A n n u a l R e p o r t 2 0 1 9
Simplified | Dynamic | Streamlined
Simplified | Dynamic | Streamlined
After successfully completing a five-year transformation
into a streamlined commercial finance powerhouse,
we took the opportunity to capture Accord’s new spirit
in a redesigned logo and visual system.
The vertical chevron echoes the “A” in Accord, which
has been the cornerstone of our logo since 1978.
This dynamic icon communicates a renewed sense
of confidence, energy and progress. As we simplify
As the pace of change accelerates, unlocking
access to capital, the skyward orientation reflects
opportunity takes more than ambition; it takes
our promise to help clients thrive. The font is simple
financial strength, deep insight, and a relentless
and sophisticated, and like Accord, positioned for
pursuit of simplicity. Every one of our clients
the future.
presents a unique challenge and opportunity, but
our promise never wavers – to simplify access to
The logo also stands alone with no slogan. After 42 years
capital so our clients can thrive.
of outstanding performance, the strength of our brand
needs no description.
After a period of evolution, acquisitions and growth,
Accord has emerged as North America’s most dynamic
commercial finance company. This means we challenge
the status quo; we keep a close eye on changes and
trends within our markets, as well as seismic shifts
in technology, culture and demographics, with a
view to make relevant connections and identify
new opportunities.
Our strategic focus is to align Accord’s complementary
businesses around a singular vision and deliver
seamless service to the different markets we serve.
We’re 100% focused on being the best in North America
at supporting promising companies with the capital
they need to reach their potential. This starts with
streamlined service from first point of contact through
the life of each client relationship.
Table of Contents
Inside front cover We Help | Clients Thrive
01 Three Year Financial Highlights Summary
02 Letter To Our Shareholders
04 Management’s Discussion and Analysis
26 Ten Year Financial Summary 2010-2019
27 Complete Spectrum of Financing Solutions
28 Management’s Report to the Shareholders
29 Independent Auditors’ Report to the Shareholders
32 Consolidated Statements of Financial Position
33 Consolidated Statements of Earnings
33 Consolidated Statements of Comprehensive Income
34 Consolidated Statements of Changes in Equity
35 Consolidated Statements of Cash Flows
36 Notes to Consolidated Financial Statements
Inside back cover Corporate Information
We Help | Clients Thrive
EXPERIENCE
DEDICATION
We’re driven by seeing our clients thrive. That’s
In an on-demand economy, where money is
why Accord has assembled the industry’s
a commodity, Accord stands out as a trusted
foremost team of experts who are committed
partner. Just like our clients, we’re constantly
to building long lasting relationships and
evolving, thinking of new ways to create
passionate about finding solutions to unlock
superior client experiences. We work hard to
our clients’ potential. Unrivalled experience
understand our clients’ specific needs and
allows us to continually enhance our range of
integrate into their lives seamlessly—quickly,
solutions and tailor our services to client needs
simply and through the channels they use—
in real time. Forty-two years of success allows
offering tailored solutions designed to help
us to serve a broad base of the continent’s
them unlock their potential. And exceptional
most vital industries with confidence.
financial strength means we deliver on
our commitments.
INSIGHTS
SERVICE
With forty-two years of continuous learning
Everything we do is focused on helping our
behind us, Accord offers a unique level of
clients succeed. We work hard to understand
insight into industry and company-specific
each client’s specific needs – we listen,
challenges. We use that insight, combined
collaborate, innovate and deliver. From the
with obsessive market sensitivity, to keep our
moment of first contact, Accord offers
solutions and pricing at the leading edge of
frictionless service integrated seamlessly at
the industry. And we always keep an open
every touchpoint. And we never stop improving,
mind, tailoring flexible solutions to the distinct
continuously finding new ways to streamline
challenges and opportunities our clients face.
and simplify. The combination of strength and
Backed by financial strength, deep insights
integrity means we honor our commitments;
unlock real potential.
our word is our bond, we never waver.
Simplified
“Having worked with Accord on a number of transactions over several
years, we have found them to be a creative and flexible partner in serving
our clients’ financing needs. An example of this was a transaction involving
the sale of a company in the industrial services sector, which needed its
defaulted bank debt to be refinanced prior to being sold. Accord provided
the flexible capital needed to complete the refinancing in a timely fashion,
which relieved the threat to our client of the bank acting on its default,
and resulted in a highly successful sale of the company.”
~ Rich Messina, President
The Benchmark Company
Dynamic
“We are excited about this new relationship with Accord CapX and the
continuation of our long-term partnership with Accord Financial, who has
supported Javo Beverage as a lender since 2009. We appreciate Accord’s
readiness to support us with the capital needed to fuel our future growth
objectives. This expansion into a second facility will support the growth
of our existing and prospective customers, further expand our reach to
the East Coast, and broaden our product portfolio in the coffee, tea, and
botanical segment of the food and beverage industry.”
~ Dennis Riley, President and CEO
Javo Beverage Company
Streamlined
“Eska and Accord have been business partners since April 2012, and we
continue to enjoy a successful and beneficial relationship. Operationally,
the Accord team collaborates with our own internal finance team to
deliver best in class collections, credit analysis and problem resolution.
Reporting requirements are streamlined and automated, avoiding
burdensome administration and supporting our business efficiencies.
The Accord management team is knowledgeable, professional and
100
80
60
92.5
75.7
89.8
76.4
73.1
47.9
61.3
53.4
40
44.6
47.4
20
0
10 11 12 13 14 15 16 17 18 19
Shareholders’ Equity
(in millions of dollars)
Shareholders’ equity increased to a
record $92.5 million at December 31,
2019. Book value per share was $10.77
at December 31, 2019.
20
18.2
16.8
15
10
5
0
13.6
13.1
13.1
12.8
12.1
9.0
7.1
8.0
10 11 12 13 14 15 16 17 18 19
Return on
Average Equity
(as a percent per annum of average equity)
Return on average equity (“ROE”)
decreased to 7.1% in 2019 on reduced
earnings.
9.60
9.20
10.07
9.35
8.99
9.09
7.50
6.87
7.86
7.00
12
10
8
6
4
2
0
supportive of Eska’s goals and provides solutions which are flexible and
10 11 12 13 14 15 16 17 18 19
relevant to our business and change as we do.”
~ Mario Ricci, CFO
Eska Inc.
Share Price
(at close on December 31)
Accord’s share price closed 2019
at $10.07.
Three Year Financial
Highlights Summary
2019 2018 2017
Operating Data
Years ended December 31
(in thousands of dollars except where indicated)
Revenue $ 56,175 $ 46,927 $ 31,409
Net earnings attributable to shareholders 6,444 10,356 6,0 1 0
Adjusted net earnings 4,939 10,840 7,005
Return on average equity 7.1% 12.8% 8.0%
Adjusted return on average equity 5.4% 13.4% 9.3%
Financial Position Data
At December 31 (in thousands of dollars)
Average funds employed (during the year) $ 378,243 $ 270,900 $ 181,052
Total assets 406,214 373,783 251,020
Shareholders' equity 92,515 89,818 76,448
Common Share Data
(per common share)
Earnings per share - basic and diluted $ 0.76 $ 1.24 $ 0.72
Adjusted earnings per share - basic and diluted 0.58 1.30 0.84
Dividends paid 0.36 0.36 0.36
Share price - high 10.42 10.45 9.55
- low 8.37 8.22 8.40
- close at December 31 10.07 9.09 9.20
Book value per share at December 31 10.77 10.66 9.20
The Company’s financial statements have been prepared in accordance with IFRS. The Company uses a number of other financial measures to monitor its performance
and believes that these measures may be useful to investors in evaluating the Company’s operating performance and financial position. These measures may not have
standardized meanings or computations as prescribed by IFRS that would ensure consistency between companies using these measures and are, therefore, considered
to be non-IFRS measures. The non-IFRS measures presented in the Three Year Financial Highlights Summary, Ten Year Financial Summary, Letter to Our Shareholders and
in the Management’s Discussion and Analysis are summarized on pages 4, 5, and 6 of this Annual Report. Such non-IFRS measures include adjusted net earnings, adjusted
earnings per share, book value per share, return on average equity, adjusted return on average equity, average funds employed etc. Please refer to pages 4, 5 and 6.
60
50
40
30
20
10
5
0
56.2
46.9
31.4
28.4
31.6
30.2
31.4
28.5
25.9
26.1
10 11 12 13 14 15 16 17 18 19
150
120
90
60
30
0
124
105
88
85
80
83
79
76
72
76
10 11 12 13 14 15 16 17 18 19
12
10
8
6
4
2
0
8.24
7.59
10.36
8.76
6.57
6.88
6.38
6.54
6.44
6.01
10 11 12 13 14 15 16 17 18 19
Revenue
(in millions of dollars)
Revenue reached a record $56.2 million
in 2019, up 20% from 2018.
Diluted Earnings per
Share
2019 diluted earnings per share were
76 cents, while adjusted diluted EPS
were 58 cents.
Net Earnings
(in millions of dollars)
Net earnings decreased to $6.4 million
in 2019. Adjusted net earnings were
$4.9 million.
Annual Report 2019 1
Letter to Our Shareholders
This time last year we had just closed the books on 2018, Accord’s best year
ever. I wrote about our long-time pattern of evolution, specifically Accord’s
five-year transformation into a multi-faceted, dynamic commercial finance
company, positioned to confidently lend up and down a company’s balance
sheet. After years of acquisitions, product development and key hires, we
powered through 2019 with all the puzzle pieces in place.
Our focus for 2019 was to pull our complementary businesses into a unified
commercial finance powerhouse aligned around a singular mission: to simplify
access to capital so our clients can thrive. Given Accord’s dramatic evolution,
from receivables finance to broad-based commercial finance, our presentation
to key markets was less than consistent, and certainly not simple. We made
terrific strides in this regard, embarking on a three-year plan to modernize key
functions, built out core teams, and streamline the way we engage with our most
important markets. While still in the early stages, our “collection of boutiques”
is combining neatly into a cohesive platform, with the aim to deliver seamless
service from first point of contact through the life of each client relationship.
While I am pleased to report this progress in executing our business strategy,
our 2019 financial results fell short of expectations. We booked a significant
account write-down in the fourth quarter, which brought full year earnings
lower compared to 2018. The provision for losses is one of three key figures
we keep a close eye on, I'll touch on all three here.
The overall loan portfolio saw strong growth, with total funds employed of
$373 million at year end. Average funds employed over the year reached an
all-time high of $378 million; this is the key number, along with average yield, that
drives revenue. Not surprisingly, revenue also hit an all-time high of $56 million.
This top line performance was strong proof that our strategic plan is working.
Less prominent in our financial statements is Accord’s steadily improving
operating efficiency. We closely monitor our general and administrative expenses
as a percentage of total revenues, which provides a measure of how efficient we
are at managing a growing business. Better operating efficiency means we convert
a greater percentage of revenue to shareholder earnings as the portfolio grows.
Three years ago, in 2016, we spent 62% of revenue on overhead. In 2019 that
number declined to 48%. Scale is important in this business, and we continue
to make progress on that front.
Simon Hitzig
Ken Hitzig
2 Accord Financial Corp.
And finally, with the significant account write-down in the
fourth quarter, Accord’s provision for loan losses clocked
in at 1.9% of our average portfolio, which exceeds our
internal benchmark of 1.0%. This number is not only
conspicuous, driving full-year earnings down 38% year-
over-year, but also very disappointing. We take pride in
our conservative approach to underwriting, and this year
failed to deliver as promised. We are working hard to
mitigate the loss and maximize our recovery from this
challenging account in 2020. As always, this involves
careful assessment of our collateral measured against
other more creative ways of exiting our positions. We will
report back at the end of the first quarter of 2020.
As we work through this challenging loan, we took the
opportunity to recalibrate several key processes, including
tighter checks and balances in the loan approval process,
and enhanced early warning protocol when clients under
perform. Even with forty-two years of excellent loan loss
experience behind us, we found ways to improve.
These three metrics tell a story about the past and future.
The loan losses tell a story about what happened to an
account that went sideways in the fourth quarter. In
contrast, portfolio growth is a harbinger of positive news
to come. We enter 2020 with a strong and growing
portfolio, which drives revenue. And operating efficiency
continues a long-term trend in the right direction. Accord’s
platform is positioned for continued growth, with revenues
set to grow faster than overhead.
During 2019, Accord made progress on key measures of
shareholder value. Earnings per share in 2019 of $0.76
boosted book value per share up to $10.77 compared to
$10.66 a year ago. Accord’s share price closed the year at
$10.07 on the Toronto Stock Exchange. Four quarterly
dividends of nine cents per share were paid in 2019
extending our unbroken string of dividend payments
to 33 years.
Here are some of the 2019’s financial highlights:
• Year-end funds employed increased 10% from $339
million at Dec. 31, 2018 to $373 million at Dec. 31, 2019.
• Average funds employed rose 39% to $378 million in
2019 from $271 million in 2018.
• Total revenue was up 20% to $56.2 million in 2019
versus $46.9 million in 2018.
• Pre-tax earnings came in at $6.9 million compared to
$11.3 million the previous year.
• Shareholders' net earnings were $6.4 million in 2019
down from the $10.4 million earned in 2018.
• Earnings per share decreased to $0.76 in 2019 versus
$1.24 in 2018.
• Shareholders' equity was $92.5 million at Dec. 31, 2019
compared with $89.8 million a year earlier.
• Our efficiency ratio was 48% in 2019 versus 51% in 2018.
• Earnings before interest, taxes, depreciation and
amortization increased by 27% to $26.1 million from
$20.6 million the prior year.
We set the bar high in 2019 and fell short. Adversity,
effectively navigated, makes us stronger. So we enter
2020 with confidence; we learned a few things, adjusted
where we needed, and look forward to an outstanding
year ahead.
Simon Hitzig
President & CEO
Ken Hitzig
Chairman of the Board
Toronto, Canada
March 6, 2020
Annual Report 2019
3
Management’s Discussion & Analysis of Results
of Operations and Financial Condition (“MD&A”)
Year ended December 31, 2019 compared with year ended December 31, 2018
Stuart Adair
OVERVIEW
The following discussion and analysis explains trends in Accord Financial Corp.’s
(“Accord” or the “Company”) results of operations and financial condition for
the year ended December 31, 2019 compared with the year ended December 31,
2018 and, where presented, the year ended December 31, 2017. It is intended
to help shareholders and other readers understand the dynamics of the
Company’s business and the factors underlying its financial results. Where
possible, issues have been identified that may impact future results.
This MD&A, which has been prepared as at March 6, 2020, should be read in
conjunction with the Company’s 2019 audited consolidated financial statements
(the “Statements”) and notes thereto, the Ten Year Financial Summary (see
page 26) and the Letter to Our Shareholders all of which form part of this
2019 Annual Report.
All amounts discussed in this MD&A are expressed in Canadian dollars unless
otherwise stated and have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting
Standards Board (“IASB”). Please refer to the Critical Accounting Policies and
Estimates section below and note 2 to the Statements regarding the Company’s
use of accounting estimates in the preparation of its financial statements.
Additional information pertaining to the Company, including its Annual
Information Form, is filed under the Company’s profile with SEDAR at
www.sedar.com.
The following discussion contains certain forward-looking statements that are
subject to significant risks and uncertainties that could cause actual results to
differ materially from historical results and percentages. Factors that may
impact future results are discussed in the Risks and Uncertainties section below.
NON-IFRS FINANCIAL MEASURES
In addition to the IFRS prepared results and balances presented in the
Statements and notes thereto, the Company uses a number of other financial
measures to monitor its performance and some of these are presented in this
MD&A. These measures may not have standardized meanings or computations
as prescribed by IFRS that would ensure consistency and comparability
between companies using them and are, therefore, considered to be non-IFRS
measures. The Company primarily derives these measures from amounts
4 Accord Financial Corp.
presented in its Statements, which were prepared in
accordance with IFRS. The Company's focus continues
to be on IFRS measures and any other information
presented herein is purely supplemental to help the reader
better understand the key performance indicators used
in monitoring its operating performance and financial
position. The non-IFRS measures presented in this
MD&A and elsewhere in its 2019 Annual Report are
defined as follows:
i) Return on average equity (“ROE”) – this is
a profitability measure that presents net earnings
attributable to shareholders (“shareholders’ net
earnings”) as an annualized percentage of the average
shareholders’ equity employed in the period to earn
the income. The Company includes all components of
shareholders’ equity to calculate the average thereof;
ii) Adjusted net earnings, adjusted earnings
per common share and adjusted ROE –
adjusted net earnings presents shareholders net
earnings before stock-based compensation, business
acquisition expenses (namely, business transaction
and integration costs and amortization of intangibles)
and, if any, restructuring expenses. The Company
considers these items to be non-operating expenses.
Management believes adjusted net earnings is a
more appropriate measure of ongoing operating
performance than shareholders’ net earnings as it
excludes items which do not directly relate to ongoing
operating activities. Adjusted (basic and diluted)
earnings per common share is adjusted net earnings
divided by the (basic and diluted) weighted average
number of common shares outstanding in the period,
while adjusted ROE is adjusted net earnings for the
period expressed as an annualized percentage of
average shareholders’ equity employed in the period;
iii) Book value per share – book value is defined
as shareholders’ equity and is the same as the net
asset value of the Company (calculated as total assets
minus total liabilities) less non-controlling interests
in subsidiaries. Book value per share is the book
value divided by the number of common shares
outstanding as of a particular date;
iv) Average funds employed – funds employed
is another name that the Company uses for its
finance receivables and loans (also referred to as
“Loans” in this MD&A), an IFRS measure. Average
funds employed are the average finance receivables
and loans calculated over a particular period.
v) Profitability, yield and efficiency ratios –
Table 1 on page 9 presents certain profitability
measures. In addition to ROE and adjusted ROE, the
return on average assets is also presented. This is
net earnings expressed as a percentage of average
assets. Also presented is net revenue (revenue minus
interest expense) expressed as a percentage of
average assets, and general and administrative
expenses (“G&A”) and depreciation expressed as a
percentage of average assets and also expressed as
a percentage of revenue (our efficiency ratio). These
ratios are presented over a three-year period, which
enables readers to see at a glance trends in the
Company’s profitability, yield and operating efficiency;
vi) Financial condition and leverage ratios –
Table 2 on page 12 presents the following percentages:
(i) total equity expressed as a percentage of total
assets; (ii) tangible equity (total equity less goodwill,
intangible assets and deferred taxes) expressed as
a percentage of total assets; and (iii) debt (bank
indebtedness, loan payable, notes payable and
convertible debentures) expressed as a percentage
of total equity. These percentages provide information
on trends in the Company’s financial condition and
leverage; and
Annual Report 2019
5
RESULTS OF OPERATIONS
2019 2018
Years ended December 31 % of % of % change from
(in thousands unless otherwise stated) Actual Revenue Actual Revenue 2018 to 2019
Average funds employed (millions) $ 378 $ 271 39%
Revenue
Interest income $ 49,003 87.2% $ 37,843 80.6% 29%
Other income 7,172 12.8% 9,084 19.4% -21%
56,175 100.0% 46,927 100.0% 20%
Expenses
Interest 17,089 30.4% 9,407 20.0% 82%
General and administrative 26,151 46.6% 23,524 50.1% 11%
Provision for credit and loan losses 7,105 12.7% 2,025 4.3% 251%
Impairment of assets held for sale — — 25 0.1% -100%
Depreciation 727 1.3% 279 0.6% 161%
Business acquisition expenses (recovery):
Transaction and integration costs (2,118) -3.8% (74) -0.2% n/m
Amortization of intangible assets 300 0.5% 410 0.9% -27%
49,254 87.7% 35,596 75.8% 38%
Earnings before income tax expense 6,921 12.3% 11,331 24.2% -39%
Income tax expense 1,579 2.8% 104 0.3% n/m
Net earnings $ 5,342 9.5% $ 11,227 23.9% -52%
Net (loss) earnings attributable to
non-controlling interests in subsidiaries (1,102) -2.0% 871 1.8% -226%
Net earnings attributable to shareholders $ 6,444 11.5% $ 10,356 22.1% -38%
Adjusted net earnings $ 4,939 8.8% $ 10,840 23.1% -54%
Earnings per common share* $ 0.76 $ 1.24 -39%
Adjusted earnings per common share* $ 0.58 $ 1.30 -55%
* basic and diluted
n/m - not meaningful
vii) Credit quality – Table 3 on page 14 presents
information on the quality of the Company's total
portfolio, namely, its finance receivables and loans
and managed receivables. It presents the Company’s
year-end allowances for losses as a percentage of its
total portfolio and its annual net write-offs. It also
presents net write-offs as a percentage of revenue.
The percentage of managed receivables past due
more than 60 days is also presented in Table 3.
the United States and Canada. Accord's flexible finance
programs cover the full spectrum of asset-based lending
(“ABL”), from receivables and inventory finance, to
equipment and trade finance, to film and media finance.
Accord's business also includes credit protection and
receivables management, as well as supply chain financing
for importers. Its clients operate in a wide variety of
industries, examples of which are set out in note 23(a)
to the Statements.
ACCORD’S BUSINESS
Accord is one of North America's leading independent
commercial finance companies serving clients throughout
The Company, founded in 1978, operates six finance
companies in North America, namely, Accord Financial
Ltd. (“AFL”), Accord Financial Inc. (“AFIC”) and Accord
Small Business Finance (“ASBF”) in Canada, and Accord
6 Accord Financial Corp.
Financial, Inc. (“AFIU”), BondIt Media Capital (“BondIt”)
and Accord CapX LLC (“CapX”) (doing business as CapX
Partners) in the United States.
The Company’s business principally involves: (i) asset-
based lending by AFIC and AFIU, which entails financing
or purchasing receivables on a recourse basis, as well as
financing other tangible assets, such as inventory and
equipment; (ii) equipment financing (leasing and
equipment lending) by CapX and ASBF. ASBF also provides
working capital financing to small businesses; (iii) film
and media production financing by BondIt; and (iv) credit
protection and receivables management services by AFL,
which principally involves providing credit guarantees
and collection services, generally without financing.
SELECTED ANNUAL INFORMATION
(audited (in thousands of dollars, except per share data))
2019 2018 2017
Revenue $ 56,175 $ 46,927 $ 31,409
Net earnings attributable
to shareholders 6,444 10,356 6,010
Basic and diluted
earnings per share 0.76 1.24 0.72
Dividends per share 0.36 0.36 0.36
Total assets 406,214 373,783 251,020
Long-term financial
liabilities $ 36,261 $ 28,168 $ —
RESULTS OF OPERATIONS
Year ended December 31, 2019 compared with year
ended December 31, 2018
Shareholders’ net earnings in 2019 decreased by 38% or
$3,912,000 to $6,444,000 compared to the $10,356,000
earned in 2018 but were $434,000 or 7% higher than the
$6,010,000 earned in 2017. Shareholders’ net earnings
compared to 2018 declined mainly as a result of higher
provision for losses, G&A and income tax expenses.
Shareholders’ net earnings compared to 2017 mainly
rose on higher revenue. Basic and diluted earnings per
common share (“EPS”) declined by 39% to 76 cents
compared to the 124 cents earned last year but were
6% above the 72 cents earned in 2017. The Company’s
ROE decreased to 7.1% in 2019 compared to 12.8% last
year and 8.0% in 2017.
Adjusted net earnings decreased by 54% to $4,939,000
in 2019 compared to last year’s $10,840,000 and were
29% lower than 2017’s $7,005,000. Adjusted EPS were
58 cents in 2019, 55% lower than the 130 cents earned
in 2018 and 31% below the 84 cents earned in 2017.
Adjusted ROE was 5.4% in 2019 compared to 13.4% in
2018 and 9.3% in 2017. The following table provides a
reconciliation of shareholders’ net earnings to adjusted
net earnings:
Years ended Dec. 31
(in thousands)
Shareholders’ net earnings
Adjustments, net of tax:
Stock-based compensation
expense (recovery)
Restructuring expenses
Business acquisition
expenses (recovery)
2019
2018 2017
$
6,444 $ 10,356 $ 6,010
(124)
—
233 188
— 122
(1,381)
251 685
Adjusted net earnings
$
4,939 $ 10,840
$ 7,005
Revenue increased by 20% or $9,248,000 to $56,175,000
in 2019 compared to $46,927,000 in 2018 and was 79%
higher than the $31,409,000 in 2017. Interest income rose
by $11,160,000 or 29% to $49,003,000 in 2019 compared
to $37,843,000 in 2018 on a 39% rise in average funds
employed, partly offset by a 7% decrease in average
loan yields. Other income declined by $1,912,000 to
$7,172,000 compared to 2018 as management fees
earned by CapX from managing a legacy equipment
finance fund declined as the fund winds down, and
receivables management fees decreased. Interest income
in 2019 increased by $23,698,000 or 94% compared to
2017 on a 109% rise in average funds employed, partly
offset by a 7% decline in average loan yields. Other
income increased by $1,068,000 compared to 2017 on
a full year of management fees earned by CapX for
managing a legacy equipment finance fund compared
to approximately three months of fees in 2017. Average
funds employed in 2019 increased to $378 million
compared to $271 million last year and were 109%
higher than the $181 million in 2017.
Total expenses increased by $13,658,000 or 38% to
$49,254,000 compared to $35,596,000 in 2018. Interest
expense, the provision for credit and loan losses, G&A
and depreciation increased by $7,682,000, $5,080,000,
Annual Report 2019
7
12.7
9.3
$2,627,000 and $448,000, respectively. Transaction and integration costs,
amortization of intangibles, and impairment of assets held for sale declined
by $2,044,000, $110,000 and $25,000, respectively.
15
12
9
6
3
0
4.2
3.1
2.1
1.7
3.4
4.3
0.8
1.2
10 11 12 13 14 15 16 17 18 19
Provision for Credit
and Loan Losses
(as a percentage of revenue)
The provision rose to 12.7% of
revenue in 2019 from 4.3% last year.
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0
7.10
2.90
2.02
1.33
0.89
0.21
0.44 0.64
0.96
0.37
10 11 12 13 14 15 16 17 18 19
Provision for Credit
and Loan Losses
(in millions of dollars)
The provision increased to $7.1 million
in 2019 from $2.0 million in 2018.
61.6
54.5
50.7
47.9
55.7
53.1 53.5 52.6
47.2 48.2
70
60
50
40
30
20
10
0
10 11 12 13 14 15 16 17 18 19
Operating Expenses
(G&A and depreciation)
Operating expenses declined to 47.9%
of revenue in 2019 from 50.7% last year.
Interest expense rose by 82% to $17,089,000 in 2019 from $9,407,000 last year
on 50% higher average borrowings and increased interest rates. Interest rates
rose as the Company borrowed at higher rates under its credit facility, as well as
having a full year of higher rate borrowings on its loan payable, term notes
payable and majority of convertible debenture debt, all of which were taken
out at various times in 2018.
G&A comprise personnel costs, which represent the majority of the Company’s
costs, occupancy costs, commissions to third parties, marketing expenses,
management fees, professional fees, data processing, travel, telephone and
general overheads. G&A mainly increased on higher personnel costs, which rose
by $2,189,000 as a result of increased head count to support the Company’s
growth, as well as severance costs of $438,000. The Company continues to
manage its controllable expenses closely.
The provision for credit and loan losses increased by $5,080,000 to $7,105,000
compared to $2,025,000 last year. The provision comprised:
Years ended Dec. 31
(in thousands)
Net write-offs
Reserves expense related to increase
in total allowances for losses
2019
2018
$
5,952
$ 818
1,153
7,105
1,207
$ 2,025
$
The provision for credit and loan losses as a percentage of revenue rose to
12.7% in 2019 from 4.3% in 2018. Net write-offs increased by $5,134,000 to
$5,952,000 in 2019 compared to $818,000 in the prior year. Net write-offs in
2019 included two write-offs totalling $5,792,000. The non-cash reserves
expense decreased by $54,000 to $1,153,000. The Company’s allowance for
losses and its portfolio are discussed in detail below and also in the Statements.
In years where funds employed are growing significantly, this non-cash item
will tend to adversely impact shareholders’ net earnings. While the Company
manages its portfolio of Loans and managed receivables closely, as noted in
the Risks and Uncertainties section below, financial results can be impacted
by significant insolvencies or one-off losses as seen in 2019.
No impairment charge was taken against assets held for sale during 2019
(2018 – $25,000).
Depreciation expense increased by $448,000 to $727,000 in 2019. On January 1,
2019 the Company adopted IFRS 16, Leases, and capitalized four office leases
8 Accord Financial Corp.
as “right-of-use” assets. Depreciation of $436,000 (2018
– nil) was charged on the right-of use assets in 2019.
Business acquisition expenses consist of transaction
and integration costs related to the CapX acquisition (in
October 2017) and amortization of intangibles. In 2019,
there was a recovery of $1,818,000 (2018 – expense
$336,000). Transaction and integration costs saw a
recovery of $2,118,000 (2018 – recovery $74,000) resulting
from a reduction in the fair value of CapX contingent
consideration payable, while the amortization of intangible
assets relating to Varion and CapX decreased to $300,000
in 2019 compared to $410,000 last year (see note 9 to
the statements).
Income tax expense rose by $1,475,000 to $1,579,000
compared to $104,000 in 2018. U.S. tax regulations
released in December 2018 impacted tax planning such
that the Company saw an increase in its effective tax rate
in 2019. Towards the end of 2019, the Company
implemented a tax structure that should lower its
effective tax rate in 2020 and future years. The Company’s
effective income tax rate increased to 20.9% in 2019
compared to 0.9% last year.
TABLE 1 – PROFITABILITY, YIELD AND
EFFICIENCY RATIOS
(as a percentage) 2019 2018 2017
Return on average assets 1.6 3.5 3.0
Return on average equity 7.1 12.8 8.0
Adjusted return on average equity 5.4 13.4 9.3
Net revenue / average assets 9.6 12.6 13.8
Operating expenses* / average assets 6.6 8.0 8.4
Operating expenses* / revenue
(efficiency ratio) 47.9 50.7 54.5
*G&A and depreciation
Table 1 highlights the Company’s profitability in terms
of returns on its average assets and equity. In 2019, the
return on average assets, ROE and adjusted ROE,
expressed as percentages, declined to 1.6%, 7.1% and
5.4%, respectively, as earnings decreased.
expenses to average assets decreased to 6.6% in 2019
compared with 8.0% last year, while the efficiency ratio
(operating expenses as a percentage of revenue)
decreased to 47.9% from 50.7% in 2018.
Canadian operations reported a 203% decrease in
shareholders’ net earnings in 2019 compared to 2018
(see note 19 to the Statements) mainly as a result of a
higher interest expense. Shareholders’ net earnings
declined by $3,193,000 to a net loss of $1,619,000
compared to net earnings of $1,574,000 last year. Revenue
increased by $2,277,000 or 10% to $25,473,000. Expenses
rose by $6,228,000 to $27,221,000. Interest expense
increased by $6,638,000 or 78% to $15,124,000, while
depreciation was higher by $160,000. G&A, provision for
credit and loan losses, business acquisition expenses
(amortization of intangibles) and impairment of assets
held for sale declined by $247,000, $184,000, $114,000
and $25,000, respectively. Income tax expense decreased
by $758,000 to a recovery of $129,000.
U.S. operations reported a 8% decrease in shareholders’
net earnings compared to 2018 (see note 19 to the
Statements). Shareholders’ net earnings declined by
$719,000 to $8,063,000 compared to $8,782,000 last year.
Revenue increased by $8,078,000 or 34% to $31,972,000.
Expenses rose by $8,537,000 or 58% to $23,303,000. The
provision for credit and loan losses rose by $5,264,000
to $6,241,000, G&A increased by $2,874,000 to $15,417,000,
interest expense rose by $2,151,000 to $3,235,000, while
depreciation was higher by $288,000 at $393,000. Business
acquisition expenses declined by $2,040,000 to a recovery
of $1,983,000 for the reason noted above. Income tax
expense increased by $2,233,000 to $1,708,000. In U.S.
dollars, net earnings were 15% lower at US$5,708,000
compared to 2018. Net loss attributable to non-controlling
interests in subsidiaries totalled $1,102,000 compared to
net earnings of $871,000 in 2018.
FOURTH QUARTER 2019
Quarter ended December 31, 2019 compared with quarter
ended December 31, 2018
Net revenue as a percentage of average assets declined to
9.6% compared to 12.6% in 2018. The ratio of operating
Shareholders’ net loss for the quarter ended December 31,
2019 was $658,000 compared to shareholder’s net earnings
Annual Report 2019
9
SUMMARY OF QUARTERLY RESULTS
Quarters ended 2019 2018
(in thousands unless otherwise stated) Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
Average funds employed (millions) $ 395 $ 383 $ 388 $ 347 $ 317 $ 283 $ 255 $ 229
Revenue $ 14,297 $ 15,299 $ 13,991 $ 12,588 $ 12,951 $ 13,120 $ 10,823 $ 10,033
Expenses
Interest 4,392 4,385 4,273 4,038 3,295 2,655 1,991 1,466
General and administrative 7,227 6,502 6,187 6,235 6,594 5,810 5,714 5,406
Provision for credit and loan losses 6,094 719 265 27 (834) 1,234 186 1,439
Impairment of assets held for sale — — — — — — 25 —
Depreciation 183 184 182 178 118 62 52 47
Business acquisition expenses (1,609) (554) 172 174 (449) 254 263 268
16,287 11,236 11,079 10,652 8,724 10,015 8,231 8,626
Earnings (loss) before income tax (1,990) 4,063 2,912 1,936 4,227 3,105 2,592 1,407
Income tax expense (recovery) (688) 1,079 723 465 (103) 274 109 (176)
Net earnings (loss) (1,302) 2,984 2,189 1,471 4,330 2,831 2,483 1,583
Non-controlling interests in net earnings (loss) (644) (253) (33) (172) 169 215 120 367
Net earnings (loss) attributable
to shareholders $ (658) $ 3,237 $ 2,222 $ 1,643 $ 4,161 $ 2,616 $ 2,363 $ 1,216
Adjusted net earnings (loss) $ (2,136) $ 2,862 $ 2,397 $ 1,816 $ 3,883 $ 2,842 $ 2,674 $ 1,441
Earnings (loss) per common share ** (cents) (8) 38 26 19 50 31 28 15
Adjusted earnings (loss) per common
share** (cents) (25) 34 28 22 46 34 32 17
* Due to rounding the total of the four quarters may not agree with the reported total for a fiscal year.
** Basic and diluted
of $4,161,000 last year. Shareholders’ net loss was mainly
as a result of a higher provision for loan losses. Loss
before income tax was $1,990,000 compared to earnings
before income tax of $4,227,000 last year. Basic and
diluted loss per common share (“LPS”) was 8 cents
compared to EPS of 50 cents in the fourth quarter of 2018.
Adjusted net loss was $2,136,000 in the fourth quarter of
2019 compared to adjusted net earnings of $3,883,000 last
year. Adjusted LPS was 25 cents compared to adjusted
EPS of 46 cents in 2018. The following table provides a
reconciliation of shareholders’ net (loss) earnings to
adjusted net (loss) earnings:
Quarters ended Dec. 31
(in thousands)
Net (loss) earnings
Adjustments, net of tax:
Stock-based compensation expense
(recovery)
Business acquisition expenses (recovery)
2019
2018
$
(658) $ 4,161
(256)
(1,222)
64
(342)
Adjusted net (loss) earnings
$ (2,136) $ 3,883
Revenue rose by $1,346,000 or 10% to $14,297,000 in the
current quarter compared to $12,951,000 in the fourth
quarter of 2018. Interest income rose by $1,325,000 or
12% to $12,183,000 in the fourth quarter of 2019
compared to $10,858,000 in the fourth quarter of 2018
on a 25% increase in average funds employed partly
offset by a 10% decrease in average loan yields. Other
income rose by $20,000 to $2,113,000 in the current
quarter compared to $2,093,000 in the fourth quarter of
2018. Average funds employed in the fourth quarter of
2019 increased by 25% to $395 million compared to
$317 million last year.
Total expenses for the fourth quarter of 2019 increased
by $7,563,000 or 87% to $16,287,000 compared to
$8,724,000 last year. The provision for credit and loan
losses, interest, G&A and depreciation increased by
$6,928,000, $1,097,000, $633,000 and $65,000, respectively.
Business acquisition costs (transaction and integration
costs and amortization of intangibles) declined by
$1,160,000.
1 0 Accord Financial Corp.
12
10
8
6
4
2
0
10.66 10.77
9.11 9.20
8.79
7.38
6.50
5.76
5.49
4.92
10 11 12 13 14 15 16 17 18 19
Book Value per Share
(in dollars)
Book value per share rose to
a record high $10.77 at
December 31, 2019.
400
350
300
250
200
150
100
50
0
400
379
258
193 197
218
206
274
195
173
10 11 12 13 14 15 16 17 18 19
Total Portfolio
Loans and managed
receivables
(in millions of dollars)
The Company’s total portfolio
rose by 6% to a record $400 million
at December 31, 2019 from
$379 million last year-end.
Interest expense rose by 33% to $4,392,000 in the current quarter from $3,295,000
last year on 29% higher average borrowings and increased interest rates.
Interest rates rose for reasons noted above.
G&A increased by 10% to $7,227,000 in the current quarter compared to
$6,594,000 last year. G&A rose on higher personnel costs, which increased by
$669,000, mainly as a result of increased head count required to support the
Company's growth.
The provision for credit and loan losses increased to $6,094,000 in the fourth
quarter of 2019 compared to a recovery of credit and loan losses of $834,000
last year. The provision comprised:
Quarters ended Dec. 31
(in thousands)
Net write-offs
Reserves expense (recovery) related to
increase (decrease) in total allowances
for losses
2019
2018
$
5,233
$ 42
861
(876)
$
6,094
$ (834)
There were net write-offs of $5,233,000 in the current quarter compared to
$42,000 last year, while the non-cash reserves expense increased to $861,000
from a reserves recovery of $876,000 last year. Net write-offs in the fourth
quarter of 2019 included a write-off totalling $5,019,000.
Depreciation expense increased by $65,000 to $183,000 in the fourth quarter
of 2019. Depreciation of $108,000 (2018 – nil) was charged on the Company’s
right-of-use assets in the current quarter.
Business acquisition expenses saw a recovery of $1,609,000 (2018 – recovery
$449,000) in the fourth quarter of 2019. Transaction and integration costs saw
a recovery of $1,683,000 (2018 – recovery $552,000) for the reason noted
above, while the amortization of intangible assets relating to ASBF and CapX
decreased to $74,000 (2018 – $103,000).
Income tax recovery was $688,000 on a pre-tax loss of $1,990,000 in the
current quarter compared to a recovery of $103,000 in the fourth quarter of 2018.
REVIEW OF FINANCIAL POSITION
Shareholders’ equity at December 31, 2019 totalled $92,515,000, 3% higher
than the $89,818,000 at December 31, 2018. The increase in shareholders’
equity since December 31, 2018 resulted from increases in retained earnings,
capital stock and contributed surplus, which were partially offset by a decline
in accumulated other comprehensive income. Book value per common share
was $10.77 at December 31, 2019 compared to $10.66 at December 31, 2018.
Please also see the consolidated statements of changes in equity on page 34
of this Annual Report.
Annual Report 2019
11
Total assets rose by 9% to $406,214,000 at December 31,
2019 compared to $373,783,000 at December 31, 2018.
Total assets largely comprised Loans (funds employed).
Excluding inter-company loans, identifiable assets
located in the United States were 63% of total assets at
December 31, 2019 compared to 62% at December 31,
2018 (see note 19 to the Statements).
TABLE 2 – FINANCIAL CONDITION AND
LEVERAGE
(as a percentage) 2019 2018 2017
Tangible equity/assets 20 20 25
Total equity/assets 24 25 32
Debt*/total equity 307 276 193
(in thousands)
Receivables and loans
Loans $ 373,157 $ 339,102 $ 220,104
Managed receivables 27,338 40,145 53,478
Total Portfolio $ 400,495 $ 379,247 $ 273,582
* Bank indebtedness, loan payable, notes payable and convertible
debentures
Gross finance receivables and loans (also referred to as
Loans or funds employed), before the allowance for
losses thereon, increased by 10% to $373,157,000 at
December 31, 2019 compared to $339,102,000 at
December 31, 2018. As detailed in note 4 to the Statements,
the Company’s Loans comprised:
(in thousands) Dec. 31, 2019 Dec. 31, 2018
Receivable loans $ 103,842 $ 134,422
Other loans 167,978 135,307
Lease receivables 101,337 69,373
Finance receivables and
loans, gross 373,157 339,102
Less allowance for losses 4,520 3,450
Finance receivables and
loans, net $ 368,637 $ 335,652
The Company’s receivable loans decreased by 23% to
$103,842,000 at December 31, 2019 compared to
$134,422,000 at December 31, 2018. Other loans, which
primarily comprise advances against non-receivable
assets such as inventory and equipment, rose by 24%
to $167,978,000 at December 31, 2019 compared to
$135,307,000 at December 31, 2018. Lease receivables,
representing ASBF’s and CapX’s net investment in
equipment leases, rose by 46% to $101,337,000 at
December 31, 2019 compared to $69,373,000 at
December 31, 2018. Net of the allowance for losses
thereon, Loans increased by 10% to $368,637,000 at
December 31, 2019 compared to $335,652,000 at
December 31, 2018. The Company’s Loans principally
represent advances made by its asset-based lending
subsidiaries, AFIC and AFIU, to approximately 75 clients
in a wide variety of industries, as well as ASBF’s and
CapX’s lease receivables and equipment and related loans
to approximately 230 clients. The Company’s largest
client comprised 6% of gross Loans.
In its credit protection and receivables management
business, the Company contracts with clients to assume
the credit risk associated with respect to their receivables
without financing them. Since the Company does not
take title to these receivables, they do not appear on its
consolidated statements of financial position. These
managed receivables totalled $27 million at December 31,
2019 compared to $40 million at December 31, 2018.
Managed receivables comprise the receivables of
approximately 70 clients at December 31, 2019. The 25
largest clients comprised 85% of total volume in 2019.
Most of the clients’ customers upon which the Company
assumes the credit risk are “big box”, apparel, home
furnishings and footwear retailers in Canada and the
United States. At December 31, 2019, the 25 largest
customers accounted for 73% of total managed
receivables, of which the largest five comprised 45%. The
Company reviews and monitors the retail industry and the
credit risk related to its managed receivables very closely.
The Company’s total portfolio, which comprises both
gross Loans and managed receivables, as detailed
above, rose by 6% to $400 million at December 31, 2019
compared to $379 million at December 31, 2018.
As described in note 23(a) to the Statements, the
Company’s business principally involves funding or
assuming the credit risk on the receivables offered to it
by its clients, as well as financing other assets such as
inventory and equipment. Credit in the Company’s
asset-based lending businesses, AFIC and AFIU, media
finance business, equipment finance businesses, ASBF
1 2 Accord Financial Corp.
and CapX, and credit protection business, is approved
by a staff of credit officers, with larger amounts being
authorized by supervisory personnel and management.
In the case of credit in excess of $1.0 million (US$1.0 million
in the case of AFIU and CapX, and US$500,000 for BondIt),
credit is approved by the Company's Chairman and Vice
Chairman of its Board. Credit in excess of $2.5 million
(US$2.5 million in the case of U.S. group companies) is
approved by the Company’s credit committee, which
comprises three independent members of its Board.
The Company monitors and controls its risks and
exposures through financial, credit and legal systems
and, accordingly, believes that it has procedures in place
for evaluating and limiting the credit risks to which it is
subject. Credit is subject to ongoing management review.
Nevertheless, for a variety of reasons, there will inevitably
be defaults by clients or their customers.
In its asset-based lending operations, the Company’s
primary focus continues to be on the creditworthiness
and collectibility of its clients’ receivables. The clients’
customers have varying payment terms depending on
the industries in which they operate, although most
customers have payment terms of 30 to 60 days from
invoice date. ASBF’s and CapX’s lease receivables and
equipment and working capital loans are usually term
loans with payments spread out evenly over the term of
the lease or loan, which can be up to 60 months, although
ASBF has a “revolving” equipment loan product which
has no fixed repayment terms and can be repaid at any
time. Of the total managed receivables that the Company
guarantees payment, 3.5% were past due more than
60 days at December 31, 2019. In the Company’s asset-
based lending business, receivables become “ineligible”
for lending purposes when they reach a certain pre-
determined age, typically 75 to 90 days from invoice date,
and are usually charged back to clients, thereby limiting
the Company’s credit risk on such older receivables.
The Company employs internal client rating systems to
assess the credit risk in its asset-based lending and
leasing businesses, which review, amongst other things,
the financial strength of each client and the Company’s
underlying collateral security, while in its credit protection
business it employs a customer credit scoring system to
assess the credit risk associated with the managed
receivables that it guarantees. Please see note 4 to the
Statements which presents tables summarizing the
Company's finance receivables and loans, and managed
receivables, by their internal credit risk rating (low risk,
medium risk, high risk) and also by the three stage credit
criteria of IFRS 9, as well as an aged analysis thereof.
Credit risk is primarily managed by ensuring that, as far
as possible, the receivables financed are of the good
quality and that any inventory, equipment or other assets
securing loans are appropriately appraised. Collateral is
monitored and managed on an on-going basis to mitigate
credit risk. In its asset-based lending operations, the
Company assesses the financial strength of its clients’
customers and the industries in which they operate on
a regular and ongoing basis.
The Company also minimizes credit risk by limiting the
maximum amount that it will lend to any one client,
enforcing strict advance rates, disallowing certain types
of receivables and applying concentration limits, charging
back or making receivables ineligible for lending purposes
as they become older, and taking cash collateral in
certain cases. The Company will also confirm the validity
of the receivables that it purchases or lends against.
In its asset-based lending operations, the Company
administers and collects the majority of its clients’
receivables and so is able to quickly identify problems as
and when they arise and act promptly to minimize credit
and loan losses. In the Company’s Canadian leasing
operations, security deposits are obtained in respect of
equipment leases or loans.
As detailed in note 4, the Company had past due finance
receivables and loans of $7,795,000 at December 31, 2019,
of which $6,477,000 related to BondIt, the Company's
media finance subsidiary, while the balance thereof
related to ASBF. Repayments of BondIt's media finance
loans are often delayed for non-credit related reasons
such as production delays. At December 31, 2019, the
Company also had impaired finance receivables and
loans of $6,770,000. The impaired loans, which have been
written down to net realizable value (fair value less
costs of realization) where necessary, are mainly
collateralized by receivables, inventory and equipment,
Annual Report 2019
13
the estimated net realizable value of which was $8,034,000
at December 31, 2019. During 2019, lease receivables
totalling $6,970,000 were also transferred to assets held
for sale upon default of the leases and recovery of the
Company’s assets. As the Company’s finance receivables
and loans are generally collateralized, past due or impaired
accounts do not necessarily lead to a significant ECL
allowance depending on the net realizable value of the
collateral security which often results in a low LGD or no
LGD in respect of these accounts.
In the Company’s credit protection business, each
customer is provided with a credit limit up to which the
Company will guarantee that customer’s total receivables.
As noted above, all client and customer credit in excess
of $2.5 million (US$2.5 million for U.S. group companies)
is approved by the Company’s Credit Committee on a
case-by-case basis. Note 23(a) to the Statements provides
details of the Company’s credit exposure by industrial
sector.
TABLE 3 – CREDIT QUALITY
(as a percentage) 2019 2018 2017
Managed receivables past
due more than 60 days 3.5 3.6 3.6
Reserves*/portfolio 1.1 0.9 0.8
Reserves*/net write-offs 77 431 96
Net write-offs/revenue 10.6 1.7 7.5
*Reserves comprise the total of the allowance for losses on Loans and on the
guarantee of managed receivables.
Table 3 highlights the credit quality of the Company’s
total portfolio, both Loans and managed receivables.
Net write-offs of our managed receivables decreased to
$60,000 in 2019 compared to $664,000 in 2018, of which
$503,000 related to one customer. Net write-offs of
managed receivables were 3 basis points of volume in
2019 compared to 22 basis points in 2018. Net write-offs
in the Company’s asset-based lending business increased
to $5,892,000 in 2019 compared to $154,000 last year.
Net write-offs in 2019 included two write-offs totalling
$5,792,000. Overall, the Company’s total net write-offs
in 2019, as set out in the Results of Operations section
above, rose to $5,952,000 compared with $818,000 in
2018. After the customary detailed period-end review
of the Company’s portfolio by its Risk Management
Committee, it was determined that all problem loans
and accounts were identified and provided for where
necessary. The Company maintains separate allowances
for losses on both its Loans and its guarantee of managed
receivables at amounts which, in management’s judgment,
are sufficient to cover losses thereon.
The Company’s allowance for losses on Loans, calculated
under the expected credit loss (“ECL”) criteria of IFRS 9,
totalled $4,520,000 at December 31, 2019 compared to
$3,450,000 at December 31, 2018. The allowance for
losses on the guarantee of managed receivables totalled
$44,000 at December 31, 2019 compared to $74,000 at
December 31, 2018. This allowance represents the fair
value of estimated payments to clients under the
Company’s guarantees to them. It is included in the
total of accounts payable and other liabilities as the
Company does not take title to the managed receivables
and they are not included on its consolidated statements
of financial position. The activity in the allowance for
losses accounts in 2019 and 2018 is set out in note 4 to
the Statements. The estimates of both allowances for
losses are judgmental. Management considers them to
be reasonable and appropriate.
Assets held for sale totalled $6,970,000 at December 31,
2019 and comprised certain repossessed assets securing
defaulted equipment leases with a number of clients.
These assets are currently being marketed for sale and
will be disposed of as market conditions permit. The
net realizable value (fair value less costs to sell) of these
assets at December 31, 2019, which are based upon
appraisals thereof, totalled $8,774,000 exceeding the
carrying value of the defaulted finance receivables and
loans. Assets held for sale at December 31, 2008 totalled
$47,000. See note 5 to the Statements.
Cash decreased to $6,776,000 at December 31, 2019
compared to $16,346,000 at December 31, 2018. The
Company endeavors to minimize cash balances as much
as possible when it has bank indebtedness outstanding.
Fluctuations in cash balances are normal.
The Company adopted IFRS 16, Leases, effective
1 4 Accord Financial Corp.
January 1, 2019, which replaced IAS 17, Leases. Under
IFRS 16, right-of-use assets and lease liabilities have been
recognized at January 1, 2019 for four of the Company’s
office leases which resulted in an increase in both assets
and liabilities. Right-of-use assets and lease liabilities
totalling $2,027,000 were recorded at that date, with no
impact on retained earnings. The Company’s right-of-use
assets totalled $1,544,000 at December 31, 2019 and is
included in its property and equipment balance of
$2,337,000 (2018 – $923,000, which excluded right-of-use
assets). See detailed discussion on the adoption of
IFRS 16 below and notes 3(a) and 6 to the Statements.
Statements for information regarding the Company’s
annual goodwill impairment reviews.
Other assets, income taxes receivable, net deferred tax
assets and property and equipment at December 31,
2019 and 2018 were not significant.
Total liabilities increased by $31,248,000 to $309,846,000
at December 31, 2019 compared to $278,598,000 at
December 31, 2018. The increase mainly resulted from
higher bank indebtedness, convertible debentures
issued and increased loan payable.
Intangible assets, net of accumulated amortization,
totalled $3,639,000 at December 31, 2019 compared to
$4,116,000 at December 31, 2018. Intangible assets
totalling US$2,885,000 were acquired upon the acquisition
of CapX on October 27, 2017 and comprised customer
and referral relationships and brand name. These assets
are carried in the Company’s U.S. operations and are
translated into Canadian dollars at the prevailing
period-end exchange rate; foreign exchange adjustments
usually arise on retranslation. Customer and referral
relationships are being amortized over a period of 15
years, while the acquired brand name is considered to
have an indefinite life and is not amortized. Intangible
assets comprising existing customer contracts and broker
relationships were also acquired as part of the ASBF
acquisition on January 31, 2014. These are being
amortized over a period of 5 to 7 years. Please refer to
note 9 to the Statements.
Goodwill totalled $13,455,000 at December 31, 2019
compared to $14,031,000 at December 31, 2018. Goodwill
of US$2,409,000 and US$5,538,000 was acquired on the
acquisition of BondIt and CapX in 2017, respectively.
BondIt and CapX goodwill is carried in the Company’s
U.S. operations, together with goodwill of US$962,000
from a much earlier acquisition. Goodwill of $1,883,000
was also acquired as part of the ASBF acquisition and is
carried in the Company’s Canadian operations. The
goodwill in the Company’s U.S. operations is translated
into Canadian dollars at the prevailing period-end
exchange rate; foreign exchange adjustments usually
arise on retranslation. Please refer to note 7 to the
Amounts due to clients decreased by $752,000 to
$2,404,000 at December 30, 2019 compared to $3,156,000
at December 31, 2018. Amounts due to clients principally
consist of collections of receivables not yet remitted to
clients. Contractually, the Company remits collections
within a week of receipt. Fluctuations in amounts due
to clients are not unusual.
Bank indebtedness increased by $19,919,000 to
$242,781,000 at December 31, 2019 compared to
$222,862,000 at December 31, 2018. Bank indebtedness
mainly increased to fund the rise in Loans. In the third
quarter of 2018, the Company increased its bank credit
facility to $292 million for a three-year term maturing on
July 25, 2021 with a syndicate of six banks. In July 2019,
the Company’s banking syndicate approved a $75 million
increase in the facility taking the Company’s credit limit
to $367 million. The Company did not meet its interest
coverage ratio covenant under the bank credit facility at
December 31, 2019 and has received a waiver thereof
from its banking syndicate. In addition to the waiver, the
Company’s banking syndicate has reset the Company’s
interest coverage ratio test for the quarters ended
March 31, June 30 and September 30, 2020. The Company
was in compliance with all other loan covenants during
2019 and was in compliance with all loan covenants in
2018. Bank indebtedness principally fluctuates with the
quantum of Loans outstanding.
Loan payable increased by $5,531,000 to $11,227,000
at December 31, 2019 compared to $5,696,000 at
December 31, 2018. A revolving line of credit totalling
Annual Report 2019
15
$12,990,000 (US$10,000,000) was established during the
second quarter of 2018 with a non-bank lender, bearing
interest varying with the U.S. base rate. This line of credit
was established to finance BondIt’s business and is
collateralized by all of its assets. The line was renewed
in December 2019 for a term maturing on October 19,
2021. BondIt failed a specific covenant test at December 31,
2019 and 2018 which the lender subsequently waived.
See note 10 to the Statements.
Accounts payable and other liabilities decreased by
$4,523,000 to $6,170,000 at December 31, 2019 compared
to $10,693,000 at December 31, 2018. The decrease since
December 31, 2018 mainly resulted from the $5,309,000
reduction in contingent consideration payable related
to the CapX acquisition.
Notes payable increased by $860,000 to $18,939,000
at December 31, 2019 compared to $18,079,000 at
December 31, 2018. The increase in notes payable since
last year-end resulted from new notes issued, as well as
accrued interest. Please see Related Party Transactions
section below and note 11(a) to the Statements.
Convertible debentures with a face value of $18,400,000
were issued by the Company in December 2018. These
debentures are listed for trading on the Toronto Stock
Exchange (“TSX”). On January 18, 2019, the underwriters
of the convertible debenture issue exercised their
over-allotment option and a further 1,090 debentures
were issued with a face value of $1,090,000. On July 23,
2019, the Company issued a further 1,160 convertible
debentures with a face value of $1,160,000 by way of
private placement, bringing the total face value of the
TSX listed debentures issued to $20,650,000, being the
maximum that could be issued under the debentures trust
indenture. The debentures issued on July 23, 2019 were
issued at a $23,200 discount to face value and overall gross
proceeds from the TSX listed debentures was $20,626,800.
On September 13, 2019, under a supplemental trust
indenture, 5,000 unlisted convertible debentures were
issued with similar terms to the TSX listed debentures,
bringing the total face value of debentures issued to
$25,650,000. All unsecured convertible debentures carry a
coupon rate of 7.0% with interest payable semi-annually
on June 30 and December 31 each year. These debentures
mature on December 31, 2023 and are convertible at
the option of the holder into common shares at a
conversion price of $13.50 per common share. Net of
transaction costs and the above-noted discount, a total
of $23,781,000 was raised. Please see note 12 to the
Statements, which details how the debt and equity
components of the convertible debentures were allocated.
At December 31, 2019, the debt component was
$22,928,000 (2018 – $15,955,000), while the equity
component was $1,005,000 (2018 – $755,000), net of
deferred taxes.
As described above, the Company adopted IFRS 16 on
January 1, 2019 pursuant to which lease liabilities
totalling $2,027,000 for four of the Company’s office
leases were recognized as a liability. Outstanding lease
liabilities totalled $1,598,000 at December 31, 2019.
Please see detailed discussion in notes 3(a) and 13 to
the Statements.
Income taxes payable, deferred income and net deferred
tax liabilities at December 31, 2019 and 2018 were
not significant.
Capital stock totalled $9,481,000 at December 31, 2019
compared to $8,115,000 at December 31, 2018. There were
8,588,913 common shares outstanding at December 31,
2019 (2018 – 8,428,542). Please see note 14 to the
Statements and the consolidated statements of changes
in equity on page 34 of this report for details of changes
in capital stock during 2019 and 2018. At the date of this
MD&A, March 6, 2020, 8,568,913 common shares were
outstanding.
Contributed surplus totalled $1,323,000 at December 31,
2019 compared to $1,073,000 at December 31, 2018.
As noted above, included in contributed surplus is the
equity component of the convertible debentures issued
which totalled $1,005,000, net of deferred tax, at
December 31, 2019 (2018 – $755,000). Please refer to
note 12 to the Statements. Please see the consolidated
statements of changes in equity on page 34 of this report
for details of changes in contributed surplus during 2019
and 2018.
1 6 Accord Financial Corp.
Retained earnings totalled $74,994,000 at December 31,
2019 compared to $71,558,000 at December 31, 2018.
In 2019, retained earnings increased by $3,436,000. The
increase comprised shareholders’ net earnings of
$6,444,000 less dividends paid of $3,052,000 (36 cents
per common share) plus other comprehensive income
of $44,000 recognized on the dissolution of a foreign
subsidiary. Please see the consolidated statements of
changes in equity on page 34 of this report for details of
changes in retained earnings during 2019 and 2018.
The Company’s accumulated other comprehensive
income (“AOCI”) account solely comprises the cumulative
unrealized foreign exchange income arising on the
translation of the assets and liabilities of the Company’s
foreign operations. The AOCI balance totalled $6,717,000
at December 31, 2019 compared to $9,072,000 at
December 31, 2018. Please refer to note 20 to the
Statements and the consolidated statements of changes
in equity on page 34 of this report, which details
movements in the AOCI account during 2019 and 2018.
The $2,355,000 decrease in AOCI balance in 2019 mainly
resulted from a decline in the value of the U.S. dollar
against the Canadian dollar. The U.S. dollar declined
from $1.3637 at December 31, 2018 to $1.2990 at
December 31, 2019. This reduced the Canadian dollar
equivalent book value of the Company’s net investment
in its foreign subsidiaries by $2,355,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company considers its capital resources to include
equity and debt, namely, its bank indebtedness, loan
payable, notes payable and convertible debentures. The
Company’s objectives when managing its capital are to:
(i) maintain financial flexibility in order to meet financial
obligations and continue as a going concern; (ii) maintain
a capital structure that allows the Company to finance
its growth using internally generated cash flow and
debt capacity; and (iii) optimize the use of its capital to
provide an appropriate investment return to its
shareholders commensurate with risk.
The Company manages its capital resources and makes
adjustments to them in light of changes in economic
conditions and the risk characteristics of its underlying
assets. To maintain or adjust its capital resources, the
Company may, from time to time, change the amount
of dividends paid to shareholders, return capital to
shareholders by way of normal course issuer bid, issue
new shares, or reduce liquid assets to repay debt.
Amongst other things, the Company monitors the ratio
of its debt to total equity and its total equity and tangible
equity to total assets. These ratios are presented for the
last three years as percentages in Table 2. As noted above,
the ratios at December 31, 2019 indicate the Company’s
continued financial strength.
The Company’s financing and capital requirements
generally increase with the level of Loans outstanding.
The collection period and resulting turnover of
outstanding receivables and loans also impact financing
needs. In addition to cash flow generated from operations,
the Company maintains lines of credit in Canada and
the United States. The Company can also raise funds
through its notes payable program or raise other forms
of debt, such as convertible debentures, or equity.
The Company had credit lines totalling approximately
$380 million at December 31, 2019 and had borrowed
$254 million against these facilities. Funds generated
through operating activities and the issuance of notes
payable, convertible debentures or other forms of debt
or equity decrease the usage of, and dependence on, these
lines. Note 23(b) details the Company’s financial assets
and liabilities at December 31, 2019 by maturity date.
As noted in the Review of Financial Position section
above, the Company had cash balances totalling
$6,776,000 at December 31, 2019 compared to $16,346,000
at December 31, 2018. As far as possible, cash balances
are maintained at a minimum and surplus cash is used
to repay bank indebtedness.
Management believes that current cash balances and
existing credit lines, together with cash flow from
operations, will be sufficient to meet the cash requirements
of working capital, capital expenditures, operating
expenditures, issuer bid repurchases, interest and dividend
Annual Report 2019
17
CONTRACTUAL OBLIGATIONS AND COMMITMENTS AT DECEMBER 31, 2019
Payments due in
Less than
(in thousands of dollars) 1 year 1 to 3 years 4 to 5 years Thereafter Total
Debt obligations $ 260,798 $ 12,149 $ 22,928 $ — $295,875
Operating lease obligations 491 963 217 207 1,878
Purchase obligations 81 — — — 81
$ 261,370 $ 13,112 $ 23,145 $
207 $297,834
payments and will provide sufficient liquidity and capital
resources for future growth over the next twelve months.
FISCAL 2019 CASH FLOWS
Year ended December 31, 2019 compared with the year
ended December 31, 2018
Cash inflow from net earnings before changes in operating
assets and liabilities and income tax payments totalled
$9,394,000 in 2019 compared to $13,399,000 last year.
After changes in operating assets and liabilities and
income tax payments are taken into account, there was
a net cash outflow from operating activities of $47,560,000
in 2019 compared to $94,342,000 last year. The net cash
outflow in 2019 largely resulted from financing loans of
$51,672,000. In 2018, the net cash outflow largely resulted
from financing loans of $105,848,000. Changes in other
operating assets and liabilities are discussed above and
are set out in the Company’s consolidated statements
of cash flows on page 35 of this report.
Cash outflows from investing activities totalled
$176,000 (2018 – $501,000) in 2019 and comprised
property and equipment additions.
Net cash inflow from financing activities totalled
$37,937,000 in 2019 compared to $99,615,000 last year.
The net cash inflow in 2019 resulted from an increase in
bank indebtedness of $27,626,000, the issue of convertible
debentures, net of transaction costs, totalling $6,823,000,
a rise in loan payable of $5,890,000, notes payable issued,
net, of $1,048,000, and common shares issued of $160,000.
Partially offsetting these inflows were dividend payments
totalling $3,052,000, lease liabilities payments of $377,000
and a distribution paid to non-controlling interests of
$181,000. In 2018, the net cash inflow resulted from an
increase in bank indebtedness of $76,905,000, issue of
convertible debentures of $16,922,000, net of transaction
costs, an increase in loan payable of $5,779,000, notes
payable issued, net, of $2,069,000, common units issued
by BondIt of $924,000 and the issue of the Company’s
common shares of $18,000, which inflows were partly
offset by dividend payments totalling $3,002,000.
The effect of exchange rate changes on cash comprised
a gain of $230,000 in 2019 compared to a loss of $883,000
in 2018.
Overall, there was a net cash outflow of $9,569,000 in
2019 compared to a net cash inflow of $3,889,000
in 2018.
RELATED PARTY TRANSACTIONS
The Company has borrowed funds (notes payable) on
an unsecured basis from shareholders, management,
employees, other related individuals and third parties.
Notes payable comprise short-term notes (due within
one year) and long-term notes due on July 31, 2021.
The short-term notes comprise: (i) notes due on, or within
a week of, demand ($3,607,000) which bear interest at
rates that vary with bank prime rate or Libor; and (ii)
numerous BondIt notes ($3,183,000) which are repayable
on various dates, the latest of which is December 31,
2020, and bear interest at rates between 7% and 12%.
The long-term notes, which total $12,149,000 and mature
on July 31, 2021, were entered into for a three-year term
commencing August 1, 2018. They carry a fixed interest
rate of 7%.
1 8 Accord Financial Corp.
Notes payable totalled $18,939,000 at December 31, 2019
compared with $18,079,000 at December 31, 2018. Of
these notes payable, $15,476,000 (2018 – $15,591,000)
was owing to related parties and $3,463,000 (2018 –
$2,488,000) to third parties. Interest expense on these
notes in 2019 totalled $1,305,000 (2018 – $997,000).
Please refer to note 11(a) to the Statements.
The following parties had notes payable with the Company
at December 31, 2019:
Short term demand notes payable
Hitzig Bros.,
Hargreaves & Co. Inc.* Directors C$ 880,000
Hitzig Bros.,
Hargreaves & Co. LLC.* Directors US$ 700,000
Ken Hitzig Director C$ 250,000
Tom Henderson Director US$ 162,993
Term notes payable (due July 31, 2021)
Hitzig Bros.,
Hargreaves & Co. Inc.* Directors C$ 3,500,000
Oakwest Corporation Inc.* Director C$ 2,000,000
Belweather Capital
Partners Inc.* Director C$ 1,000,000
Ken Hitzig Director C$ 1,000,000
*a director(s) of Accord has an ownership interest in the company
Accord pays a rate of interest related to Canadian prime
(currently it pays 2.95% or 3.45%) on its Canadian dollar
unsecured demand notes payable, while its U.S. dollar
unsecured demand notes pay a LIBOR based rate of
interest (currently 2.75%). These rates of interest are
below the rates that the Company pays on its main
syndicated bank facility with The Bank of Nova Scotia
(“BNS”) resulting in interest savings to the Company.
Upon renewal of the BNS facility in July 2018, the
Company entered into three-year unsecured notes
payable maturing July 31, 2021. These notes are solely
with related parties and pay a rate of interest of 7%.
The Company’s credit facility allows these three-year
notes to be included in its tangible net worth (TNW) for
the purpose of leveraging its bank line (up to 3.5 times
TNW). This created additional borrowing capacity that
Accord can utilize at lower credit facility rates of
interest, which was the main business purpose thereof.
BondIt also utilizes loan participations to provide capital
for and reduce the risk of loss on client loans, as well as
reduce its overall cost of capital. A number of related parties
have participated in the BondIt loans. At December 31,
2019, BondIt loan participations totalled US$6,101,000
(2018 – US$3,080,000), of which US$990,000 (2018 –
US$748,000) was provided by related parties. Specifically,
US$800,000 (2018 – US$748,000) was provided by Hitzig
Bros., Hargreaves & Co. LLC, while US$190,000 (2018 – nil)
was provided by BondIt management and a company
related to BondIt management. Please refer to note 11(b).
FINANCIAL INSTRUMENTS
All financial assets and liabilities, with the exception of
cash, derivative financial instruments, and the guarantee
of managed receivables, are recorded at cost. The
exceptions noted are recorded at fair value. Financial
assets and liabilities, other than the lease receivables
and loans to clients in our equipment finance business,
lease liabilities, convertible debentures and term notes
payable, are short-term in nature and, therefore, their
carrying values approximate fair values.
At December 31, 2019, the Company had entered into
forward foreign exchange contracts with a financial
institution which must be exercised by the Company
between January 31, 2020 and July 31, 2020 and which
oblige the Company to sell Canadian dollars and buy
US$650,000 at exchange rates between 1.3090 and
1.3288. These contracts were entered into by the
Company on behalf of a client and similar forward
foreign exchange contracts were entered into between
the Company and the client, whereby the Company will
buy Canadian dollars from and sell US$650,000 to the
client. These contracts are discussed further in note 18
to the Statements.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
Critical accounting estimates represent those estimates
that are highly uncertain and for which changes in
those estimates could materially impact the Company’s
financial results. The following are accounting estimates
Annual Report 2019
19
that the Company considers critical to the financial
results of its business segments:
i)
the allowance for losses on both its Loans and its
guarantee of managed receivables. The Company
maintains a separate allowance for losses on each of
the above items at amounts which, in management’s
judgment, are sufficient to cover losses thereon. The
allowances are based upon several considerations
including current economic environment, condition
of the loan and receivable portfolios, typical industry
loss experience, macro-economic factors and
forward-looking information. These estimates are
particularly judgmental and operating results may
be adversely affected by significant unanticipated
credit or loan losses, such as occur in a bankruptcy
or insolvency.
The Company’s allowance for losses on its Loans and
its guarantee of managed receivables are provided
for under the three stage criteria set out in IFRS 9,
where a Stage 1 allowance is established to reserve
against ECL on accounts which have not experienced
a significant increase in credit risk (“SICR”) and
which cannot be specifically identified as impaired
on an item-by-item or group basis at a particular
point in time. Stage 1 ECL results from default events
on the financial instrument that are possible within
the twelve-month period after the reporting date.
Stage 1 accounts are considered to be in good
standing. In establishing its Stage 1 allowances, the
Company applies percentage formulae to its Loans
and managed receivables based on its credit risk
analysis. The Company’s Stage 2 allowances are
based on a review of the loan or managed receivable
and comprises an allowance for those financial
instruments which have experienced a SICR since
initial recognition. The Company generally considers
an account to have a SICR when there is a change
in internal risk rating since initial recognition which
prompts the Company to place the account on its
“watchlist.” Lifetime ECL are recognized for all
Stage 2 financial instruments. Stage 3 financial
instruments are those that the Company has
classified as impaired. The Company classifies a
financial instrument as impaired when the future
cash flows of the financial instrument could be
adversely impacted by events after its initial
recognition. Evidence of impairment includes
indications that the borrower is experiencing
significant financial difficulties, or a default or
delinquency has occurred. The Company also refers
to these accounts as “workout” accounts. Lifetime
ECL are recognized for all Stage 3 financial
instruments. In Stage 3, financial instruments are
written-off, either partially or in full, against the
related allowance for losses when the Company
judges that there is no realistic prospect of future
recovery in respect of those amounts after the
collateral has been realized or transferred at net
realizable value. Any subsequent recoveries of
amounts previously written-off are credited to the
respective allowance for losses. Management believes
that its allowances for losses are sufficient and
appropriate and does not consider it reasonably
likely that the Company’s material assumptions will
change. The Company’s allowances are discussed
above and in notes 3(e), 4 and 23(a) to the Statements.
ii)
the extent of any provisions required for outstanding
claims. In the normal course of business there is
outstanding litigation, the results of which are not
normally expected to have a material effect upon
the Company. However, the adverse resolution of a
particular claim could have a material impact on
the Company’s financial results. Management is not
aware of any claims currently outstanding the
aggregate liability from which would materially
affect the financial position of the Company.
ADOPTION OF NEW ACCOUNTING
POLICY
Effective January 1, 2019, the Company adopted a new
accounting standard as issued by the IASB comprising
IFRS 16, Leases, which replaced IAS 17, Leases. IFRS 16
sets out the principles for the recognition, measurement,
presentation and disclosure of leases. IFRS 16 was
applied using the modified retrospective method
20 Accord Financial Corp.
pursuant to which the Company will not have to restate
2018 comparatives.
there can be no assurance that any design will succeed
in achieving its stated goal under all potential conditions.
The adoption of IFRS 16 resulted in a fundamental
change to the accounting treatment of leases. IFRS 16
eliminated the current dual accounting model for lessees,
which distinguished between on-balance sheet finance
leases and off-balance sheet operating leases. Instead,
there is now a single, on-balance sheet accounting model
that is similar to finance lease accounting. Under IFRS 16,
right-of-use assets and lease liabilities have been
recognized at the date of implementation resulting in
an increase in both assets and liabilities. Lessees also
recognize depreciation expense on the right-of-use assets
and interest expense on the lease liabilities in the income
statement. The Company elected to use exemptions
available under IFRS 16 for lease terms which end within
twelve months of January 1, 2019 and also for lease
contracts of certain office equipment that are considered
low value. On adoption of IFRS 16, the Company
recognized right-of-use assets in respect of four of its
office leases totalling $2,027,000 and related lease
liabilities in the same amount. There was no impact on
the Company’s retained earnings. Adoption of IFRS 16
did not have a material impact on the Company’s net
earnings. For further details, please refer to note 3(a) to
the Statements.
CONTROL ENVIRONMENT
There have been no changes to the Company’s disclosure
controls and procedures (“DC&P”) and internal control
over financial reporting (“ICFR”) during 2019 that have
materially affected, or are reasonably likely to materially
affect, DC&P or ICFR.
Internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable
assurance with respect to financial statement preparation
and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate and, as such,
Disclosure controls and procedures
The Company’s management, including its President and
Chief Financial Officer, are responsible for establishing
and maintaining the Company’s disclosure controls and
procedures and has designed them to provide reasonable
assurance that material information relating to the
Company is made known to it by others within the
Company on a timely basis. The Company’s management
has evaluated the effectiveness of its disclosure controls
and procedures (as defined in the rules of the Canadian
Securities Administrators (“CSA”)) as at December 31,
2019 and has concluded that such disclosure controls
and procedures are effective.
Management’s annual report on internal
control over financial reporting
The following report is provided by the Company’s
management, including its President and Chief Financial
Officer, in respect of the Company’s internal control over
financial reporting (as defined in the rules of the CSA):
(i)
the Company’s management is responsible for
establishing and maintaining adequate internal
control over financial reporting within the Company.
All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even
those systems determined to be effective can
provide only reasonable assurance with respect to
financial statement preparation and presentation;
(ii)
the Company’s management has used the Committee
of Sponsoring Organizations of the Treadway
Commission (COSO) 2013 framework to evaluate
the design of the Company’s internal control over
financial reporting and test its effectiveness; and
(iii) the Company’s management has designed and
tested the effectiveness of its internal control over
financial reporting as at December 31, 2019 to
provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the
Company’s financial statements for external purposes
Annual Report 2019
21
in accordance with IFRS and advises that there are
no material weaknesses in the design of internal
control over financial reporting that have been
identified by management.
RISKS AND UNCERTAINTIES THAT
COULD AFFECT FUTURE RESULTS
Past performance is not a guarantee of future performance,
which is subject to substantial risks and uncertainties.
Management remains optimistic about the Company’s
long-term prospects. Factors that may impact the
Company’s results include, but are not limited to, the
factors discussed below. Please refer to note 23 to the
Statements, which discuss the Company’s principal
financial risk management practices.
Competition from alternative sources of
financing
The Company operates in an intensely competitive
environment and its results could be significantly
affected by the activities of other industry participants.
The Company expects this level of competition to persist
in the future as the markets for its services continue to
develop and as additional companies enter its markets.
There can be no assurance that the Company will be
able to compete effectively with current or future
competitors. If the Company’s competitors engage in
aggressive pricing policies with respect to services that
compete with those of the Company’s, the Company
would likely lose some clients or be forced to lower its
rates, both of which could have a material adverse effect
on the Company’s business, financial condition and
results of operations. In addition, some of the Company’s
competitors may have higher risk tolerances or different
risk assessments, which could allow them to establish
more origination sources and customer relationships to
increase their market share. Further, because there are
fewer barriers to entry to the markets in which the
Company operates, new competitors could enter these
markets at any time. Because of all these competitive
factors, the Company may be unable to sustain its
operations at its current levels or generate growth in
revenues or operating income, either of which could
have a material adverse impact on the Company’s
business, financial condition and results of operations.
Credit risk, inability to underwrite finance
receivables and loan applications
The Company is in the business of financing its clients’
receivables and making asset-based loans, including
inventory and equipment financings, designed to serve
small- and medium-sized businesses, which are often
owner-operated and have limited access to traditional
financing. There is a high degree of risk associated with
providing financing to such parties as a result of their
lower creditworthiness. Even with an appropriately
diversified lending business, operating results can be
adversely affected by large bankruptcies and/or
insolvencies. Losses from client loans in excess of the
Company’s expectations could have a material adverse
impact on the Company’s business, financial condition
and results of operations. In addition, since defaulted
loans as well as certain delinquent loans cannot be used
as collateral under the Company’s credit facilities, higher
than anticipated defaults and delinquencies could
adversely affect the Company’s liquidity by reducing
the amount of funding available to the Company under
these financing arrangements. Furthermore, increased
rates of delinquencies or loss levels could cause the
Company to be in breach of its financial covenants under
its credit facilities, and could also result in adverse
changes to the terms of future financing arrangements
available to the Company, including increased interest
rates payable to lenders and the imposition of more
burdensome covenants and increased credit
enhancement requirements.
Interest rate risk
The Company has fixed rate borrowings, as well as
floating rate borrowings. The Company’s agreements
with its clients (affecting interest revenue) and lenders
(affecting interest expense) usually provide for rate
adjustments in the event of interest rate changes.
However, as the Company’s floating rate funds employed
are currently similar to its floating rate borrowings, the
Company is currently economically hedged against
interest rate fluctuations. Fluctuations in interest rates
may have a material adverse impact on the Company’s
business, financial condition and results of operations.
22 Accord Financial Corp.
Foreign currency risk
The Company has international operations, primarily in
the United States. Accordingly, a significant portion of
its financial resources are held in currencies other than
the Canadian dollar. In recent years, the Company has
seen the fluctuations in the U.S. dollar against the
Canadian dollar affect its operating results when its
foreign subsidiaries results are translated into Canadian
dollars. It has also affected the value of the Company’s
net Canadian dollar investment in its foreign subsidiaries,
which had, in the past, reduced the accumulated other
comprehensive income component of equity to a loss
position, although it is now in a significant gain position.
No assurances can be made that changes in foreign
currency rates will not have a significant adverse effect
on the Company’s business, financial condition or results
of operations.
External financing
The Company depends and will continue to depend on
the availability of credit from external financing sources,
to continue to, among other things, finance new and
refinance existing loans and satisfy the Company’s other
working capital needs. The Company believes that
current cash balances and existing credit lines, together
with cash flow from operations, will be sufficient to
meet its cash requirements with respect to investments
in working capital, operating expenditures and dividend
payments, and also provide sufficient liquidity and
capital resources for future growth over the next twelve
months. However, there is no guarantee that the Company
will continue to have financing available to it or if the
Company were to require additional financing that it
would be able to obtain it on acceptable terms or at all.
If any or all of the Company’s funding sources become
unavailable on terms acceptable to the Company or at
all, or if any of the Company’s credit facilities are not
renewed or re-negotiated upon expiration of their terms,
the Company may not have access to the financing
necessary to conduct its businesses, which would limit
the Company’s ability to finance its operations and could
have a material adverse impact on it’s business, financial
condition and results of operations.
Deterioration in economic or business
conditions; impact of significant events
and circumstances
The Company operates mainly in Canada and the
United States. The Company’s operating results may be
negatively affected by various economic factors and
business conditions, including the level of economic
activity in the markets in which it operates. To the
extent that economic activity or business conditions
deteriorate, delinquencies and credit losses may increase.
As the Company extends credit primarily to small- and
medium-sized businesses, many of its customers are
particularly susceptible to economic slowdowns or
recessions, and may be unable to make scheduled lease
or loan payments during these periods. Unfavorable
economic conditions may also make it more difficult for
the Company to maintain new origination volumes and
the credit quality of new loans at levels previously
attained. Unfavorable economic conditions could also
increase funding costs or operating cost structures,
limit access to credit facilities and other capital markets
funding sources or result in a decision by the Company’s
lenders not to extend further credit. Any of these events
could have a material adverse impact on the Company’s
business, financial condition and results of operations.
Dependence on key personnel
Employees are a significant asset of the Company, and
the Company depends to a large extent upon the abilities
and continued efforts of its key operating personnel
and senior management team. If any of these persons
becomes unavailable to continue in such capacity, or if
the Company is unable to attract and retain other qualified
employees, it could have a material adverse impact on
the Company’s businesses, financial condition and
results of operations. Market forces and competitive
pressures may also adversely affect the ability of the
Company to recruit and retain key qualified personnel.
Income tax matters
The income of the Company must be computed in
accordance with Canadian, U.S. and foreign tax laws, as
applicable, and the Company is subject to Canadian,
U.S. and foreign tax laws, all of which may be changed
Annual Report 2019
23
in a manner that could adversely affect the Company’s
business, financial condition or results of operation.
financial condition and results of operations.
Recent and future acquisitions and
investments
In recent years, the Company has acquired or invested
in businesses and may seek to acquire or invest in
additional businesses in the future that expand or
complement its current business. Recent acquisitions by
the Company have increased the size of the Company’s
operations and the amount of indebtedness that may
have to be serviced by the Company and future
acquisitions by the Company, if they occur, may result
in further increases in the Company’s operations or
indebtedness. The successful integration and management
of any recently acquired businesses or businesses
acquired in the future involves numerous risks that could
adversely affect the Company’s business, financial
condition, or results of operations, including: (i) the risk
that management may not be able to successfully
manage the acquired businesses and that the integration
of such businesses may place significant demands on
management, diverting their attention from the
Company’s existing operations; (ii) the risk that the
Company’s existing operational, financial, management,
due diligence or underwriting systems and procedures
may be incompatible with the markets in which the
acquired business operates or inadequate to effectively
integrate and manage the acquired business; (iii) the
risk that acquisitions may require substantial financial
resources that otherwise could be used to develop other
aspects of the Company’s business; (iv) the risk that as
a result of acquiring a business, the Company may
become subject to additional liabilities or contingencies
(known and unknown); (v) the risk that the personnel of
any acquired business may not work effectively with
the Company’s existing personnel; (vi) the risk that the
Company fails to effectively deal with competitive
pressures or barriers to entry applicable to the acquired
business or the markets in which it operates or introduce
new products into such markets; and (vii) the risk that
the acquisition may not be accretive to the Company.
The Company may fail to successfully integrate such
acquired businesses or realize the anticipated benefits
of such acquisitions, and such failure could have a
material adverse impact on the Company’s business,
Fraud by lessees, borrowers, vendors
or brokers
The Company may be a victim of fraud by lessees,
borrowers, vendors and brokers. In cases of fraud, it is
difficult and often unlikely that the Company will be able
to collect amounts owing under a lease/loan or repossess
any related collateral. Increased rates of fraud could have
a material adverse impact on the Company’s business,
financial condition and results of operations.
Risk of future legal proceedings
The Company is threatened from time to time with, or
is named as a defendant in, or may become subject to,
various legal proceedings, fines or penalties in the ordinary
course of conducting its businesses. A significant
judgment or the imposition of a significant fine or penalty
on the Company could have a material adverse impact
on the Company’s business, financial condition and
results of operation. Significant obligations may also be
imposed on the Company by reason of a settlement or
judgment involving the Company, as well as risks pertinent
to financing facilities, including acceleration and/or loss
of funding availability. Publicity regarding involvement
in matters of this type, especially if there is an adverse
settlement or finding in the litigation, could result in
adverse consequences to the Company’s reputation that
could, among other things, impair its ability to retain
existing or attract further business. The continuing
expansion of class action litigation in U.S. and Canadian
court actions has the effect of increasing the scale of
potential judgments. Defending such a class action or
other major litigation could be costly, divert management’s
attention and resources and have a material adverse
impact on the Company’s business, financial condition
and results of operations.
OUTLOOK
The Company’s principal objective is managed growth –
putting quality new business on the books while
maintaining high underwriting standards.
The Company is benefitting from the continued
substantial growth in its funds employed, which have
24 Accord Financial Corp.
Company has raised $25.6 million through convertible
debenture offerings, including $7.2 million raised in
2019. The Company will continue to review alternative
sources of financing to augment its balance sheet if and
when necessary.
U.S. tax regulations released in December 2018 impacted
tax planning such that the Company saw an increase in
its effective tax rate and income tax expense in 2019. This
significantly impacted net earnings in 2019. The Company
implemented an alternative tax strategy towards the end
of 2019 which should help lower its effective tax rate in
future years.
With its substantial capital and borrowing capacity,
Accord is well positioned to capitalize on market
conditions. That, coupled with experienced management
and employees, will enable the Company to meet
increased competition and develop new opportunities.
Accord continues to introduce new financial and credit
services to fuel growth in a very competitive and
challenging environment.
Stuart Adair
Senior Vice President, Chief Financial Officer
Toronto, Canada
March 6, 2020
grown 166% from the $140 million at the end to 2016 to
finish 2019 at $373 million. Growth in funds employed, a
key indicator of where the Company is heading, has
been achieved organically through the introduction of
new lending products and through the investments in
ASBF in 2014, and BondIt and CapX in the second half
of 2017.
Revenue in 2019 increased 20% from 2018 and will
continue to grow as more funds are deployed. Average
funds employed in 2019 were 39% higher than 2018’s
average. Growth in funds employed is expected to
continue and will result in improved revenues in the
future which bodes well for future financial results,
although the Company continues to face intense
competition, particularly in the U.S. which has resulted
in lower loan yields there in recent years. It is anticipated
that the Company’s asset-based financing units, AFIC and
AFIU, will be able to continue to build on their growth,
particularly in the U.S. where synergies with CapX are
being realized, despite operating in very competitive
markets. The Company’s Canadian equipment financing
and leasing business, ASBF, is forecasting growth to
continue in future years. That unit continues to expand
its product offerings, which include working capital
loans and the equipment revolving line of credit product
that it introduced in 2017, as well as carefully increasing
its average equipment finance deal size.
Our newest group companies are also expected to grow
their funds employed. BondIt’s funds employed are
seeing growth, while CapX, which started from scratch in
the fourth quarter of 2017, had grown funds employed to
$111 million at the end of 2019, which growth is expected
to continue. Our credit protection and receivables
management business faces intense competition from
multinational credit insurers which is expected to
continue and its business is likely to decline further in
2019 although it continues to be profitable.
To support this growth, in July 2019 the Company’s
banking syndicate approved a $75 million increase in its
bank facility bringing the credit line up to $367 million.
This should provide the Company with the majority of
funding needed to support further growth in the next
twelve months. In addition, since December 2018, the
Annual Report 2019
25
Ten Year Financial Summary 2010-2019
All figures are in thousands of dollars except earnings per share, dividends per share, book value per share, share
price history and return on equity.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revenue $ 31,406 28,408 25,891 26,074 30,235 31,577 28,522 31,409 46,927 56,175
Interest 1,730 2,047 1,911 1,913 2,523 2,258 2,281 3,847 9,407 17,089
General and administrative 14,679 13,558 13,615 13,845 16,154 17,484 17,427 16,945 23,524 26,151
Provision for credit and loan losses 1,325 886 213 438 639 375 963 2,898 2,025 7,105
Impairment of assets held for sale 1,237 462 — — — 50 44 24 25 —
Depreciation 159 130 126 112 125 136 154 161 279 727
Business acquisition expenses — — — — 570 575 509 932 336 (1,818)
Total expenses 19,130 17,083 15,865 16,308 20,011 20,878 21,378 24,807 35,596 49,254
Earnings before income tax expense 12,276 11,325 10,026 9,766 10,224 10,699 7,144 6,602 11,331 6,921
Income tax expense 4,033 3,740 3,649 3,228 3,345 1,940 578 391 104 1,579
Net earnings $ 8,243 7,585 6,377 6,538 6,879 8,759 6,566 6,211 11,227 5,342
Non-controlling interests — — — — — — — 201 871 (1,102)
Net earnings attributable
to shareholders $ 8,243 7,585 6,377 6,538 6,879 8,759 6,566 6,010 10,356 6,444
Earnings per common share:
Basic and diluted 0.88 0.85 0.76 0.80 0.83 1.05 0.79 0.72 1.24 0.76
Dividends per common share $ 0.28 0.30 0.31 0.32 0.33 0.35 0.36 0.36 0.36 0.36
Finance receivables and loans, net $ 102,313 89,124 108,477 109,775 136,346 134,259 138,115 217,975 335,652 368,637
Other assets 10,811 9,368 16,115 11,034 18,278 20,301 20,451 33,045 38,131 37,577
Total assets $ 113,124 98,492 124,592 120,809 154,624 154,560 158,566 251,020 373,783 406,214
Bank indebtedness $ 44,596 27,222 54,572 43,368 63,995 54,094 62,484 138,140 222,862 242,781
Loan payable — — — — — — — — 5,696 11,227
Notes payable 10,142 14,611 14,492 14,809 16,808 13,201 11,370 15,862 18,079 18,939
Convertible debentures — — — — — — — — 15,955 22,928
Other liabilities 13,826 8,804 8,132 9,201 12,489 14,199 9,030 16,885 16,006 13,971
Total liabilities 68,564 50,637 77,196 67,378 93,292 81,494 82,884 170,887 278,598 309,846
Shareholders' equity 44,560 47,855 47,396 53,431 61,332 73,066 75,682 76,449 89,818 92,515
Non-controlling interests in subsidiaries — — — — — — — 3,684 5,367 3,853
Total equity 44,560 47,855 47,396 53,431 61,332 73,066 75,682 80,133 95,185 96,368
Total liabilities and equity $ 113,124 98,492 124,592 120,809 154,624 154,560 158,566 251,020 373,783 406,214
Shares outstanding at Dec. 31 # 9,066 8,719 8,221 8,221 8,308 8,308 8,308 8,308 8,429 8,589
Book value per share at Dec. 31 $ 4.92 5.49 5.76 6.50 7.38 8.79 9.11 9.20 10.66 10.77
Share price - high $ 8.14 8.25 7.15 9.25 10.75 12.05 9.95 9.55 10.45 10.42
- low 5.25 6.50 6.50 6.84 7.85 9.00 8.70 8.40 8.22 8.37
- close at Dec. 31 7.50 6.87 7.00 7.86 9.35 9.60 8.99 9.20 9.09 10.07
Return on average equity % 18.2 16.8 13.6 13.1 12.1 13.1 9.0 8.0 12.8 7.1
26 Accord Financial Corp.
COMPLETE SPECTRUM OF FINANCING SOLUTIONS
Asset-based lending
Accord’s asset-based lending serves companies of all sizes across North America. Our flexible ABL
solutions allow clients to unlock working capital from their accounts receivable, inventory and
equipment. Accord also provides financing solutions to other lending companies, enabling them to
grow more quickly than they would with traditional funding. Over forty years of superior service
combined with exceptional financial strength makes us the most reliable finance partner for companies
positioning for their next phase of growth.
Equipment Financing
Accord finances equipment for small- and medium-sized businesses, serving a broad base of North
America’s most dynamic industries, from forestry and energy, to construction and manufacturing.
We’re equally comfortable financing incremental CapX or business expansion, or refinancing existing
assets to optimize balance sheet strength. Our success has been built on our commitment to supporting
private equity sponsors, finance professionals and SMEs directly.
Credit protection & receivables management
Accord is one of North America’s most experienced firms providing complete receivables management
services. For over forty years we’ve served small- and medium-sized businesses with flexible, cost-effective,
risk-free credit guarantees and collection services. With complete coverage of the U.S. and Canada,
and strong alliances worldwide, we have the knowledge, expertise and connections to deliver
superior results across all industries.
Supply Chain Finance
Since 1978, Accord has been a leader in cross-border trade, simplifying supply chain finance for
importers and exporters. Our unique AccordOctet program provides trade financing for North American
companies sourcing goods anywhere in the world, while our alliance with Factors Chain International
facilitates seamless credit and collection services through a network of close to 400 members and
trade firms in 90 countries worldwide.
Small Business Finance
AccordAccess is a flexible working capital solution aimed at financing growth for qualified small- and
medium-sized businesses. AccordAccess provides unsecured loans of up to $75,000, repaid in 18 months
or sooner with simple, fixed weekly payments. This innovative program is designed to help small
businesses take advantage of growth opportunities or manage through challenging times. AccordAccess
is an ideal supplement to the owners’ investment and to long-term financing, like leasing and bank credit.
Media finance
Accord provides media finance through affiliate BondIt Media Capital, a world renowned film, television
and media financier founded in 2014. Since inception, BondIt has participated in the debt financing of
over 270 feature film and television productions ranging from micro-budgets to studio level projects.
Based in Santa Monica, BondIt is a flexible financing partner for projects, producers and media
companies alike.
Annual Report 2019
27
Management’s Report to the Shareholders
The management of Accord Financial Corp. is responsible for the preparation,
fair presentation and integrity of the audited consolidated financial statements,
financial information and MD&A contained in this annual report. This responsibility
includes the selection of the Company’s accounting policies in addition to
judgments and estimates in accordance with International Financial Reporting
Standards (IFRS). The accounting principles which form the basis of the consolidated
financial statements and the more significant policies applied are described in
note 3 to the consolidated financial statements. The MD&A has been prepared in
accordance with the requirements of the CSA’s National Instrument 51-102.
In order to meet its responsibility for the reliability and timeliness of financial
information, management maintains systems of accounting and administrative
controls that assure, on a reasonable basis, the reliability of financial information
and the orderly and efficient conduct of the Company’s business. A report on the
design and effectiveness of the Company’s disclosure controls and procedures and
the design and operating effectiveness of it internal control over financial reporting
is set out in the MD&A as required by CSA’s National Instrument 52-109.
The Company’s Board of Directors is responsible for ensuring that management
fulfils its responsibilities for financial reporting and internal control. The Board is
assisted in exercising its responsibilities through its Audit Committee, which is
composed of three independent directors. The Committee meets at least quarterly
with management and periodically with the Company’s auditors to satisfy itself that
management’s responsibilities are properly discharged, to review the Company’s
financial reports, including consolidated financial statements and MD&A, and to
recommend approval of the consolidated financial statements and MD&A to
the Board.
KPMG LLP, independent auditors appointed by the shareholders, expresses an
opinion on the fair presentation of the consolidated financial statements. They have
full and unrestricted access to the Audit Committee and management to discuss
matters arising from their audit, which includes a review of the Company’s
accounting records and consideration of its internal controls.
Stuart Adair
Toronto, Canada
March 6, 2020
28 Accord Financial Corp.
Independent Auditors' Report to the Shareholders
TO THE SHAREHOLDERS OF ACCORD
FINANCIAL CORP.
BASIS FOR OPINION
OPINION
We conducted our audit in accordance with IFRS. Our
responsibilities under those standards are further described
in the “Auditors’ Responsibilities for the Audit of the Financial
We have audited the consolidated financial statements of
Statements” section of our auditors’ report.
Accord Financial Corp. (the Entity), which comprise:
• the consolidated statements of financial position as at
ethical requirements that are relevant to our audit of the
December 31, 2019 and December 31, 2018;
financial statements in Canada and we have fulfilled our
• the consolidated statements of earnings for the years
other responsibilities in accordance with these requirements.
We are independent of the Entity in accordance with the
then ended;
• the consolidated statements of comprehensive income
We believe that the audit evidence we have obtained is
for the years then ended;
sufficient and appropriate to provide a basis for our opinion.
• the consolidated statements of changes in equity for the
years then ended;
OTHER INFORMATION
• the consolidated statements of cash flows for the years
then ended; and
Management is responsible for the other information.
• notes to the consolidated financial statements, including
Other information comprises:
a summary of significant accounting policies.
(hereinafter referred to as the “financial statements”).
• the information included in Management’s Discussion
and Analysis filed with the relevant Canadian Securities
In our opinion, the accompanying financial statements
Commissions; and
present fairly, in all material respects, the consolidated
• the information, other than the financial statements and
financial position of the Entity as at December 31, 2019
the auditors’ report thereon, included in a document
and December 31, 2018, and its consolidated financial
likely to be entitled “Annual Report 2019”.
performance and its consolidated cash flows for the years
then ended in accordance with International Financial
Our opinion on the financial statements does not cover the
Reporting Standards (IFRS) as issued by the International
other information and we do not and will not express any
Accounting Standards Board.
form of assurance conclusion thereon.
Annual Report 2019
29
In connection with our audit of the financial statements,
our responsibility is to read the other information identified
AUDITORS’ RESPONSIBILITIES FOR THE
AUDIT OF THE FINANCIAL STATEMENTS
above and, in doing so, consider whether the other
information is materially inconsistent with the financial
Our objectives are to obtain reasonable assurance about
statements or our knowledge obtained in the audit and
whether the financial statements as a whole are free from
remain alert for indications that the other information
material misstatement, whether due to fraud or error, and
appears to be materially misstated.
to issue an auditors’ report that includes our opinion.
We obtained the information included in Management’s
Reasonable assurance is a high level of assurance, but is
Discussion and Analysis filed with the relevant Canadian
not a guarantee that an audit conducted in accordance
Securities Commissions as at the date of this auditors’
with Canadian generally accepted auditing standards will
report. If, based on the work we have performed on this
other information, we conclude that there is a material
always detect a material misstatement when it exists.
misstatement of this other information, we are required to
Misstatements can arise from fraud or error and are
report that fact in the auditors’ report.
We have nothing to report in this regard.
RESPONSIBILITIES OF MANAGEMENT AND
THOSE CHARGED WITH GOVERNANCE FOR
THE FINANCIAL STATEMENTS
considered material if, individually or in the aggregate,
they could reasonably be expected to influence the
economic decisions of users taken on the basis of the
financial statements.
As part of an audit in accordance with Canadian generally
accepted auditing standards, we exercise professional
judgment and maintain professional skepticism
Management is responsible for the preparation and fair
throughout the audit.
presentation of the financial statements in accordance
with IFRS, and for such internal control as management
We also:
determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether
due to fraud or error.
• Identify and assess the risks of material misstatement of
the financial statements, whether due to fraud or error,
design and perform audit procedures responsive to
In preparing the financial statements, management is
those risks, and obtain audit evidence that is sufficient
responsible for assessing the Entity’s ability to continue as
and appropriate to provide a basis for our opinion.
a going concern, disclosing as applicable, matters related
to going concern and using the going concern basis of
The risk of not detecting a material misstatement resulting
accounting unless management either intends to liquidate
from fraud is higher than for one resulting from error, as
the Entity or to cease operations, or has no realistic alternative
fraud may involve collusion, forgery, intentional
but to do so.
omissions, misrepresentations, or the override of
internal control.
Those charged with governance are responsible for
overseeing the Entity’s financial reporting process.
• Obtain an understanding of internal control relevant to
30 Accord Financial Corp.
the audit in order to design audit procedures that are
reasonably be thought to bear on our independence,
appropriate in the circumstances, but not for the
and where applicable, related safeguards.
purpose of expressing an opinion on the effectiveness
of the Entity's internal control.
• Obtain sufficient appropriate audit evidence regarding
the financial information of the entities or business
• Evaluate the appropriateness of accounting policies used
and the reasonableness of accounting estimates and
activities within the group Entity to express an opinion
on the financial statements. We are responsible for the
related disclosures made by management.
direction, supervision and performance of the group
audit. We remain solely responsible for our audit opinion.
• Conclude on the appropriateness of management's use
of the going concern basis of accounting and, based on
the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that
Chartered Professional Accountants, Licensed Public
may cast significant doubt on the Entity's ability to
Accountants
continue as a going concern. If we conclude that a material
The engagement partner on the audit resulting in this
uncertainty exists, we are required to draw attention in
auditors’ report is James Loewen
our auditors’ report to the related disclosures in the
financial statements or, if such disclosures are inadequate,
Toronto, Canada
to modify our opinion. Our conclusions are based on the
March 6, 2020
audit evidence obtained up to the date of our auditors’
report. However, future events or conditions may cause
the Entity to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content
of the financial statements, including the disclosures,
and whether the financial statements represent the
underlying transactions and events in a manner that
achieves fair presentation.
• Communicate with those charged with governance
regarding, among other matters, the planned scope and
timing of the audit and significant audit findings,
including any significant deficiencies in internal control
that we identify during our audit.
• Provide those charged with governance with a
statement that we have complied with relevant ethical
requirements regarding independence, and communicate
with them all relationships and other matters that may
Annual Report 2019
31
Consolidated Statements of Financial Position
December 31, 2019 December 31, 2018
Assets
Cash $ 6,776,422 $ 16,345,848
Finance receivables and loans, net (note 4) 368,637,083 335,651,770
Income taxes receivable 996,039 327,553
Other assets 2,426,949 1,133,367
Assets held for sale (note 5) 6,970,369 46,882
Deferred tax assets, net (note 15) 975,714 1,207,699
Property and equipment (note 6) 2,337,365 923,080
Intangible assets (note 9) 3,639,468 4,115,886
Goodwill (note 7) 13,454,926 14,031,320
$ 406,214,335 $ 373,783,405
Liabilities
Due to clients $ 2,403,717 $ 3,156,045
Bank indebtedness (note 8) 242,781,300 222,861,724
Loan payable (note 10) 11,226,897 5,695,568
Accounts payable and other liabilities 6,170,491 10,693,554
Income taxes payable 337,764 129,083
Notes payable (note 11(a)) 18,938,887 18,078,919
Convertible debentures (note 12) 22,927,941 15,954,642
Lease liabilities (note 13) 1,597,664 —
Deferred income 1,210,471 1,514,199
Deferred tax liabilities, net (note 15) 2,251,060 514,700
309,846,192 278,598,434
Equity
Capital stock (note 14) 9,481,382 8,114,733
Contributed surplus (note 14(d)) 1,322,575 1,072,753
Retained earnings 74,994,381 71,558,552
Accumulated other comprehensive income (note 20) 6,716,581 9,071,661
Shareholders’ equity 92,514,919 89,817,699
Non-controlling interests in subsidiaries (note 21) 3,853,224 5,367,272
Total equity 96,368,143 95,184,971
$ 406,214,335 $ 373,783,405
Contingent liabilities (note 17)
See accompanying notes to consolidated financial statements.
On behalf of the Board
Ken Hitzig
Chairman of the Board
Simon Hitzig
President and Chief Executive Officer
32 Accord Financial Corp.
Consolidated Statements of Earnings
Years ended December 31 2019 2018
Revenue
Interest (note 4) $ 49,002,838 $ 37,842,708
Other income (note 4) 7,172,247 9,084,643
56,175,085 46,927,351
Expenses
Interest 17,089,579 9,407,145
General and administrative 26,150,907 23,524,060
Provision for credit and loan losses (note 4) 7,105,154 2,025,469
Impairment of assets held for sale — 25,000
Depreciation 726,618 278,514
Business acquisition expenses (recovery):
Transaction and integration costs (2,117,768) (74,519)
Amortization of intangible assets 300,117 410,229
49,254,607 35,595,898
Earnings before income tax expense 6,920,478 11,331,453
Income tax expense (note 15) 1,579,000 104,000
Net earnings 5,341,478 11,227,453
Net (loss) earnings attributable to non-controlling
interests in subsidiaries (1,102,241) 871,539
Net earnings attributable to shareholders $ 6,443,719 $ 10,355,914
Basic and diluted earnings per common share (note 16) $ 0.76 $ 1.24
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
Years ended December 31 2019 2018
Net earnings attributable to shareholders
Other comprehensive (loss) income:
$ 6,443,719 $ 10,355,914
Items that are or may be reclassified to profit or loss:
Unrealized foreign exchange (loss) gain on translation
of self-sustaining foreign operations (note 20) (2,355,080) 3,478,235
$ 4,088,639 $ 13,834,149
Comprehensive income
See accompanying notes to consolidated financial statements.
Annual Report 2019
33
Consolidated Statements of Changes in Equity
Capital stock Accumulated Non-controlling
Number of other interests
common shares Contributed Retained comprehensive in subsidiaries
outstanding Amount surplus earnings income (note 21) Total
Balance at January 1, 2018
Comprehensive income
Common shares issued
Equity component of convertible
debentures, net of tax
Capital injection in BondIt
Net earnings attributable to
non-controlling interests
in subsidiaries
Stock-based compensation expense
related to stock option grants
Dividends paid
Translation adjustments on
non-controlling interests
Impact of IFRS 9 remeasurement
Balance at December 31, 2018
Comprehensive income
Common shares issued
Equity component of convertible
debentures, net of tax
Net loss attributable to
non-controlling interests
in subsidiaries
Dividends paid
Distribution to non-controlling
interests
Translation adjustment on
non-controlling interests
Other comprehensive income
recognized on dissolution
of foreign subsidiary
Balance at December 31, 2019
8,307,713 $ 6,896,153 $
—
120,829
297,825 $ 63,661,034 $ 5,593,426 $ 3,684,071 $ 80,132,509
— — 10,355,914 3,478,235 — 13,834,149
1,218,580 — — — — 1,218,580
—
—
—
—
—
—
—
— 755,283 — — — 755,283
— — 456,265 — 438,372 894,637
— — — — 871,539 871,539
— 19,645 — — — 19,645
— — (3,001,825) — — (3,001,825)
— — — — 379,450 379,450
— — 87,164 — (6,160) 81,004
8,428,542 $ 8,114,733 $ 1,072,753 $71,558,552 $ 9,071,661 $ 5,367,272 $95,184,971
— — — 6,443,719 (2,355,080) — 4,088,639
1,366,649 — — — — 1,366,649
160,371
—
— 249,822 — — — 249,822
— — — — — (1,102,241) (1,102,241)
— — — (3,051,812) — — (3,051,812)
— — — — — (181,213) (181,213)
— — — — — (230,594) (230,594)
— — — 43,922 — — 43,922
8,588,913 $ 9,481,382 $ 1,322,575 $74,994,381 $ 6,716,581 $ 3,853,224 $96,368,143
See accompanying notes to consolidated financial statements.
34 Accord Financial Corp.
Consolidated Statements of Cash Flows
Years ended December 31 2019 2018
Cash (used in) provided by:
Operating activities
Net earnings $ 5,341,478 $ 11,227,453
Items not affecting cash:
Allowances for losses, net of write-offs and recoveries 1,152,676 1,207,388
Deferred income (156,176) 62,930
Amortization of intangible assets 300,117 410,229
Depreciation of property and equipment 726,618 278,514
Loss on disposal of property and equipment — 2,941
Gain on disposal of assets held for sale (39,793) —
Impairment of assets held for sale — 25,000
Accretion of convertible debentures 490,345 60,530
Stock-based compensation expense related to stock option grants — 19,645
Deferred tax expense (recovery) 1,763,711 (128,188)
Current income tax (recovery) expense (184,711) 232,188
9,394,265 13,398,630
Changes in operating assets and liabilities:
Finance receivables and loans, gross (51,672,039) (105,847,980)
Due to clients (710,806) (1,523,506)
Other assets (1,346,667) (489,884)
Accounts payable and other liabilities (3,168,097) 272,841
Disposal of assets held for sale 86,675 —
Income tax paid, net (143,202) (152,245)
(47,559,871) (94,342,144)
Investing activities
Additions to property and equipment, net (176,364) (501,268)
Financing activities
Bank indebtedness 27,626,269 76,904,952
Loan payable 5,890,496 5,779,357
Notes payable issued, net 1,047,589 2,068,618
Issuance of common shares 160,341 18,000
Convertible debentures issued, net of transaction costs 6,822,847 16,921,708
Dividends paid (3,051,812) (3,001,825)
Common member units issued by BondIt — 924,254
Distribution paid to non-controlling interests in subsidiary (181,213) —
Lease liabilities (377,398) —
37,937,119 99,615,064
Effect of exchange rate changes on cash 229,690 (882,804)
(Decrease) increase in cash (9,569,426) 3,888,848
Cash at January 1 16,345,848 12,457,000
Cash at December 31 $ 6,776,422 $ 16,345,848
Supplemental cash flow information
Net cash used in operating activities includes:
Interest paid $ 14,529,344 $ 8,562,377
See accompanying notes to consolidated financial statements.
Annual Report 2019
35
Notes to Consolidated Financial Statements
Years ended December 31, 2019 and 2018
1. Description of the business
Accord Financial Corp. (the “Company”) is incorporated by way of Articles
of Continuance under the Ontario Business Corporations Act and, through
its subsidiaries, is engaged in providing factoring, financing, leasing, credit
investigation, credit protection and receivables management, to industrial
and commercial enterprises, principally in Canada and the United States.
The Company's registered office is at 40 Eglinton Avenue East, Suite 602,
Toronto, Ontario, Canada
2. Basis of presentation and statement of compliance
These consolidated financial statements are expressed in Canadian dollars,
the Company’s functional and presentation currency, and are prepared in
compliance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”).
The preparation of the consolidated financial statements in conformity
with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the
reported amounts of assets, liabilities, revenue and expenses. Actual
results may differ from those estimates. Estimates and underlying
assumptions are reviewed on an ongoing basis. Changes to accounting
estimates are recognized in the year in which the estimates are revised
and in any future periods affected. Estimates that are particularly
judgmental relate to the determination of the allowance for losses relating
to finance receivables and loans and to the guarantee of managed receivables
(notes 3(e) and 4), the determination of the value of goodwill on acquisition
and annual impairment testing (note 7) and the value of intangible assets
(note 9), as well as the net realizable value of deferred tax assets and
liabilities. Management believes that these estimates are reasonable and
appropriate. The audited consolidated financial statements of the
Company have been prepared on an historical cost basis except for the
following items which are recorded at fair value:
• Cash
• Derivative financial instruments (a component of other assets and/or
accounts payable and other liabilities)
• Senior executive long-term incentive plan (“LTIP”)*; and
• Guarantee of managed receivables*
* a component of accounts payable and other liabilities
36 Accord Financial Corp.
These audited consolidated financial statements
were approved for issue by the Company’s Board of
Directors (“Board”) on March 6, 2020.
3. Significant accounting policies
(a) Adoption of new accounting policy
Effective January 1, 2019, the Company adopted a
new accounting standard as issued by IASB. IFRS 16,
Leases, which replaced IAS 17, Leases, and IFRIC 4,
Determining Whether an Arrangement Contains a
Lease. IFRS 16 affects the accounting for the
Company’s office leases where payments under such
leases were previously expensed as part of operating
expenses. On January 1, 2019, the Company assessed
whether its lease contracts conveyed the right to
control the use of an identified asset for a period of
time in exchange for consideration. The Company has
recognized four office leases as right-of-use assets
and lease liabilities under IFRS 16. The Company
has elected to use the modified retrospective
exemptions available under IFRS 16 for lease terms
which end within twelve months of January 1, 2019,
and also for lease contracts for certain office
equipment that are considered low value and,
accordingly, has not recognized right-of-use assets
and lease liabilities in respect of these leases. Upon
adoption of IFRS 16, the Company used the modified
retrospective method under which it did not restate
2018 comparatives.
The Company recognizes a right-of-use asset and a
lease liability at the lease commencement date.
A right-of-use asset is initially measured at cost,
which comprised of the initial amount of the lease
liability adjusted for any lease payments made at or
before the commencement date, plus any initial
direct costs incurred and an estimate of costs to
dismantle and remove the underlying asset or to
restore the underlying asset or the site on which it
is located, less any lease incentives received. The
right-to-use assets, which are included in property
and equipment, are depreciated to the end of their
useful life using the straight-line method over the
lease term as this most closely reflects the expected
pattern of consumption of the future economic
benefits. The lease term includes periods covered
by an option to extend if the Company is reasonably
certain to exercise that option. Lease terms range
from 3 to 8 years for the four office leases recognized
as right-of-use assets. In addition, the right-of-use
asset is adjusted for impairment, if any, and adjusted
for certain remeasurements of the lease liability.
A lease liability is initially measured at the present
value of the lease payments that are not paid at the
commencement of the leases and are discounted
using the interest rate implicit in the lease or, if that
rate cannot be readily determined, the Company’s
incremental borrowing rate. Generally, the Company
uses its incremental borrowing rate to determine
the discount rates. A lease liability is measured at
amortized cost using the effective interest method
whereby payments under the lease include both a
principal and an interest component. It is remeasured
when there is a change in future lease payments
arising from a change in an index or rate, if there is
a change in the Company’s estimate of the amount
expected to be payable under a residual value
guarantee, or if the Company changes its assessment
of whether it will exercise a purchase, extension or
termination option. When the lease liability is
remeasured in this way, a corresponding adjustment
is made to the carrying amount of the right-of-use
asset, or is recorded in profit or loss if the carrying
amount of the right-of-use asset has been reduced
to zero.
The Company recognized right-of-use assets and
lease liabilities at January 1, 2019 which resulted in
an increase in both assets and liabilities. Right-of-
use assets and lease liabilities totalling $2,027,000
Annual Report 2019
37
were recorded at January 1, 2019, with no impact
to retained earnings. When measuring lease liabilities,
the Company discounted lease payments using its
incremental borrowing rates at January 1, 2019.
The discount rates applied ranged from 6.00%
to 7.25%.
The following table shows the Company’s operating
lease obligations at December 31, 2018 that were
capitalized at the present value of the lease
obligations on initial application of IFRS 16 on
January 1, 2019.
(in thousands)
Undiscounted operating lease
commitments at December 31, 2018 $ 2,485
Less: Low value and short-term leases elected
for exemption on adoption of IFRS 16 (100)
Undiscounted operating lease commitments
at January 1, 2019 for leases recognized
pursuant to IFRS 16
Discount using incremental borrowing
rates of 6.00% to 7.25% (358)
2,385
Lease liabilities recognized on adoption
of IFRS 16 on January 1, 2019 $ 2,027
(b) Basis of consolidation
These financial statements consolidate the accounts
of the Company and its wholly owned subsidiaries;
namely, Accord Financial Ltd. (“AFL”), Accord
Financial Inc. (“AFIC”) and Varion Capital Corp.
(doing business as Accord Small Business Finance
(“ASBF”)) in Canada and Accord Financial, Inc.
(“AFIU”) in the United States. The Company exercises
100% control over each of its subsidiaries. The
accounting policies of the Company's subsidiaries
are aligned with IFRS. Intercompany balances and
transactions are eliminated upon consolidation.
(c) Revenue recognition
Revenue principally comprises interest, including
discount fees, and factoring commissions and other
fees from the Company’s asset-based financial
services, including factoring and leasing, and is
measured at the fair value of the consideration
received. Interest charged on finance receivables
and loans is recognized as revenue using the effective
interest rate method. For receivables purchased in
its recourse factoring business, discount fees are
calculated as a discount percentage of the gross
amount of the factored invoice and are recognized
as revenue over the initial discount period. Additional
discount fees are charged on a per diem basis if the
invoice is not paid by the end of the initial discount
period. For managed receivables, factoring
commissions are charged upfront and a certain
portion is deferred and recognized over the period
that costs are incurred collecting the receivables.
In the Company’s leasing business, interest is
recognized over the term of the lease agreement or
installment payment agreement using the effective
interest rate; the effective interest rate is that rate
which exactly discounts estimated future cash
receipts through the expected life of the lease,
installment payment or loan agreement. Fees
related to direct finance leases, installment payment
agreements and loan receivables of ASBF and
Accord CapX LLC (“CapX”), a subsidiary of AFIU, are
considered an integral part of the yield earned on
the debtor balance and are accounted for using
the effective interest rate method. Other revenue,
such as management fees, due diligence fees,
documentation fees and commitment fees, is
recognized as revenue when earned.
(d) Finance receivables and loans
The Company finances its clients principally by
providing asset-based loans, including factoring
receivables and financing equipment leases.
Finance receivables and loans are non-derivative
financial assets with fixed or determinable
payments that are not quoted in an active market
and that the Company does not intend to sell
immediately or in the near term. Finance receivables
and loans are initially measured at fair value plus
incremental direct transaction costs and subsequently
measured at amortized cost using the effective
interest rate method.
The company’s financial assets are measured at
amortized cost as the following conditions are met:
the asset is held within a business model
i)
whose objective is to hold assets to collect
contractual cash flows; and
38 Accord Financial Corp.
ii)
the contractual terms of the financial asset give
rise on specified dates to cash flows that are
Solely Payments of Principal and Interest.
The Company's leasing operations have standard
lease contracts that are non-cancellable direct
financing leases and provide for monthly lease
payments, usually for periods of one to five years.
The present value of the minimum lease payments
and residual values expected to be received under
the lease terms is recorded at the commencement
of the lease. The difference between this total value,
net of execution costs, and the cost of the leased
asset is unearned revenue, which is recorded as a
reduction in the asset value, with the net amount
being shown as the net investment in leases
(specifically, the Company's lease receivables). The
unearned revenue is then recognized over the life
of the lease using the effective interest rate method,
which provides a constant rate of return on the net
investment throughout the lease term.
(e) Allowances for losses
The Company maintains allowances for losses on
its finance receivables and loans and its guarantee
of managed receivables pursuant to the provisions
of IFRS 9, Financial Instruments, under which
allowances for expected credit losses (“ECL”) are
recognized on all financial assets that are classified
either at amortized cost or fair value through other
comprehensive income (“FVOCI”) and for all loan
commitments and financial guarantees that are not
measured at fair value through profit and loss
(“FVTPL”). ECL allowances represent credit losses
that reflect an unbiased and probability-weighted
amount which is determined by evaluating a range
of possible outcomes, the time value of money and
reasonable and supportable information about past
events, current conditions and forecasts of future
economic conditions. Forward-looking information
is explicitly incorporated into the estimation of ECL
allowances, which involves significant judgment.
The Company’s ECL allowances are measured at
amounts equal to either: (i) 12-month ECL (also
referred to as Stage 1 ECL) which comprises an
allowance for all non-impaired financial instruments
which have not experienced a significant increase
in credit risk (“SICR”) since initial recognition.
Stage 1 ECL is the portion of lifetime expected credit
losses that represent the expected credit losses that
result from default events on the financial instrument
that are possible within the twelve-month period
after the reporting date; or (ii) lifetime ECL (also
referred to as Stage 2 ECL) which comprises
allowances for those financial instruments which
have experienced a SICR since initial recognition.
Significant judgment is required in the application
of SICR. The Company generally considers an
account to have a SICR when there is a change in
internal risk rating since initial recognition which
prompts the Company to place the account on its
“watchlist.” We recognize lifetime ECL for Stage 2
financial instruments compared to twelve months of
ECL for Stage 1 financial instruments. In subsequent
reporting periods, if the credit risk of the financial
instrument improves such that there is no longer a
SICR since initial recognition, then the Company will
revert back to recognizing twelve months of ECL as
the financial instrument has migrated back to Stage 1.
The calculation of ECL is based on the expected
value of three probability-weighted scenarios to
measure the expected cash shortfalls, discounted
at the effective interest rate. A cash shortfall is the
difference between the contractual cash flows that
are due and the cash flows that the Company expects
to receive. The key inputs in the measurement of
ECL allowances are as follows: (i) the probability of
default (PD) which is an estimate of the likelihood
of default over a given time horizon; (ii) the loss given
default (LGD) which is an estimate of the loss arising
in the case where a default occurs at a given time;
and (iii) the exposure at default (EAD) which is an
estimate of the exposure at a future default date.
Lifetime ECL is the expected credit losses that
result from all possible default events over the
expected life of a financial instrument. Stage 3
financial instruments are those that the Company
has classified as impaired. Lifetime ECL are
recognized for all Stage 3 financial instruments. No
allowance for ECL is provided for Stage 3 accounts,
Annual Report 2019
39
rather the financial instrument is written down to
its estimated net realizable value, or in respect of
the Company’s managed receivables, an amount is
accrued for the expected payment under its
guarantee. The Company classifies a financial
instrument as impaired when the future cash flows
of the financial instrument could be adversely
impacted by events after its initial recognition.
Evidence of impairment includes indications that
the borrower is experiencing significant financial
difficulties, or a default or delinquency has occurred.
The Company also refers to these accounts as
“workout” accounts. Accounts are in “workout” as
a result of one or more loss events that occurred
after the date of initial recognition of the instrument
and the loss event has a negative impact on the
estimated future cash flows of the instrument that
can be reliably estimated and could include
significant financial difficulty of the borrower, default
or delinquency in interest or principal payments, a
high probability of the borrower entering a phase
of bankruptcy or a financial reorganization, or a
measurable decrease in the estimated future cash
flows from the loan or the underlying assets that
back the loan. A financial instrument is no longer
considered impaired when all past due amounts,
including interest, have been recovered, and it is
determined that the principal and interest are fully
collectable in accordance with the original contractual
terms or revised market terms of the financial
instrument with all criteria for the impaired
classification having been remedied. Financial
instruments are written-off, either partially or in full,
against the related allowance for losses when we
judge that there is no realistic prospect of future
recovery in respect of those amounts after the
collateral has been realized or transferred at net
realizable value. Any subsequent recoveries of
amounts previously written-off are credited to the
respective allowance for losses.
(f) Property and equipment
Property and equipment are stated at cost.
Depreciation is provided over the estimated useful
lives of the assets using the following bases and
annual rates:
Asset
Basis
Furniture and
equipment
Computer
equipment
Automobiles
Leasehold
improvements
Declining balance
Declining balance
Declining balance
Straight line
Right-of-use assets
Straight line
Rate
20%
30%
30%
Over remaining
lease term
Over lease term
Upon retirement or sale of an asset, its cost and
related accumulated depreciation are removed from
the accounts and any gain or loss is recorded in
income or expense. The Company reviews its plant
and equipment on a regular basis to determine that
their carrying values have not been impaired.
(g) Goodwill
Goodwill arises upon the acquisition of subsidiaries
or loan portfolios. Goodwill is not amortized, but
an annual impairment test is performed by
comparing the carrying amount to the recoverable
amount for the cash generating unit (“CGU”). If the
carrying value of the goodwill exceeds its recoverable
amount, the excess is charged against earnings in
the year in which the impairment is determined.
(h) Intangible assets
Purchased intangible assets are recognized as
assets in accordance with IAS 38, Intangible Assets,
when it is probable that the use of the asset will
generate future economic benefits and where the
cost of the asset can be reliably determined. Intangible
assets acquired are initially recognized at cost of
purchase, which is also the fair value at the date
acquired, and are subsequently carried at cost less
accumulated amortization and, if applicable,
accumulated impairment losses. The Company's
intangible assets, with the exception of the
acquired brand name which is considered to have
an indefinite life and is not amortized, have a finite
life and are amortized over their useful economic
life. Intangible assets are also assessed for impairment
each reporting period. The amortization period and
method of amortization are reassessed annually.
Changes in the expected useful life are accounted
for by changing the amortization period or method,
40 Accord Financial Corp.
as appropriate, and are treated as a change in
accounting estimates. The amortization expense is
recorded as a charge against earnings. The Company's
intangible assets comprise existing customer
contracts, customer relationships, broker relationships
and brand name in its leasing operations. With the
exception of the brand name, these are amortized
over a period of five to fifteen years.
(i) Income taxes
The Company follows the balance sheet liability
method of accounting for income taxes, whereby
deferred tax assets and liabilities are recognized
based on temporary differences between the tax
and accounting bases of assets and liabilities, as
well as losses available to be carried forward to
future years for income tax purposes.
Income tax expense comprises current and deferred
taxes. Current tax and deferred tax are recognized
through the statement of earnings except to the
extent that it relates to a business combination, or
items recognized directly in equity or in other
comprehensive income.
Current tax is the expected tax payable or receivable
on the taxable income or loss for the year, using tax
rates enacted or substantively enacted at the
reporting dates, and any adjustment to taxes payable
in respect of previous years.
Deferred tax is recognized in respect of temporary
differences between the carrying amounts of assets
and liabilities for financial reporting purposes and
the amounts used for taxation purposes, as well as
the available losses carried forward to future years
for income tax purposes. Deferred tax is measured
at the tax rates that are expected to be applied to
the temporary differences when they reverse, based
on the laws that have been enacted or substantively
enacted by the reporting date. A deferred tax asset
is recognized for unused tax losses, tax credits and
deductible temporary differences to the extent that
it is probable that future taxable income will be
available against which they can be utilized.
Deferred tax assets are reviewed at each reporting
date and are reduced to the extent that it is no longer
probable that the related tax benefit will be realized.
Deferred tax liabilities are recognized in respect of
taxes payable in the future based on taxable
temporary differences.
Income taxes receivable and payable, and deferred
tax assets and liabilities, are offset if there is a legally
enforceable right of set off, they relate to income
taxes levied by the same taxation authority and the
Company intends to settle its current tax assets and
liabilities on a net basis, or their tax assets and
liabilities will be realized simultaneously.
(j) Foreign subsidiaries
The Company's foreign subsidiaries report in U.S.
dollars and their assets and liabilities are translated
into Canadian dollars at the exchange rate prevailing
at the period-end. Revenue and expenses are
translated into Canadian dollars at the average
monthly exchange rate then prevailing. Resulting
translation gains and losses are credited or charged
to other comprehensive income or loss and presented
in the accumulated other comprehensive income
or loss component of equity.
(k) Foreign currency transactions
Monetary assets and liabilities denominated in
currencies other than the Canadian dollar are
translated into Canadian dollars at the exchange
rate prevailing at each reporting date. Any non-
monetary assets and liabilities denominated in
foreign currencies are translated at historical rates.
Revenue and expenses are translated into Canadian
dollars at the prevailing average monthly exchange
rate. Translation gains and losses are credited or
charged to earnings.
(l) Earnings per common share
The Company presents basic and diluted earnings
per share ("EPS") for its common shares. Basic EPS
is calculated by dividing the net earnings attributable
to common shareholders of the Company by the
weighted average number of common shares
outstanding during the year. Diluted EPS is calculated
by dividing net earnings attributable to common
Annual Report 2019
41
shareholders by the diluted weighted average
number of common shares outstanding in the year,
which comprises the weighted average number of
common shares outstanding plus the effects of all
dilutive common share equivalents.
(m) Stock-based compensation
The Company accounts for stock options issued to
directors and/or employees using fair value-based
methods. The Company utilizes the Black-Scholes
option-pricing model to calculate the fair value of
the stock options on the grant date. The fair value
of the stock options is recorded in general and
administrative expenses over the awards vesting
period.
The Company's LTIP (note 14(g)) contemplates that
grants thereunder may be settled in common shares
and/or cash. Grants are determined as a percentage
of the participants' short-term annual bonus, up to
an annual LTIP pool maximum, and are then adjusted
up or down based on the Company's adjusted return
on average equity over the three-year vesting period
of an award. The fair value of the LTIP awards,
calculated at each reporting date, is recorded in
general and administrative expenses over the
awards' vesting period, with a corresponding
liability established.
(n) Derivative financial instruments
The Company records derivative financial instruments
on its consolidated statements of financial position
at their respective fair values. Changes in the fair
value of these instruments are reported in the
consolidated statements of earnings unless all of
the criteria for hedge accounting are met, in which
case, changes in fair value would be recorded in
other comprehensive income or loss. The Company
has employed only cash flow or economic hedges.
(o) Financial assets and liabilities
Financial assets and liabilities are recorded at
amortized cost, with the exception of cash, derivative
financial instruments, and the guarantee of managed
receivables which are all recorded at fair value. Fair
value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly
manner between participants in an active (or in its
absence, the most advantageous) market to which
the Company has access at the transaction date.
The Company initially recognizes loans and
receivables on the date that they are originated. All
other financial assets are recognized initially on the
transaction date on which the Company becomes a
party to the contractual provisions. The Company
derecognizes a financial asset when the contractual
rights to the cash flows from the asset expire, or it
transfers the rights to receive the contractual cash
flows on the financial asset in a transaction in which
substantially all the risks and rewards of ownership
of the financial asset are transferred. Any interest in
transferred financial assets that is created or retained
by the Company is recognized as a separate asset
or liability. Financial assets and liabilities are offset
and the net amount presented in the consolidated
statements of financial position when, and only when,
the Company has a legal right to offset the amounts
and intends either to settle on a net basis or to realize
the asset and settle the liability simultaneously.
A financial asset or a group of financial assets is
impaired when objective evidence demonstrates
that a loss event has occurred after the initial
recognition of the asset(s) and that the loss event
has an impact on the future cash flows of the
asset(s) that can be reliably estimated.
(p) Convertible debentures
Convertible debentures include both a debt and
equity component due to the embedded financial
derivative associated with the conversion option.
The debt component of the debenture is initially
recognized at fair value determined by discounting
the future principal and interest payments at the
rate of interest prevailing on the issue date for similar
non-convertible debt instruments. The equity
component of the convertible debenture is initially
determined as the difference between the gross
proceeds of the debenture issue and the debt
component, net of any deferred tax liability that
arises from the temporary difference between the
carrying value of the debt and its tax basis. The
equity component is included in contributed surplus
within total equity. Directly attributable transaction
costs related to the issuance of convertible debentures
42 Accord Financial Corp.
are allocated to the debt and equity components on
a pro-rata basis, reducing their fair value at the
time of initial recognition.
(q) Assets held for sale
Assets acquired or repossessed on realizing
security on defaulted finance receivables and loans
are held for sale and are stated at the lower of cost
or recoverable amount (also referred to as "net
realizable value").
(r) Financial instruments - disclosures
The financial instruments presented on the
consolidated statements of financial position at fair
value are further classified according to a fair-value
hierarchy that prioritizes the quality and reliability
of information used in estimating fair value. The
fair values for each of the three levels are based on:
• Level 1 - quoted prices in active markets;
• Level 2 - models using observable inputs
other than quoted market prices included
within Level 1; and
• Level 3 - models using inputs that are not
based on observable market data.
4. Finance receivables and loans and
managed receivables
(a) Finance receivables and loans
Finance receivables and loans at December 31
were as follows:
2019 2018
Receivable loans $ 103,841,877 $ 134,422,542
Other loans* 167,978,086 135,306,707
Lease receivables 101,337,120 69,372,521
Finance receivables
and loans, gross 373,157,083 339,101,770
Less allowance for losses 4,520,000 3,450,000
Finance receivables
and loans, net $ 368,637,083 $ 335,651,770
*Other loans primarily comprise inventory and equipment loans.
The Company's finance receivables and loans are
generally collateralized by a first charge on
substantially all of the borrowers’ assets, or are
leased assets or factored receivables which the
Company owns. Collateral securing the Company’s
finance receivables and loans primarily comprises
receivables, inventory and equipment, as well as,
from time to time, other assets such as real estate
and guarantees.
Lease receivables comprise the net investment in
leases by ASBF and CapX as described in note 3(d).
Lease receivables at December 31, 2019 are expected
to be collected over a period of up to five years.
Interest income earned on finance receivables and
loans in 2019 totalled $49,002,838 (2018 –
$37,842,708).
Finance receivables and loans based on the
contractual repayment dates thereof can be
summarized as follows:
(in thousands) Dec. 31, 2019 Dec. 31, 2018
Less than 1 year $ 201,259 $ 215,562
1 to 2 years 54,357 60,313
2 to 3 years 44,838 39,619
3 to 4 years 57,631 17,648
4 to 5 years 15,071 5,853
Thereafter 1 107
$ 373,157 $ 339,102
The aged analysis of the Company’s finance
receivables and loans was as follows:
(in thousands) Dec. 31, 2019 Dec. 31, 2018
Current $ 358,592 $ 333,031
Past due but not impaired:
Past due less than 90 days 1,162 1,983
Past due 90 to 180 days 3,949 3,263
Past due 180 days or more 2,684 765
Impaired loans 6,770 60
$ 373,157 $ 339,102
The past due finance receivables and loans,
especially those past due over 90 days, do not
necessarily represent a SICR or an impairment, which
may be rebutted where payments are delayed for
non-credit related reasons, such as specific industry
related reasons or practices as we often see across
our lines of business.
At December 31, 2019, the estimated net realizable
value of the collateral securing the impaired loans
Annual Report 2019
43
Finance receivables and loans classified under the
three stage credit criteria of IFRS 9 were as follows:
(in thousands) Dec. 31, 2019 Dec. 31, 2018
Stage 1 $ 341,093 $ 332,015
Stage 2 (SICR) 25,294 7,027
Stage 3 (Impaired) 6,770 60
$ 373,157 $ 339,102
Stage 1 finance receivables and loans comprise
those accounts in good standing where there has
been no SICR since initial recognition. Stage 2
finance receivables and loans comprise those
accounts that have experienced a SICR since initial
recognition. The Company refers to these finance
receivables and loans as “watchlist” accounts, while
Stage 3 finance receivables and loans comprise those
accounts which are impaired. The Company refers
to these as “workout” accounts.
The activity in the allowance for losses on finance
receivables and loans account during 2019 and
2018 was as follows:
2019 2018
Allowance for losses at
January 1 $ 3,450,000 $ 1,996,966
Specific write-offs
reclassified to
allowance for losses — 35,000
Provision for loan losses 7,075,574 1,427,099
Write-offs (6,311,397) (243,681)
Recoveries 418,502 89,972
Foreign exchange
adjustment (112,679) 144,644
Allowance for losses
at December 31 $ 4,520,000 $ 3,450,000
The activity in the allowance for losses on finance
receivables and loans during 2019 by stage of
allowance was as follows:
totalled $8,034,000. During 2019, lease receivables
totalling $6,970,000 were also transferred to assets
held for sale upon default of the leases and recovery
of the Company’s assets.
The Company maintains internal credit risk ratings
on its finance receivables and loans by client which
it uses for credit risk management purposes. The
Company’s internal credit risk ratings are defined
as follows:
Low risk: finance receivables and loans that exceed
the credit risk profile standard of the Company with
a below average expected credit loss.
Medium risk: finance receivables and loans that are
typical for the Company’s risk appetite and credit
standards and retain an average expected credit loss.
High risk: finance receivables and loans within the
Company’s risk appetite and credit standards that
have an additional element of credit risk that could
result in an above average expected credit loss.
These finance receivables and loans are expected
to represent a small percentage of the Company’s
total finance receivables and loans.
Impaired: finance receivables and loans on which
the Company has commenced enforcement
proceedings available to it under its contractual
agreements and/or where there is objective evidence
that there has been a deterioration in credit quality
to the extent that the Company no longer has
reasonable assurance as to the timely collection of
the full amount of principal and interest.
The following table summarizes the Company's
finance receivables and loans by their internal
credit risk rating:
(in thousands) Dec. 31, 2019 Dec. 31, 2018
Low risk $ 139,684 $ 122,212
Medium risk 180,670 205,689
High risk 46,033 11,141
Impaired 6,770 60
$ 373,157 $ 339,102
44 Accord Financial Corp.
Stage 1
Stage 2
Total
(114,956)
Allowance for losses
at Jan. 1, 2019 $2,669,024 $ 780,976 $3,450,000
Transfers from Stage 1
to Stage 2, net
Reserve expense*
related to increase in
allowance for losses
Foreign exchange
adjustment
Allowance for losses
at Dec. 31, 2019 $2,911,016 $1,608,984 $4,520,000
749,480 1,182,679
(36,428)
(76,251)
114,956
433,199
—
(112,679)
* a component of the provision for loan losses
The activity in the allowance for losses on finance
receivables and loans during 2018 by stage of
allowance was as follows:
Allowance for losses at
Jan. 1, 2018
Transfers from Stage 1
to Stage 2, net
Reserve expense*
related to increase in
allowance for losses
Specific write-off
reclassified to
allowance for losses
Foreign exchange
adjustment
Allowance for losses
at Dec. 31, 2018
Stage 1
Stage 2
Total
$ 1,965,824 $
31,142 $ 1,996,966
(109,900)
109,900
—
680,382
593,008
1,273,390
35,000
—
35,000
97,718
46,926
144,644
$ 2,669,024 $ 780,976 $ 3,450,000
* a component of the provision for loan losses
There was no Stage 3 allowance for losses at
December 31, 2019 and 2018 as impaired finance
receivables and loans have been written down to the
present value of their estimated net recoverable
amounts.
The nature of the Company's business involves
funding or assuming the credit risk on receivables
offered to it by its clients, as well as financing other
assets, such as inventory and equipment. These
transactions are conducted on terms that are usual
and customary to the Company's asset-based
lending activities. The Company controls the credit
risk associated with its finance receivables and
loans, and managed receivables as discussed below,
in a variety of ways. For details of the Company's
policies and procedures in this regard, please refer
to note 23(a).
At December 31, 2019, the Company held cash
collateral of $2,736,397 (2018 – $1,516,588) to help
reduce the risk of loss on certain of the Company's
finance receivables and loans.
(b) Managed receivables
The Company has entered into agreements with
clients whereby it has assumed the credit risk with
respect to the majority of the clients' receivables.
At December 31, 2019, the gross amount of these
managed receivables was $27,338,317 (2018 –
$40,145,156).
Fees from the Company’s receivables management
and credit protection business during 2019 totalled
$2,222,537 (2018 – $2,663,068). This is included in
other income.
The aged analysis of the Company’s managed
receivables was as follows:
(in thousands) Dec. 31, 2019 Dec. 31, 2018
Current $ 19,537 $ 23,561
Past due but not impaired:
Past due less than 90 days 7,387 16,143
Past due more than 90 days 414 441
$ 27,338 $ 40,145
The past due managed receivables do not
necessarily represent a SICR or an impairment which
are rebutted as the collection period in the retail
industry is often past due.
The following table summarizes the Company’s
managed receivables by their internal credit
risk rating:
(in thousands) Dec. 31, 2019 Dec. 31, 2018
Low risk $ 4,059 $ 7,963
Medium risk 21,910 28,416
High risk 1,369 3,766
$ 27,338 $ 40,145
There were no impaired managed receivables at
the above dates.
Managed receivables classified under the three
stage credit criteria of IFRS 9 were as follows:
Annual Report 2019
45
(in thousands) Dec. 31, 2019 Dec. 31, 2018
Stage 1 $ 27,162 $ 39,678
Stage 2 (SICR) 176 467
Stage 3 (Impaired) — —
$ 27,338 $ 40,145
Stage 1 managed receivables comprise those
accounts in good standing where there has been no
SICR since initial recognition. Stage 2 managed
receivables comprise those accounts that have
experienced a SICR since initial recognition. The
Company refers to these managed receivables as its
“watchlist” accounts. There were no Stage 3
(impaired) managed receivables at the above dates
as any outstanding client claims for payment under
the Company’s guarantees are an actual liability
that is accrued for and included in accounts payable
and other liabilities.
Management provides an allowance for losses on the
guarantee of these managed receivables, which
represents the estimated fair value of the guarantees
at that date. This allowance is included in the total
of accounts payable and other liabilities as the
Company does not take title to the managed
receivables and they are not included in the
consolidated statements of financial position.
The activity in the allowance for losses on the
guarantee of managed receivables account during
2019 and 2018 was as follows:
2019
2018
Allowance for losses
at January 1 $ 74,000 $ 140,000
Provision for loan losses 29,580 598,375
Write-offs (77,330) (664,823)
Recoveries 17,750 448
Allowance for losses
at December 31 $ 44,000 $ 74,000
The activity in the allowance for losses on the
guarantee of managed receivables during 2019 by
stage of allowance was follows:
Stage 1
Stage 2
Total
$ 31,943 $ 42,057 $ 74,000
Allowance for losses
at Jan. 1, 2019
Reserve expense (recovery)*
related to increase
(decrease) in allowance
for losses
Allowance for losses
at Dec. 31, 2019 $ 40,480 $
8,537
(38,537) (30,000)
3,520 $ 44,000
* a component of the provision for credit losses
The activity in the allowance for losses on the
guarantee of managed receivables during 2018 by
stage of allowance was follows:
Stage 1
Stage 2 Total
Allowance for losses
at Jan. 1, 2018 $ 88,600 $ 51,400 $ 140,000
Reserve recovery* related
to decrease in allowance
for losses
Allowance for losses
at Dec. 31, 2018 $ 31,943 $ 42,057 $ 74,000
(9,343) (66,000)
(56,657)
* a component of the provision for credit losses
There were no transfers between the two stages
of the allowance for losses on the guarantee of
managed receivables during 2019 and 2018.
5. Assets held for sale
Assets held for sale and movements therein during
2019 and 2018 were as follows:
2019 2018
Assets held for sale
at January 1 $ 46,882 $ 71,882
Additions 6,970,369 —
Disposal (46,882) —
Impairment charge — (25,000)
Assets held for sale
at December 31 $ 6,970,369 $ 46,882
During 2019, the Company obtained title to or
repossessed certain long-lived assets securing
defaulted finance receivables and loans from a
number of clients. These assets are currently being
actively marketed for sale and will be disposed of as
market conditions permit. The estimated net realizable
value (being fair value less costs to sell) of the assets
at the above dates was based upon appraisals of
the assets and totalled $8,774,000. As the estimated
net realizable value exceeded the carrying value of
46 Accord Financial Corp.
the defaulted finance receivables and loans on an
account by account basis no write down to the
carrying values was required upon repossession.
The assets disposed of in 2019 were sold for $86,675
resulting in a gain on sale of $39,793 compared to
the carrying value of the assets. The gain was
included in other income.
6. Property and equipment
(in thousands) Dec. 31, 2019 Dec. 31, 2018
Cost $ 4,148 $ 2,219
Accumulated depreciation (1,764) (1,296)
Foreign exchange
adjustment (47) —
$ 2,337 $ 923
Property and equipment includes the Company’s
right-of-use assets. Upon adoption of IFRS 16 on
January 1, 2019, the Company recognized right-of-
use assets in respect of four of its office leases each
of which had a remaining lease term of over one
year at that date. The Company’s right-of-use assets
and movements therein during 2019 were as follows:
(in thousands) 2019
Right-of-use assets recognized on
January 1, 2019 $ 2,027
Depreciation expense (436)
Foreign exchange adjustment (47)
Right-of-use assets at December 31, 2019 $ 1,544
7. Goodwill
2019 2018
Goodwill at January 1 $14,031,320 $ 13,081,651
Foreign exchange
adjustment (576,394) 949,669
Goodwill at December 31 $13,454,926 $ 14,031,320
At December 31, 2019 and 2018 goodwill of
US$8,908,713 was carried in AFIU. A foreign exchange
adjustment is recognized each period-end when
this balance is translated into Canadian dollars at a
different prevailing period-end exchange rate.
Goodwill was allocated to the following cash
generating units (“CGUs”) at December 31, 2019
and 2018:
2019 2018
U.S. operations $11,572,419 $12,148,813
Canadian operations 1,882,507 1,882,507
$13,454,926 $14,031,320
Goodwill is tested for impairment annually. During
2019 and 2018, the Company conducted annual
impairment reviews on each CGU and determined
that there was no impairment to the carrying value
of goodwill. The Company estimates the fair value
(being the recoverable amount) of each of its CGUs
and compares this to the carrying value of the CGU
to determine if there has been an impairment of
goodwill. In the Company’s case the estimated fair
value of each CGU is determined to be a multiple of
the “expected” earnings of the CGU, where “expected”
earnings are a conservative estimate of future year’s
earnings. This provides a similar result to extrapolating
and discounting budgeted earnings for the CGUs.
The estimated fair value of each CGU is then compared
to the carrying value of the CGU, including goodwill,
to determine if the goodwill is impaired. The fair
value estimate would be considered Level 3 under
the fair value hierarchy as defined in note 3(r).
The most sensitive assumption used in the
impairment testing was the multiple applied to
“expected” earnings of each CGU in determining the
fair value thereof. In 2019, a multiple of 10.0 was
used, while in 2018 a multiple of 10.5 was used.
Management believes a reasonable decrease in the
multiple would not cause an impairment in the
goodwill of its CGUs.
8. Bank Indebtedness
During 2019 the Company’s banking syndicate
approved a $75 million increase in its line of credit
to approximately $367 million. The line of credit,
established with a syndicate of six banks, bears
interest varying with the bank prime rate or Libor.
The line of credit was entered into for a three-year
term on July 26, 2018 and superceded earlier lines of
credit. The line is collateralized primarily by the
Company’s finance receivables and loans.
At December 31, 2019, the amount outstanding
under the line of credit totalled $242,781,300 (2018 –
$222,861,724). The Company did not meet its interest
coverage ratio covenant under the facility at
Annual Report 2019
47
December 31, 2019 and has received a waiver thereof
from its banking syndicate. In addition to the waiver,
the Company's banking syndicate has reset the
Company's interest coverage ratio test for the quarters
ended March 31, June 30 and September 30, 2020.
The Company was in compliance with all other
loan covenants under its bank line of credit during
2019 and was in compliance with all loan covenants
in 2018.
9. Intangible assets
Intangible assets and movements therein during 2019 and 2018 were as follows:
Existing Customer
customer and referral Broker
2019 contracts relationships relationships name Total
Brand
Cost
January 1, 2019 $ 1,179,097 $ 2,076,915 $ 1,343,938 $ 1,857,359 $ 6,457,309
Foreign exchange adjustment — (98,538) — (88,121) (186,659)
December 31, 2019 $ 1,179,097 $ 1,978,377 $ 1,343,938 $ 1,769,238 $ 6,270,650
Accumulated amortization
January 1, 2019 $ (1,179,097) $ (158,658) $ (1,003,668) $ — $ (2,341,423)
Amortization expense — (134,939) (165,178) — (300,117)
Foreign exchange adjustment — 10,358 — — 10,358
December 31, 2019 $ (1,179,097) $ (283,239) $ (1,168,846) $ — $ (2,631,182)
Book value
January 1, 2019 $ — $ 1,918,257 $ 340,270 $ 1,857,359 $ 4,115,886
December 31, 2019 $ — $ 1,695,138 $ 175,092 $ 1,769,238 $ 3,639,468
Existing Customer
customer and referral
2018 contracts relationships relationships name Total
Broker
Brand
Cost
January 1, 2018 $ 1,179,097 $ 1,914,563 $ 1,343,938 $ 1,712,171 $ 6,149,769
Foreign exchange adjustment — 162,352 — 145,188 307,540
December 31, 2018 $ 1,179,097 $ 2,076,915 $ 1,343,938 $ 1,857,359 $ 6,457,309
Accumulated amortization
January 1, 2018 $ (1,104,817) $ (18,409) $ (799,532) $ — $ (1,922,758)
Amortization expense (74,280) (131,813) (204,136) — (410,229)
Foreign exchange adjustment — (8,436) — — (8,436)
December 31, 2018 $ (1,179,097) $ (158,658) $ (1,003,668) $ — $ (2,341,423)
Book value
January 1, 2018 $ 74,280 $ 1,896,154 $ 544,406 $ 1,712,171 $ 4,227,011
December 31, 2018 $ — $ 1,918,257 $ 340,270 $ 1,857,359 $ 4,115,886
10. Loan payable
A revolving line of credit totalling $12,990,000
(US$10,000,000) was established by BondIt Media
Capital (“BondIt”), a subsidiary of AFIU, in April 2018
with a non-bank lender, bearing interest varying
with the U.S. base rate. This line was renewed in
December 2019 for a period expiring in October 2021
and is collateralized by all of BondIt’s assets. At
December 31, 2019, the amount outstanding under
this line of credit totalled $11,226,897 (2018 –
$5,695,568). Under this revolving credit facility,
BondIt failed a specific covenant test at December 31,
2019 and 2018 which the lender subsequently waived.
48 Accord Financial Corp.
11. Related parties
(a) Notes payable
Notes payable comprise unsecured short-term
notes (due in less than one year), as well as long-term
notes (due after one year) which were entered into
for a three-year term on August 1, 2018 and mature
on July 31, 2021. The short-term notes comprise:
(i) notes due on, or within a week of, demand
($3,607,337); and (ii) numerous BondIt notes
($3,182,550) which are repayable on various dates
the latest of which is December 31, 2020. Notes
payable are to individuals or entities and consist of
advances from shareholders, management,
employees, other related individuals and third parties.
Notes payable at December 31 were as follows:
2019 2018
Short-term notes:
Related parties $ 3,326,849 $ 3,377,550
Third parties 3,463,038 2,487,669
6,789,887 5,865,219
Long-term notes:
Related parties 12,149,000 12,213,700
$ 18,938,887 $ 18,078,919
Notes due on, or within a week of, demand bear
interest at rates that vary with bank prime rate or
Libor, while the BondIt notes bear interest at rates
between 7% and 12%. The long-term notes carry a
fixed interest rate of 7% with interest payable each
calendar quarter-end.
Interest expense on the notes payable was as follows:
2019 2018
Related parties $ 1,058,727 $ 864,237
Third parties 245,793 132,794
$ 1,304,520 $ 997,031
(b) BondIt loan participations
BondIt utilizes loan participations to provide capital
for and reduce the risk of loss on certain client loans,
as well as reduce its overall cost of capital. A number
of related parties have participated in the BondIt client
loans. At December 31, 2019, participations in
BondIt client loans totalled US$6,101,000 (2018 –
US$3,080,000), of which US$990,000 (2018 –
US$748,000) was provided by related parties. These
participations are not included in the Company's
Statements of Financial Position.
(c) Compensation of directors and key
management personnel
The remuneration of directors and key management
personnel(1) during 2019 and 2018 was as follows:
2019 2018
Salaries and directors' fees $ 4,013,883 $ 4,042,340
Stock-based compensation(2) (152,699) 327,325
$ 3,861,184 $ 4,369,665
(1) Key management personnel comprise the Chairman and Vice
Chairman of the Company's Board, the President of the
Company, the Presidents of its six operating subsidiaries and
the Company's Chief Financial Officer.
(2) Stock-based compensation comprises the expense (recovery)
related to the Company's stock option and LTIP grants. Please
see note 14(h).
12. Convertible debentures
In December 2018, the Company issued 18,400 7.0%
convertible unsecured debentures with a face value
of $1,000 each for proceeds of $18,400,000. On
January 17, 2019, the underwriters of the debenture
issue exercised their overallotment option and a
further 1,090 convertible debentures were issued
for proceeds of $1,090,000. On July 23, 2019, the
Company issued a further 1,160 convertible
debentures with a face value of $1,160,000 by way
of private placement, bringing the total face value
of the debentures issued to $20,650,000, which is
the maximum issuable under the debenture trust
indenture. The debentures issued on July 23, 2019
were issued at a $23,200 discount to face value.
These debentures are listed on the Toronto Stock
Exchange. On September 13, 2019, the Company
issued 5,000 7.0% unlisted convertible unsecured
debentures with a face value of $1,000 each for
proceeds of $5,000,000. Interest on all the
convertible debentures is payable semi-annually
on June 30 and December 31 each year. The
debentures mature on December 31, 2023 and are
convertible at the option of the holder into common
shares of the Company at a conversion price of
$13.50 per common share.
The debentures are not redeemable by the Company
prior to December 31, 2021 except in limited
Annual Report 2019
49
circumstances following a change of control. On or
after December 31, 2021 and at any time prior to
December 31, 2022, the debentures may be redeemed
at the option of the Company at a redemption price
equal to 100% of their principal amount plus any
accrued and unpaid interest thereon provided that
the market price of the Company’s common shares
is at least 125% of the conversion price. On or after
December 31, 2022 and prior to the maturity date,
these debentures may be redeemed in whole or in
part at the option of the Company at a redemption
price equal to 100% of their principal amount plus
any accrued and unpaid interest thereon.
The Company used the residual method to calculate
the allocation between the debt and equity
components of the debentures. The gross proceeds
of $25,626,800 were allocated towards the debt
component of these debentures by discounting the
future principal and interest payments at the rate
of interest prevailing on the issue date for similar
non-convertible debentures. The equity component
is initially determined to be the difference between
the gross proceeds and the debt component.
Transaction costs were then allocated to the debt
and equity components on a pro-rata basis. The
equity component is carried net of deferred taxes
and is included in contributed surplus. The allocation
of the gross proceeds from the convertible debentures
issuance and the balances outstanding on the debt
and equity components at December 31, 2019 were
as follows:
Liability
Equity
component of component of
debentures
debentures
Total
Debentures issued $ 24,152,897 $ 1,473,903 $ 25,626,800
Transaction costs (1,739,323) (106,414) (1,845,737)
Net proceeds 22,413,574 1,367,489 23,781,063
Deferred taxes — (362,384) (362,384)
Accretion in carrying
value of debenture
liability 514,367 — 514,367
$ 22,927,941 $ 1,005,105 $ 23,933,046
The allocation of the gross proceeds from the
convertible debentures issuance and the balances
outstanding on the debt and equity components at
December 31, 2018 were as follows:
Liability
Equity
component of component of
debentures
debentures
Total
Debentures issued $ 17,282,632 $ 1,117,368 $ 18,400,000
(89,772) (1,478,292)
(1,388,520)
Transaction costs
1,027,596 16,921,708
15,894,112
Net proceeds
Deferred taxes
(272,313) (272,313)
—
Accretion in carrying
value of debenture
liability
Accrued interest
$ 15,954,642 $
— 14,019
— 46,511
755,283 $ 16,709,925
14,019
46,511
At December 31, 2019, all debentures remained
outstanding.
13. Lease liabilities
The following table presents the contractual
undiscounted cash flows for office lease obligations
at December 31, 2019:
(in thousands)
Less than one year
One to five years
Thereafter
Total undiscounted lease obligations
Less: Short-term lease commitments
elected for exemption under IFRS 16
Less: Future interest
$ 491
1,181
206
1,878
(26)
(254)
Lease liabilities at December 31, 2019
$ 1,598
During 2019, principal and interest payments for
the four leases recognized under IFRS 16 totalled
$377,398 and $112,979, respectively, for total lease
payments of $490,377. No variable lease payments
are included in the measurement of the Company’s
lease liabilities. See note 3(a) for details regarding
the adoption of IFRS 16.
14. Capital stock, share repurchase
program, contributed surplus,
dividends, stock option plans, senior
executive long-term incentive plan,
and stock-based compensation
(a) Authorized capital stock
The authorized capital stock of the Company
consists of an unlimited number of first preferred
shares, issuable in series, and an unlimited number
of common shares with no par value. The first
preferred shares may be issued in one or more
series and rank in preference to the common shares.
50 Accord Financial Corp.
Designations, preferences, rights, conditions or
prohibitions relating to each class of shares may be
fixed by the Board. At December 31, 2019 and 2018,
there were no first preferred shares outstanding.
(b) Issued and outstanding
The Company's issued and outstanding common
shares during 2019 and 2018 are set out in the
consolidated statements of changes in equity.
(c) Share repurchase program
On December 4, 2019, the Company received
approval from the TSX to commence a normal course
issuer bid (the "2019 Bid") for up to 429,445 of its
common shares at prevailing market prices on the
TSX. The 2019 Bid commenced on December 9, 2019
and will terminate on December 8, 2020 or the date
on which a total of 429,445 common shares have
been repurchased pursuant to its terms. All shares
repurchased pursuant to the 2019 Bid will be
cancelled. To December 31, 2019, the Company had
not repurchased and cancelled any common shares
under the 2019 Bid.
(d) Contributed surplus
The Company's contributed surplus and movements
therein during 2019 and 2018 are set out in the
consolidated statements of changes in equity.
(e) Dividends
Dividends in respect of the Company’s common
shares are declared in Canadian dollars. During 2019,
dividends totalling $3,051,812 (2018 – $3,001,825)
or $0.36 (2018 – $0.36) per common share were
declared and paid. On January 30, 2020, the
Company declared a quarterly dividend of $0.09 per
common share, which was paid on March 2, 2020 to
shareholders of record at the close of business on
February 14, 2020.
(f) Stock option plans
The Company has established an employee stock
option plan. Under the terms of the plan, an aggregate
of 1,000,000 common shares has been reserved for
issue upon the exercise of options granted to key
managerial employees of the Company and its
subsidiaries. According to the terms of the plan,
these options vest over a period of three years
provided certain minimum earnings criteria are met.
Although the Company may still grant stock options
to employees, it has not done so since 2004.
The Company has also established a non-executive
directors' stock option plan (“NEDSOP”). Under the
terms of the plan, an aggregate of 500,000 common
shares has been reserved for issue upon the exercise
of options granted to non-executive directors of the
Company. Fifty percent of these options vest after
one year and fifty percent after two years. The
options have to be exercised within five years of the
grant date at which time they expire.
Options are granted to purchase common shares at
prices not less than the market price of such shares
on the grant date.
Outstanding options granted under the NEDSOP at
December 31, 2019 and 2018 were as follows:
Exercise price
$9.56
$9.28
Grant date
October 28, 2015
July 27, 2016
Outstanding, earned and exercisable
Number of
options
80,000
80,000
160,000
A director who resigned on June 30, 2018 did not
exercise his options within the required sixty day
period after he ceased to be director. Accordingly,
his 40,000 options expired on August 29, 2018.
The fair value of the options granted was determined
using the Black-Scholes option pricing model with
the following assumptions on the grant date:
July 27, 2016 October 28, 2015
grant grant
Risk free interest rate 0.65% 0.82%
Expected dividend yield 3.88% 3.77%
Expected share price volatility 23.78% 23.50%
Expected life of option 5.0 years 5.0 years
Fair value per option $1.35 $1.40
(g) Senior executive long-term incentive
plan
Under the LTIP, which was introduced in 2015, grants
may be made annually to the Company’s senior
executive management group and are measured
and assessed over a three-year performance period.
Grants are determined as a percentage of the
participants’ short-term annual bonus subject to an
annual LTIP pool maximum of 5% of adjusted
consolidated net earnings. Vesting of the LTIP is
subject to achievement over a three-year period of
a cumulative adjusted return on average equity and
Annual Report 2019
5 1
may be adjusted up or down subject to achievement
of certain minimum and maximum return thresholds.
The Compensation Committee of the Board has the
discretion to determine whether payments are settled
through the issuance of shares and/or paid in cash.
(h) Stock-based compensation
During 2019, the Company recorded a stock-based
compensation recovery totalling $174,597 (2018 –
expense of $326,519). The stock-based compensation
recovery in 2019 related to outstanding LTIP awards.
During 2018 stock-based compensation in respect
of LTIP awards was $306,874, while there was also a
$19,645 expense in respect of the Company’s
NEDSOP grants.
15. Income taxes
The Company's income tax expense comprises:
2019 2018
Current income tax (recovery)
expense $ (184,711) $ 232,188
Deferred tax expense (recovery) 1,763,711 (128,188)
Income tax expense $ 1,579,000 $ 104,000
During 2019 and 2018, the Company's statutory
income tax rate was 26.5%. The Company's income
tax expense varies from the amount that would be
computed using the Canadian statutory income tax
rate due to the following:
2019 %
Income tax expense computed
at statutory rates $ 1,833,927 26.5
Decrease resulting from:
Lower effective tax rate on
income of subsidiaries (702,999) (10.2)
Non-controlling interests in
subsidiaries 232,190 3.4
Other 215,882 3.1
Income tax expense $ 1,579,000 22.8
2018 %
Income tax expense computed
at statutory rates $ 3,002,835 26.5
Decrease resulting from:
Lower effective tax rate on
income of subsidiaries (2,671,247) (23.6)
Non-controlling interest in
subsidiaries (183,074) (1.6)
Other (44,514) (0.4)
Income tax expense $ 104,000 0.9
The tax effects that give rise to the net deferred tax
assets at December 31 are as follows:
2019 2018
Deferred tax assets:
Unused tax losses $ 6,296,351 $ 4,201,559
419,079 217,555
Allowances for losses
37,000 —
Leasing timing difference
24,000 16,000
Property and equipment
— 48,000
LTIP liability
22,545 30,194
Other
$ 6,798,975 $ 4,513,308
Deferred tax liabilities:
Basis differential on pass
through subsidiaries (5,715,600)
Property and equipment (57,000)
Acquired intangibles —
Other (50,661)
(5,823,261)
$ 975,714
(3,240,151)
—
(64,094)
(1,364)
(3,305,609)
$ 1,207,699
The tax effects that give rise to the net deferred tax
liabilities at December 31 are as follows:
2019 2018
Deferred tax assets:
Allowances for losses $ (39,000)
Unused tax losses —
LTIP liability —
(39,000)
Deferred tax liabilities:
Basis differential on pass
through subsidiaries 1,327,101
Convertible debentures
accretion 402,835
Acquired intangibles 284,124
Lease receivables 276,000
Property and equipment —
$ (117,000)
(107,068)
(44,000)
(268,068)
—
259,313
256,455
236,000
31,000
2,290,060
$ 2,251,060
782,768
$ 514,700
A deferred tax asset is recognized for unused tax
losses, tax credits and deductible temporary
differences, to the extent that it is probable that
future taxable profits will be available against which
they can be utilized. Management's estimate of
future taxable profits and the recognition of deferred
tax assets are reviewed at each reporting date and
deferred tax assets are reduced to the extent that it
is no longer probable that the related tax benefit
will be realized.
52 Accord Financial Corp.
At December 31, 2019 and 2018, deferred tax
liabilities for temporary differences associated with
investments in domestic and foreign subsidiaries
were not recognized as the Company is able to
control the timing of the reversal of the temporary
differences, and it is probable that the temporary
differences will not reverse in the foreseeable future.
16. Earnings per common share and
weighted average number of
common shares outstanding
Basic earnings per share have been calculated based
on the weighted average number of common shares
outstanding in the year without the inclusion of
dilutive effects. Diluted earnings per share are
calculated based on the weighted average number
of common shares plus dilutive common share
equivalents outstanding in the year, which in the
Company's case consist of stock options and
convertible debentures.
The following is a reconciliation of common shares
used in the calculation for the years ended
December 31:
2019 2018
Basic weighted average
number of common
shares outstanding 8,463,891 8,328,655
Effect of dilutive stock options 3,254 2,194
Diluted weighted average
number of common shares
outstanding 8,467,145 8,330,849
All convertible debentures were excluded from the
calculations of the diluted weighted average number
of common shares outstanding during 2019 and 2018
because they were anti-dilutive for earnings per
common share purposes.
17. Contingent liabilities
(a) In the normal course of business there is outstanding
litigation, the results of which are not expected to
have a material effect upon the Company. Pending
litigation, or other contingent matters represent
potential financial loss to the Company. The
Company accrues a potential loss if the Company
believes the loss is probable and it can be reasonably
estimated. The decision is based upon information
that is available at the time. The Company estimates
the amount of the loss by consulting with the outside
legal counsel that is handling the defense. This
involves analyzing potential outcomes and assuming
various litigation and settlement strategies. At
December 31, 2019 and 2018, the Company was not
aware of any litigation the aggregate liability from
which would materially affect the financial position
of the Company, and thus had not accrued a loss.
(b) At December 31, 2019, the Company was liable
with respect to letters of credit issued on behalf of
clients in the amount of $220,830 (2018 – $508,170).
In addition, at December 31, 2019, the Company
was contingently liable with respect to letters of
guarantee issued on behalf of clients in the amount
of $1,026,210 (2018 – $13,637). These amounts were
considered in determining the allowance for losses
on finance receivables and loans.
18. Derivative financial instruments
At December 31, 2019, the Company had entered
into forward foreign exchange contracts with a
financial institution which must be exercised by the
Company between January 31, 2020 and July 31,
2020 and which oblige the Company to sell Canadian
dollars and buy US$650,000 at exchange rates ranging
from 1.3090 to 1.3288. These contracts were entered
into by the Company on behalf of a client and
similar forward foreign exchange contracts were
entered into between the Company and the client,
whereby the Company will buy Canadian dollars from
and sell US$650,000 to the clients. At December 31,
2018, the Company had no outstanding forward
foreign exchange contracts. The favorable and
unfavorable fair values of these contracts were
recorded on the Company's consolidated statements
of financial position in other assets and accounts
payable and other liabilities, respectively. The fair
value of the contracts was classified as Level 2
under IFRS 7. During 2019 and 2018 there was no
movement between the three-level fair value
hierarchy described in note 3(r).
Annual Report 2019
53
19. Segmented information
The Company operates and manages its businesses in one dominant industry segment – providing asset-based
financial services to industrial and commercial enterprises, principally in Canada and the United States. An
operating segment is a component in the Company that engages in business activities from which it may earn
revenues and incur expenses, including revenues and expenses relating to transactions with any of the Companies
other subsidiaries, whose operating results are regularly reviewed by the Company’s Chief Operating Decision
Makers (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance
and for which discrete financial information is available. Segment results that are reported to the CODM include
items that are directly attributable to a segment as well as those that can be allocated on a reasonable basis.
There were no significant changes to property and equipment, except as described in note 6, and goodwill during
the periods under review.
2019 (in thousands) Canada United States Intercompany Consolidated
Identifiable assets
Revenue
Interest income
Other income
Expenses
Interest
General and administrative
Provision for credit and loan losses
Depreciation
Business acquisition expenses (recovery)
(Loss) earnings before income tax expense
Income tax (recovery) expense
Net (loss) earnings
Net (loss) attributable to non-controlling interests
in subsidiaries
Net (loss) earnings attributable to shareholders
$ 184,198
$ 254,632
$ (32,616)
$ 406,214
$ 21,281
4,192
25,473
15,124
10,734
864
334
165
27,221
(1,748)
(129)
(1,619)
$ 28,992
2,980
31,972
3,235
15,417
6,241
393
(1,983)
23,303
8,669
1,708
6,961
$ (1,270)
—
(1,270)
(1,270)
—
—
—
—
(1,270)
—
—
—
$ 49,003
7,172
56,175
17,089
26,151
7,105
727
(1,818)
49,254
6,921
1,579
5,342
—
$ (1,619)
(1,102)
$ 8,063
—
$ —
(1,102)
$ 6,444
2018 (in thousands) Canada United States Intercompany Consolidated
Identifiable assets
Revenue
Interest income
Other income
Expenses
Interest
General and administrative
Provision for credit and loan losses
Impairment of assets held for sale
Depreciation
Business acquisition expenses
Earnings before income tax expense
Income tax expense (recovery)
Net earnings
Net earnings attributable to non-controlling interests
in subsidiaries
Net earnings attributable to shareholders
$ 146,844
$ 231,051
$ (4,112)
$ 373,783
$ 18,771
4,425
23,196
8,486
10,981
1,048
25
174
279
20,993
2,203
629
1,574
$ 19,235 $ (163)
—
4,659
(163)
23,894
1,084
12,543
977
—
105
57
14,766
9,128
(525)
9,653
(163)
—
—
—
—
—
(163)
—
—
—
$ 37,843
9,084
46,927
9,407
23,524
2,025
25
279
336
35,596
11,331
104
11,227
—
$ 1,574
871
$ 8,782
—
$ —
871
$ 10,356
54 Accord Financial Corp.
20. Accumulated other comprehensive
income
23. Financial risk management
Accumulated other comprehensive income ("AOCI")
solely comprises the unrealized foreign exchange
gain (commonly referred to as cumulative translation
adjustment) arising on translation of the assets and
liabilities of the Company's foreign subsidiaries
which report in U.S. dollars. Changes in the AOCI
balance during the years ended December 31, 2019
and 2018 are set out in the consolidated statements
of changes in equity.
21. Non-controlling interests in
subsidiaries
Non-controlling interests in subsidiaries at
December 31, 2019 and 2018 comprise an effective
49% interest in BondIt’s common member units and
a 10% interest in CapX’s common units. Please see
the consolidated statements of changes in equity
for movements in non-controlling interests during
2019 and 2018.
22. Fair values of financial assets and
liabilities
Financial assets or liabilities, other than lease
receivables and loans to clients in our equipment
finance business, lease liabilities, convertible
debentures and term notes payable, are short term
in nature and, therefore, their carrying values
approximate fair values. Changes in interest rates,
credit spreads and liquidity costs are the main cause
of changes in the fair value of the Company’s financial
instruments resulting in a favorable or unfavorable
variance compared to carrying value. For the
Company’s financial instruments carried at cost or
amortized cost, the carrying value is not adjusted
to reflect increases or decreases in fair value due to
market fluctuations, including those due to interest
rate changes. Under the fair value hierarchy, finance
receivables and loans would be classified as Level 3
in 2019 and 2018.
The Company is exposed to credit, liquidity and
market risks related to the use of financial
instruments in its operations. The Board has overall
responsibility for the establishment and oversight
of the Company's risk management framework
through its Audit Committee. In this respect, the
Audit Committee meets with management and the
Company's Risk Management Committee at least
quarterly. The Company's risk management policies
are established to identify, analyze, limit, control
and monitor the risks faced by the Company. Risk
management policies and systems are reviewed
regularly to reflect changes in the risk environment
faced by the Company.
(a) Credit risk
Credit risk is the risk of financial loss to the Company
if a client or counterparty to a financial instrument
fails to meet its contractual obligations. In the
Company's case, credit risk arises with respect to its
loans to and other financial transactions with clients,
its guarantee of managed receivables, and any other
financial transaction with a counterparty that the
Company deals with. The carrying amount of these
loans ($373 million) and managed receivables
($27 million) represents the Company's maximum
credit exposure and is the most significant measurable
risk that it faces. The nature of the Company's asset-
based lending business involves funding or assuming
the credit risk on the receivables offered to it by its
clients, as well as financing other assets, such as
inventory and equipment. The Company will usually
either: (i) own the factored receivables or leased
assets that it finances; or (ii) take collateral security
over the other assets that it lends against. The
Company also makes unsecured small business loans;
these totalled $1,365,503 at December 31, 2019.
The Company does not take title to the managed
receivables as it does not lend against them,
although it assumes the credit risk from the client
in respect of these receivables.
Annual Report 2019
55
In its asset-based lending business, the Company
makes loans that are, in most cases, secured against
various forms of collateral. The collateral is generally
first ranking security on the client’s assets which
typically comprise receivables, inventory, equipment
and real estate. The Company provides a loss
allowance on all of its finance receivables and loans
based on the assessed credit risk. There were no
significant changes in the quality of collateral or
changes to the Company’s collateral policy during
2019 and 2018.
At December 31, 2019, the Company had impaired
loans of $6,770,000 (2018 – $60,000), while at that
date, it held collateral for these loans with an
estimated net realizable value of $8,034,000 (2018 –
$314,000). These impaired loans were mainly
secured by receivables, inventory and/or equipment.
In its asset-based lending businesses (AFIC and
AFIU), media financing business (BondIt), equipment
finance businesses (ASBF and CapX), and credit
protection and receivables management operations
(AFL), credit is approved by a staff of credit officers,
with larger amounts being authorized by supervisory
personnel, management and, in the case of credit
in excess of $1.0 million (US$1.0 million in case of
AFIU and CapX, and US$500,000 for BondIt), the
Company's Chairman and Vice Chairman of its Board.
Credit in excess of $2.5 million (US$2.5 million in the
case of U.S. group companies) is approved by the
Company’s Credit Committee, which comprises three
independent members of its Board. The Company
monitors and controls its risks and exposures through
financial, credit and legal systems and, accordingly,
believes that it has procedures in place for evaluating
and limiting the credit risks to which it is subject.
Credit is subject to ongoing management review.
Nevertheless, for a variety of reasons, there will
inevitably be defaults by clients or their customers.
In its asset-based lending operations, a primary
focus continues to be on the credit-worthiness and
collectability of its clients' receivables. The clients'
customers have varying payment terms depending
on the industries in which they operate, although
most customers have payment terms of 30 to 60
days from the invoice date. The Company's lease
receivables and equipment and working capital loans
are mainly term loans with payments usually spread
out evenly over the term of the lease or loan, which
can typically be up to 60 months. Of the total
managed receivables that the Company guarantees
payment, 3.5% were past due more than 60 days at
December 31, 2019 (2018 – 3.6%). In the Company's
asset-based lending business, trade receivables
become "ineligible" for lending purposes when they
reach a certain pre-determined age, usually 75 to 90
days from the invoice date, and are usually charged
back to clients, thereby eliminating the Company's
credit risk on such older receivables.
The Company employs an internal client credit risk
rating system to assess the credit risk in its asset-
based lending and leasing businesses, which
reviews, amongst other things, the financial strength
of each client and the Company's underlying security,
while in its credit protection and receivables
management business, it employs a customer credit
scoring system to assess the credit risk associated
with the managed receivables that it guarantees.
Please see note 4 which presents the Company’s
finance receivables and loans and managed
receivables by their internal credit risk rating (low
risk, medium risk, high risk) and by the three stage
credit criteria of IFRS 9, as well as an aged analysis
thereof. Credit risk is primarily managed by ensuring
that, as far as possible, the receivables financed are
of the highest quality and that any inventory,
equipment or other assets securing loans are
appropriately appraised. Collateral is monitored and
managed on an ongoing basis to mitigate credit risk.
In its asset-based lending operations, the Company
assesses the financial strength of its clients'
customers and the industries in which they operate
on a regular and ongoing basis.
The Company also minimizes credit risk by limiting
the maximum amount that it will lend to any one
client, enforcing strict advance rates, disallowing
certain types of receivables, charging back or making
56 Accord Financial Corp.
receivables ineligible for lending purposes as they
become older, and taking cash collateral in certain
cases. The Company will also confirm the validity of
the receivables that it finances. In its asset-based
lending operations, the Company administers and
collects the majority of its clients' receivables and
so is able to quickly identify problems as and when
they arise and act promptly to minimize credit and
loan losses. Regular field examinations are conducted
to verify collateral such as inventory and equipment.
In the Company's Canadian leasing operations,
security deposits are also obtained as additional
collateral for its equipment leases or loans.
In the Company’s credit protection and receivables
management business, each customer is provided
with a credit limit up to which the Company will
guarantee that customer's total receivables. All
customer credit in excess of $2.5 million is approved
by the Company's Credit Committee on a case-by-
case basis. At December 31, 2019, the Company had
not guaranteed accounts receivable in excess of
$5 million for any customer.
The Company's credit exposure relating to its
finance receivables and loans by industrial sector
was as follows:
2019
Gross finance
Industrial sector receivables % of
(in thousands) and loans total
Manufacturing $ 87,195 23
Professional services 70,416 19
Financial services 63,723 17
Wholesale and distribution 31,965 9
Retail 28,819 8
Media 24,561 6
Transportation 19,666 5
Construction 17,875 5
Other 28,937 8
$ 373,157 100
2018
Gross finance
Industrial sector receivables % of
(in thousands) and loans total
Manufacturing $ 80,465 24
Financial services 69,065 20
Professional services 48,064 14
Wholesale and distribution 41,298 12
Transportation 28,308 8
Retail 22,007 7
Construction 20,006 6
Media 14,656 4
Other 15,233 5
$ 339,102 100
The Company’s credit exposure relating to its
managed receivables by industrial sector was
as follows:
2019
Industrial sector Managed % of
(in thousands) receivables total
Retail $ 22,698 83
Wholesale and distribution 1,567 6
Other 3,073 11
$ 27,338 100
2018
Industrial sector Managed % of
(in thousands) receivables total
Retail $ 31,580 79
Wholesale and distribution 4,418 11
Other 4,147 10
$ 40,145 100
As set out in notes 3(e) and 4, the Company maintains
an allowance for credit and loan losses on its finance
receivables and loans and its guarantee of managed
receivables in accordance with IFRS 9. The Company
maintains a separate allowance for losses on each of
the above items at amounts which, in management's
judgment, are sufficient to cover losses thereon. The
allowances are based upon several considerations,
including current economic trends, condition of the
loan and receivable portfolios and typical industry
loss experience.
Annual Report 2019
57
(b) Liquidity risk
The Company’s financial assets and liabilities at December 31, 2019 by maturity date were as follows:
Less than
(in thousands) 1 year
1 to 2
years
2 to 3 3 to 4 4 to 5
years years years Thereafter Total
Financial assets
Cash
Finance receivables
and loans
All other assets
Financial liabilities
Due to clients
Bank indebtedness
Loan payable
Notes payable
Convertible debentures
All other liabilities
$
6,777 $ — $
— $
— $
— $
— $
6,777
201,259 54,357 44,838 57,631 15,071 1 373,157
3,422 — — — — — 3,422
1 $ 383,356
$ 44,838 $ 57,631 $ 15,071 $
$ 211,458 $ 54,357
$ 2,404
242,781
11,227
6,790
—
6,464
$ 269,666
$
— $
— $
— $
2,404
$ —
—
— — — — 242,781
— — — — — 11,227
— — — — 18,939
— 22,928 — — 22,928
— — — — 6,464
— $ 304,743
— $ 22,928 $
12,149
—
—
$ 12,149
— $
— $
$
The Company’s financial assets and liabilities at December 31, 2018 by maturity date were as follows:
(in thousands)
Financial assets
Cash
Finance receivables
and loans
All other assets
Less than
1 to 2
1 year years
2 to 3 3 to 4 4 to 5
years years years Thereafter Total
$ 16,346 $
—
$
— $
— $
— $
— $ 16,346
215,562
1,440
$ 233,348
60,313
—
$ 60,313
39,619 17,648 5,853 107 339,102
— — — — 1,440
107 $ 356,888
$ 39,619 $ 17,648 $
5,853 $
Financial liabilities
Due to clients
Bank indebtedness
Loan payable
Notes payable
Convertible debentures
All other liabilities
$
$
3,156
—
222,862 —
—
—
—
1,676
1,676
5,696
5,865
—
9,074
$ 246,653
$
$
— $
— $ — $
— $ 3,156
— — — — 222,862
— — — — 5,696
12,214 — — — 18,079
— — 15,955 — 15,955
— — — — 10,750
— $ 276,498
$ 12,214 $ — $ 15,955 $
Liquidity risk is the risk that the Company will not
be able to meet its financial obligations as they fall
due. The Company's approach to managing liquidity
risk is to ensure that, as far as possible, it will always
have sufficient liquidity to meet its liabilities when
they fall due, under both normal and stressed
conditions, without incurring unacceptable losses
or risking damage to the Company's reputation.
The Company's principal obligations are its bank
indebtedness, loan payable, notes payable,
convertible debentures, due to clients, and accounts
payable and other liabilities. Revolving credit lines
totalling approximately $380,000,000 have been
established with a syndicate of banks, as well as a
non-bank lender, bearing interest varying with the
bank prime rate or Libor. At December 31, 2019, the
Company had borrowed $254,008,197 (2018 –
$228,557,292) against these facilities. These lines
of credit are collateralized primarily by finance
receivables and loans to clients. As detailed in note 8,
the Company did not meet its interest coverage ratio
covenant under its bank credit facility at December 31,
58 Accord Financial Corp.
2019 but has received a waiver thereof. The Company’s
banking syndicate has also reset the Company’s
interest coverage ratio test for the quarters ended
March 31, June 30 and September 30, 2020. The
Company was compliant with all other loan covenants
under its bank credit facility during 2019 and was in
compliance with all loan covenants under its bank
lines of credit in 2018. BondIt failed a covenant test
with its non-bank lender at December 31, 2019 and
2018, which were subsequently waived. See note 10.
Notes payable of $3,607,337 are due on, or within a
week of demand, while BondIt notes totalling
$3,182,550 are repayable at various dates the latest
of which is December 31, 2020. Long-term notes
payable of $12,149,100 entered into on August 1, 2018
mature on July 31, 2021 (see note 11(a)). Notes payable
are to individuals or entities and consist of advances
from shareholders, directors, management,
employees, other related individuals and third parties.
At December 31, 2019, 82% (2018 – 86%) of these
notes were due to related parties and 18% (2018 –
14%) to third parties. The Company’s convertible
debenture liability was $22,927,941 at December 31,
2019. These debentures mature on December 31,
2023. Due to clients principally consist of collections
of receivables not yet remitted to the Company's
clients. Contractually, the Company remits collections
within a week of receipt. Accounts payable and other
liabilities comprise a number of different obligations,
the majority of which are payable within six months.
At December 31, 2019, the Company had gross
finance receivables and loans totalling $373,157,083
(2018 – $339,101,770) which substantially exceeded
its total liabilities of $309,846,192 at that date (2018 –
$278,598,434). The Company's receivables normally
have payment terms of 30 to 60 days from invoice
date. Together with its unused credit lines,
management believes that current cash balances
and liquid short-term assets are more than sufficient
to meet its financial obligations as they fall due.
(c) Market risk
Market risk is the risk that changes in market prices,
such as foreign exchange rates and interest rates,
will affect the Company's income or the value of its
financial instruments. The objective of managing
market risk is to control market risk exposures
within acceptable parameters, while optimizing the
return on risk.
(i) Currency risk
The Company's Canadian operations have some
assets and liabilities denominated in foreign
currencies, principally finance receivables and loans,
cash, bank indebtedness, due to clients and notes
payable. These assets and liabilities are usually
economically hedged, although the Company
enters into foreign exchange contracts from time to
time to hedge its currency risk when there is no
economic hedge. At December 31, 2019, the
Company's unhedged foreign currency positions in
its Canadian operations totalled $11,037,000 (2018
– $49,000), of which $10,677,000 resulted from the
dissolution of a foreign subsidiary on December 31,
2019. This position was subsequently closed in early
January 2020 resulting in a small foreign exchange
gain. The Company ensures that its net exposure is
kept to an acceptable level by buying or selling foreign
currencies on a spot or forward basis to address
short-term imbalances. The impact of a 1% change
in the value of the Company’s foreign currency
holdings against the Canadian dollar would not have
a material impact on the Company's net earnings.
(ii) Interest rate risk
Interest rate risk pertains to the risk of loss due to
the volatility of interest rates. The Company's lending
and borrowing rates are usually based on bank
prime rates of interest or Libor and are typically
variable. The Company actively manages its interest
rate exposure, where possible.
The Company's agreements with its clients (affecting
interest revenue) and lenders (affecting interest
expense) usually provide for rate adjustments in the
event of interest rate changes so that the Company's
spreads are protected to a large degree. As the
Company's floating rate finance receivables and loans
are currently similar to its floating and short-term fixed
rate (usually 30 days) borrowings, the Company’s
exposure to interest rate risk is not significant.
However, as the Company’s equipment finance
business continues to grow the Company expects it
will deploy interest rate hedges in the near future
where certain bank borrowings or other debt is
matched up with fixed rate lease receivables and term
loan maturities in our equipment finance businesses.
Annual Report 2019
59
The following table summarizes the interest rate sensitivity gap at December 31, 2019:
Floating 0 to 12 1 to 3 4 to 5 Non-rate
(in thousands) rate months years years sensitive Total
Assets
Cash
Finance receivables and loans, net
Assets held for sale
All other assets
$
Liabilities
— $
4,421 $
6,776
— $
230,413 18,844 106,114 16,308 (3,042) 368,637
— 6,970 — — — 6,970
— 861 — — 22,970 23,831
234,834 26,675 106,114 16,308 22,283 406,214
2,355 $
— $
Due to clients
Bank indebtedness
Loans payable
Notes payable
Convertible debentures
All other liabilities
Equity —
37,148
$ 197,686
— — — — 2,404 2,404
22,314 221,365 — — (898) 242,781
11,227 — — — — 11,227
3,607 3,183 12,149 — — 18,939
— — 22,928 — — 22,928
— 337 — — 11,230 11,567
— — — 96,368 96,368
224,885 35,077 — 109,104 406,214
—
$(198,210) $ 71,037 $ 16,308 $ (86,821) $
Based on the Company's interest rate positions at
December 31, 2019, a sustained 100 basis point rise
in interest rates across all currencies and maturities
would reduce net earnings by approximately $5,000
over a one-year period. A decrease of 100 basis points
in interest rates would increase net earnings to a
similar extent.
24. Capital disclosure
The Company considers its capital structure to include
equity and debt; namely, its bank indebtedness, loan
payable, notes payable and convertible debentures.
The Company's objectives when managing capital are
to: (a) maintain financial flexibility in order to preserve
its ability to meet financial obligations and continue as
a going concern; (b) maintain a capital structure that
allows the Company to finance its growth using
internally-generated cash flow and debt capacity; and
(c) optimize the use of its capital to provide an appropriate
investment return to its shareholders commensurate
with risk. The Company's financial strategy is formulated
and adapted according to market conditions in order to
maintain a flexible capital structure that is consistent
with its objectives and the risk characteristics of its
underlying assets. The Company manages its capital
structure and makes adjustments to it in light of changes
in economic conditions and the risk characteristics of
its underlying assets. To maintain or adjust its capital
structure, the Company may, from time to time, change
the amount of dividends paid to shareholders, return
capital to shareholders by way of normal course issuer
bid, issue new shares or debt, or reduce liquid assets to
repay other debt. The Company monitors the ratio of its
debt to total equity and its total equity to total assets.
At December 31, 2019, as a percentage, these ratios were
307% (2018 – 276%) and 24% ( 2018 – 25%), respectively.
The Company's debt and leverage will usually rise with
an increase in finance receivables and loans and vice-versa.
The Company's share capital is not subject to external
restrictions. However, the Company's credit facilities
include debt to tangible net worth ("TNW") covenants.
Specifically, at December 31, 2019, the Company is
required to maintain a debt to TNW ratio of less than
3.5 on its syndicated bank facility. BondIt, which has
entered into a loan facility with a non-bank lender, is
required to maintain a TNW of at least US$5,000,000.
There were no changes in the Company's approach to
capital management from previous periods.
25. Subsequent events
At March 6, 2020, there were no subsequent events
occurring after December 31, 2019 that required disclosure
or adjustments to the financial statements.
60 Accord Financial Corp.
Corporate Information
Annual Meeting
Board of Directors
The Annual Meeting of
Shareholders will be held
Wednesday, May 6, 2020 at
4:00 pm at
The Toronto Board of Trade,
First Canadian Place,
Toronto, Ontario
2
Ken Hitzig, Toronto, Ontario
Simon Hitzig, Toronto, Ontario
David Beutel, Toronto, Ontario
Tom Henderson, Greenville, South Carolina
Gary Prager, Wake Forest, North Carolina
Robert S. Sandler, White Plains, New York
Stephen D. Warden, Oakville, Ontario
1, 2
1, 3
1, 3
2, 3
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Credit Committee
Officers
Ken Hitzig, Chairman of the Board
Tom Henderson, Vice Chairman
Simon Hitzig, President & CEO
Stuart Adair, Senior Vice President,
Chief Financial Officer
Irene Eddy, Senior Vice President,
Capital Markets
Cathy Osborne, Senior Vice President,
Human Resources
Jim Bates, Secretary
Subsidiaries
Accord Financial Ltd.
Jim Bates, President
Accord Financial Inc.
Jason Rosenfeld, President
Accord Financial, Inc.
Terry Keating, President
Accord Small Business Finance
(Varion Capital Corp.)
James Jang, President
Accord CapX LLC
Jeff Pfeffer, President
BondIt Media Capital
Matthew Helderman, President
Auditors
KPMG LLP
Legal Counsel
Stikeman Elliott
Bankers
Bank of Montreal
The Bank of Nova Scotia
Branch Banking and Trust
Canadian Imperial Bank of Commerce
HSBC Bank Canada
M&T Bank
The Toronto-Dominion Bank
Stock Exchange Listings
Toronto Stock Exchange Symbols:
Common Shares: ACD
Convertible Debentures: ACD.DB
Registrar & Transfer
Agent
Computershare Trust Company
of Canada
602-40 Eglinton Avenue East • Toronto • Ontario • Canada M4P 3A2
Tel (800) 967-0015 • Fax (416) 961-9443
www.accordfinancial.com
IN CANADA
Toronto (800) 967-0015
Montreal (800) 231-2977
Vancouver (844) 982-3010
IN THE U.S.
(800) 231-2757
www.accordfinancial.com