VersaBank

Good morning, ladies and gentlemen. Welcome to VersaBank's first quarter fiscal 2023 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the first quarter ended January 31st, 2023. 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 this morning's conference call. The webcast is listen-only, so 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 provided 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 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.

Good morning everybody 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 on this call and our reporting currency, Canadian dollars. Those interested, we'll provide US translations for most of our financial numbers in our standard investor presentation, which will be updated and available on our website shortly. Now to the results. The first quarter was not only another record quarter for VersaBank, but more importantly, one that was demonstrative of the true efficiency and return on equity generating capability of our branchless business-to-business digital banking model. And once again, this was complemented by the continued profitable contribution of our cybersecurity services business. Our digital banking operations continue to see very strong year-over-year growth in our loan portfolio at 46%. which drove our portfolio to an all-time high of just under $3.25 billion. Growth was again driven primarily by Canadian point of sale loan and lease portfolio, which was up 68% from Q1 last year. The combination of loan growth and stable net interest margin drove record revenue and record interest income. On the cost side, As we anticipated, the transitory costs related to growth investments and our move to NASDAQ that temporarily elevated our non-interest expense and dampened our profitability in 2022 substantially normalized in the first quarter, putting our efficiency ratio back on track towards its full potential. We continue to expect further normalization as our non-interest expense and, importantly, We haven't only barely begun to realize the growth contributions of those investments we made last year. All this drove by far our best quarter ever in terms of net income and EPS. Save for one outside quarter for net income in 2017 due to an accounting recognition when VersaBank amalgamated with PwC Capital. Net income grew 69% year-over-year to $9.4 million, besting our previous record of $6.4 million by a full $3 million. And EPS grew 79% or 15 cents year-over-year to 34 cents. Looking more closely at our performance, as I noted a moment ago, The first quarter financial results were marked once again by our best ever revenue, net interest income and net income and earnings per share. Outside of these record results, there are three metrics that I'd like to highlight. The first is our net interest margin. It's important to note that we have generated loan growth while maintaining our overall net interest margin and without taking on additional risk. This is something relatively unique compared to our peers. The second is our efficiency ratio. Now that we are through the bulk of our transitory costs for our strategic growth initiatives, the true scalability and efficiency of our model is emerging. The third, earnings per share growth, which outpaced net income growth as a result of our active share repurchase program. As we look ahead, in addition to the continued growth we expect in our Canadian loan portfolio, we expect to generate significant long-term growth from our launch of the United States Receivable Purchase Program. This is our high-value ad financing offering for consumers and small business lenders. Based on our proprietary technology that provides them with a regular, reliable, inexpensive funding alternative, to help them succeed in their businesses. As I discussed in our last quarterly call, this acquisition is transformational, the 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. We have launched this program on a limited basis in the United States, of the broad national rollout planned upon completion of the acquisition of the Minnesota-based Stearns Bank, Holdingford, a fully operational OCC chartered national U.S. bank. Specifically, this acquisition will enable us to broadly roll out our receivable purchase program to the underserved U.S. market, which has been so successful in Canada, where we call it our point-of-sale financing business. In December, we submitted the requisite filings to the OCC and the reserve, seeking approval of the acquisition. And based on continuing dialogue, we remain optimistic with respect to near-term approval. In terms of an update on timing, which is ultimately the discretion of our regulators on both sides of the border, we anticipate receiving a decision with respect to its approval of the proposed application from the U.S. regulators during the second quarter of the calendar 2023. And if favorable, we will proceed to complete the acquisition as soon as possible subject to Canadian regulatory approval. In the interim, we continue to actively prepare for the significant opportunity to bring our differentiated and attractive financing solutions to U.S. partners. Pumping up U.S. Receivable Purchase Program, or BP, our U.S. portfolio continues to expand with loans now nearly $44 million. As I discussed in our last call, we have limited warning of loans ahead of the fulsome rollout upon completing the U.S. acquisition. And in fact, demand to date has continued to outstrip our self-imposed short-term capacity restrictions. Very comfortable with our progress and with the revised expectations for completion, we have made the decision to ramp up our US RPP loans ahead of closing the acquisition. More on this in a moment. I'd now like to turn the call over to Sean to review our financial results.

Thanks, David. Before I begin, just a quick reminder that our full financial statements and MD&A for the first quarter are available on our website under the Investor section, as well as on CDAR and EDGAR. And, as David mentioned, all of 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 first quarter of fiscal 2023 were just over 3.5 billion, up 46% from 2.4 billion at the end of Q1 last year, and up 8% from 3.3 billion at the end of fiscal 2022. Cash and securities at the end of Q1 were 251 million, or 7% of total assets, compared with 155 million, or 6% of total assets at the end of Q1 last year, and 230 million, or 7% of total assets at the end of fiscal 2022. Our total loan portfolio at the end of the first quarter expanded to another record balance of $3.24 billion, an increase of 46% year over year and 8% sequentially. I'll break this out into its component parts in a moment. Book value per share increased 8% year-over-year and 3% sequentially to another record at $12.77. These increases were both a function of higher retained earnings resulting from net income growth, partially offset by dividends paid, and also benefited from the lower number of outstanding shares as a result of our active share buyback program. Our CET1 ratio was 11.2%, down from 14.8% at the end of Q1 last year, and down from 12% at the end of fiscal 2022 where our leverage ratio at the end of Q1 of this year was 9.21%, down from 12.7% at the same point last year, and 9.8% at the end of fiscal 2022. Both of our CET1 and leverage ratios remain well above our internal targets. Turning to our income statement. Total consolidated revenue increased 42% year-over-year and 7% sequentially to a record $25.9 million, with the increase driven primarily by higher net interest income derived from our digital banking operations resulting from the strong growth in our loan portfolio that I mentioned earlier and the maintenance of our net interest margin. Consolidated net income for Q1 increased 69% year-over-year and 46% sequentially to a new record of $9.4 million, excluding Q1 2017, which is attributable primarily to a one-time recognition of deferred income tax assets pursuant to the amalgamation of VersaBank with PwC Capital, as David mentioned earlier. In addition to the growth in net interest income, as expected, non-interest expense substantially reduced year-over-year and sequentially as the transitory costs related to our strategic investments in several strategic growth initiatives including the U.S. bank acquisition and the launch of the Receivable Purchase Program in the U.S., rolled off. Consolidated earnings per share increased 79% year-over-year and 48% sequentially to $0.34, with the increase benefiting from strong earnings and a lower number of outstanding shares due to our active share repurchase program. During the first quarter, we repurchased and canceled just over 822,000 shares, bringing the total number of shares purchased under the NCIB as of the end of Q1 to just over 1 million. Primary driver of growth in our loan portfolio was once again our point-of-sale financing business, which increased 68% year-over-year and surpassing the $2.4 billion mark. This growth continued to be driven mainly by strong demand for home, home improvement, HVAC, and auto receivable financing. As we noted on our last call, although we expect very healthy growth from our point-of-sale business in 2023, we won't see the same outsized growth as last year. Q1 of this year saw sequential growth in the point-of-sale portfolio of 9%, relative to Q4 of last year, and we believe sequentially quarterly growth in the same range throughout the remainder of the year is achievable as consumer spending in the sectors on which we focus remains active. Our point-of-sale portfolio represents 75% of our total loan portfolio as of the end of Q1, which was unchanged from the end of fiscal 2022. Our commercial real estate portfolio has expanded 5% year-over-year and 6% sequentially to $807 million at the end of Q1. As discussed in our last several quarterly calls, we have taken a more cautionary stance with respect to our commercial lending portfolios due to the expected volatility in 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 labour market. That said, we are seeing healthy demand for our construction and term financing products in the form of very high quality deal flow. We expect this to continue throughout 2023. We remain very comfortable with the risk profile of our commercial real estate portfolios based on our criteria of working only with well-established, well-capitalized development partners to demonstrate excellent track records and, of course, restricting transaction 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, securities, and other assets, decreased 20 basis points or 6% year-over-year, but was unchanged sequentially at 3.03%. The year-over-year decrease was due mainly to a shift in the bank's funding mix combined with rising interest rates over the respective periods, offset partially by generally higher yields earned on our lending portfolio. The interest margin overall, which includes the impact of cash, securities, and other assets, increased six basis points, or 2%, year-over-year, and two basis points, or slightly less than 1%, sequentially to 2.83%. This is attributable to higher yields earned on lending and Treasury assets, offset partially by higher cost of funds. Non-interest expenses for Q1 were $12.3 million compared with $10.6 million for the same period of 2022, however down meaningfully from the elevated levels of $13.8 million for Q4 2022. The year-over-year increase is due mainly to higher salary and benefits costs, resulting from an increase in staffing levels to support expanded revenue-generating business activity across the entire bank, higher costs related to employee retention in a very tight labour market, and higher costs related to investments in the bank's business development initiatives, offset partially by lower insurance premiums attributed to VersaBank's listing on the NASDAQ in September 2021, as well as lower capital tax expense. The sequential decrease is due to the expected significant reduction in transitory costs related to strategic growth investments and our listing on NASDAQ that David and I have both mentioned earlier, as well as lower capital tax expense. Cost of funds for Q1 was 2.95%, up 166 basis points year-over-year and up 50 basis points sequentially, with both increases due mainly to the larger proportion of wealth management deposits relative to our lower cost insolvency professional deposits versus the comparative periods, as well as the general increase in market interest rates. The increase in our cost of funds remains significantly less than the Bank of Canada's increase in the benchmark rate of 425 basis points to the beginning of fiscal 2021. Insolvency professional deposits once again contracted slightly in Q1 on both a year-over-year and sequential basis due to the historically low bankruptcy activity Canada has experienced, primarily as a result of government support for both individuals and small businesses extended during the pandemic. Wealth management, or what we refer to as personal deposits, expanded 87% year-over-year and 14% sequentially. Dave will talk a little bit more about our expectations around funding mix in just a moment. Our provision for credit losses, or PCLs, in Q1 once again evidenced the prudent risk mitigation strategies inherent in our lending models and outstanding credit quality of our loan portfolio, especially evident given the broader expansion in PCL ratios that our peers are reporting. Provision for credit losses for Q1 was $385,000 compared with a provision for credit losses of $2,000 in Q1 of last year and a provision for credit losses of $205,000 for the fourth quarter of 2022. Sequential and year-over-year changes were a function primarily of changes in the forward-looking information used by the bank and its credit risk models, as well as higher lending asset balances. PCLs as a percentage of average loans for Q4 was 5 basis points, and our average for the past 12 quarters was 0. Our PCL ratio continues to remain one of the lowest in the Canadian banking industry. Turning now to DRTC, I would like to remind you that DBG's gross profit amounts are included in DRTC's consolidated revenue, which in turn is reflected in non-interest income and VersaBank's consolidated statements of income and comprehensive income. DBG's revenue for Q1 decreased 3% year-over-year and 19% sequentially at $2.3 million as a function of lower service work volume in the current quarter. Historically, Q1 is softer for DBG, attributable to the impact of the slower holiday period, which typically results in lower revenue-generating activity. Gross profit, however, increased 70% year-over-year and decreased 6% sequentially to $1.6 million, with a year-over-year increase driven primarily by higher pricing on engagements and improved operational efficiency. DBG remained profitable on a standalone basis this quarter. DRTC consolidated revenue for the quarter, that is, including revenue generated through the provision of various technology support and consultation services provided to VersaBank's digital banking operations, increased 3% sequentially, 29% year-over-year to $1.8 million. DRTC recorded a net loss of just over a half a million dollars compared to net income of $150,000 in Q1 last year and net loss of just under half a million in Q4 of last year. The year-over-year trend was a function primarily of higher non-interest expenses attributed to higher salary and benefits expense due to higher staffing levels to support expanded business activity and higher costs associated with employer retention amidst the current challenging labor market. I'd now like to turn the call back to David for some closing remarks. David?