2018 Financial Report. First Quarter

Transcription

1 2018 Financial Report First Quarter June 30,

2 Executive Summary The Canadian economy is showing more growth. The economy grew at an annualized rate of 3.7% in the first quarter of and has created 316,800 jobs over the last 12 months. Unemployment rates in the three largest provinces are near or at their lowest historical levels. The economy is close to running at full capacity, which gave support to the recent increase in interest rates by the Bank of Canada. The Canadian economy continues to benefit from a solid American economy and a relatively low Canadian dollar. For example, strong car sales and a growing housing sector in the U.S. have increased Canadian exports significantly. Tourism is also benefitting from the current context and having a positive impact on the economy in every part of the country. Commodity prices are slowly increasing. The price of oil is hovering between US$45 and US$50 per barrel. This slow recovery and the recent announcements of pipeline projects are spurring more economic activity and investment. Both Alberta and Saskatchewan will benefit from higher oil prices and should move out of recession in calendar. Business confidence continues to improve, which will support business investment. Ontario, B.C. and Quebec investments will lead the country this year. However, investment in residential construction is slowing down, as housing starts are declining in Toronto and Vancouver, two very strong markets over the last few years. High consumer debt ratios remain a risk for the Canadian economy, especially in the context of the increase in interest rates. The renegotiation of NAFTA also represents a risk to the generally positive outlook. Business credit conditions remained stable in the first quarter of fiscal In May, the yearly annual growth in business credit from chartered banks was still high, at more than 8%. This favourable economic context contributed to increased activity for BDC during the first quarter of fiscal Loans accepted by clients of Financing (1) reached $2.2 billion during the first quarter ended June 30,, compared to $1.7 billion for the same period last year, mainly due to the renewal of a few large credit facilities and to an initiative to provide additional financing to existing clients. BDC continued to successfully leverage its online presence through its virtual business centre, as evidenced by a strong volume of online financing activity during this quarter. Financing s (1) loan portfolio, before allowance for credit losses, stood at $23.0 billion as at June 30,, a $568 million or 2.6% increase since March 31,. BDC continued to assist small and medium-sized enterprises (SMEs) that have difficulty accessing financing due to their location, sector or demographic. To that end, BDC announced a $280 million loan package to SMEs in the Atlantic provinces. Targetted industries include information and communications technology (ICT), agri-food, ocean technology, and tourism. During the quarter ended June 30,, clients of Growth & Transition Capital (G&TC) accepted $114.2 million in financing, compared to $101.2 million in the same period last year. In June, as part of G&TC s strategy to broaden its product offerings, BDC announced its intention to invest $250 million in Growth Equity over the next five years, a minority equity offering for high-potential, rapidly growing businesses.this new offering aims to fill the gap between small-scale financing options generally available to smaller firms and the range of sources available to larger, more established companies. (1) Unless otherwise indicated, Financing excludes Growth & Transition Capital. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 2

3 Executive Summary Venture Capital authorized investments totalling $55.1 million in the first quarter of fiscal 2018, compared to $30.4 million for the same period last year. The increase can be explained by the need to support existing investees and by lower than usual activity in fiscal. In May, as part of its commitment to support women entrepreneurs, BDC and MaRS Investment Accelerator Fund (IAF) launched StandUp Ventures Fund I, with a $5 million contribution from BDC. The fund will raise additional capital from investors up to a maximum of $15 million.it is part of BDC's Women in Tech initiative. StandUp Ventures will invest in Canadian pre-seed and seed-stage high-growth, capital-efficient ventures in health, IT and cleantech. Qualifying investments will have at least one female founder in an executive role, who holds a significant ownership position. Twelve to 20 investments will be made over the next three to five years, ranging from $250,000 to $1 million each. BDC continued to manage the Venture Capital Action Plan (VCAP), a federal government initiative to invest $400 million to increase private sector venture capital financing for high-potential, innovative Canadian businesses. As at June 30,, the total VCAP portfolio stood at $339.4 million, compared to $301.5 million as at March 31,. BDC Advisory Services initiated 357 mandates in the first quarter of fiscal 2018 for a total value of $6.7 million, compared to $5.4 million for the same period last year. The Growth Driver program was responsible for most of the increase. In the first quarter of fiscal 2018, BDC posted consolidated net income of $145.6 million, compared to $92.4 million for the same period last year. The favourable variance compared to fiscal was mostly attributable to a higher net change in unrealized appreciation of venture capital and VCAP investments, as well as higher net interest and fee income as a result of Financing s portfolio growth. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 3

4 The Business Development Bank of Canada (BDC) is a Crown corporation wholly owned by the Government of Canada. BDC is the only bank devoted exclusively to Canadian entrepreneurs. It promotes entrepreneurship with a focus on small and medium-sized businesses. With more than 110 business centres from coast to coast, BDC provides businesses with financing, investment and advisory services. When entrepreneurs succeed, they make an irreplaceable contribution to Canada s economy. Supporting them is in our national interest. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 4

5 Table of Contents Management Discussion and Analysis... 6 Context of the Quarterly Financial Report... 6 Risk Management... 6 Analysis of Financial Results... 7 Consolidated Financial Statements From time to time, we make written or oral forward-looking statements. We may make forward-looking statements in this quarterly financial report. These forward-looking statements include, but are not limited to, statements about objectives and strategies for achieving objectives, as well as statements about outlooks, plans, expectations, anticipations, estimates and intentions. By their very nature, forward-looking statements involve numerous factors and assumptions, and they are subject to inherent risks and uncertainties, both general and specific. These uncertainties give rise to the possibility that predictions, forecasts, projections and other elements of forward-looking statements will not be achieved. A number of important factors could cause actual results to differ materially from the expectations expressed. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 5

6 Management Discussion and Analysis Context of the Quarterly Financial Report The Financial Administration Act requires that all departments and parent Crown corporations prepare and make public a quarterly financial report. The Standard on Quarterly Financial Reports for Crown Corporations is issued by the Treasury Board of Canada Secretariat to provide parent Crown corporations with the form and content of the quarterly financial report under the authority of section of the Financial Administration Act. There is no requirement for an audit or review of the financial statements included in the quarterly financial report. Therefore, the condensed quarterly Consolidated Financial Statements included in this report have not been audited or reviewed by an external auditor. Risk Management In order to fulfill its mandate while ensuring sustainability, BDC must take and manage risk. BDC s approach to risk management is based on establishing a risk governance structure, including organizational design, policies, processes and controls to effectively manage risk in line with its risk appetite. This structure enables the establishment of a comprehensive risk management framework for risk identification, assessment and measurement, risk analytics, reporting and monitoring. In addition, this framework is designed to ensure that risk is considered in all business activities and that risk management is an integral part of day-to-day decision-making, as well as the annual corporate planning process. The primary means through which risk management reports risk is through its quarterly Integrated Risk Management (IRM) report to senior management and the Board of Directors. This report provides a comprehensive quantitative and qualitative assessment of performance against the risk appetite, profiles of BDC s major risk categories, identifies significant existing and emerging risks, and provides in-depth portfolio monitoring. No significant changes were made to BDC s IRM practices and no new risks were identified during the quarter ended June 30,. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 6

7 Management Discussion and Analysis Analysis of Financial Results Analysis of financial results is provided to enable a reader to assess BDC s results of operations and financial condition for the three-month period ended June 30,, compared to the corresponding period of the prior fiscal year. This analysis also includes comments about significant variances from BDC s fiscal Corporate Plan, when applicable. BDC reports on five business segments: Financing, Growth & Transition Capital, Venture Capital, Advisory Services and Venture Capital Action Plan (VCAP). In past years, Financing and Securitization were presented as separate segments. Starting in fiscal 2018, BDC will no longer report on Securitization separately and will present asset-backed securities (ABS) as a product of Financing. For fiscal 2018, BDC adopted a refined methodology to recharge shared corporate services to the business lines, as indicated in its fiscal Corporate Plan. All amounts are in Canadian dollars, unless otherwise specified, and are based on unaudited condensed quarterly Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards (IFRS). This analysis should be read in conjunction with the unaudited condensed quarterly Consolidated Financial Statements included in this report. Consolidated net income Three months ended June 30 ($ in millions) F2018 F Financing Growth & Transition Capital Venture Capital 5.3 (10.9) Advisory Services (12.7) (10.6) Venture Capital Action Plan 11.0 (12.8) Net income Net income attributable to: BDC's shareholder Non-controlling interests (0.1) (1.5) Net income Three months ended June 30 For the quarter ended June 30,, BDC recorded consolidated net income of $145.6 million compared, to $92.4 million for the same period last year. The increase was mostly attributable to a higher net change in unrealized appreciation of venture capital and VCAP investments, as well as higher net interest and fee income as a result of Financing s portfolio growth. Currently, BDC expects its consolidated net income for fiscal 2018 to meet the Corporate Plan target of $486 million. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 7

8 Management Discussion and Analysis Consolidated comprehensive income Three months ended June 30 ($ in millions) F2018 F Net income Other comprehensive income (loss) Items that may be reclassified subsequently to net income Net change in unrealized gains (losses) on available-for-sale assets (1.2) (1.1) Net change in unrealized gains (losses) on cash flow hedges (0.2) (0.2) Total items that may be reclassified subsequently to net income (1.4) (1.3) Items that will not be reclassified to net income Remeasurements of net defined benefit asset or liability (92.5) (60.8) Other comprehensive income (loss) (93.9) (62.1) Total comprehensive income Total comprehensive income attributable to: BDC's shareholder Non-controlling interests (0.1) (1.5) Total comprehensive income Three months ended June 30 Consolidated total comprehensive income comprises net income and other comprehensive income. Other comprehensive income is mostly affected by remeasurements of the net defined benefit asset or liability, which are subject to strong volatility as a result of market fluctuations. For the first quarter of fiscal 2018, BDC recorded other comprehensive loss of $93.9 million, compared to a loss of $62.1 million for the same period last year. The decrease in OCI was attributable to the remeasurement loss on net defined benefit asset or liability of $92.5 million, compared to $60.8 million in fiscal. This loss was mainly due to lower discount rates used to value the net defined benefit liability, as well as lower returns on pension plan assets, compared to those recorded in the first quarter of fiscal. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 8

9 Management Discussion and Analysis Financing results Three months ended June 30 ($ in millions) F2018 F Net interest and fee income Provision for credit losses (43.9) (37.8) Net change in unrealized appreciation (depreciation) of investments (0.2) - Net gains (losses) on other financial instruments 0.7 (0.2) Income before operating and administrative expenses Operating and administrative expenses Net income from Financing Three months ended June 30 As % of average portfolio F2018 F Net interest and fee income Provision for credit losses (0.8) (0.7) Net change in unrealized appreciation (depreciation) of investments - - Net gains (losses) on other financial instruments - - Income before operating and administrative expenses Operating and administrative expenses Net income from Financing Three months ended June 30 Financing s net income was $129.7 million for the first quarter of fiscal 2018, compared to $117.6 million for the same period last year. The increase in profitability in fiscal 2018 was mainly due to higher net interest and fee income, mainly as a result of strong portfolio growth. Net interest and fee income as a percentage of average portfolio fell compared to fiscal, reflecting interest rate market dynamics and strong fee income recorded in fiscal. Operating and administrative expenses for the quarter ended June 30,, were higher than those in the corresponding period last year in order to support portfolio growth. This increase was partially offset by slightly lower shared costs as a result of the revised methodology to recharge shared corporate services to business lines. However, as a percentage of the average portfolio, operating and administrative expenses were lower than those during the same period last year. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 9

10 Management Discussion and Analysis Growth & Transition Capital results Three months ended June 30 ($ in millions) F2018 F Net revenue on investments Net change in unrealized appreciation (depreciation) of investments (4.0) (1.2) Income before operating and administrative expenses Operating and administrative expenses Net income from Growth & Transition Capital Net income attributable to: BDC's shareholder Non-controlling interests Net income from Growth & Transition Capital Three months ended June 30 As % of average portfolio F2018 F Net revenue on investments Net change in unrealized appreciation (depreciation) of investments (1.8) (0.6) Income before operating and administrative expenses Operating and administrative expenses Net income from Growth & Transition Capital Net income attributable to: BDC's shareholder Non-controlling interests - - Net income from Growth & Transition Capital Three months ended June 30 Growth & Transition Capital recorded higher results compared to fiscal, mainly due to a growing portfolio and good performance of investments. Net income reached $12.3 million for the first quarter of fiscal 2018, compared to $9.1 million for the same period last year. Net revenue on investments, which comprised net interest income, net realized gains (losses) on investments, and fee and other income amounted to $25.5 million for the first quarter of fiscal 2018, $7.2 million higher than in the corresponding period last year. The increase compared to fiscal was mainly due to higher net interest income as a result of portfolio growth and to higher realized gains on investments. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 10

11 Management Discussion and Analysis Growth & Transition Capital reported a net change in unrealized depreciation of investments of $4.0 million in the first quarter of fiscal 2018, compared to a net change in unrealized depreciation of $1.2 million during the same period last year, as detailed below. Operating and administrative expenses amounted to $9.2 million for the three-month period ended June 30,, higher than the $8.0 million recorded last year. The increase was mainly due to higher staff levels required to fully support growth and to a revised methodology to recharge shared corporate services to business lines. However, as a percentage of the average portfolio, operating and administrative expenses decreased compared to fiscal. Venture Capital results Three months ended June 30 ($ in millions) F2018 F Net fair value appreciation (depreciation) (3.8) (3.0) Reversal of net fair value depreciation (appreciation) due to realized income and write-offs (0.2) 1.8 Net change in unrealized appreciation (depreciation) of investments (4.0) (1.2) Three months ended June 30 ($ in millions) F2018 F Net revenue (loss) on investments (16.4) (1.1) Net change in unrealized appreciation (depreciation) of investments 42.6 (3.6) Net unrealized foreign exchange gains (losses) on investments (14.9) (1.1) Net gains (losses) on other financial instruments (0.1) (0.1) Income before operating and administrative expenses 11.2 (5.9) Operating and administrative expenses Net income (loss) from Venture Capital 5.3 (10.9) Net income attributable to: BDC's shareholder 5.5 (9.4) Non-controlling interests (0.2) (1.5) Net income (loss) from Venture Capital 5.3 (10.9) BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 11

12 Management Discussion and Analysis Three months ended June 30 During the first quarter of fiscal 2018, Venture Capital recorded net income of $5.3 million, compared to a net loss of $10.9 million for the same period last year. Fiscal 2018 net income was driven by a strong net change in unrealized appreciation of investments. Net loss on investments was $16.4 million for the first quarter of fiscal 2018 as Venture Capital recorded higher write-offs and higher realized losses compared to the same period of fiscal. During the first quarter of fiscal 2018, proceeds received from divestiture of investments were $18.0 million, compared to $34.0 million received for the same period of fiscal. Venture Capital recorded a net change in unrealized appreciation of investments of $42.6 million for the first quarter of fiscal 2018, as detailed below. For the three-month period ended June 30, net fair value appreciation of $25.2 million was mainly attributable to the indirect portfolio. Three months ended June 30 ($ in millions) F2018 F Net fair value appreciation (depreciation) 25.2 (9.5) Reversal of fair value depreciation (appreciation) on divested investments and write-offs Net change in unrealized appreciation (depreciation) of investments 42.6 (3.6) Net unrealized foreign exchange losses on investments were due to foreign exchange fluctuations on the U.S. dollar and were higher than last year due to a stronger Canadian dollar and a higher U.S dollar portfolio. On a year-to-date basis, operating and administrative expenses were $5.9 million, higher than those recorded for the same period of fiscal, mainly due to higher staff levels to better support venture capital initiatives and portfolio growth, and to a revised methodology to recharge shared corporate services to business lines. Advisory Services results Three months ended June 30 ($ in millions) F2018 F Revenue Delivery expenses Gross operating margin Operating and administrative expenses Net loss from Advisory Services (12.7) (10.6) 1 Delivery expenses are included in operating and administrative expenses in the Consolidated Statement of Income. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 12

13 Management Discussion and Analysis Three months ended June 30 The offering under Advisory Services is considered an investment in entrepreneurs. As such, a net loss of $12.7 million was recorded for the first quarter of fiscal This is higher than last year, as BDC continues to invest to develop its non-financial services, including new offerings for Canada s high-impact firms (Growth Driver Program), the Accelerated Growth Service (AGS) program and an enhanced offering to help businesses expand internationally. Advisory Services increased its reach in fiscal, which is reflected in higher revenue compared to last year. Revenue amounted to $4.5 million for the first quarter ended June 30,, representing a 4.3% growth compared to last year. Gross operating margin, at $1.2 million, was lower than the $1.7 million recorded for the same period last year. This is mainly due to delivery expenses related to the implementation of the new Growth Driver Program. Operating and administrative expenses of $13.9 million were $1.6 million higher than those recorded in the same period of fiscal, mainly as a result of a revised methodology to recharge shared corporate services to business lines. Venture Capital Action Plan results Three months ended June 30 ($ in millions) F2018 F Net revenue (loss) on investments Net change in unrealized appreciation (depreciation) of investments 11.3 (12.8) Net unrealized foreign exchange gains (losses) on investments (0.2) - Income (loss) before operating and administrative expenses 11.2 (12.7) Operating and administrative expenses Net income (loss) from Venture Capital Action Plan 11.0 (12.8) Three months ended June 30 During the first quarter of fiscal 2018, Venture Capital Action Plan (VCAP) recorded net income of $11.0 million, compared to a net loss of $12.8 million for the same period last year. Strong fiscal 2018 results are explained by a net change in unrealized appreciation of underlying funds. The fiscal net change in unrealized depreciation of investments was impacted by a decrease in fair value of underlying funds, as well as by expenses related to the closing of two funds of funds. Operating and administrative expenses of $0.2 million were comparable to those recorded in the same period of fiscal. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 13

14 Management Discussion and Analysis Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows As at June 30,, total BDC assets amounted to $26.0 billion, an increase of $0.7 billion from March 31,, largely due to the $568 million increase in our loans portfolio, combined with a $55.9 million increase in the subordinate financing investment portfolio, and a $104.8 million increase in the VC and VCAP investment portfolios, partially offset by a $12.4 million decrease in asset-backed securities. At $22.3 billion, the loan portfolio represented BDC s largest asset ($23.0 billion in gross portfolio less a $0.7-billion allowance for credit losses). The gross loan portfolio grew by 2.6% in the three months after March 31,, reflecting a strong level of activity. BDC s investment portfolios, which include the subordinate financing, venture capital and VCAP portfolios, stood at $2.3 billion, compared to $2.2 billion as at March 31,. The asset-backed securities portfolio stood at $506 million, slightly lower than it was on to March 31,. Derivative assets of $27.8 million and derivative liabilities of $1.2 million reflected the fair value of derivative financial instruments as at June 30,. Net derivative fair value increased by $7.1 million, compared to the fair value as at March 31,, primarily due to fair value change as a result of a decrease in the U.S. dollar exchange rate. As at June 30,, BDC recorded a net defined benefit asset of $42.6 million related to the registered pension plan and a net defined benefit liability of $243.9 million for the other plans, for a total net defined benefit liability of $201.3 million. This represented an increase of $91.0 million compared to the total net defined benefit liability as at March 31,, primarily as a result of remeasurement losses recorded in fiscal Refer to page 8 of this report for further information on remeasurements of net defined benefit asset or liability. BDC holds cash and cash equivalents in accordance with its Treasury Risk Policy. The Bank s liquidities, which ensure funds are available to meet BDC s cash outflows, totalled $675.4 million as at June 30,, compared to $649.2 million as at March 31,. For the three-month period ended June 30,, operating activities used $449.4 million, mainly to support the growth of the loans portfolio. Cash flows used by investing activities amounted to $131.7 million, reflecting net disbursements of subordinate financing, venture capital and VCAP investments. Financing activities provided $607.3 million in cash flow, mainly as a result of the issuance of short-term notes. As at June 30,, BDC funded its portfolios and liquidities with borrowings of $19.6 billion and total equity of $6.0 billion. Borrowings comprised $19.4 billion in short-term notes and $0.2 billion in long-term notes. Capital Adequacy BDC s capital management framework is based on its Internal Capital Adequacy Assessment Process (ICAAP). To assess its capital adequacy, BDC monitors its capital status regularly by comparing its available capital to its capital demand. A key measure for assessing the adequacy of BDC s capital status is its BDC s internal capital ratio. BDC s internal capital ratio as at June 30,, was 129%, compared to 130% as at March 31,, well within the operating range but below the 134% target. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 14

15 Consolidated Financial Statements Management s Responsibility for Financial Information Consolidated Statement of Financial Position Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Note 1 BDC General Description Note 2 Basis of Preparation Note 3 Significant Accounting Policies Note 4 Future Accounting Changes Note 5 Significant Accounting Judgements, Estimates and Assumptions Note 6 Classification and Fair Value of Financial Instruments Note 7 Asset-Backed Securities Note 8 Loans Note 9 Subordinate Financing Investments Note 10 Venture Capital Investments Note 11 Venture Capital Action Plan Investments Note 12 Share Capital Note 13 Segmented Information Note 14 Guarantees Note 15 Commitments Note 16 Related Party Transactions Note 17 Subsequent events BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 15

16 Consolidated Financial Statements Management s Responsibility for Financial Information Management is responsible for the preparation and fair presentation of these condensed quarterly Consolidated Financial Statements in accordance with the Treasury Board of Canada Standard on Quarterly Financial Reports for Crown Corporations, and for such internal controls as management determines are necessary to enable the preparation of condensed quarterly Consolidated Financial Statements that are free from material misstatement. Management is also responsible for ensuring all other information in this quarterly financial report is consistent, where appropriate, with the quarterly Consolidated Financial Statements. Based on our knowledge, these unaudited condensed quarterly Consolidated Financial Statements present fairly, in all material respects, the financial position, results of operations and cash flows of the corporation, as at the date of and for the periods presented in the condensed quarterly Consolidated Financial Statements. Michael Denham President and Chief Executive Officer Paul Buron, CPA, CA Executive Vice President and Chief Financial Officer Montreal, Canada July 26, BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 16

17 Consolidated Financial Statements Consolidated Statement of Financial Position (unaudited) June 30, March 31, (in thousands of Canadian dollars) Notes ASSETS Cash and cash equivalents 675, ,168 Derivative assets 27,791 21,332 Loans and investments Asset-backed securities 7 505, ,088 Loans 8 22,320,509 21,752,511 Subordinate financing investments 9 916, ,448 Venture capital investments 10 1,082,642 1,015,713 Venture capital action plan investments , ,541 Total loans and investments 25,164,634 24,448,301 Property and equipment 29,955 29,103 Intangible assets 34,308 33,148 Net defined benefit asset 42, ,098 Other assets 19,047 14,615 Total assets 25,993,638 25,316,765 LIABILITIES AND EQUITY Liabilities Accounts payable and accrued liabilities 127, ,035 Derivative liabilities 1,152 1,789 Borrowings Short-term notes 19,419,484 18,809,436 Long-term notes 166, ,391 Total borrowings 19,585,706 18,976,827 Net defined benefit liability 243, ,498 Other liabilities 47,637 48,321 Total liabilities 20,005,431 19,377,470 Equity Share capital 12 2,413,400 2,413,400 Contributed surplus 27,778 27,778 Retained earnings 3,526,721 3,473,612 Accumulated other comprehensive income 1,271 2,710 Equity attributable to BDC's shareholder 5,969,170 5,917,500 Non-controlling interests 19,037 21,795 Total equity 5,988,207 5,939,295 Total liabilities and equity 25,993,638 25,316,765 Guarantees (Note 14) Commitments (Note 15) The accompanying notes are an integral part of these Consolidated Financial Statements. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 17

18 Consolidated Financial Statements Consolidated Statement of Income (unaudited) Three months ended June 30 (in thousands of Canadian dollars) 2016 Interest income 306, ,367 Interest expense 20,806 19,466 Net interest income 285, ,901 Net realized gains (losses) on investments (15,214) (3,935) Revenue from Advisory Services 4,478 4,292 Fee and other income 8,013 12,752 Net realized gains (losses) on other financial instruments 156 2,037 Net revenue 283, ,047 Provision for credit losses (43,915) (37,813) Net change in unrealized appreciation (depreciation) of investments 49,636 (17,544) Net unrealized foreign exchange gains (losses) on investments (14,997) (1,081) Net unrealized gains (losses) on other financial instruments 363 (2,336) Income before operating and administrative expenses 274, ,273 Salaries and benefits 91,825 86,320 Premises and equipment 10,175 10,150 Other expenses 26,520 26,435 Operating and administrative expenses 128, ,905 Net income 145,634 92,368 Net income attributable to: BDC's shareholder 145,640 93,902 Non-controlling interests (6) (1,534) Net income 145,634 92,368 The accompanying notes are an integral part of these Consolidated Financial Statements and Note 13 provides additional information on segmented net income. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 18

19 Consolidated Financial Statements Consolidated Statement of Comprehensive Income (unaudited) Three months ended June 30 (in thousands of Canadian dollars) 2016 Net income 145,634 92,368 Other comprehensive income (loss) Items that may be reclassified subsequently to net income Net change in unrealized gains (losses) on available-for-sale assets (1,190) (1,046) Net unrealized gains (losses) on cash flow hedges - (166) Reclassification to net income of losses (gains) on cash flow hedges (249) (47) Net change in unrealized gains (losses) on cash flow hedges (249) (213) Total items that may be reclassified subsequently to net income (1,439) (1,259) Items that will not be reclassified to net income Remeasurements of net defined benefit asset or liability (92,531) (60,766) Other comprehensive income (loss) (93,970) (62,025) Total comprehensive income 51,664 30,343 Total comprehensive income attributable to: BDC's shareholder 51,670 31,877 Non-controlling interests (6) (1,534) Total comprehensive income 51,664 30,343 The accompanying notes are an integral part of these Consolidated Financial Statements. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 19

20 Consolidated Financial Statements Consolidated Statement of Changes in Equity For the three-month period ended June 30 (unaudited) Balance as at March 31, 2,413,400 27,778 3,473,612 (711) 3,421 2,710 5,917,500 21,795 5,939,295 Total comprehensive income Net income 145, ,640 (6) 145,634 Other comprehensive income (loss) Net change in unrealized gains (losses) on available-for-sale assets (1,190) (1,190) (1,190) (1,190) Net change in unrealized gains (losses) on cash flow hedges (249) (249) (249) (249) Remeasurements of net defined benefit asset or liability (92,531) (92,531) (92,531) Other comprehensive income (loss) - - (92,531) (1,190) (249) (1,439) (93,970) - (93,970) Total comprehensive income ,109 (1,190) (249) (1,439) 51,670 (6) 51,664 Distributions to non-controlling interests (2,752) (2,752) Capital injections from non-controlling interests - - Transactions with owner, recorded directly in equity (2,752) (2,752) Balance as at June 30, 2,413,400 27,778 3,526,721 (1,901) 3,172 1,271 5,969,170 19,037 5,988,207 Accumulated other comprehensive income (loss) Equity attributable Non- Share Contributed Retained Available- Cash flow to BDC's controlling Total (in thousands of Canadian dollars) capital surplus earnings for-sale assets hedges Total shareholder interests equity Accumulated other comprehensive income (loss) Equity attributable Non- Share Contributed Retained Available- Cash flow to BDC's controlling Total (in thousands of Canadian dollars) capital surplus earnings for-sale assets hedges Total shareholder interests equity Balance as at March 31, ,288,400 27,778 3,003, ,855 3,812 5,323,473 26,046 5,349,519 Total comprehensive income Net income 93,902 93,902 (1,534) 92,368 Other comprehensive income (loss) Net change in unrealized gains (losses) on available-for-sale assets (1,046) (1,046) (1,046) (1,046) Net change in unrealized gains (losses) on cash flow hedges (213) (213) (213) (213) Remeasurements of net defined benefit asset or liability (60,766) (60,766) (60,766) Other comprehensive income (loss) - - (60,766) (1,046) (213) (1,259) (62,025) - (62,025) Total comprehensive income ,136 (1,046) (213) (1,259) 31,877 (1,534) 30,343 Dividends on common shares (68,649) (68,649) (68,649) Distributions to non-controlling interests (940) (940) Capital injections from non-controlling interests Transactions with owner, recorded directly in equity - - (68,649) (68,649) (420) (69,069) Balance as at June 30, ,288,400 27,778 2,967,970 (89) 2,642 2,553 5,286,701 24,092 5,310,793 The accompanying notes are an integral part of these Consolidated Financial Statements. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 20

21 Consolidated Financial Statements Consolidated Statement of Cash Flows (unaudited) Three months ended June 30 (in thousands of Canadian dollars) 2016 Operating activities Net income 145,634 92,368 Adjustments to determine net cash flows Interest income (306,440) (278,367) Interest expense 20,806 19,466 Net realized losses (gains) on investments 15,214 3,935 Provision for credit losses 43,915 37,813 Net change in unrealized depreciation (appreciation) on investments (49,636) 17,544 Net unrealized foreign exchange losses (gains) on investments 14,997 1,081 Net unrealized losses (gains) on other financial instruments (363) 2,336 Defined benefits funding below (in excess of) amounts expensed (1,549) (4,593) Depreciation of property and equipment, and amortization of intangible assets 3,898 3,945 Other (5,044) (5,576) Interest expense paid (18,905) (18,204) Interest income received 299, ,417 Changes in operating assets and liabilities Net change in loans (614,064) (520,680) Net change in accounts payable and accrued liabilities 7,969 10,455 Net change in other assets and other liabilities (5,116) (2,549) Net cash flows provided (used) by operating activities (449,393) (368,609) Investing activities Disbursements for asset-backed securities (41,068) (46,206) Repayments and proceeds on sale of asset-backed securities 52,034 57,908 Disbursements for subordinate financing investments (106,064) (76,239) Repayments of subordinate financing investments 51,531 27,152 Disbursements for venture capital investments (73,392) (45,724) Proceeds on sale of venture capital investments 17,955 34,010 Disbursements for venture capital action plan investments (26,769) (68,455) Proceeds on sale of venture capital action plan investments - 54 Acquisition of property and equipment (2,376) (1,092) Acquisition of intangible assets (3,535) - Net cash flows provided (used) by investing activities (131,684) (118,592) Financing activities Net change in short-term notes 610, ,069 Repayment of long-term notes - (110,549) Distributions to non-controlling interests (2,752) (940) Capital injections from non-controlling interests Dividends paid on common shares - (68,649) Net cash flows provided (used) by financing activities 607, ,451 Net increase (decrease) in cash and cash equivalents 26,185 (32,750) Cash and cash equivalents at beginning of period 649, ,093 Cash and cash equivalents at end of period 675, ,343 The accompanying notes are an integral part of these Consolidated Financial Statements. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 21

22 1. BDC General Description The Business Development Bank of Canada is a Crown corporation that was established by an Act of Parliament on December 20, 1974, as the Federal Business Development Bank and continued under its current name by an Act of Parliament that was enacted on July 13, The Business Development Bank of Canada is incorporated in Canada and wholly owned by the Government of Canada. The objectives of the Business Development Bank of Canada and its subsidiaries (together, BDC) are to promote and assist in the establishment and development of business enterprises in Canada, with a focus on small and medium-sized enterprises, by providing a range of complementary lending, investment and consulting services. BDC offers Canadian companies services tailored to meet their current needs while earning an appropriate return on equity, which is used to further BDC s activities. BDC does not receive appropriations from the Government of Canada. 2. Basis of Preparation Statement of compliance BDC s condensed quarterly Consolidated Financial Statements are in compliance with the Standard on Quarterly Financial Reports for Crown Corporations, as required by the Financial Administration Act and issued by the Treasury Board of Canada Secretariat. These condensed quarterly Consolidated Financial Statements have been prepared using International Financial Reporting Standards (IFRS) and were approved for issue by the Board of Directors on July 26,. Basis of presentation and measurement These condensed quarterly Consolidated Financial Statements have been prepared on a historical cost basis, except for the following: available-for-sale financial assets, financial assets and financial liabilities at fair value through profit or loss, and derivative financial instruments have been measured at fair value; and the net defined benefit asset or liability in respect of post-employment benefits has been recognized as the present value of the defined benefit obligation less the fair value of the plans assets. These condensed quarterly Consolidated Financial Statements are presented in Canadian dollars, which is BDC s functional currency as well as the functional currency of its subsidiaries. Unless otherwise specified, the figures presented in the Consolidated Financial Statements are stated in thousands of Canadian dollars. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 22

23 Basis of consolidation BDC conducts business through a variety of entities, including a wholly owned subsidiary, and several investment funds and other entities that are considered to be subsidiaries for financial reporting purposes. The condensed quarterly Consolidated Financial Statements of BDC comprise the financial statements of the parent entity and the consolidated financial statements of the subsidiaries referred to above as of June 30,, and March 31,. The financial statements of the subsidiaries are prepared using uniform accounting policies and valuation methods for similar transactions. Subsidiaries For financial reporting purposes, subsidiaries are defined as entities controlled by BDC. BDC controls an entity when it has power over the investee; it is exposed to, or has rights to, variable returns from its involvement with the entity; and it has the ability to affect those returns through its power over the entity. Control is presumed when BDC directly or indirectly holds the majority of the voting rights. The existence and effect of potential voting rights are considered when assessing whether BDC controls another entity. In instances where BDC does not hold a majority of the voting rights, further analysis is performed to determine whether or not BDC has control of the entity. BDC is deemed to have control when, according to the terms of the shareholder s and/or limited partnership agreements, it makes most of the decisions affecting relevant activities. Subsidiaries are fully consolidated from the date that control begins until the date that control ceases. No subsidiary has been acquired or disposed of during the reporting periods. Intercompany transactions and balances are eliminated upon consolidation. The following entities have been consolidated in BDC s condensed quarterly Consolidated Financial Statements. Entity Principal activity Country of incorporation and residence Proportion of ownership and voting power held Basis of control BDC Capital Inc. Holding company structure for investment activities Canada 100% Voting power AlterInvest Investment Fund Inc. Investments in subordinate financing Canada 50% Voting power and contractual agreements AlterInvest Fund L.P. Investments in subordinate financing Canada 50% Voting power and contractual agreements AlterInvest II Fund L.P. Investments in subordinate financing Canada 50% Voting power and contractual agreements Go Capital L.P. Investments in venture capital Canada 20% Voting power and contractual agreements BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 23

24 Go Capital L.P. Although BDC owns less than half of Go Capital L.P. and holds less than half of the voting power, management has determined, based on the terms of the agreement under which Go Capital L.P. was established, that BDC controls this entity. As the general partner, BDC has the current ability to direct the relevant activities of Go Capital L.P. and has the power to affect the variable returns, to which BDC is exposed. Go Capital L.P. s year-end date is December 31, as agreed upon by the partners at the time this entity was established. Consequently, additional financial information regarding this entity is prepared for the interim period for the purposes of consolidation. AlterInvest II Fund L.P. During fiscal 2014, having reached the end of their intended lives, AlterInvest Fund L.P. and AlterInvest Investment Fund Inc. began liquidating their investments. Those investments that were not reimbursed by their respective clients were transferred into AlterInvest II Fund L.P. As each partner has equal interest in all of the funds, their partnership interest in AlterInvest II Fund L.P. did not change as a result of these transactions. BDC is in the process of dissolving these entities. Non-controlling interests Interests in the equity of subsidiaries not attributable to the parent entity are reported in consolidated equity as noncontrolling interests. Net income and each component of other comprehensive income are attributed to BDC s shareholder and to non-controlling interests in accordance with their respective shareholdings, even if this results in the non-controlling interests having a deficit balance. Associates Associates are those entities in which BDC has significant influence, but not control, over the financial and operating policies. Subordinate financing and venture capital investments in associates that are held as part of BDC s investment portfolio by BDC Capital Inc. are carried in the Consolidated Statement of Financial Position at fair value. This treatment is permitted by International Accounting Standard (IAS) 28, Investments in Associates, which permits investments in an associate held by an entity that is a venture capital organization or other similar entity to elect to measure these investments at fair value through profit or loss in accordance with IAS 39, Financial Instruments: Recognition and Measurement. 3. Significant Accounting Policies The principal accounting policies applied in the preparation of these condensed quarterly Consolidated Financial Statements are set out below. These policies have been consistently applied to all periods presented in these condensed quarterly Consolidated Financial Statements and have been applied consistently by all entities consolidated by BDC. Financial instruments Recognition and measurement of financial instruments Financial assets and financial liabilities are recognized when BDC becomes party to the contractual provisions of the financial instrument. Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognized when the related contractual obligation is extinguished, discharged or cancelled, or when it expires. Financial instruments are recognized and derecognized using settlement date accounting. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 24

25 On initial recognition, financial instruments are measured at fair value. Fair value on initial recognition includes transaction costs directly attributable to the acquisition or issue of financial instruments, except for financial instruments carried at fair value through profit or loss, for which transaction costs are recognized in net income in the period when they are incurred. Financial instruments are measured in subsequent periods either at fair value or at amortized cost using the effective interest rate method, depending on the financial instrument classification. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to its carrying amount. When calculating the effective interest rate, BDC estimates future cash flows, considering all contractual terms of the financial instrument. Classification of financial instruments Fair value through profit or loss Financial instruments carried at fair value through profit or loss include financial instruments that are either (i) classified as held-for-trading or (ii) designated as at fair value through profit or loss upon initial recognition if they meet certain conditions. Financial instruments classified as held-for-trading A financial instrument is classified as held-for-trading if: it is acquired or incurred principally for the purpose of selling or repurchasing instruments in the near term; or at initial recognition, it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivative financial instruments are also classified as held-for-trading unless they are designated as hedging instruments. Financial instruments designated as at fair value through profit or loss A financial instrument can be designated as at fair value through profit or loss in the following circumstances: the asset or liability is managed, evaluated and reported internally on a fair value basis; the designation eliminates or significantly reduces an accounting mismatch that would otherwise arise; or the asset or liability contains an embedded derivative that is separable and significantly modifies the cash flows that would otherwise be required under the contract. A description of the basis for each designation is set out in the major types of financial instruments section of this note. Subsequent to initial recognition, financial instruments classified or designated as at fair value through profit or loss are measured at fair value, with the variation of unrealized gains or losses being recognized in the Consolidated Statement of Income as: net change in unrealized appreciation or depreciation of investments, or net unrealized foreign exchange gains or losses on investments when related to asset-backed securities, subordinate financing, venture capital investments and venture capital action plan investments; or net unrealized gains or losses on other financial instruments when related to derivatives and borrowings. Gains and losses upon the sale, disposal or write-off of these financial instruments are included directly in the Consolidated Statement of Income and are reported as: net realized gains or losses on investments when related to asset-backed securities, subordinate financing, venture capital investments and venture capital action plan investments; or net realized gains or losses on other financial instruments when related to derivatives and borrowings. BDC Quarterly Financial Report First Quarter 2018 (ended June 30, ) 25