VersaBank

Good morning, ladies and gentlemen, and welcome to VersaBank's second quarter fiscal 2024 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the second quarter ended April 30, 2024. That 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 as well as on 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're listening to the webcast but wish to ask questions in the Q&A session following Mr. Taylor's presentation, please dial in into the conference line. The details of which are included 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 by 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 Bursa Bank management. Actual results could differ materially from our expectations due to various material risks and uncertainties associated with Bursa Bank's businesses. Please refer to Bursa Bank'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 Bursa Bank. Please go ahead, Mr. Taylor.

Good morning, everyone, and thank you for joining us for today's call. With me today is our Chief Financial Officer, John Asmus. 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 the Standard Investor presentation, which will be updated and available on our website shortly. Now on to the highlights. At risk of starting to sound repetitive on the calls, the second quarter results once again showed the operating leverage and our highly efficient branchless business-to-business digital banking model as our loan portfolio continues to grow. 18% year-over-year growth in total assets generated 15% year-over-year growth in net income. And that, combined with a continued focus on management of our fixed costs, drove both a year-over-year and sequential improvement in the digital banking efficiency ratio to a record new 38%, and a 2% year-over-year increase in average return on common equity to 12.4%. Notably, Q2 was a solid quarter for our point-of-sale receivable purchase program business, which expanded by a healthy 1% sequentially, as HVAC home improvement sector, which continues to make up the largest component of our point of sale portfolio, continues to see robust consumer activity. That contributed to another record high for total assets of $4.4 billion, another meaningful step towards our next milestone of $5 billion. And the continued outsized positive impact on our efficiency our profitability and our return on equity. Quarters one and two combined for a strong first half of 2024 with a year-over-year growth in net income and EPS of 25% and 29% respectively. Looking more closely at our Q2 numbers, I will note here that the second quarter is historically the softest quarter for the bank. This is something that hasn't been readily apparent in the last few years due to hyper growth in our point of sale portfolio. Due to the nature of the types of purchases our point of sale partners are financing, we historically see lower activity during the winter months. A milder than normal winter here in Canada, and in particular our most populous market in Ontario, further dampened the number of winter related purchases. And in our cybersecurity service business, Q2 reflects the start of a fiscal year for many of its clients, in contrast to Q1, which, due to the bank's fiscal year end being October, historically benefits from calendar year-end spending by our customers. As was the case in Q1, Q2 also reflected our planned strategy to transition a component of our real estate portfolio from higher-yielding, higher-risk-weighted loans to lower yielding, lower risk weighted CMHC insured loans. As we ramp up these activities, you will see the percentage of CMHC loans increase quarter over quarter. There will be a little more on this later. We are also seeing what appears to be some softness in the macro point of sale financing market due to elevated interest rate environment and softness in certain parts of the economy. This is the result of a combination of slower growth and the rich nation by our partners, as well as higher than typical level of early repayments by our consumers. I'll provide more color on what remains a very positive outlook for our point of sale business in a few minutes. The second item I want to call out in Q2 is net interest margin, which to a large degree reflects the success of our focus on growing point of sale financing portfolio that portfolio is lower risk weighted has lower yielding loans than our real estate portfolio over the past 24 months the proportion of our point of sale financing portfolio has expanded from 66 to now 78 percent that said q2 net interest margins are below our near-term expectations on the lending side we believe these There is still some room for expansion in our Canadian point-of-sale business. And the deposit side, we expect higher than normal broker spreads in our wealth management deposits to moderate. While we expect to benefit from continued expansion of our lower cost insolvency deposit portfolio. The third item of note is that despite the very strong year-over-year growth in net income and EPS, Q2 profitability was dampened slightly by a number of transitory items that masked the underlying performance of your digital banking operations. A significant component of the 7% sequential decrease in net income reflects higher provisions for taxes and a modest increase in non-interest expenses, primarily due to lower than typical expenses in the first quarter of fiscal 2024 at DRT cyber. When we strip away this noise, pre-tax profitability for our digital bank operations was actually up sequentially. And notably, non-interest expenses in our digital banking operation was down 6% year over year and down 4% sequentially. I'd now like to turn the call over to John to review our financial results in detail. John?

Thanks, David. Before I begin, I will remind you that our full financial statements and MD&A for the second quarter and first half of the 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 second quarter of fiscal 2024 grew 18% year-over-year and 2% sequentially to a new high of $4.4 billion. As David noted earlier, Q2 is historically the slowest quarter for growth due to seasonality on both the digital banking operations and cybersecurity services businesses. While we continue to experience some temporary dampening of our results due to our strategy to transition a portion of the real estate portfolio to CMHC insured mortgages, which will contribute to higher return on common equity. Cash and securities were $303 million or 7% of total assets. Consistent at 7%, in Q2 of last year and up slightly from 6% in Q1 of this year. Book value per share increased to a new high of $14.88. Our CET1 ratio increased to 11.63%, and our leverage ratio was 8.55%, both remaining above our internal targets. Turning to the income statement, total consolidated revenue increased 7% year over year, but decreased 1% sequentially to $28.5 million. The year over year increase was driven primarily by higher net interest income as our digital banking loan portfolio continues to grow, while sequential decrease was mainly due to seasonality, as well as the temporary dampening of revenue, excuse me, due to transition of a portion of the real estate portfolio to CMHC-insured loans. Consolidated net non-interest expenses were $12.2 million down from $12.7 million last year and up slightly from $12 million for Q1 of this year, as management continues to focus on managing the fixed expenses line across the business. Consolidated net income for Q2 increased 15% year-over-year to $11.8 million and decreased 12% sequentially. As David mentioned, notwithstanding this healthy year-over-year growth, Q2 profitability was slightly dampened by a number of transitory items that masked positive sequential growth in the pre-tax profitability for our digital banking operations. Consolidated earnings per share increased 18% year over year to $0.45, benefiting from a lower number of shares outstanding due to the buyback program we had in place during fiscal 2023. The loan growth grew to just over $4 billion at the end of Q2, driven once again by our point-of-sale receivable purchase program, which increased 23% year over year and 1% sequentially to 3.1 billion. Our point of sale portfolio represents 78% of our total loan portfolio at the end of Q2, up slightly from the end of Q1. Our real estate portfolio expanded 1% year over year and was flat sequentially at 828 million as we transitioned to CMHC insured loans. As a reminder, our real estate portfolio is primarily mortgages and construction loans for real estate properties. We have very little exposure to commercial use properties. Turning to the income statement for digital banking operations, net interest margins on loans, that is, excluding cash from securities, was 2.52%. That was 47 basis points or 16% lower on a year-over-year basis and 11 basis points or 4% sequentially. Net interest margin overall, including the impact of cash, securities, and other assets, decreased 33 basis points year-over-year or 12% and decreased 3 basis points or 1% sequentially to 2.45%. As David discussed, Q2 net interest margin reflects the strong growth of the POS financing portfolio, which is comprised of low risk weighted, lower yielding, but higher ROCE assets than commercial real estate, as well as the transitory impact of the transition of the real estate loans to higher return opportunities. Cost of funds for Q2 was 4.21%, up 94 basis points year over year and up 22 basis points sequentially. Cost of funds was again somewhat elevated in Q2 due to the raised rates for term deposits. We continue to expect to increasingly benefit from the continued expansion of our insolvency professional deposits. as policy activity in Canada continues to steadily increase. Our provisions for credit losses, or PCLs, in Q2 remain negligible at 0% of average loans compared to 0.03 last year and with a 12-quarter average of 0.01%. I'll now briefly turn to DRTC. On a standalone basis, digital boundaries group Q2 revenue increased 8% year-over-year to $2.8 million, and gross profit increased 5% to $2 million, both due to higher service engagements. Sequentially, both were down, reflecting the seasonality in the business, as our fiscal Q2 coincides with the start of many customers' fiscal years. during which they are often planning and ramping stages of their budgets, projects, and deliverables. DBG remained profitable within DRTC. DRTC's net loss of $162,000 in Q2 of this year compares with a net income of $433,000 last year, with the difference mainly due to higher expenses and higher people costs to support past and expected expansions in business activity. The decrease from net income of $435,000 in Q1 of this year was primarily due to some positive compensation adjustments in the comparable quarter. I'd like to turn the call back to David for some closing remarks. David.