 ) $ - $ 9,417 $ 5,415 $ (472 ) $ - $ 4,943
Total assets $ 3,719,592 $ 25,559 $ (15,758 ) $ 3,729,393 $ 3,522,279 $ 23,797 $ (14,386 ) $ 3,531,690 $ 2,692,510 $ 21,386 $ (21,750 ) $ 2,692,146
Total liabilities $ 3,366,614 $ 29,057 $ (22,797 ) $ 3,372,874 $ 3,174,197 $ 27,751 $ (21,435 ) $ 3,180,513 $ 2,347,610 $ 23,727 $ (20,605 ) $ 2,350,732
VersaBank – Q2 2023 MD&A 31
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(thousands of Canadian dollars)
for the six months ended April 30, 2023 April 30, 2022
Digital Banking DRTC Eliminations/ Consolidated Digital Banking DRTC Eliminations/ Consolidated
Adjustments Adjustments
Net interest income $ 48,883 $ - $ - $ 48,883 $ 34,127 $ - $ - $ 34,127
Non-interest income 124 3,979 (383 ) 3,720 2 2,855 (83 ) 2,774
Total revenue 49,007 3,979 (383 ) 52,603 34,129 2,855 (83 ) 36,901
Provision for (recovery of) credit losses 622 - - 622 80 - - 80
48,385 3,979 (383 ) 51,981 34,049 2,855 (83 ) 36,821
Non-interest expenses:
Salaries and benefits 13,614 3,072 - 16,686 11,025 1,784 - 12,809
General and administrative 5,993 832 (383 ) 6,442 7,243 483 (83 ) 7,643
Premises and equipment 1,235 698 - 1,933 1,241 710 - 1,951
20,842 4,602 (383 ) 25,061 19,509 2,977 (83 ) 22,403
Income (loss) before income taxes 27,543 (623 ) - 26,920 14,540 (122 ) - 14,418
Income tax provision 7,780 (540 ) - 7,240 3,706 203 - 3,909
Net income (loss) $ 19,763 $ (83 ) $ - $ 19,680 $ 10,834 $ (325 ) $ - $ 10,509
Total assets $ 3,719,592 $ 25,559 $ (15,758 ) $ 3,729,393 $ 2,692,510 $ 21,386 $ (21,750 ) $ 2,692,146
Total liabilities $ 3,366,614 $ 29,057 $ (22,797 ) $ 3,372,874 $ 2,347,610 $ 23,727 $ (20,605 ) $ 2,350,732

Digital Banking Operations

Q2 2023 vs Q1 2023

Net income decreased 1% to $9.8 million as a function of higher tax provision amounts in the current quarter attributable primarily to the impact of a shift in the allocation of taxable earnings between tax jurisdictions. Income before income taxes increased 1% to $13.8 million as a function of higher revenues attributable primarily to strong loan growth, redeployment of available cash into higher yielding, low risk securities, and lower provision for credit losses, offset partially by higher non-interest expenses. The non-interest expenses trend was a function primarily of higher salary and benefits expense attributable to higher staffing levels to support expanded business activity across VersaBank, higher general, annual compensation adjustments and higher costs attributable to the continuing regulatory approval process associated with the Bank’s acquisition of a US bank.

VersaBank – Q2 2023 MD&A 32

Q2 2023 vs Q2 2022

Net income increased 82% as a function of higher revenue attributable primarily to strong loan growth and redeployment of available cash into higher yielding, low risk securities, offset partially by higher non-interest expenses. The non-interest expenses trend was a function primarily of higher salary and benefits expense attributable to higher staffing levels to support expanded business activity across VersaBank, higher general, annual compensation adjustments and higher costs attributable to the continuing regulatory approval process associated with the Bank’s acquisition of a US bank offset partially by lower insurance premiums and lower capital taxes.

Q2 YTD 2023 vs Q2 YTD 2022

Net income increased 82% as a function of higher revenue attributable primarily to strong loan growth and redeployment of available cash into higher yielding, low risk securities, offset partially by higher non-interest expenses. The non-interest expenses trend was a function primarily of the variables and associated trends set out above.

DRTC (Cybersecurity Services and Banking and Financial Technology Development)

Q2 2023 vs Q1 2023

DRTC revenue increased 17% to $2.1 million, while non-interest expenses decreased 5% to $2.2 million resulting in pre-tax losses reducing 81% to $99,000. In the current quarter DRTC recognized a $530,000 deferred tax asset associated with DRTC’s non-capital loss carryforwards which are anticipated to be applied to future taxable earnings, resulting in a net income of $433,000 compared to a net loss of $516,000 in the comparative period.

DRTC’s DBG services revenue and gross profit increased 11% and 17% to $2.6 million and $1.9 million respectively as a function of higher service engagements in the current quarter. DBG’s gross profit amounts are included in DRTC’s consolidated revenue which is reflected in non-interest income in VersaBank’s consolidated statements of income and comprehensive income.

Q2 2023 vs Q2 2022

DRTC’s revenue increased 50% as a function primarily of higher gross profit from DBG but was offset by higher non-interest expenses attributable to higher salary and benefits expense due to higher staffing levels to support expanded business activity. The favourable trend in revenue along with the recognition in the current quarter of a deferred tax asset associated with DRTC’s non-capital loss carryforwards resulted in DRTC recording net income of $433,000 compared to a net loss of $472,000 in the comparative period.

VersaBank – Q2 2023 MD&A 33

DBG revenue increased 5% as a function of higher service engagements in the current quarter while gross profit increased 35% as a function primarily of improvements in operational efficiency achieved by DBG over the course of the year.

Q2 YTD 2023 vs Q2 YTD 2022

DRTC’s revenue increased 39% as a function primarily of higher revenues and gross profit from DBG but was offset by higher non-interest expenses attributable to higher salary and benefits expense due to higher staffing levels to support expanded business activity. The favourable trend in revenue along with the recognition in the current period of a deferred tax asset associated with DRTC’s non-capital loss carryforwards resulted in a net loss of $83,000 compared to a net loss of $325,000 in the comparative period.

DBG revenue increased 2% as a function of higher service work volume in the current period while gross profit increased 26% as a function primarily of improvements in operational efficiency achieved by DBG over the course of the year.

Summary of Quarterly Results

(thousands of Canadian dollars
except per share amounts) 2023 2022 2021
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Results of operations: **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Interest income $ 53,595 $ 49,561 $ 42,072 $ 34,177 $ 25,848 $ 24,720 $ 23,924 $ 22,400
Yield on assets (%) 6.05 % 5.78 % 5.26 % 4.70 % 4.15 % 4.06 % 4.04 % 4.02 %
Interest expense 28,986 25,287 19,595 14,115 8,606 7,835 7,778 7,858
Cost of funds (%) 3.27 % 2.95 % 2.45 % 1.94 % 1.38 % 1.29 % 1.31 % 1.41 %
Net interest income 24,609 24,274 22,477 20,062 17,242 16,885 16,146 14,542
Net interest margin (%) 2.78 % 2.83 % 2.81 % 2.76 % 2.77 % 2.77 % 2.73 % 2.61 %
Net interest margin on loans (%) 2.99 % 3.03 % 3.03 % 3.07 % 3.11 % 3.23 % 3.31 % 3.23 %
Non-interest income 2,076 1,644 1,775 1,177 1,393 1,381 2,090 1,187
Total revenue 26,685 25,918 24,252 21,239 18,635 18,266 18,236 15,729
Provision for (recovery of) credit losses 237 385 205 166 78 2 (279 ) 96
Non-interest expenses 12,726 12,335 13,774 13,216 11,767 10,636 10,377 8,200
Efficiency ratio 48 % 48 % 57 % 62 % 63 % 58 % 57 % 52 %
Efficiency ratio - Digital Banking 43 % 42 % 51 % 57 % 58 % 56 % 56 % 50 %
Tax provision 3,459 3,781 3,844 2,137 1,847 2,062 2,228 1,997
Net income $ 10,263 $ 9,417 $ 6,429 $ 5,720 $ 4,943 $ 5,566 $ 5,910 $ 5,436
Income per share
Basic $ 0.38 $ 0.34 $ 0.23 $ 0.20 $ 0.17 $ 0.19 $ 0.24 $ 0.25
Diluted $ 0.38 $ 0.34 $ 0.23 $ 0.20 $ 0.17 $ 0.19 $ 0.24 $ 0.25
Return on average common equity 12.07 % 10.79 % 7.32 % 6.57 % 5.92 % 6.58 % 8.07 % 8.72 %
Return on average total assets 1.13 % 1.07 % 0.77 % 0.75 % 0.75 % 0.87 % 0.96 % 0.93 %

The financial results for each of the last eight quarters are summarized above. Key drivers of VersaBank’s quarter over quarter performance trends for the current reporting period were:

Lending asset growth attributable to growth in the POS Financing and CRE Mortgage portfolios;
Lower NIM as a function of higher cost of funds attributable to a shift in the Bank’s funding mix offset partially by higher yields earned on the Bank’s lending and treasury assets;
---
VersaBank – Q2 2023 MD&A 34
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Lower provision for credit losses attributable primarily to changes in the forward-looking information used by VersaBank in its credit risk models in the current quarter offset partially by higher lending asset balances; and,
Higher non-interest expenses attributable primarily to higher salary and benefits expense and higher costs attributable to the continuing regulatory approval process associated with the Bank’s acquisition of a US bank.
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Non-GAAP and Other Financial Measures

Non-GAAP and other financial measures are not standardized financial measures under the financial reporting framework used to prepare the financial statements of the Bank to which these measures relate. These measures may not be comparable to similar financial measures disclosed by other issuers. The Bank uses these financial measures to assess its performance and as such believes these financial measures are useful in providing readers with a better understanding of how management assesses the Bank’s performance.

Non-GAAP Measures

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

(unaudited)
for the three months ended for the six months ended
April 30 April 30 April 30 April 30
(thousands of Canadian dollars) 2023 2022 2023 2022
Return on average common equity **** **** **** **** **** **** **** **** **** **** **** ****
Net income $ 10,263 $ 4,943 $ 19,680 $ 10,509
Preferred share dividends (247 ) (247 ) (494 ) (494 )
Adjusted net income 10,016 4,696 19,186 10,015
Annualized adjusted net income 41,077 19,259 38,690 20,196
Average common equity $ 340,202 $ 325,536 $ 339,951 $ 323,113
Return on average common equity 12.07 % 5.92 % 11.38 % 6.25 %

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.

for the three months ended for the six months ended
April 30 April 30 April 30 April 30
(thousands of Canadian dollars) 2023 2022 2023 2022
Book value per common share **** **** **** **** **** **** **** ****
Common equity $ 342,872 $ 327,767 $ 342,872 $ 327,767
Shares outstanding 26,003,986 27,441,082 26,003,986 27,441,082
Book value per common share $ 13.19 $ 11.94 $ 13.19 $ 11.94
VersaBank – Q2 2023 MD&A 35
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Return on Average Total Assets is defined as annualized net income less amounts relating to preferred share dividends, divided by average total assets.

for the three months ended for the six months ended
April 30 April 30 April 30 April 30
(thousands of Canadian dollars) 2023 2022 2023 2022
Return on average total assets **** **** **** **** **** **** **** **** **** **** **** ****
Net income $ 10,263 $ 4,943 $ 19,680 $ 10,509
Preferred share dividends (247 ) (247 ) (494 ) (494 )
Adjusted net income 10,016 4,696 19,186 10,015
Annualized adjusted net income 41,077 19,259 38,690 20,196
Average Assets $ 3,630,542 $ 2,553,746 $ 3,497,696 $ 2,553,616
Return on average total assets 1.13 % 0.75 % 1.11 % 0.79 %

Other Financial Measures

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

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

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

Net Interest Margin on Loans is calculated as net interest income adjusted for the impact of cash. securities and other assets, divided by average gross loans. This metric 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 is calculated as non-interest expenses from consolidated operations as a percentage of total revenue (as presented in the interim Consolidated Statements of Comprehensive Income). This ratio does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions.

Efficiency Ratio Digital Banking is calculated as non-interest expenses from the Digital Banking operations as a percentage of total revenue from the Digital Banking operations. 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.

VersaBank – Q2 2023 MD&A 36

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

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

Significant Accounting Policies and Use of Estimates and Judgements

Significant accounting policies and use of estimates and judgements are detailed in note 2 and note 3 of VersaBank’s 2022 Audited Consolidated Financial Statements. There have been no material changes in accounting policies since October 31, 2022, except as noted below.

During the current year VersaBank updated or incorporated the following significant accounting policies:

Derivative instruments:

Derivatives are reported as other assets when they have a positive fair value and as other liabilities when they have a negative fair value. Derivatives may be embedded in other financial instruments. Derivatives embedded in other financial instruments are valued as separate derivatives when: the economic characteristics and risks associated are not clearly and closely related to those of the host contract; the terms of the embedded derivative would meet the definition of a derivative if it was a stand-alone, independent instrument; and the combined contract is not held for trading or designated at fair value through profit or loss. For financial statement disclosure purposes, embedded derivatives are combined with the host contract.

Hedge accounting:

The Bank has elected, as permitted, to apply the hedge accounting requirements of IAS 39. Interest rate swap agreements are entered into for asset liability management (“ALM”) purposes. When hedge accounting criteria are met, derivative contracts are accounted for as described below.

To meet the criteria for hedge accounting, the Bank documents all relationships between hedging instruments and hedged items, how hedge effectiveness is assessed, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets or liabilities on the Consolidated Statements of Financial Position. The Bank also formally assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of the hedged items.

VersaBank – Q2 2023 MD&A 37

There are three main types of hedges: (i) fair value hedges, (ii) cash flow hedges and (iii) net investment hedges.

The Bank has only fair value hedges outstanding. In a fair value hedge, the change in the fair value of the hedging derivative is recognized in non-interest income in the Consolidated Statements of Income and Comprehensive Income. The change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item (basis adjustment) and is also recognized in non-interest income in the Consolidated Statements of Income and Comprehensive Income. The Bank utilizes fair value hedges primarily to convert fixed rate financial assets to floating rate financial assets. The primary financial instruments designated in fair value hedging relationships are loans. If the derivative expires or is sold, terminated, no longer meets the criteria for hedge accounting, or the designation is revoked, hedge accounting is discontinued. Any basis adjustment up to that point made to a hedged item for which the effective interest method is used is amortized to the Consolidated Statements of Income and Comprehensive Income as part of the recalculated effective interest rate of the item over its remaining term. If the hedged item is derecognized, the unamortized fair value is recognized immediately in the Consolidated Statements of Income and Comprehensive Income.

In fair value hedges, ineffectiveness arises to the extent that change in fair value of the hedging items differs from the change in fair value of the hedge risk in the hedged item. Any hedge ineffectiveness is measured and recorded in non-interest income in the Consolidated Statements of Income and Comprehensive Income.

Derivative contracts which do not qualify for hedge accounting are marked-to-market and the resulting net gains or losses are recognized in non-interest income in the Consolidated Statement of Income.

Controls and Procedures

During the quarter ended April 30, 2023, there were no changes in VersaBank’s internal controls over financial reporting, that have materially affected, or are reasonably likely to materially affect VersaBank’s internal controls over financial reporting.

VersaBank – Q2 2023 MD&A 38

ex_528438.htm

Exhibit 99.3

ex_528438img001.jpg

For Immediate Release: June 7, 2023

Attention: Business Editors

VERSABANK REPORTS CONTINUED STRONG RESULTS FOR SECOND QUARTER 2023 HIGHLIGHTED BY 108% YEAR-OVER-YEAR GROWTH IN NET INCOME TO $10.3 MILLION

– Digital Banking Operations Benefitting from Significant Operating Leverage as Loan Portfolio Continues to Experience Strong Growth –

All amounts are unaudited and in Canadian dollars and are based on financial statements prepared in compliance with International Accounting Standard 34 Interim Financial Reporting, unless otherwise noted. Our second quarter 2023 (“Q2 2023”) unaudited Interim Consolidated Financial Statements for the period ended April 30, 2023 and Management’s Discussion and Analysis ("MD&A"), are available online at www.versabank.com/investor-relations*, SEDAR at* www.sedar.com and EDGAR at www.sec.gov/edgar.shtml. Supplementary Financial Information will also be available on our website at www.versabank.com/investor-relations*.*

LONDON, ON/CNW – VersaBank (“VersaBank” or the “Bank”) (TSX: VBNK; NASDAQ: VBNK), a North American leader in business-to-business digital banking, as well as technology solutions for cybersecurity, today reported its results for the second quarter of fiscal 2023 ended April 30, 2023. All figures are in Canadian dollars unless otherwise stated.

CONSOLIDATED AND SEGMENTED FINANCIAL SUMMARY

(unaudited) As at or for the three months ended As at or for the six months ended
(thousands of Canadian dollars except per share amounts) April 30<br><br> <br>2023 January 31<br><br> <br>2023 Change April 30<br> <br>2022 Change April 30<br><br> <br>2023 April 30<br><br> <br>2022 Change
Financial results **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Total revenue $ 26,685 $ 25,918 3 % $ 18,635 43 % $ 52,603 $ 36,901 43 %
Cost of funds^(1)^ 3.27 % 2.95 % 11 % 1.38 % 137 % 3.13 % 1.30 % 141 %
Net interest margin^(1)^ 2.78 % 2.83 % (2 %) 2.77 % 0 % 2.82 % 2.69 % 5 %
Net interest margin on loans^(1)^ 2.99 % 3.03 % (1 %) 3.11 % (4 %) 3.02 % 3.14 % (4 %)
Net income **** 10,263 **** 9,417 **** 9 % **** 4,943 **** 108 % **** 19,680 **** 10,509 **** 87 %
Net income per common share basic and diluted 0.38 0.34 12 % 0.17 124 % 0.72 0.36 100 %
Balance sheet and capital ratios **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Total assets $ 3,729,393 $ 3,531,690 6 % $ 2,692,146 39 % $ 3,729,393 $ 2,692,146 39 %
Book value per common share^(1)^ 13.19 12.77 3 % 11.94 10 % 13.19 11.94 10 %
Common Equity Tier 1 (CET1) capital ratio 11.21 % 11.19 % 0 % 13.66 % (18 %) 11.21 % 13.66 % (18 %)
Total capital ratio 15.37 % 15.34 % 0 % 18.68 % (18 %) 15.37 % 18.68 % (18 %)
Leverage ratio 8.83 % 9.21 % (4 %) 11.63 % (24 %) 8.83 % 11.63 % (24 %)
(1) See definitions under ‘Non-GAAP and Other Financial Measures' in the Q2 2023 Management’s Discussion and Analysis.
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1

(thousands of Canadian dollars)

for the three months ended April 30, 2023 January 31, 2023 April 30, 2022
Digital DRTC Eliminations/ Consolidated Digital DRTC Eliminations/ Consolidated Digital DRTC Eliminations/ Consolidated
Banking Adjustments Banking Adjustments Banking Adjustments
Net interest income $ 24,609 $ - $ - $ 24,609 $ 24,274 $ - $ - $ 24,274 $ 17,242 $ - $ - $ 17,242
Non-interest income 122 2,146 (192 ) 2,076 2 1,833 (191 ) 1,644 1 1,434 (42 ) 1,393
Total revenue 24,731 2,146 (192 ) 26,685 24,276 1,833 (191 ) 25,918 17,243 1,434 (42 ) 18,635
Provision for (recovery of) credit losses 237 - - 237 385 - - 385 78 - - 78
24,494 2,146 (192 ) 26,448 23,891 1,833 (191 ) 25,533 17,165 1,434 (42 ) 18,557
Non-interest expenses:
Salaries and benefits 6,930 1,499 - 8,429 6,684 1,573 - 8,257 5,586 1,140 - 6,726
General and administrative 3,131 377 (192 ) 3,316 2,862 455 (191 ) 3,126 3,761 300 (42 ) 4,019
Premises and equipment 612 369 - 981 623 329 - 952 659 363 - 1,022
10,673 2,245 (192 ) 12,726 10,169 2,357 (191 ) 12,335 10,006 1,803 (42 ) 11,767
Income (loss) before income taxes 13,821 (99 ) - 13,722 13,722 (524 ) - 13,198 7,159 (369 ) - 6,790
Income tax provision 3,991 (532 ) - 3,459 3,789 (8 ) - 3,781 1,744 103 - 1,847
Net income (loss) $ 9,830 $ 433 $ - $ 10,263 $ 9,933 $ (516 ) $ - $ 9,417 $ 5,415 $ (472 ) $ - $ 4,943
Total assets $ 3,719,592 $ 25,559 $ (15,758 ) $ 3,729,393 $ 3,522,279 $ 23,797 $ (14,386 ) $ 3,531,690 $ 2,692,510 $ 21,386 $ (21,750 ) $ 2,692,146
Total liabilities $ 3,366,614 $ 29,057 $ (22,797 ) $ 3,372,874 $ 3,174,197 $ 27,751 $ (21,435 ) $ 3,180,513 $ 2,347,610 $ 23,727 $ (20,605 ) $ 2,350,732

HIGHLIGHTS FOR THE SECOND QUARTER OF FISCAL 2023

Consolidated

● Consolidated revenue increased 43% year-over-year and 3% sequentially to a record $26.7 million, driven by higher interest income resulting primarily from continuing strong loan growth, as well as an increased contribution from DRT Cyber Inc. (“DRTC”);
● Consolidated net income increased 108% year-over-year and 9% sequentially to a record^1^ $10.3 million as a function of higher revenue, which was driven primarily by strong loan growth, as well as an increased contribution from DRTC, offset partially by higher non-interest expense;
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● Consolidated earnings per share increased 124% year-over-year and 12% sequentially to $0.38 as a function of higher net income, as well as the positive impact of the purchase and cancellation of VersaBank’s common shares through its Normal Course Issuer Bid (“NCIB”);
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● The Bank purchased and cancelled 419,500 common shares under its NCIB, bringing the total number of common shares purchased through the NCIB as at April 30, 2023 to 1,437,096; and,
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● The Bank continues to advance the process seeking approval of its proposed acquisition of OCC-chartered US bank, Stearns Bank Holdingford, and expects a decision with respect to approval of its application from US regulators by the end of summer 2023. If favourable, the Bank will proceed toward completion of the acquisition as soon as possible, subject to Canadian regulatory (OSFI) approval.
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(1) Record net income adjusting for the impact of the recognition of a deferred tax asset attributable to future tax loss carry-forwards.  In the first quarter of 2017 the Bank recognized an $8.8 million deferred tax asset derived from the tax loss carryforwards assumed pursuant to the amalgamation of VersaBank with PWC Capital Inc. and in the current quarter recognized a $530,000 deferred tax asset associated with DRTC’s non-capital loss carryforwards.  Quarterly net income for January 31, 2017, excluding the $8.8 million deferred tax asset was $3.1 million, while the quarterly net income for April 30, 2023, excluding the $530,000 deferred tax asset was $9.7 million.
--- ---

Digital Banking Operations

● Loans increased 40% year-over-year and 6% sequentially to a record $3.42 billion, driven primarily by growth in the Bank’s Point-of-Sale (“POS”) Financing portfolio, which increased 58% year-over-year and 5% sequentially, as well as growth in the Bank’s Commercial Real Estate (“CRE”) portfolio (predominantly related to residential use properties), which increased 4% year-over-year and 7% sequentially;
● Revenue increased 43% year-over-year and 2% sequentially to a record $24.7 million, driven primarily by loan growth, as well as redeployment of available cash into higher yielding, low risk securities, offset partially by higher interest expense attributable to higher deposit balances;
--- ---

2

● Net interest margin on loans decreased 12 bps, or 4%, year-over-year and decreased 4 bps, or 1%, sequentially to 2.99% due to higher cost of funds attributable primarily to a shift in the Bank’s funding mix, offset partially by higher yields earned on the Bank’s lending assets;
● Net interest margin increased 1 bp year-over-year, or less than 1%, and decreased 5 bps, or 2%, sequentially to 2.78%. The year-over-year trend was as a function primarily of higher yields earned on the Bank’s lending and treasury assets resulting primarily from a higher interest rate environment, offset partially by higher cost of funds. The sequential trend was a function primarily of higher cost of funds attributable primarily to a shift in the Bank’s funding mix, offset partially by higher yields earned on the Bank’s lending and treasury assets;
--- ---
● Provision for credit losses as a percentage of average loans was 0.03%, compared with a 12-quarter average of -0.01%, which remains among the lowest of the publicly traded Canadian Schedule I (federally licensed) Banks; and,
--- ---
● Efficiency ratio (excluding DRTC) improved year-over-year to 43% (down from 58%) due to revenue growth (43%) continuing to significantly outpace non-interest expense growth (8%) over the same period. On a sequential basis, efficiency ratio increased slightly (up from 42%).
--- ---

DRTC (Cybersecurity Services and Banking and Financial Technology Development)

● Revenue for the Cybersecurity Services component of DRTC (Digital Boundary Group, or DBG) increased 5% year-over-year to $2.6 million as a function of higher service engagement in the current quarter, while gross profit increased 35% to $1.9 million as a function primarily of improved operational efficiency.  Sequentially, revenue and gross profit for Digital Boundary Group increased 11% and 17% respectively as a function of higher service engagements in the current quarter. DBG’s gross profit amounts are included in DRTC’s consolidated revenue which is reflected in non-interest income in VersaBank’s consolidated statements of income and comprehensive income.  DBG remained profitable on a standalone basis within DRTC.

MANAGEMENT COMMENTARY

“Our second quarter financial results were once again evidence that VersaBank is at an inflection point in terms of realizing the significant operating leverage inherent in our branchless, digital banking model,” said David Taylor, President and Chief Executive Officer, VersaBank. “40% year-over-year loan growth to a record $3.42 billion loan portfolio drove a 108% year-over-year increase in net income and a 124% increase in earnings per share, as we continue to take advantage of our share buyback program.”

“We anticipate continued strong growth in our loan portfolio in the second half of 2023, driven by continued growth in our Canadian Point of Sale portfolio, which typically benefits from higher consumer spending in the spring and summer months.  We also expect to benefit from continued growth from the ramp up of the limited launch of our US Receivable Purchase Program, which we plan to broadly launch upon approval of our pending US bank acquisition. At the same time, we are being opportunistic in our Commercial Real Estate portfolio, 90% of which is related to residential use properties, an asset class that continues to present an attractive return on equity and low risk profile in Canada.”

“Our pending acquisition of a national, OCC-chartered US bank presents the opportunity to supercharge our already strong growth prospects domestically through the opportunity to address an underserved market need with an innovative, proven financing solution. We continue to be encouraged by our discussions with prospective partners as we advance toward regulatory approval of our acquisition, which we now expect to receive by the end of the summer of this year. If favourable, we will proceed toward Canadian regulatory approval and closing of the acquisition as quickly as possible thereafter.”

“Continued strong growth in our loan portfolio combined with the significant operating leverage in our model is expected to drive meaningful improvement in our efficiency ratio, continued strong growth in net income, significant expansion of return on common equity and continued creation of value for our shareholders.”

3

FINANCIAL REVIEW

Consolidated

Net Income – Net income for the second quarter of fiscal 2023 was $10.3 million, or $0.38 per common share (basic and diluted), compared with $9.4 million, or $0.34 per common share (basic and diluted) last quarter and $4.9 million, or $0.17 per common share (basic and diluted), for the same period of fiscal 2022. The sequential and year-over-year increases were a function of higher revenue attributable primarily to lending asset growth, redeployment of available cash into higher yielding, low risk securities and higher revenue contributions from DRTC, offset partially by higher non-interest expense.

Digital Banking Operations

Net Interest Margin – Net interest margin (or spread) for the quarter was 2.78% compared to 2.83% last quarter and 2.77% for the same period of fiscal 2022. The sequential trend was a function primarily of higher cost of funds attributable to a shift in the Bank’s funding mix, offset partially by higher yields earned on the Bank’s lending and treasury assets. The year-over-year trend was as a function primarily of higher yields earned on the Bank’s lending and treasury assets attributable to a higher interest rate environment offset partially by higher cost of funds.

Net Interest Margin on Loans – Net interest margin on loans for the quarter was 2.99% compared to 3.03% last quarter, and 3.11% for the same period of fiscal 2022. Year-to-date net interest margin on loans was 3.02% compared to 3.14% for the same period a year ago. The sequential and year-over-year trends were a function primarily of higher cost of funds attributable to a shift in the Bank’s funding mix offset partially by higher yields earned on the Bank’s lending assets due to a higher interest rate environment.

Net Interest Income – Net interest income for the quarter increased to a record $24.6 million from $24.3 million last quarter and $17.2 million for the same period of fiscal 2022. The sequential and year over year trends were a function primarily of higher interest income earned on higher loan balances attributable to strong growth in both the Bank’s POS Financing and CRE Mortgage portfolios, higher yields earned on floating-rate lending assets, and the redeployment of available cash into higher-yielding, low-risk securities offset partially by higher interest expense attributable to higher deposit balances.

Non-Interest Expenses – Non-interest expenses for the quarter were $12.7 million compared with $12.3 million last quarter and $11.8 million for the same period of fiscal 2022. The sequential and year-over-year trends were a function primarily of higher salary and benefits amounts attributable to higher staffing levels to support expanded business activity across the Bank, higher general, annual compensation adjustments and higher professional fees attributable to the continuing regulatory approval process associated with VersaBank’s acquisition of a US bank. Investments associated with the acquisition of the US bank are expected to continue over the course of fiscal 2023 in amounts similar to the current period and will be related primarily to the Bank ensuring that it is in compliance with all necessary US banking regulatory requirements. The year-over-year increase in non-interest expenses was partially offset by lower insurance premiums relative to the premiums paid during the comparative period attributable to VersaBank’s listing on the Nasdaq in September 2021 and lower capital tax expense attributable to a shift in the provincial allocation of the Bank’s loan and deposit originations.

Provision for/Recovery of Credit Losses – Provision for credit losses for the quarter was $237,000 compared to a provision for credit losses of $385,000 last quarter and a provision for credit losses of $78,000 for the same period of fiscal 2022. The sequential trend was a function primarily of changes in the forward-looking information used by the Bank in its credit risk models, offset partially by higher lending asset balances and changes in the Bank’s lending asset mix. The year-over-year trend was a function primarily of changes in the forward-looking information used by the Bank in its credit risk models, higher lending asset balances and changes in the Bank’s lending asset mix. Provision for credit losses as a percentage of average loans was 0.03%, compared with a 12-quarter average of -0.01%,

Capital – At April 30, 2023, VersaBank’s total regulatory capital was $455 million compared with $447 million last quarter and $432 million a year ago. The Bank’s total capital ratio at April 30, 2023 was 15.37%, compared 15.34% last quarter and 18.68% a year ago. The sequential and year-over-year capital ratio trends were a function primarily of retained earnings growth, the impact of the purchase and cancellation of common shares through the Bank’s NCIB and changes to the Bank’s risk-weighted asset balances and composition over the same periods.

4

Credit Quality – The Bank’s allowance for expected credit losses, (“ECL”) at April 30, 2023 was $2.5 million compared with $2.3 million last quarter and $1.5 million a year ago. The sequential and year-over-year changes were a function primarily of the factors set out in the Provision for/Recovery of Credit Losses section above. VersaBank’s Provision for Credit Losses ratio continues to be one of the lowest in the Canadian banking industry, reflecting the very low risk profile of the Bank’s lending portfolio, enabling it to generate superior net interest margins by offering innovative, high-value deposit and lending solutions that address unmet needs in the banking industry through a highly efficient partner model. Given that the vast majority of the Bank’s CRE portfolio is composed of loans and mortgages for residential use properties, it has very limited exposure to the commercial real estate market.

Lending Operations: POS Financing – POS Financing portfolio balances for the quarter increased 5% sequentially and 58% year-over-year to $2.5 billion as a function primarily of continued strong demand for home improvement/HVAC and transportation receivable financing. Although consumer spending and business investment in Canada are expected to slow during the second half of 2023 (due primarily to the impact of higher interest rates combined with elevated inflation), the economic slowdown is expected to be short lived, with modest layoffs and stable unemployment levels.  As was the case during the first half of fiscal 2023, management expects any impact of a slower economy on the POS Financing portfolio in the second half of fiscal 2023 to be substantially outweighed by the Bank’s continued success in adding new origination partners and expanding business with existing partners.  Combined with what is seasonally stronger growth historically in the POS portfolio in the second half of the fiscal year, management expects growth in the POS portfolio for the second half of 2023 to be, at a minimum, consistent with that of the first half.

US Receivable Purchase Program (“RPP”) - Despite higher interest rates, elevated inflation and high gas prices in the US, the labour market remains tight which management expects will continue to support consumer spending, and in turn will support stable demand for durable goods and agricultural products which is expected to continue to stimulate transportation and manufacturing equipment purchases. Additionally, despite a cooling of the residential home market in the US overall construction activity is expected to continue to expand modestly over the course of 2023 which is anticipated to support demand for construction equipment in the near term which management believes will continue to support growth in the Bank’s RPP portfolio over the course of fiscal 2023.

Lending Operations: Commercial Lending – **** The Commercial Lending portfolio for the quarter increased 7% sequentially and 4% year-over-year to $866 million. Management anticipates continued moderate growth in the commercial mortgage sector related to financing for residential housing properties, which is expected to result in healthy demand for the Bank’s residential construction and term financing products for which the Bank is currently experiencing and expects to continue to experience high quality deal flow, throughout at least fiscal 2023. Notwithstanding the effective risk mitigation strategies that are employed in managing the Bank’s CRE portfolios, including working with well-established, well-capitalized partners and maintaining modest loan-to-value ratios on individual transactions, management continues to take a cautionary stance with respect to its broader CRE portfolios due to the anticipation of volatility in CRE asset valuations in the current and anticipated interest rate environment and the potential impact of same on borrowers’ ability to service debt, as well as due to concerns related to inflation and higher input costs, which continue to have the potential to drive higher construction costs. Additionally, management anticipates more meaningful participation in the OFSI B-20 compliant conventional, uninsured mortgage financing space. Management anticipates business generated from this initiative will have a positive balance sheet impact through fiscal 2024.

Deposit Funding – Cost of funds for the second quarter was 3.27%, an increase of 32 bps sequentially and 189 bps year-over-year attributable to a shift in the Bank’s funding mix and a higher interest rate environment. Management expects that commercial deposit volumes raised via VersaBank’s Trustee Integrated Banking (“TIB”) program will return to growth late in the second half of fiscal 2023 as a function of an increase in the volume of consumer and commercial bankruptcy and proposal restructuring proceedings over the same timeframe, attributable primarily to a more challenging current and forecasted economic environment as evidenced by increasing Canadian consumer bankruptcy filing volumes. Further, VersaBank continues to pursue a number of initiatives to grow and expand its well-established, diverse deposit broker network through which it sources personal deposits, consisting primarily of guaranteed investment certificates. The Bank’s current deposit channels remain an efficient, reliable and diversified source of funding providing ample access to reasonably priced deposits in volumes that comfortably support the Bank’s liquidity requirements. Substantially all of the Bank’s deposit volumes raised through these channels are eligible for CDIC insurance.

5

DRTC (Cybersecurity Services and Banking and Financial Technology Development)

DRTC revenue (including that from services provided to the Digital Banking operations) increased 17% sequentially to $2.1 million and 50% year-over-year, as a function primarily of higher service engagements in the current quarter and higher gross profit from DBG. DRTC recorded net income of $433,000 compared to a net loss of $516,000 in the sequential quarter and net loss of $472,000 a year ago. The sequential and year-over-year trends were a function primarily of a $530,000 deferred tax asset associated with DRTC’s non-capital loss carryforwards which are anticipated to be applied to future taxable earnings.

DBG revenue increased 11% sequentially as a function of higher service engagements in the current quarter while gross profit increased 17% sequentially as a function primarily of improved operational efficiency achieved by DBG over the course of the year. DRTC’s DBG services revenue and gross profit increased 5% and 35% year-over-year to $2.6 million and $1.9 million respectively as a function of higher service engagements in the current quarter. DBG’s gross profit amounts are included in DRTC’s consolidated revenue which is reflected in non-interest income in VersaBank’s consolidated statements of income and comprehensive income.

6

FINANCIAL HIGHLIGHTS

(unaudited) for the three months ended for the six months ended
April 30 April 30 April 30 April 30
(thousands of Canadian dollars except per share amounts) 2023 2022 2023 2022
Results of operations **** **** **** **** **** **** **** **** **** **** **** ****
Interest income $ 53,595 $ 25,848 $ 103,156 $ 50,568
Net interest income 24,609 17,242 48,883 34,127
Non-interest income 2,076 1,393 3,720 2,774
Total revenue 26,685 18,635 52,603 36,901
Provision for credit losses 237 78 622 80
Non-interest expenses 12,726 11,767 25,061 22,403
Digital Banking 10,673 10,006 20,842 19,509
DRTC 2,245 1,803 4,602 2,977
Net income **** 10,263 **** 4,943 **** 19,680 **** 10,509
Income per common share:
Basic $ 0.38 $ 0.17 $ 0.72 $ 0.36
Diluted $ 0.38 $ 0.17 $ 0.72 $ 0.36
Dividends paid on preferred shares $ 247 $ 247 $ 494 $ 494
Dividends paid on common shares $ 651 $ 687 $ 1,314 $ 1,374
Yield* 6.05 % 4.15 % 5.95 % 3.99 %
Cost of funds* 3.27 % 1.38 % 3.13 % 1.30 %
Net interest margin* 2.78 % 2.77 % 2.82 % 2.69 %
Net interest margin on loans* 2.99 % 3.11 % 3.02 % 3.14 %
Return on average common equity* 12.07 % 5.92 % 11.38 % 6.25 %
Book value per common share* $ 13.19 $ 11.94 $ 13.19 $ 11.94
Efficiency ratio* 48 % 63 % 48 % 61 %
Efficiency ratio - Digital Banking* 43 % 58 % 43 % 57 %
Return on average total assets* 1.13 % 0.75 % 1.11 % 0.79 %
Provision for credit losses as a % of average loans* 0.03 % 0.01 % 0.04 % 0.01 %
as at
--- --- --- --- --- --- --- --- --- --- --- --- ---
Balance Sheet Summary **** **** **** **** **** **** **** **** **** **** **** ****
Cash $ 223,661 $ 198,157 $ 223,661 $ 198,157
Securities 39,652 - 39,652 -
Loans, net of allowance for credit losses 3,419,455 2,450,276 3,419,455 2,450,276
Average loans 3,327,269 2,332,957 3,206,067 2,276,663
Total assets 3,729,393 2,692,146 3,729,393 2,692,146
Deposits 3,108,218 2,124,916 3,108,218 2,124,916
Subordinated notes payable 104,532 98,410 104,532 98,410
Shareholders' equity 356,519 341,414 356,519 341,414
Capital ratios** **** **** **** **** **** **** **** **** **** **** **** ****
Risk-weighted assets $ 2,957,933 $ 2,313,030 $ 2,957,933 $ 2,313,030
Common Equity Tier 1 capital 331,614 315,963 331,614 315,963
Total regulatory capital 454,622 432,083 454,622 432,083
Common Equity Tier 1 (CET1) ratio 11.21 % 13.66 % 11.21 % 13.66 %
Tier 1 capital ratio 11.67 % 14.25 % 11.67 % 14.25 %
Total capital ratio 15.37 % 18.68 % 15.37 % 18.68 %
Leverage ratio 8.83 % 11.63 % 8.83 % 11.63 %
* See definitions under ‘Non-GAAP and Other Financial Measures' in the Q2 2023 Management’s Discussion and Analysis.
---
** Capital management and leverage measures are in accordance with OSFI's Capital Adequacy Requirements  and Basel III Accord.

7

About VersaBank

VersaBank is a Canadian Schedule I chartered (federally licensed) bank with a difference. VersaBank became the world’s first fully digital financial institution when it adopted its highly efficient business-to-business model in 1993 using its proprietary state-of-the-art financial technology to profitably address underserved segments of the Canadian banking market in the pursuit of superior net interest margins while mitigating risk. VersaBank obtains all of its deposits and provides the majority of its loans and leases electronically, with innovative deposit and lending solutions for financial intermediaries that allow them to excel in their core businesses. In addition, leveraging its internally developed IT security software and capabilities, VersaBank established wholly owned, Washington, DC-based subsidiary, DRT Cyber Inc. to pursue significant large-market opportunities in cyber security and develop innovative solutions to address the rapidly growing volume of cyber threats challenging financial institutions, multi-national corporations and government entities on a daily basis.

VersaBank’s Common Shares trade on the Toronto Stock Exchange (“TSX”) and Nasdaq under the symbol VBNK. Its Series 1 Preferred Shares trade on the TSX under the symbol VBNK.PR.A.

Forward-Looking Statements

VersaBank’s public communications often include written or oral forward-looking statements. Statements of this type are included in this document and may be included in other filings and with Canadian securities regulators or the US Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the “safe harbor” provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. The statements in this management’s discussion and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, many of which are out of VersaBank’s control. Risks exist that predictions, forecasts, projections, and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian and US economy in general and the strength of the local economies within Canada and the US in which VersaBank conducts operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada and the US Federal Reserve; global commodity prices; the effects of competition in the markets in which VersaBank operates; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations pertaining to financial services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; the impact of wars or conflicts including the crisis in Ukraine and the impact of the crisis on global supply chains and markets; the impact of potential new variants of COVID-19; the possible effects on our business of terrorist activities; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; and VersaBank’s anticipation of and success in managing the risks implicated by the foregoing. For a detailed discussion of certain key factors that may affect VersaBank’s future results, please see VersaBank’s annual MD&A for the year ended October 31, 2022.

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

8

Conference Call

VersaBank will be hosting a conference call and webcast today, Wednesday, June 7, 2023, at 9:00 a.m. (EDT) to discuss its second quarter results, featuring a presentation by David Taylor, President & CEO, and other VersaBank executives, followed by a question and answer period.

Dial-in Details

Toll-free dial-in number: 1 (888) 664-6392 (Canada/U.S.)
Local dial-in number: (416) 764-8659

Please call between 8:45 a.m. and 8:55 a.m. (EDT).

To join the conference call by telephone without operator assistance, you may register and enter your phone number in advance at https://emportal.ink/3McGJdd to receive an instant automated call back.

Webcast Access: For those preferring to listen to the conference call via the Internet, a webcast of Mr. Taylor’s presentation will be available via the internet, accessible here https://app.webinar.net/6VP5qe6YDXl or from the Bank’s web site.

Instant Replay

Toll-free dial-in number: 1 (888) 390-0541 (Canada/U.S.)
Local dial-in number: (416) 764-8677
Passcode: 008318#
Expiry Date: July 7th, 2023, at 11:59 p.m. (EDT)

The archived webcast presentation will also be available via the Internet for 90 days following the live event at https://app.webinar.net/6VP5qe6YDXl and on the Bank’s web site.

FOR FURTHER INFORMATION, PLEASE CONTACT:

LodeRock Advisors<br><br> <br>Lawrence Chamberlain<br><br> <br>(416) 519-4196<br><br> <br>lawrence.chamberlain@loderockadvisors.com

Visit our website at: www.versabank.com

Follow VersaBank on Facebook, Instagram, LinkedIn and Twitter

9

ex_528563.htm

Exhibit 99.4

logo02.jpg

For Immediate Release: June 7, 2023

Attention: Business Editors

VERSABANK DECLARES DIVIDENDS

LONDON, ON/CNW - VersaBank (the “Bank”) (TSX: VBNK; NASDAQ: VBNK) today announced that cash dividends in the amount of CAD $0.025 per Common Share of the Bank and CAD $0.1693 per Series 1 Preferred Share of the Bank, have been declared for the quarter ending July 31, 2023, payable as of July 31, 2023, to shareholders of record at the close of business on July 7, 2023.

The dividends to which this notice relates are eligible dividends for tax purposes.

About VersaBank

VersaBank is a Canadian Schedule I chartered (federally licensed) bank with a difference. VersaBank became the world’s first fully digital financial institution when it adopted its highly efficient business-to-business model in 1993 using its proprietary state-of-the-art financial technology to profitably address underserved segments of the Canadian banking market in the pursuit of superior net interest margins while mitigating risk. VersaBank obtains all of its deposits and provides the majority of its loans and leases electronically, with innovative deposit and lending solutions for financial intermediaries that allow them to excel in their core businesses. In addition, leveraging its internally developed IT security software and capabilities, VersaBank established wholly owned, Washington, DC-based subsidiary, DRT Cyber Inc. to safeguard its digital infrastructure and to pursue significant large-market opportunities in cyber security and develop innovative solutions to address the rapidly growing volume of cyber threats challenging financial institutions, multi-national corporations and government entities on a daily basis.

VersaBank’s Common Shares trade on the Toronto Stock Exchange (“TSX”) and Nasdaq under the symbol VBNK. Its Series 1 Preferred Shares trade on the TSX under the symbol VBNK.PR.A.

Follow VersaBank on Facebook, Instagram, LinkedIn and Twitter.

FOR FURTHER INFORMATION, PLEASE CONTACT:

LodeRock Advisors

Lawrence Chamberlain

(416) 519-4196

lawrence.chamberlain@loderockadvisors.com

Visit our website at: www.versabank.com

Follow VersaBank on Facebook, Instagram, LinkedIn and Twitter.

ex_528564.htm

Exhibit 99.5

smlogo01.jpg

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, David R. Taylor, President & Chief Executive Officer of VersaBank, certify the following:

1. Review:  I have reviewed the interim financial statements and interim MD&A (together, the “interim filings”) of VersaBank (the “issuer”) for the interim period ended April 30, 2023.
2. No misrepresentations:  Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
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3. Fair presentation:  Based on my knowledge, having exercised reasonable diligence, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
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4. Responsibility:  The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’Annual and Interim Filings, for the issuer.
--- ---
5. Design:  Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
--- ---
(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
--- ---
(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
--- ---
(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
--- ---
(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
--- ---
5.1 Control framework:  The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control –Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
--- ---
  • 2 -
5.2 N/A
5.3 N/A
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6. Reporting changes in ICFR:  The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on February 1, 2023 and ended on April 30, 2023 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
--- ---

Date:  June 7, 2023

/s/ David R. Taylor
David R. Taylor<br><br> <br>President &<br><br> <br>Chief Executive Officer

ex_528565.htm

Exhibit 99.6

smlogo01.jpg

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Shawn Clarke, Chief Financial Officer of VersaBank, certify the following:

1. Review:  I have reviewed the interim financial statements and interim MD&A (together, the “interim filings”) of VersaBank (the “issuer”) for the interim period ended April 30, 2023.
2. No misrepresentations:  Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
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3. Fair presentation:  Based on my knowledge, having exercised reasonable diligence, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
--- ---
4. Responsibility:  The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’Annual and Interim Filings, for the issuer.
--- ---
5. Design:  Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
--- ---
(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
--- ---
(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
--- ---
(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
--- ---
(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
--- ---
5.1 Control framework:  The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control –Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
--- ---
  • 2 -
5.2 N/A
5.3 N/A
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6. Reporting changes in ICFR:  The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on February 1, 2023 and ended on April 30, 2023 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
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Date:  June 7, 2023

/s/ Shawn Clarke
Shawn Clarke<br><br> <br>Chief Financial Officer

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