VersaBank

2022. That news release, along with the bank's financial statements and supplemental financial information, are available on the bank's website in the 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 archived for replay both by telephone and via the internet beginning approximately one hour following completion of the call. Details on how to access the replays are available in this morning's news release. I would 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 analysis made by VersaBank Management. Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank's business. Please refer to VersaBank's forward-looking statement advisory in today's presentation. I would now like to turn the call over to Mr. David Taylor, President and Chief Executive Officer of VersaBank. Please go ahead, Mr. Taylor.

Thank you, Michelle. Good morning, everyone, and thank you for joining us today's call. With me is Sean Clark, our Chief Financial Officer. For those who have been following VersaBank for a number of quarters or more will know that some small but we think important adjustments to the way we are describing our business and our quarterly results. First off, we are more definitively referring to our digital banking operations when describing our deposit and lending business, and to DRTC when describing our cybersecurity services, as well as certain banking and financial technology development. Further, we have begun breaking out our non-interest expense into its component digital banking and DRTC parts to provide a more fulsome view of each operational segment. We believe this better serves our shareholders and prospective investors, providing a clearer picture of the individual performance of each of our digital banking and DRTC operations and enabling better comparison to our peers in each sector. Within our digital banking operations, we are presenting net interest margin based on total assets That is including cash and other assets as we have done historically and is the convention with publicly traded banks in Canada. However, we are also presenting net interest margin with cash and other assets excluded as per the practice of U.S. banks. In addition, we are now reporting our efficiency ratio for only our digital banking operations, which excludes the impact of DRTC. Again, we believe these adjustments will enable the investment community to better compare our results to those of our peers, including our U.S. peers. And finally, a quick reminder here that we report our financial results in Canadian dollars, and all amounts in today's call will be in Canadian dollars unless otherwise stated. Now, on to the results. For the second quarter of 2022, Q2 saw continued momentum across our business. and was highlighted by yet another record loan portfolio in our digital banking operations, which increased 34% year-on-year and 11% sequentially to just shy of $2.5 billion. Importantly, this growth was driven to a large degree by our strategic focus on point-of-sale financing portfolio, which grew 51% year-over-year. Consolidated net income for Q2, however, was dampened by expenses related to a number of investments that we believe will continue to drive portfolio growth in both the short and long terms. Most notably, transitory costs associated with the preparation for the launch of the rollout of the point of sale offering in the United States and preparation for the launch of the Canadian dollar version of our revolutionary digital deposit receipts. We also saw a dampening effect from the successful execution of our strategy to expand point of sale portfolio on the net interest margin in our digital banking operations. As a reminder, we earn slightly lower margins on average from our point of sale loans than we do on our commercial real estate loans. From a sheer growth opportunity, however, the point of sale market represents our far greatest opportunity to drive sustained long-term profitability and also a considerably more efficient use of our capital. In DRTC, we continue to see strong growth, which delivered year-over-year increases in revenue and gross profit of 41% to 57% respectively. Although profitability here was dampened by investment in prep for VCAT launch, including completion of the SOC 2 audit. I'll remind you here that the gross profit amount for DRTC is included in non-interest income in VersaBank's consolidated income statement. Sean will discuss the financials in more detail in a moment. A significant highlight of the second quarter was the launch of point of sale business in the United States and the addition of our first U.S. point of sale customer on March 31st. That customer is a large North American commercial transportation financing business focused on independent owner-operators and a great example of the inherent value of our offering, addressing an unmet need in a market by providing a highly flexible and economically superior technology-based alternative. We're off to a great start. Discussions with our other potential partners are very encouraging, confirming our belief that our offering is unique and very much in demand. The other highlight of the quarter, as I've noted earlier, was the completion of the SOC 2 compliance audit for proprietary blockchain technology that is the foundation of our digital deposit receipts. Our own internally developed, first of all, technology, in essence, the voluntary SOC 2 audit conducted by an independent national chartered professional accountancy and advisory firm verified the non-financial reporting controls relating to security, availability, processing, integrity, confidentiality, and privacy of our VersaVault, which we believe will be a significant advantage from both an end user and a regulatory perspective now and well into the future. Our digital deposit receipts were born out of the recognition of the fundamental long-term evolution towards rapid, frictionless transactions in the digital realm. We continue to advance towards launch of our VCADs in Canada. VersaBank has long and proud history of being at the leading edge of banking, especially related to technology. Sometimes that can be protracted. What we are already are conservative timelines as we ensure that we are stakeholders fully understand these initiatives. I'd now like to turn the call over to Sean to review our financial results in detail. Sean?

Thanks, David. Just a quick reminder that our full financial statements and MD&A for the second quarter and year-to-date 2022 are available on our website under the Investors section, as well as on CDAR and on EDGAR. And, as David mentioned, all of the following numbers reported are in Canadian dollars as per our financial statements, unless otherwise noted. We do offer U.S. dollar translations of our key metrics in our Standard Investor presentation, which will be updated for the second quarter numbers and posted to our website very shortly. On the slide nine, the balance sheet. Starting with our balance sheet, total assets at the end of the second quarter were $2.7 billion, up 26% from $2.1 billion at the end of Q2 last year, and up 11% from the end of Q1 of this year. Our cash balance at the end of Q2 was $198 million, or 7% of total assets, down from $272 million, or 13% of total assets, at the end of Q2 last year, and up from $155 million, or 6% of total assets, at the end of Q1 this year. The year-over-year decrease is the result of deploying our temporarily elevated cash balances into our loan portfolios, while the sequential quarter-over-quarter increase was in preparation to fund new loans in our short-term pipeline. Our total loan portfolio at the end of the second quarter grew to another record balance of $2.45 billion, which, as David mentioned earlier, represents an increase of 34% year-over-year and 11% sequentially. Both value per share increased 8% year-over-year and 1% sequentially to $11.94, with a year-over-year increase due primarily to the impact of our common share offering in September of 2021, and higher retained earnings attributable to net income earned in the current period offset partially by the payment of dividends over the same timeframe, and a sequential increase being due primarily to higher retained earnings attributable to net income earned in the current quarter offset partially by the payment of dividends over the same period. Our CET1 ratio was 13.66%, up from 12.52% at the end of Q2 of last year, and down from 14.83% at the end of Q1 of this year. Finally, our leverage ratio at the end of Q2 is 11.63%, up from 10.46% at the end of Q2 last year, and down from 12.69% at the end of Q1 of this year. The year-over-year increases in our regulatory capital levels and ratios, as well as changes in our leverage ratio, were a function of a number of factors, including our common share offering in September 2021 for total net proceeds adjusted for tax-affected issue costs, in the amount of $75.1 million, retained earnings growth year-over-year, and, in the case of our capital ratios, changes to our risk-weighted assets and composition. Both our CET1 and leverage ratios will remain well above regulatory thresholds. On to slide 10. Consistent with David's earlier comments on reporting, I will begin with an overview of our consolidated results and then proceed to discussing digital banking operations and DRTC individual Total consolidated revenue increased 17% year-over-year and 2% sequentially to $18.6 million, with the increase driven primarily by higher net interest income in our digital banking operations, which in turn was driven by strong growth in our loan portfolio. We also generated higher non-interest income at DRTC. I will discuss each of these in more detail in a moment. As David noted earlier, consolidated net income for the quarter was dampened by what were predominantly transitory costs associated with specific growth initiatives, including our U.S. point-of-sale launch and preparation for the launch of VCAT. As a result, net income was down 14% year-over-year and down 11% sequentially to $4.9 million. Net income was also impacted by higher salary and benefits costs and higher office expenses incurred as our team returned to work at our offices. While these specific transitory costs recognized in Q2 will reduce materially in the back half of the year, we expect to see additional expenses associated with our pursuit of an acquisition of a U.S. bank, the magnitude and timing of which will depend on our progress toward achieving this objective. Earnings per share for Q2 were $0.17, which is down 32% year-over-year and 11% sequentially. The year-over-year decrease in EPS was disproportionately larger than that of net income, due to the higher number of shares outstanding, resulting from the issuance of 6.3 million common shares under our U.S.