VersaBank

Good morning, ladies and gentlemen. Welcome to VersaBank's fourth quarter and year-end fiscal 2023 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, 2023. The news release, along with the bank's financial statements, MD&A, and supplemental financial information, are available on the bank's website in the Investor Relations section at as well as on the Cedar Plus 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. 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 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 and our standard investor presentation, which will be updated and available on our website shortly. Now for the results. Another record quarter capped off another record year for our bank as we realized the significance and increasing operating leverage in our branchless, business-to-business, partner-based digital banking model with the continued growth in our loan portfolio. 94% year-over-year growth in net income was more than triple that of our healthy 29% growth in our loan portfolio. and that drove an 86% increase in average return on common equity to nearly 14%. Looking more closely at our fourth quarter performance, our results once again show the predictability and momentum of our business. Those of you that have followed VersaBank for some time will have heard me say that the $4 billion mark for total assets was the point in which we begin to see the operating leverage in our digital banking model. That can clearly be seen in Q4 numbers. With total assets crossing $4 billion mark during Q4, ending the quarter and the year at $4.2 billion, we are seeing the outsized positive impact on efficiency, profitability, and our return on equity. Continued steady growth in our loan portfolio due primarily to the continued strength of our point-of-sale receivable purchase program, drove very healthy sequential revenue growth of 9%, which contributed to 20% growth year over year. We achieved this growth while holding non-interest expenses flat. In reality, it was down a bit, which drove our digital banking efficiency ratio to 45% from 51%. As I noted last quarter, this level of efficiency already leads the vast majority of North American banks. Fourth quarter return on common equities saw a big jump up to 13.58%, up 243 basis points sequentially, and 626 basis points year over year. This was Always my vision for a branchless business-to-business partner-based digital bank. Our ability to grow revenue while holding non-interest expenses is the engine that drives and will increasingly continue to drive earnings growth, return on equity, and value for our shareholders. Importantly, we are really just beginning to realize the true efficiencies of our model. Our highlights for fiscal 2023 include year very much mirror those for the fourth quarter. Our digital banking efficiency ratio for 2023 improved to 43% from 55% as we grew revenue by 31% while holding non-interest expenses to just a 1% increase. And that, with the benefit of solid profitable growth from our cybersecurity subsidiary, translated into an 86% increase in net income, and a 99% increase in earnings per share. Return on common equity for the year improved substantially to 11.75% from 6.61%. The vast majority of our 2023 growth was driven by the continued solid performance of our Canadian point of sale receivable purchase program. We continue to expect solid growth for the foreseeable future. We're also seeing continued incremental growth from the limited U.S. launch of our receivable purchase program. We'll fill off a small base. This growth is indicative of the uniqueness and attractiveness of this offering. The real opportunity in the U.S., however, remains the broad national rollout of our solution, what remains an underserved market. It will supercharge our expected growth. We continue to advance the approval process for our proposed acquisition of US-based Stearns Bank Holdingford, which will provide the US license to enable us to undertake this broad rollout. We understand and respect the protracted nature of the process and remain encouraged by our interactions with the regulators to date. Should we receive the approval we are seeking, we know that it would be well worth 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, I will remind you that our full financial statements in MD&A for the fourth quarter and the full year are available on our website under the Investors 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 fourth quarter of fiscal 2023 grew to a new high of just over $4.2 billion. It was up 29% from $3.3 billion at the end of Q4 of last year and up 6% sequentially from $4 billion at the end of Q3 of this year. Cash and securities at the end of Q4 were $230 million, or 7% of total assets, which is unchanged from both Q4 of last year and Q3 of this year. Our total loan portfolio at the end of the fourth quarter expanded to another record balance of $3.85 billion, an increase of 29% year-over-year and 5% sequentially. Book value per share increased 13% year-over-year and 3% sequentially to a record $14. These increases were the result of higher retained earnings, as well as fewer shares outstanding due to our share repurchase program offset partially by dividends paid. Our CET ratio at the end of the quarter was 11.33%, down from 12% at the end of Q4 of last year and up from 11.15% from Q3 of this year. Our leverage ratio is 8.30%, down from 9.84% at the end of Q4 last year and down from 8.53% at the end of Q3 of this year. Both our CET1 and leverage ratios remain well above our internal targets. Turning to the income statements. Total consolidated revenue for the quarter increased 20% year-over-year and 9% sequentially to another record of $29.2 million. The increase was driven primarily by higher net interest income from our digital banking operations, primarily due to the strong growth of our loan portfolio. Consolidated non-interest expense was $12.4 million for the quarter, down from $13.8 million for Q4 of last year and down from $12.9 million for Q3 of this year. The year-over-year decrease was a function of lower salary and benefits expenses, as well as lower costs incurred in the current quarter attributable to the regulatory process associated with the VersaBank's proposed acquisition of a U.S. financial institution. The sequential decrease was due primarily to certain costs specific to Q3 that were not repeated in Q4. Consolidated net income for Q4 increased 94% year-over-year and 25% sequentially to $12.5 million. Consolidated earnings per share for Q4 increased 104% year-over-year and 24% sequentially to another record $0.47, benefiting in part from a lower number of shares outstanding due to our share repurchase program. During the 2023 fiscal year, we purchased and cancelled over 1.3 million common shares, bringing the total number of shares purchased as of the end of fiscal 2023 to just over 1.5 million. Our Q4 profitability contributed to by far the best year in the history of the bank, with fiscal 2023 net income increasing 86% compared to 2022 to $42.2 million, while EPS increased 99% to $1.57. Primary driver of growth in our loan portfolio was once again our point of sale financing business, which increased 30% year over year and 4% sequentially to $2.9 billion. I should note here that the completion of a planned portfolio sale early in the quarter had the effect of reducing quarter over quarter POS financing portfolio growth by approximately 2%. Our point of sale portfolio represented 75% of our total loan portfolio at the end of Q4, down just slightly from Q3 of this year. Our commercial real estate portfolio expanded 24% year-over-year and 10% sequentially to $898 million at the end of Q4. This increase was due primarily to increased loan origination activity and select markets that are aligned with the bank's conservative loan origination strategy in this space. I should note here that our commercial portfolio is 90% composed of loans and mortgages, which are financing residential properties, predominantly multi-unit in nature, and we continue to have very little exposure to commercial use properties. Turn to the income statement for our digital banking operations. Net interest margin on loans, or that is excluding cash and securities, was 2.69%. That was 34 basis points, or 11% lower on a year-over-year basis, but unchanged sequentially. Net interest margin overall, including the impact of cash, securities, and other assets, decreased 27 basis points year-over-year, or 10%, and decreased three basis points, or 1%, sequentially to 2.54%. Q4 net interest margin was again dampened by a spike in market rates for term deposits relative to Government of Canada rates during the quarter. And I will note that despite some volatility in the term deposit rates over the course of the year, net interest margin was essentially in line with that of last year. Non-interest expenses for digital banking for Q4 were $11.4 million, down slightly from $11.5 million for Q4 last year and up from $10.8 million for Q3 of this year. The sequential increase was a function primarily of higher fees related to intercompany technology and cybersecurity services, which were disproportionately high in Q4 and are expected to return to normalized levels in Q1 of fiscal 2024. Cost of funds for Q4 is 3.86%, up 141 basis points year-over-year and up 24 basis points sequentially. The bulk of the year-over-year increase is a result of the higher interest rate environment, although the increase in our cost of funds since the Bank of Canada began increasing its benchmark rate at the beginning of fiscal 2021 remains significantly below the policy rate increase of 475 basis points. Cost of funds was somewhat elevated in Q4 due to the spike in market rates for term deposits, as previously discussed. Our provision for credit losses, or PCLs, in Q4 remained very low at just 0.02% of average loans, compared with a 12-quarter average of 0.00%. Turning now to DRTC, as a reminder, beginning in Q1 this year, revenue for DRTC includes income from digital banking operations associated with the delivery of various technology development services in addition to the contribution from our cybersecurity services business, Digital Boundary Group, or DBG. Let me start with DBG's standalone results. DBG's revenue for Q4 increased 21% year-over-year and 46% sequenced to $3.4 million, driven by continued growth in service engagements. Gross profit increased 50% year-over-year and 45% sequentially to $2.6 million as DBG continues to realize efficiencies in the business. DBG remained profitable on a standalone basis within DRTC. Total DRTC revenue, including revenue derived from services provided to digital banking operations, increased 108% year-over-year and 83% sequentially to $3.7 million. DRTC's net income of $1.2 million was an improvement over a net loss $486,000 a year ago and a net loss of $99,000 in Q3 of this year. With that, I would now like to turn the call back to David for some closing remarks. David?