VersaBank

Good morning, ladies and gentlemen, and welcome to the VersaBank's fourth quarter and year-end fiscal 2021 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the fourth quarter and year-ended October 31, 2021. That news release, along with the bank's financial statements and supplement financial information, are available on the bank's website at in its investor relations section, as well as on CDAR and EDGAR. Please note that in addition to the telephone dial-in, VersaBank is webcasting the conference call live over the Internet. The webcast is listen-only. If you are listening to the webcast but wish to ask a question in the Q&A session following Mr. Taylor's presentation, please dial into the conference line, the details of which are included in this morning's news release. and on the bank's website. For those participating in today's call by telephone, the accompanying slide presentation is available on the bank's website. Also, today's call will be achieved for replay both by telephone and via the Internet, beginning approximately one hour following the completion of the call. Details on how to access the replays are available in this morning's news release. I would now like to remind our listeners that the statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysts made by VersaBank's management. Actual results could differ materially from our expectations due to the various material risk and uncertainties associated with VersaBank's businesses. Please refer to VersaBank's forward-looking statement advisory in today's presentation. I would now like to turn the conference call over to Mr. David Taylor, President and Chief Executive Officer of VersaBank. Please go ahead, Mr. Taylor.

Thank you, Kelsey. Good morning, everyone, and thank you for joining us for today's call. I'm very pleased to be here for what is our first earnings call since our very successful U.S. IPO. And welcome to our new shareholders who are joining us today. With me for today's call is Sean Clark, our Chief Financial Officer. A record first quarter capped off what was a record year for VersaBank as our core digital banking operations continued to deliver strong growth in both loans and income. We achieved another loan portfolio record of just under $2.1 billion and a record net income of $5.9 million, up 25% year over year. And a reminder to our U.S. shareholders and analysts, that will report our financial results in Canadian dollars, and all amounts in today's call will be in Canadian dollars unless otherwise stated. As proud as we are of our strong financial performance for both the quarter and the year, these were also periods in which we took a number of important steps that we believe will not only continue our growth trajectory, but accelerate it. These include initiation and expansion of our closed ecosystem testing of our revolutionary digital deposit receipts, or DDRs for short, a significantly new low-cost deposit opportunity, as well as continued progress on execution of DRT Cyber's growth strategy. And perhaps most noteworthy during the quarter, we completed our initial public offering of common shares in the U.S. for gross proceeds of U.S. dollars $63.3 million and concurrent listing on the NASDAQ. I couldn't be more pleased with the success of our offering and the overwhelming positive reception that VersaBank received from U.S.-based investors. I will note that our offering was well oversubscribed. And I would like to take this opportunity to acknowledge the excellent work of the team at Raymond James U.S., as well as KBW and Stifle Canada for their hard work and support in making the offering a great success. Total loans at the end of the fourth quarter were up 27% year-over-year and 8% sequentially to a record $2.1 billion, the result of strong growth in both point-of-sale loan and lease receivable portfolio and our commercial real estate portfolio. Total revenue for Q4 increased 33% year-over-year and 16% sequentially to a record $18.2 million. Cost of funds decreased 20 basis points or 13% year-over-year and decreased 10 basis points or 7% sequentially to 1.31%. Net interest margin was down 9 basis points or 3% year-over-year, but up 12 basis points or 5% sequentially to 2.73%, with the year-over-year decline largely a result of our higher cash balances. And finally, net income increased 25% year-over-year and 9% sequentially to a record $5.9 million. We are again this quarter especially proud to have achieved this performance amidst the temporary damping effect of our higher-than-normal cash balances, as I just noted, which were 11% of total assets at the end of the fourth quarter compared to a historical 6% to 7%. This, I will note, is down from 13% at the end of Q3 this year as we put to work US $63 million in capital raised by our US IPO common share offering. Notably, 2021 saw a return to strong growth in profitability following a flat year in 2020, when we held atypically high cash balances of an abundance of caution as the pandemic arose and unfolded. Our 15% year-over-year increase in net income contributed to a compounded annual growth rate and earnings of 22% since 2014, with growth in every year except 2020. Operationally, Q4 was a very busy and productive quarter, As you've heard me discuss, VersaBank's access to ultra-low-cost deposits is core components of our model to generate superior net interest margins and profitability while taking less risk. The significant growth in our insolvency professional deposit business, an entirely unique offering based on our proprietary software over the past six years, has contributed to a decrease in our cost of funds from 1.98% to 1.31% in the most recent quarter. Building on a solid foundation of momentum, our revolutionary highly encrypted digital deposit receipt, or DDRs for short, is expected to provide an additional new opportunity for step function growth in our low-cost deposits. We anticipate strong demand for these deposits as highly encrypted digital deposit receipts When placed on a public blockchain, we believe our receipts can be superior, regulatory-compliant alternative to the current stablecoins for mainstream financial applications. In August, we initiated closed ecosystem testing of our Canadian dollar-denominated DDRs, or VCAT, and earlier this week, we announced expansion of testing to include U.S. dollar-denominated DDRs, or VUSD. as well as the Algorand and Ethereum blockchains, in addition to the Stellar blockchain. We also added a receipt distributor who will become one of our primary distributors of our DDRs at our commercial launch. Concurred with expanded testing, our DDR system is undergoing SOC2 audit, which is intended to verify the non-financial reporting controls relating to security, availability, processing integrity, confidentiality, privacy of the system. Testing will continue until completion of the SOC 2 audit as soon as possible, following which we plan to commercially launch DCAT and PUSD, which is currently targeted for early next year. As I noted earlier, we view our DDRs as a significant additional low-cost deposit generator But clearly, with rapidly developing regulatory environment for digital currencies, there are much broader business opportunities which we're actively and prudently exploring. Alongside the continuing strong performance in our core digital banking operations, our wholly owned subsidiary, DRT Cyber, continue to steadily execute on its growth strategy. A central part of its strategy is the introduction of new services that enhance DRT's ability to provide comprehensive suite of cybersecurity solutions anchored by its leading penetration testing solution and cross-sell and upsell these solutions, including through partnerships with other leading cybersecurity providers. During the fourth quarter, DRT entered into reciprocal reseller agreements with UK-based Serenis, which provides personal information management and stakeholder engagement solutions for large global enterprises. Under these arrangements, DRT Cyber will sell Serenis subscription-based flagship product, Cassie, a world-leading consent and preference management solution for organizations globally. DRT Cyber will add Cassie to its suite of innovative solutions for data protection, cybersecurity, compliance, and Serenis will act as reseller of DRT Cyber anti-spam legislation solution, Raven, which integrate seamlessly with Serenis' CASI. 2021 was a good year for DRT overall, and we look forward to building on this success in 2022. I'd now like to turn the call over to Sean to review our financial results in detail.

Thanks very much, David. Good morning, everyone. In the interest of time, I'm going to confine my remarks primarily to selected fourth quarter results. Our full financial statements and MD&A for both the fourth quarter and the year ended October 31, 2021 are available on our website under the investor section, as well as on CDAR and EDGAR. I will remind you that all the numbers reported here this morning are in Canadian dollars as per our financial statements, unless otherwise noted. Respect to our balance sheet, total assets at the end of the fourth quarter were $2.4 billion, about 24% from $1.9 billion a year ago and up modestly from $2.3 billion sequentially. Our cash balance at the end of Q4 was $272 million, down from $297 million last quarter, and up from $258 million at the end of the fourth quarter of last year. As David noted earlier, the increase from Q4 of last year is primarily the result of the common share offering completed in the current quarter for net cash proceeds of $73 million Canadian, and the supported debt issue completed in April of this year for net cash proceeds of $89.5 million, offset partially by the redemption of the Series 3 preferred shares also completed in April of this year. The decrease from the third quarter of this year was the result of continued deployment of cash into lending assets over the course of the quarter. Our total loan portfolio at the end of the fourth quarter was up 27% year over year and up 8% sequentially to another record of $2.1 billion, as David mentioned earlier. Looking at the composition of our balance sheet growth, our point of sale portfolio grew 12% sequentially and 30% year over year to $1.28 billion. representing 61% of our total loan portfolio as at October 31st, up from 59% last quarter. Our commercial real estate portfolio grew 2% sequentially and 24% year over year to $784 million, representing 37% of our total loan portfolio as at October 31st, down slightly from 39% last quarter. Finally, on the balance sheet, our book value per share increased 8.5% year over year and 3% sequentially to $11.61. Shifting to our regulatory capital position, our CET1 ratio at the end of Q4 was 15.18%, up from 13.88% last year and up from 11.94% last quarter. Our leverage ratio at the end of Q4 was 12.60%, up from 12.19% last year and up from 9.99% last quarter. The year-over-year increases in our regulatory capital levels and ratios, as well as our leverage ratio, are a function of a number of factors, which included issuance of the supported notes in late April, Our common share offering completed in late September. And, of course, retained earnings growth and tax provision recoveries related to the bank's deferred tax asset, all offset partially by the redemption of the bank's outstanding non-cumulative Series 3 preferred shares in late April. Our regulatory capital and leverage ratios at this time remain well above target. As David noted, the fourth quarter was not only a record quarter for VersaBank across a number of financial metrics, but also one that saw strong year-over-year and sequential growth across substantially all of our key performance indicators. Total revenue for the fourth quarter was up 33% year-over-year and up 16% sequentially to $18.2 million as a function primarily of higher interest income, higher non-interest income, and lower cost of funds. The interest margin for the quarter was 2.73%, down 9 basis points from 2.82% for the same period last year, but up 12 basis points from 2.61% for the third quarter of 2021. The year-over-year decrease was a function primarily of lower yields earned on elevated cash balances, which was, as you know, an internal decision made of an abundance of caution at the onset of the pandemic, as well as a function of lower yields earned on lending assets, offset partially by lower cost of funds. The sequential increase was due primarily to higher fees earned and lower cost of funds in the current quarter. Net interest income for the quarter was $16.1 million, up 18% from $13.7 million for the same period a year ago, and up 11% from $14.5 million for the third quarter of 2021. Both the sequential and year-over-year trends were a function primarily of higher interest income, tributary strong lending asset growth, and lower cost of funds. Non-interest expenses for the quarter were $10.4 million, up from $7.8 million compared to the same period a year ago, and up from $8.2 million compared to the third quarter of 2021. Both the year-over-year and sequential increases were the result of higher administrative costs attributable primarily to the U.S. IPO share offering and concurrent listing on the NASDAQ in September. The year-over-year trend also reflects higher salary and benefits expense attributable to an increase in staff complement and a general increase in staff-related costs, as well as the consolidated results of digital boundary group. As a result, our efficiency ratio for the fourth quarter jumped to 57%, well north of the low 50% range we enjoyed over the course of the year. That said, we view these additional costs as an investment in our future growth and fully expect our efficiency ratio to trend back to the low 50% range over the course of the first half of this year, coming year, and likely break into the high 40% range as our loan portfolio grows. Net income for the fourth quarter of 2021 was a record $5.9 million. or $0.24 per common share on both the basic and diluted basis, up 25% from $4.7 million or $0.20 per common share for the same period last year, and up 9% from $5.4 million or $0.25 per common share for the third quarter this year. With the sequential decrease in EPS, a function primarily of the increased administrative expenses I mentioned earlier, combined with the dilution resulting from the common share offering completed in September. More broadly, the year-over-year increase in net income was a function primarily of higher revenue, offset partially by lower recovery of credit losses and higher non-interest expenses, while the sequential quarter-over-quarter increase in net income was a function of higher revenue combined with a higher recovery of credit losses, offset partially by higher non-interest expenses. As David noted earlier, Q4 once again saw a decrease in our cost of funds, which fell to 1.31 percent down 20 basis points from 1.51% for the fourth quarter of last year, and down 10 basis points from the third quarter of this year. The decrease was primarily the result of the continued growth in our insolvency professional deposit space, which currently pays 0% interest despite lower bankruptcy activity in Canada. Looking ahead, we expect insolvency professional deposits to continue to grow over the course of fiscal 2022 through the continued onboarding of new trustee partners and organic growth from existing partners, combined with the potential for increased consumer bankruptcy and proposal restructuring volumes in the coming year as a number of COVID-19-related Canadian government support programs come to an end, as well as the prospect for potentially higher interest rates as a result of the Bank of Canada potentially tightening monetary policies. Credit quality of our loan portfolio remains very strong, and as at the end of the quarter, we had no impaired loans or loans in arrears on our balance sheet, which continues to be the case today. For Q4, we recorded a recovery of credit losses in the amount of $279,000 compared to a recovery of credit losses in the amount of $582,000 for the same period a year ago, and a provision for credit losses in the amount of $96,000 for the third quarter of this year. The sequential trend was a function primarily of changes in the asset mix comprising our commercial real estate portfolio, as well as broadly more favorable macroeconomic forecast data uses forward-looking information in the bank's credit risk models, offset partially by higher loan balances. Our PCL ratio or provision for credit losses as a percentage of average loans for the fourth quarter was negative 0.05%, up from negative 0.14% for the same period last year. Our PCL ratio for the year ended October 31, 2021 was negative 0.02%, unchanged from 2020. Finally, our average PCL ratio for the past 12 quarters was negative 0.01%. Amidst the continuing evolution of the pandemic, though, we continue to operate at a heightened level of awareness to ensure that our origination and underwriting practices remain highly disciplined and focused. I'd now like to turn the call back to David for some closing remarks.