VersaBank

Good morning, ladies and gentlemen. Welcome to VersaBank's second quarter fiscal 2023 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the second quarter ended April 30, 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 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 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 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 on 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. Now for the results. The second quarter of fiscal 2023 was very much like the first, was yet another record quarter for VersaBank. which, as importantly, once again demonstrated the power of the significant operating leverage in our branchless, business-to-business digital banking model. Q2 2023 saw another record loan portfolio, $3.4 billion, another very solid step closer to our next major milestone of $4 billion, and the significant efficiency and return on investment common equity gains that go along with it. I will discuss these a little later in the call. In addition to Q2 results, also benefited from profitable growth in our cybersecurity services business. Looking more closely at our Q2 performance, there are a couple of specific highlights I'd like to note. The first is our efficiency ratio. That is what it costs us to generate a dollar of revenue. The lower the number, the more efficient we are in terms of generating revenue. With a significant year-over-year growth in our loan portfolio, relatively stable net interest margin, and substantially normalization of our non-interest expenses compared to last year, our efficiency ratio improved to 43%. This is very low number for a bank, a direct function of our digital branchless model, and evidence of our trajectory toward our target to be in the 30s, which is pretty much unheard of in the banking industry. Growth was again driven primarily by our Canadian point of sale loan and lease portfolio, which was up 58% year over year and 5% sequentially. I will note there is some seasonality to the point of sale business, such that growth is historically a little stronger in the second half due to higher consumer demand spending in the summer months. For the first half of the year, our point of sale portfolio has grown 14.3%. All of this is to say that we have a very good visibility into baseline earnings capacity of our Canadian business, which of course the upside potential of the ramp up of the receivable purchase program in the United States. This drove are by far best quarter ever in terms of net income and EPS, save for one outsized quarter for the net income in 2017 due to an accounting recognition when VersaBank amalgamated with PWC Capital. Net income grew 108% year-over-year and 9% sequentially to $10.3 million, while EPS grew 124% year-over-year and 12% sequentially The second major highlight is a considerable improvement in our return on common equity, which increased 615 basis points, or 104% year-over-year, and 128 basis points, or 12% sequentially, to just over 12%, clearly offering leverage at thriving value. With respect to our U.S. Receivable Purchase Program opportunity, we continue to be encouraged by our steady incremental progress towards our regulatory decision on acquisition of Minnesota-based Stearns Bank Holdingford. We understand and appreciate the lengthy and intensive due diligence process by various U.S. regulatory agencies, especially in what has become a very challenging period in the U.S. banking industry. We now anticipate receiving a decision on our acquisition by the end of the summer of this year. If favorable, we will proceed toward Canadian regulatory approval and closing of the acquisition as quickly as possible thereafter. We continue to view this acquisition as transformational for our bank, essentially erasing the border for our unique and attractive financing solution for an underserved market in the United States. that continues to drive significant growth for us here in Canada. We remain confident in our prospects in the United States. The limited launch of the RPP program in the United States continues to give us confidence in that we can achieve with our broad national launch. I noted on our last call, with the protracted timeline for the regulatory review of our acquisition, we were ramping up our limited RPP launch in the United States. As a result, we saw our US RPP portfolio grow by 35% from the end of Q1 to the end of Q2 and was prior to any contribution from our second partner that we spoke of last quarter. I'd now like to turn the call over to Sean to review our financial results in detail.

Thanks, David, and good morning, everyone. Before I begin, I'll remind you that our full financial statements and MD&A for the second 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 the balance sheet. Total assets at the end of the second quarter of fiscal 2023 were just over 3.7 billion, up 39% year-over-year from 2.7 billion at the end of Q2 last year, and up 6% sequentially from 3.5 billion at the end of Q1 of this year. Cash and securities at the end of Q2 were 263 million, or 7% of total assets, compared with 198 million, or 7% of total assets at the end of Q2 last year, and 251 million, or 7% of total assets at the end of Q1 this year. Our total loan portfolio at the end of the second quarter expanded to another record balance of $3.4 billion, an increase of 40% year-over-year and 6% sequentially in what is typically the seasonally lightest quarter of the year for loan growth, as David mentioned earlier. I will break loans out into its component parts in a moment. Book value per share increased 10% year-over-year and 3% sequentially to another record at $13.19. These increases were a function of higher retain earnings resulting from net income growth, and the impact of the lower number of shares due to our active share repurchase program, all partially offset by dividends paid. Our CEQ1 ratio was 11.21%, down from 13.66% at the end of Q2 last year, and up two basis points at the end of Q1 of this year. The average ratio at the end of Q2 of this year was 8.83%, down from 11.63% at the end of Q2 last year, and 9.21% at the end of Q1 of this year. Our CET1 and leverage ratios remain well above our internal targets. Turning to the income statement, total consolidated revenue increased 43% year-over-year and 3% sequentially to a record $26.7 million, with the increase driven primarily by higher net interest income derived from our digital banking operations resulting from growth in our loan portfolio, all while maintaining our net interest margin. Consolidated revenue also benefited from a higher contribution from DRT cyber. Solidated net income for Q2 increased 108% year-over-year and 9% sequentially to a new high of 10.3 million. The year-over-year and sequential increases were both a function of higher revenue to manage the expanded loan portfolio, as well as the redeployment of available cash into higher yielding, lower securities, and higher revenue contributions in DRTC, offset partially by higher non-interest expense. Solidated earnings per share increased 124% year-over-year and 12% sequentially to 38 cents. with the increase benefiting from a lower number of shares out due to our active share repurchase program. During the second quarter, we repurchased and cancelled just under 420,000 shares, bringing the total number of shares purchased and cancelled under the current NCIB at the end of Q2 to more than 1.4 million shares. The primary driver of growth in our loan portfolio was once again our point of sale finance and business, which increased 58% year over year and 5% sequentially to $2.5 billion. As noted earlier, Q1 and Q2 are historically a little lighter for point of sale loan growth than the second half of the year. Our point of sale portfolio represented 74% of our total loan portfolio at the end of Q2, which is unchanged from the end of Q1 of this year. While consumer spending and business investment in Canada are expected to slow during the second half of the year, As is the case during the first half of this year, we expect any impact of a slower economy on the POS financing portfolio to be subsequently outweighed by continued expansion of the business. Combined with what is seasonally stronger growth in the second half of the year, we expect growth in the point-of-sale portfolio for the second half to be at a minimum in line with the first half of the year. Our commercial real estate portfolios expanded 4% year-over-year and 7% sequentially to $866 million at the end of Q2. As we continue to maintain a generally cautionary position with respect to this portfolio, we are being opportunistic with respect to loans that provide an attractive return on equity, low risk profile. I want to take this opportunity to reiterate that while we refer to this portfolio as commercial, because these loans are business to business, approximately 90% of the portfolio is comprised of loans and mortgages which are financing residential properties, predominantly multi-unit in nature. As such, we have very little exposure to commercial use properties. We remain very comfortable with the risk profile of our commercial real estate portfolio. It's in our current 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, decreased 12 basis points or 4% year-over-year and 4 basis points or 1% sequentially to 2.99%. Trends were due mainly to a shift in the bank's deposit mix and rising interest rates over the respective periods, as well as significant growth in our point of sale portfolio, all partially offset by generally higher yields earned on our lending portfolio due to the higher interest rate environment. Net interest margin overall, including the impact of cash and securities and other assets, increased one basis point year over year and decreased five basis points sequentially to 2.78%. Non-interest expenses for Q2 were $12.7 million compared with $11.8 million for Q2 of last year, and $12.3 million for Q1 of this year. The year-over-year increase is due mainly to higher salary and benefits costs as we increase staffing levels to support expanded revenue-generating business activity across the bank, higher general annual compensation adjustments, and higher professional fees attributable primarily to the continuing regulatory approval process associated with the first bank's acquisition of a U.S. bank. The cost of funds for Q2 was 3.27%, up 189 basis points year-over-year and up 32 basis points sequentially. with both increases due mainly to the larger proportion of wealth management deposits relative to our lower cost insolvency professional deposits in the comparative periods and the general increase in interest rates. The increase in our cost of funds since the Bank of Canada began increasing its benchmark rate at the beginning of fiscal 2021 has been significantly less than the benchmark increase of 425 basis points. Insolvency professional deposit balances at the end of Q2, although down on a year-over-year basis, were essentially unchanged from Q1. With the anticipated increase in bankruptcy activity in the general economy, we expect these deposits to grow sequentially in the quarters to come as the Canadian economy returns to more normalized bankruptcy volumes. Wealth management, or what we refer to as personal deposits, expanded 67% year-over-year and 8% sequentially. And finally, our provision for credit losses, or PCLs, in Q2 remained very low at just 0.03% of average loans compared with a 12-quarter average of minus 0.01%. Turning now to DRTC, and as a reminder, beginning last quarter, revenue for DRTC includes that generated from the bank's digital banking operation for various technology development services, in addition to the contribution from our cybersecurity services business, Digital Boundary Group, or DBG. Starting with DBG standalone results, DBG revenue for Q2 increased 5% year-over-year, 11% sequentially to $2.6 million, while gross profit increased 35% year-over-year and 17% sequentially to $1.9 million. Notably, DBG remained profitable on a standalone basis within DRTC. Total DRTC revenue included revenue from services provided to the bank's digital banking operations, as well as revenue generated by DBG, increased 17% sequentially and 50% year-over-year to $2.1 million, with a positive net income of $433,000 compared to a net loss of just over half a million in Q1 of this year and a net loss of $472,000 in Q2 of last year. due to this year's benefit from the recognition of a $530,000 deferred tax asset associated with DRTC's non-capital loss carry-fors, which are anticipated to be applied to future taxable earnings. With that, I'd now like to turn the call back to David for some closing remarks.