VersaBank

Good morning, ladies and gentlemen. Welcome to VersaBank's fourth quarter and year-end fiscal 2022 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the fourth quarter and fiscal year ended October 31. That news release, along with the bank's financial statement and supplemental financial information, are available on the bank's website in the investor relations section, as well as on CEDAR and EDGAR. Please note that, in addition to the telephone dialing, VersaBank is webcasting this morning's conference call. The webcast is listened only. If you are listening on 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 the completion of the call. Details on how to access the replays are available in this morning's new 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 businesses. Please refer to VersaBank's forward-looking statement advisory in today's presentation. I would now like to turn the call over to David Taylor, President and Chief Executive Officer of VersaBank. Please go ahead, Mr. Taylor.

Good morning, everyone, and thank you for joining us for today's call. With me is Sean Clark, our Chief Financial Officer. Before I begin, I'd like to remind you that our financial results are reported and will be discussed in this call in our reporting currency of Canadian dollars. For those interested, we provide U.S. dollar translations for most of our financial numbers in our standard investor presentation, which will be updated and available on our website shortly. On to our results. A record fourth quarter across each of our key performance metrics capped off a record year for VersaBank. In our digital banking operations, continued strong year-over-year growth in our point-of-sale loan and lease portfolio drove our loan portfolio to an all-time high of just under $3 billion. That was up 42% as we maintained our overall net interest margin without trading or taking any additional credit risk. This drove record revenue, record net interest income, record net income, save for one outsized quarter in 2017 due to a large tax recovery. Additionally, the cybersecurity services component of DRTC had a strong fourth quarter and remains profitable. Importantly, we achieved net income despite the significant transitory expenses incurred during the year on our account of strategic growth initiatives, the returns of which we expect to begin to realize in fiscal 2023. All of this positions VersaBank for continued growth in 2023 comfortable in the knowledge that our bank has a track record of performing even a little better during economic slowdowns. I'll discuss this more in a few minutes. Looking more closely at our performance, the fourth quarter was highlighted by the highest ever levels of revenue, net interest income, and net income, even with a dampening effect on our bottom line of the transitory investments and multiple strategic growth initiatives we made throughout the year. Combined, these investments totaled $1.8 million, the vast majority of which will run off during the current quarter. As Sean will discuss, we will also experience the temporary elevated provision for taxes in Q4, which further dampen our net income by $1.1 million and which we expect to reduce early in fiscal 2023. Fourth quarter performance was driven mainly by continued outsized growth in the Canadian point of sale financing business, which increased 11% sequentially to the end of the year and 74% higher than fiscal 2021. Again, I will note that we achieved this growth with essentially no impact on net interest margin and without relaxing our stringent credit policy. Similarly, For the full fiscal year, the outside growth in our Canadian point of sale drove record revenue, net interest income, and net income. And like the fourth quarter, record net income was dampened by expenses related to the transitory strategic investment, which for the year totaled $5.2 million. As well, the $1.1 million elevated tax in Q4. Again, these investments will substantially dissipate throughout Q1 of fiscal 2023, and our tax provision will reduce early in 2023. I'd like to provide a quick update on our planned acquisition of Minnesota-based Stearns Bank Holdingford, a fully operational OCC chartered national U.S. bank. As I discussed On our last quarterly call, this acquisition is transformational, next step in VersaBank's long-term growth strategy that will enable us to bring our track record of innovative digital banking solutions to address unmet needs to one of the world's largest banking markets. Specifically, this acquisition will enable us to broadly roll out our receivable purchase program in the underserved U.S. markets. which has been so successful in Canada, where we call it our point of sale financing business. Although the process has taken a little longer than initially thought, I'm pleased to report that earlier this morning we submitted the requisite filing to the OCC and the Federal Reserve seeking approval of this acquisition. With these filings complete, we can now move ahead with our application to our Canadian regulators. I'm also pleased to announce that Tom Ridge, former governor of Pennsylvania and inaugural secretary of the US Office of Homeland Security, has agreed to become chair of our new US subsidiary, First Bank USA. We are targeting to close this acquisition early in calendar 2023. On the topic of US Receivable Purchase Program, our first partner, a large North American commercial transportation financing business focused on independent owner-operators, has continued to expand their business with us, with loans now nearly $50 million. That number would have been even higher. However, we are somewhat constrained in this limited early rollout ahead of completion of U.S. bank acquisitions. Recently, we added a second partner, the retail finance division of a $40-plus billion U.S.-based financial services company, and expect to begin taking on loans shortly. And we continue to be very encouraged by our discussions we're having with other potential partners in the United States. They are repeatedly confirming our belief that we are a valuable alternative for point-of-sale financing. in this $1.8 billion and growing US market. And finally, before I turn over the call to Sean, an update on our revolutionary digital deposit receipts. As I discussed last quarter, there have been tremendous amount of turmoil in the sector and heightened regulatory awareness and scrutiny, which has been further exacerbated by FTX debacle. The downside of this, of course, is that it has negative repercussions very broadly in our industry. The upside, at least for us, is that all of these events further underscore the importance of regulation and our belief that we share with some of our regulatory pundits that licensed banks are the right entities to be issuing digital currencies. With the rapid evolution of the market and the regulatory environment, we made a decision to substantially change our model such that our DDR accounts, our digital deposit receipt accounts, which are essentially e-wallets, are hosted by VersaBank as opposed to being hosted by external third party. We are now able to do this through the addition of our viewer software, a tool developed exclusively for our bank. To prove out the new model in November, we initiated an initial pilot program for the new offering, which we are calling CAD-V. The pilot is restricted to VersaBank's directors, executives, all of whom reside in Canada. With this progression to a new model, we'll further extend our time to launch. Our DDR program is, as it always has been, a long-term opportunity to grow low-cost deposits. we still have access to abundant low-cost deposits to fuel our growth in Canada. In fact, I will discuss in a moment, we expect to return to robust growth in our bankruptcy deposit channel, resulting from the challenging and potentially more challenging economic environment. Finally, I will note that we continue to see some digital currency offerings trickle out here and there, and each and every time we do, we're even more confident with respect to the significant competitive advantages that our offering brings. I'd now like to turn the call over to Sean to review our financial results in detail.

Sean? Thank you, David, and good morning, everyone. Before I begin, just a quick reminder that our full financial statements and MD&A for the fourth quarter and full fiscal 2022 year are available on our website under the Investors Relations section, as well as on CDAR and on EDGAR. And as David mentioned, all the following numbers are reported in Canadian dollars as per our financial statements, unless otherwise noted. Starting with our balance sheet. Total assets at the end of the fourth quarter crossed the $3.3 billion mark, up 35% from $2.4 billion at the end of Q4 of last year, and up 6% from $3.1 billion at the end of the third quarter of this year. Cash and securities at the end of Q4 were at $230 million, or 7% of total assets, down from $272 million, or 11% of total assets at the end of Q4 of last year, and up from $218 million, or 7% of total assets at the end of Q3 of this year. The year-over-year decrease was the result of the bank deploying cash into higher-yielding lending assets and lower-risk securities over the course of the quarter. Our total loan portfolio at the end of the fourth quarter expanded to another record balance of $2.99 billion, an increase of 42% year-over-year and 6% sequentially. I'll break this out into its component parts in a moment. Book value per share increased 7% year-over-year and 2% sequentially to another record at $12.37. These increases were both a function of higher retained earnings resulting from net income growth, partially offset by dividends paid, while the year-over-year increase was also impacted by our common share offering in the U.S. last September. Our CEQ1 ratio was 12%, down from 15.2% at the end of Q4 of last year, and down from 12.51% at the end of Q3 of this year, while our leverage ratio at the end of Q4 was 9.8%, down from 12.6% at the same point last year, and 10.38% at the end of Q3 of this year. Both our CET1 and leverage ratios remain comfortably above our internal regulatory ratio targets. Turning to the income statement, total consolidated revenue increased 33% year-over-year and 14% sequentially to a record $24.3 million, with the increase being driven primarily by higher net interest income derived from our digital banking operations, resulting from the strong growth in our loan portfolio that was discussed earlier. Consolidated net income for Q4 increased 9% year-over-year and 12% sequentially to a record $6.4 million, with the exception of Q1 2017, during which we recorded a one-time tax recovery resulting from the amalgamation of a bank and PwC capital in that same period. Net income for Q4 was reduced by transitory costs totaling $1.8 million, as David mentioned earlier, incurring the period related to our investments in several strategic growth initiatives, including the U.S. bank acquisition, the launch of the U.S. version of our point-of-sale offering our receivable purchase program in preparation for the launch of our digital deposit receipts. We expect these investments to begin to contribute to profitability over the course of fiscal 2023. Net income was also reduced by $1.1 million in incremental tax provisions, which we also expect will reduce in fiscal 2023. Consolidated earnings per share decreased 4% year-over-year to 23 cents. with a decrease due primarily to the impact of the issuance of 6.3 million common shares concurrent with the bank's listing on the NASDAQ in September of last year. On a sequential basis, however, consolidated EPS was up 15%. For context, the impact of the transitory strategic investments and higher income tax on our 2022 EPS metric was $0.06 per share and $0.04 per share, respectively. Primary driver growth in our loan portfolio was once again our point-of-sale financing business, which increased 74% year-over-year and 11% sequentially, surpassing the $2.2 billion mark. This growth continued to be driven primarily by strong demand for home finance, home improvement, HVAC, and auto receivable financing. Our point-of-sale portfolio continues to expand as a proportion of the overall portfolio as per our strategy, representing now 75% of our total loan portfolio as at the end of the fourth quarter, up from 71% at the end of the third quarter. Our commercial real estate portfolio decreased 7% year-over-year and 6% sequentially to $759 million at the end of the fourth quarter. As we now have noted for several quarters, management has taken a more cautionary stance with respect to the commercial real estate portfolio due to expected volatility in the valuations within this asset class in a rising interest rate environment, as well as concerns related to higher construction costs resulting from supply chain disruptions and a very tight labor market. That said, we remain very comfortable with the risk profile of our commercial real estate portfolio, based on our criteria of working only with well-established, well-capitalized development partners with excellent track records and restricting transactions to modest loan-to-value ratios. Turning to the income statement for our digital banking operations, net interest margin on loans, that is, excluding cash and securities and other assets, decreased 28 basis points, or 8% year-over-year, and 4 basis points, or 1%, sequentially to 3.03%, due primarily to a shift in the bank's funding mix and rising interest rates over the respective periods, as well as the successful execution of our strategy to grow our POS financing portfolio. These factors were partially offset by generally higher yields earned on our lending portfolio during the period, also as a function of rising interest rates. And as a margin for the quarter, which includes the impact of cash, securities, and other assets, increased 8 basis points, or 3% year-over-year, and 5 basis points, or 2% sequentially, to 2.81%. Non-interest expenses for the quarter were $13.8 million compared to $10.4 million for the same period last year and $13.2 million for Q3 of this year. The year-over-year and quarter-over-quarter increases were substantially due to transitory costs related to the strategic growth investments I described earlier. Investments associated with the acquisition and integration of the operations of the U.S. Bank are anticipated to be realized substantially by the end of the first quarter of 2023. The year-over-year and quarter-over-quarter increases were also impacted by higher salary and benefits costs, contributed to increased staffing levels to support expanded revenue-generating business activity across the bank, as well as higher costs associated with employee retention in this very tight labor market. Cost of funds for the fourth quarter was 2.45% of 114 basis points year over year and up 51 basis points sequentially, due primarily to our funding mix being comprised of a large proportion of wealth management deposits relative to our lower cost insolvency professional deposits and the impact, of course, of rising interest rates. Insolvency professional deposit balances contracted slightly in Q4 compared to a year ago, despite adding more partners and as we continue to experience historically low bankruptcy activity, which remains well below pre-pandemic levels. During the same period, our wealth management deposits grew 65%. Looking ahead to 2023, we do expect insolvency deposits to grow moderately throughout the year as a function of an increase in the volume of consumer bankruptcy and proposed restructuring proceedings amidst the challenging current and forecasted economic environment. Our provision for credit losses or PCLs in Q4 was again demonstrative of the prudent risk mitigation strategies inherent in our lending and credit risk management processes, as well as the outstanding credit quality of our current loan portfolio. PCLs in the current quarter were $205,000 compared with a recovery of credit losses in the amount of $279,000 for the same period last year, and a PCL of $166,000 for Q3 of this year. The recovery recorded last year was pivotal primarily to changes in the bank's lending asset portfolio mix. and changes in the forward-looking information used in the bank's credit risk models offset partially by higher lending balances. Sequential change this year was a function primarily of higher lending asset balances and changes in the forward-looking information that we use in our credit risk models offset partially by changes in the bank's lending asset mix. Our PCL ratio remains one of the lowest in the Canadian banking industry at an average of 0% over the past 12 quarters. And as David will discuss in a moment, the superior risk profile is expected to serve us well should an economic downturn materialize over the course of 2023. Post-impaired loan balances of October 21 to October 31, 2022 were $0.3 million, all of which were repaid on November 1, 2022, compared to $1.4 million last quarter and nil a year ago. Turning now to DRTC, sales were generated almost exclusively through our Cybersecurity Services Business Digital Boundary Group. increased 33% sequentially, decreased 8% year-over-year to $2.8 million due primarily to the timing of service engagements in those respective periods. Gross profit, however, increased 48% sequentially and decreased 19% year-over-year to $1.7 million. The sequential increases were driven primarily by higher pricing charged on services as well as meaningful improvements in DBG's operational efficiency. DRT generated net losses of $0.5 million in the current quarter compared with the net income of $0.5 million in Q4 of last year and net loss of $0.7 million in Q3 of this year, which are the higher gross profits from DBG being partially offset by higher salary and benefits expense associated with employee retention in a highly competitive labor market. I will note here that the net loss for DRTC includes costs associated with strategic technology development investments for our digital banking operations. The operations of DBG on a standalone basis continue to be profitable. Finally, before I turn the call back to David, in August, we received approval from the TSX to undertake a normal course issuer bid for up to 1.7 million common shares, or just over 9.5% of our public float at the time of application. And further, in September, we received approval from the NASDAQ to proceed with an NCIB on that exchange as well. As of October 31st of this year, we have repurchased an aggregate 195,300 shares under the NCIB program. I'd now like to turn the call back to David for some closing remarks.