VersaBank

Q2 2021 Earnings Conference Call

5/27/2021

spk00: Good morning, ladies and gentlemen. Welcome to VersaBank's second quarter fiscal 2021 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the second quarter and year-to-date in April 30th, 2021. That news release, along with the bank's financial statements and supplemental financial information, are available on the bank's website, in the Investors Relations section, as well as on CDAR. Please note that in addition to the telephone dialing, VersaBank is webcasting its earnings conference call live over the internet. The webcast is listen only. If you are listening to the webcast but wish to ask a question in the question and answer session following Mr. Taylor's presentation, please dial into the conference line. The details of which are included in this morning's news release 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 advisor 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.
spk04: Good morning, everyone, and thank you for joining us for today's call. With me on today's call are Sean Clark, our Chief Financial Officer, Brent Hodge, General Counsel, and Corporate Secretary. The second quarter saw the continuation of the momentum in our digital banking operations, highlighted by increases in all key metrics on a year-over-year basis and substantially on all key metrics on a sequential basis. Our core digital banking operations once again delivered a number of record results. Most importantly, the highest net income in our history when we exclude the one-time non-cash accounting related to a gain generated by the amalgamation in Q1 2017. It was also a quarter that saw a number of important operational achievements that even further strengthened our prospects for the future. I'll speak to these in a moment. And I do want to note here that even having reached new peaks across many of these key metrics, our performance was dampened by several factors. First, we still have cash balances that are higher than our historical norms, as our cash balance at the end of April, not including the proceeds of the subordinate note offering completed on the last day of the quarter, was approximately 40% higher than the average cash balance for the six months leading up to the pandemic, resulting from our very cautious stance at the start of the pandemic, as I've discussed on past calls. Second, origination in both our point of sale and commercial banking lending businesses was impacted by the lockdowns across the country throughout much of the quarter due to the pandemic. also marked the first quarter of financial contribution from Digital Boundary Group, the leading North American cybersecurity penetration testing operation that we acquired via our wholly owned subsidiary, Washington, D.C.-based DRT Cyber, in November. More on this in a few minutes. The combination of our steady redeployment of cash and high market demand for financing in certain sectors of the economy were driving another quarter of solid loan growth, even amidst the pandemic headwinds that I mentioned a moment ago, as we continue to lower our cost of funds to an all-time low. Net interest income increased 4% year-over-year and 5% sequentially to $15.1 million, including the non-interest income contributed by Digital Boundary Group, total revenue increased 10% year-on-year and 4% sequentially to a record $16 million. Cost of funds decreased by 47 basis points year-over-year and 14 basis points sequentially to a record low of 1.28%. Net interest margin increased sequentially to 2.96%, although it was lower year on year due to the still elevated cash balances, which attract a lower yield than our lending assets. After historic cash balances, net interest margin would have been approximately 10 to 15 basis points higher to 3.05 or 3.1%. Net income increased 12% year-on-year, 9% sequentially to $5.7 million, or $0.25 per share. And your record, when we exclude the one-time non-cash gain resulting from the recognition of a deferred tax asset on the amalgamation in Q1 2017 of the bank and its former parent, PwC Capital. And finally, core cash earnings increased 12% year-on-year, and 9% sequentially to $7.9 million, or $0.38 per share, also a record. Turning to the balance sheet, you can see the continued growth in our total assets, which reached just over $2.1 billion at the end of the quarter, up 9% from the end of Q2 last year, and up 5% from the end of the first quarter. Our cash balance, including liquid securities, at the end of Q2 was $272 million. However, normalizing for the recent private placement of $75 million in subordinate notes payable and redemption of our Series 3 preferred shares, which combined results in net proceeds of approximately $73 million Canadian dollars. Our cash balance would have been closer to $200 million Canadian dollars. down from $212 million at the end of the first quarter as we continued to redeploy cash into higher-yielding assets. As a reminder, our cash position peaked at more than $400 million in Q3 of 2020 during the height of our cautionary pandemic stance. The $272 million at the end of Q2 equates to 13% of total assets, still much higher than our typical cash levels in the range of 6% to 7%. You'll recall that previously we had expected to return to our historical liquidity levels mid-year, but with the capital raise and the deployment of those funds to come, we now anticipate returning to normal cash levels towards the end of this year. In regards to subordinate notes payable on April 30th, 2021, We completed a private placement of U.S. institutional investors of MVCC-compliant fixed floating rate subordinate notes payable, and the principal amount of $75 million U.S., or the equivalent Canadian amount of $92 million as of April 30, 2021. Importantly, this is a non-diluted growth capital that we issued on favorable terms. we were not only able to take advantage of the extremely low market interest rates, but also leverage our favorable debt and issuer rating of A- and A-rating, respectively assigned by a U.S. rating agency, Eden Jones. We were also pleased by the strong level of interest from U.S. institutional investors. The demand pushed our initial debt offering from $50 million to $75 million U.S. dollars. evidenced by the strong level of interest in U.S. investors in both the digital banking space and VersaBank in particular as the leader in this section. Finally, on the balance sheet, book value per share increased 7% year over year and 2% sequentially to $11.06. And our CET1 was essentially unchanged from the end of Q1 At 12.52%, our leverage ratio declined to 9% year-on-year and 8% sequentially to 10.46%, the result of the redemption of our preferred shares and our higher loan balances. The credit quality of our loan portfolio remains very strong, as the low-risk nature of our model once again proved itself. For Q2, we recorded a recovery of credit loss provisions in the amounts of $312,000, following a provision for credit losses in the amounts of just $57,000 in Q1. As a result, the bank's PCL ratio for Q2 was negative 0.07% compared to a PCL ratio of 0.01% in Q1, and we continue to have no loans subject to deferrals and no loans in arrears. As I noted earlier, we saw yet another sequential decline in our cost of funds to yet another record low of 1.28%. As a reminder, this number is down from 1.88% in Q1 of 2020 and has been driven primarily by the continued expansion of our insolvency professional deposits, which currently pay 0% interest. The bulk of this growth has been driven by the onboarding of deposits from new customers we have acquired over the last year as we continue to extend our reach into the insolvency professional firms attracted to our high-value service offering. So while we expect to see continued growth from our existing customers going forward, it is more likely to be driven by the anticipated increase in bankruptcies as government support payments are eventually curtailed. Our total loan portfolio increased 8% sequentially to a record high of $1.83 billion. Last quarter, I described that the bank was experiencing the highest loan growth in its history. Although we continue to experience overall sequential growth, as I mentioned earlier, new loan origination was impacted by the pandemic-related restrictions which temporarily affected both our commercial real estate lending and points of sale business, especially real estate lending, which contracted 3% sequentially, although it would fill up 25% on a year-on-year basis, primarily as a result of the strong momentum prior to the reinstated pandemic restrictions, especially in Ontario. In addition to the pandemic impact, The small decline in Q1 was attributable to the deferral of two large commercial mortgages into Q3, and atypically large repayments that got into Q2. Point of sale increased 6% sequentially and was up 10% year on year. With a very strong Q1, loan growth for the first half of the year is up 11%, And we expect both portfolios to return to their healthy growth trajectories as the country reopens, permitting pre-lockdown levels of construction to resume. And the point-of-sale business benefits from both pent-up demand and summer season. And we remain confident in our loan growth potential this year. Although it now appears that we'll be more equally weighted among the front and back halves of the year, with potential additional upside in the back half. Another important development during Q2 was the receipt of investment grade credit rating from Egan Jones Rating Company, a U.S. nationally recognized statistical rating organization and U.S. National Association of Insurance Commissioners recognized credit rating provider. The bank received an issuer rating of A overall and A minus rating on the 75 million US dollars supported notes issued. I will note here that our A issuer rating is comparable to that of several of the big six Canadian Schedule I banks. And we believe an external affirmation of the low risk nature of our digital banking model. The importance of these ratings cannot be underestimated. They significantly expand our universe of depositors, most importantly with US-based financial institutions, and open up a new low-risk lending channel, providing the opportunity to further accelerate our growth by means that were not previously available to us. In addition, as we discussed earlier, our investment-grade rating for sub-debt provides us with new option or significantly lower-cost, non-dilutive, tax-efficient capital that was previously not available to us to fuel our growth. Moreover, these new ratings are especially valuable as we explore the potential to launch our innovative digital banking services in new geographic markets beyond Canada, where we see significant unmet needs similar to those that have driven the bank's strong growth and steady growth. Yes, another highlight during the quarter was our announcement in February of our intention to launch a new highly encrypted digital deposit offering, VCAT. It is not only a natural evolution of our secure digital deposit taking business, which we have been doing right throughout our history as the first digital financial institution, but more broadly, it's a natural evolution of banking industry Once again, we are at the leading edge of the banking revolution. We strongly believe that as a Schedule 1 chartered Canadian bank, it is incumbent upon us to provide the absolute highest level of security to our customers, and DCAD does this at an entirely new level with blockchain technology. In fact, our mission when we received our Schedule 1 license, and still is today, to maximize the value of our common shares and total return to our shareholders by providing innovative financial solutions to our clients. There is no better example of this than VCAD. Each VCAD unit will represent one Canadian dollar on deposit with VersaBank and can be redeemed at any time with absolute certainty around the value and ability to consummate the transaction. Because of its ease of transferability, VCAD could potentially be used as a digital currency with the highest level of stability and security amongst digital currencies available today. VCAD combines all the efficiency, audibility, and technical security of encrypted digital assets without the associated volatility and risk. And we believe VersaBank's investment-grade issuer rating will make this a very attractive offering globally. Importantly for the bank, as a deposit offering, VCAD represents a significant potential additional source of very low-cost deposits, providing the opportunity to even further reduce our already ultra-low-cost funds. We are moving steadily through the testing and plan to launch BCAD later this summer. As our core digital banking operation delivered record results, the second quarter saw first full quarter of contribution from Digital Boundary Group, which we acquired last November through DRT Cyber. DBG has delivered more than 60% year-over-year growth in net income for the five-month period since its acquisition in November 2020, despite coming through their typically slower period seasonally, given that there is a certain amount of testing that involves outdoor work and on-site work. We have also seen some deferral in engagements later in the year due to pandemic lockdown in many parts of Canada. We are now nearly six months with DBG as part of our cybersecurity business and are making steady progress in our strategy to capitalize on the significant business development opportunities from the combined teams as both business and government grapple with the increasing number of high-consequence cyberattacks that can be defended through regular penetration testing. During the quarter, DRT Cyber released new email privacy compliance platform, which we call Raven, as an external beta to a select group of customers prior to full market release. Raven is the first and only fully automated and integrated solution that provides complete compliance with all major global anti-spam legislation. Raven is an important component of DRT Cyber's business strategy adding a privacy solution to its broader suite of cybersecurity solutions to be able to address this critical aspect of every organization's cybersecurity needs and provide governments and corporate organizations with a comprehensive suite of effective cybersecurity solutions. At the macro level, we have all just recently witnessed cybersecurity breach yet again in the United States, maybe globally with the hacking of Colonial Pipeline, which shut down the pipeline and very quickly resulted in gas shortages throughout eastern states. It is a stark reminder of how vulnerable many of our most important IT systems are and that no one is immune to such attacks in the absence of proper security. Those behind such attacks undertake them because they can, but they are preventable. DBG provides corporate and government clients with a suite of IT security assurance services and is one of the leading penetration testers. Very simply, they find the vulnerabilities in the IT system so that an organization can address them to prevent these types of breaches. In fact, a core component of DBG's client list are infrastructure assets, which include those of one of the U.S. preeminent investors. To conclude, our second quarter results were once again reflective of the earnings power and significant growth potential of our digital banking strategy, addressing unmet needs in banking through innovative solutions based on proprietary software platform through a highly efficient partner-based model. With the additional capital raised through the subordinate note offering in April, Opportunities to continue to lower our cost of funds, our point of sale, and commercial lending business poised to benefit from relaxation of pandemic-related restrictions and the launch of our instant mortgage offering on the horizon, our strong performance in the first half of 2021 positions VersaBank for an even better second half and a return to our track record of strong year-over-year growth in annual profitability. And with that, we'd like to open up the call to questions.
spk00: Operator? Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have any questions, please press star followed by one on your touchtone phone. You will hear a three-tone brown acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift your hands up before pressing any keys. One moment for your first question. Your first question comes from Shihan Chunky with Syphil. Shihan, please go ahead.
spk02: Oh, hey, everyone. Good morning. Congratulations on a pretty solid quarter. Maybe just with respect to your cash balance, lots of different growth opportunities. It sounds like organic and inorganic. Could you just talk about your capital deployment priorities after the sub-debt raise in the U.S.? Maybe if we can start with that.
spk04: Well, thanks, John. Yes, cash balances are... are high, much higher than historic levels. And we expect that we will be able to deploy some of that excess cash into the U.S. market. We are pursuing some new relationships in the U.S. market presently. And as a natural hedge to the $75 million that we have on deposit with a major bank, it would be nice to fund U.S. dollar receivables. So, yeah, we're looking into the states for opportunities to grow. And in Canada, there's a little bit of a damping effect of the recent lockdowns in Ontario, both in the real estate financing and the point of sale. Although traditionally, some are point of sale rebounds as folks are out buying cars and fixing up their homes. And I expect the real estate will rebound also.
spk02: Thanks for that, Dave. Maybe just as a follow-up, let's talk about expanding into the U.S. It sounds like initially purchasing some U.S.-based receivables. How do you guys think about M&A opportunities in the U.S. Does JetRace position you for that, or is that maybe something a little bit further down the line? How should we think about that?
spk04: Well, eventually, I hope that our business extends to the point in the U.S. that an acquisition of a federally licensed bank would be appropriate. But it's probably somewhat down the road. It certainly days in the expansion south of the border.
spk02: Gotcha, thanks. Maybe just on growth, loan growth, appreciating that, you know, the last couple of months, Ontario lockdown dampening on construction activity. Despite that, you're still able to put up a pretty solid order of results and loan growth. How do you think about, you know, the potential for loan growth in the back half of the year versus the first half of the year? order of magnitude, any help you can give us with targeting that would be helpful.
spk04: Yeah, I expect the second half to exceed the first half by quite a margin. All the positive things are seasonality, the summer is better for construction, it's better for home purchasing, better for improvements. So the summer in itself, and then hopefully the impact of the most recent lockdown in Ontario is over. So the second half should be a good bit better than the first half.
spk02: Okay. And then maybe just an update on instant mortgage. You said where you want in the summertime here. Anything you can tell us about how many partnerships you have on the funding side for that, and any kind of additional information that you can provide that would be helpful as well, just on how the rollout's going and that kind of stuff.
spk04: At this point, we only have a few partners, and we've been working with a mortgage servicing company to finish up the electronic connection. I'd look for instant mortgage to go live probably in about three weeks to a month and then that of course opens up for us an entirely new channel of low risk weighted mortgages that up until the launch of instant mortgage we haven't had access to. We don't utilize retail mortgage brokers So this is a new way to go directly after that business through the point-of-sale partners.
spk02: Okay, and then just one last one from me, if I could. Maybe just an update on the VCAD rollout. Sounds like that's progressing nicely. As well, anything on the partnership side, any updates on the regulatory side, just any more color on what the potential could be there and how you guys are positioning yourselves. That would be great.
spk04: Well, the internal testing is going very well with ECAD. We'll probably be able to complete that in the next 45 days or so. With respect to the regulatory regime that we operate in, I think our mission statement is that we got our bank charter to provide innovative financial solutions. And that in itself attracts a lot of regulatory attention, as it should. So we're working with our regulators, fielding their questions. But in the final analysis, We've been taking digital deposits since we started the financial institution in 1993. VCAT just represents an enhancement to those digital deposit receipts in that it employs blockchain technology, which, of course, is highly encrypted and takes the level of security, I think, to a much higher, better level. So in itself, just on those aspects, VCAT is, I think, a significant improvement over how FIs are receiving their data now. But it comes with the added advantage that it enables the deposit receipt to be easily transferable. And that aspect, of course, likely means that VCAT can be used as a payment vehicle. And from a bank's perspective, if you have a deposit that has another feature to it, you can probably get away with paying less interest, and it'll probably be a lot more sticky vis-a-vis, say, the traditional high rate daily interest savings account, which is generally people just deposit with the bank to get the high rate of interest. VCAD has another utility to it that which will likely make it more attractive. So testing-wise, it's going very well, and we are continuing to work with the various regulators on answering their questions. As we do over the years, every time we come up with something innovative and new, it creates all kinds of curiosities.
spk02: Appreciate the color of their day. I'll pass it on from here. Thanks very much, and great job on a good quarter, guys. Well, thank you, Tim.
spk00: Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star 1. We have a following question from Greg McDonald with Lauderdale Research. Greg, please go ahead.
spk01: Thank you. And good morning, guys. Congrats on the quarter. David, I'm curious, just a bit of a follow-on question on the VCAD product. You do a good job describing this as, in fact, being a digital deposit, and clearly there are going to be some – there's going to be some interest from the regulators. Could you define in some way where you are, you think, with the relationship with the regulator on this product itself? Are you kind of in the middle of the regulator wrapping its head around slash – feeling comfortable with it? Are you closer to the end? Maybe just give us a sense of what that sort of regulatory, I don't want to call it risk, but relationship is in terms of their ability to get comfortable with it.
spk04: Greg, I'd say we're in the middle. It is, in one respect, as I was saying earlier, it's almost the same as the digital deposits that we've raised since 1993. That was That was a revolutionary change in the industry when we started employing telephone modems and digital transfer of data. But that now is the standard in the industry. All small SIs use a CANX system to receive their deposit information digitally. So VCAT, in that respect, looks just like the digital deposit receipts we presently have. except the data feed would come through the blockchain and be highly encrypted. And we think a step better than the existing systems. The fact that it will be easily transferable because it is still by the blockchain, it causes regulators to think about it a lot. Although, I think we've been fielding a lot of questions and which is normal for us. As I was saying earlier, we got our charter to provide innovative solutions to the financial industry. The government in Canada wants consumers to have choice and wants to encourage innovation in our sector. So, you know, we're happy to as we have done in the past with every other product we've come out with. I'm happy to field the questions, and hopefully the regulators understand that this is a step better than the existing system. And that is another first for Canada in the banking industry. Good for our bank being first mover advantage, and good for Canada to... you have to come up with another innovative product.
spk01: Great. And on the commercial side, I mean, the question was asked earlier, but maybe there's some more comments to be made, maybe without getting into specifics, but early interest from corporate Canada or corporate America on the commercial opportunity for a product like this. I have to think, that a lot of companies are looking at the volatility in Bitcoin and really kind of questioning the potential to be using that medium for payment or any other commercial application. What kind of interest are you getting from corporate Canada on this and maybe give us a sense of that?
spk04: Well, we're getting a lot of interest from the biggest companies in the world. I think that, as seen as it is, kind of a breakthrough in digital currencies. And it's the first digital currency that would carry an A rating, for one thing. It's the first digital currency that is issued by a highly regulated bank. And rather than being tethered to an asset to create stability, it actually is the asset. It actually represents a deposit for the bank. So I think it's a huge breakthrough in virtual currencies. And I think it'll be an ideal payment vehicle. And that has been recognized almost instantly by payment people in the world since we announced that this makes all the other tethered currencies and digital currencies somewhat obsolete.
spk01: Okay, that's helpful. And then the last question I have is just on DRT. You mentioned the Colonial Pipeline hack. Clearly, security overall remains front and center in headlines. That's got to be front and center with corporations out there. Launched a new privacy product. That's an important product in terms of major themes these days. Where do we stand on the suite of products overall for DRT? And just maybe a general update on that, something that would be helpful. Thanks.
spk04: Well... DRT has developed a lot of in-house products, one being Raven that we just spoke about. We're still in the integration with DBG and stage where we're not quite ready yet to go hard at the market with the new products, but we have been introducing Other products were developed to DBG's customers and to other entities in the United States, particularly in the United States and some in Canada. So it's still early days with the full integration of DRTC with DBG. But we think the market is demanding a kind of state-of-the-art technology cybersecurity that DRT has to offer.
spk01: And then just context on growth, I mean, that business is still growing independently, these two, as you're integrating, are still growing at double-digit rates. Any reason to think that that outlook is changing in any way?
spk04: It should grow faster than that. DBG, based on its financial statements from the same period last year, it's up about 60% this year. And this is going into its growth season in that a lot of the penetration testing is actually done physically and has been deferred somewhat by the lockdown and also by the winter. So 60% growth is what it's doing now, but it should be way, way more than that.
spk01: Okay, thanks. I'll leave the rest of the questions for others. Thanks, David.
spk05: Thank you.
spk01: Thanks, Roy.
spk00: Thank you. Your next question comes from Trevor Reynolds with Acumen Capital. Trevor, please go ahead.
spk03: Hey, guys. Just wondering if you can touch a little further on the expansion opportunities that you're seeing in the U.S. and whether it's a risk having that U.S. currency right now, given where rates have gone.
spk04: Yeah, Trevor, good question. I think everybody knows, having a look at our model over the years, we're somewhat risk-averse and don't like taking... any additional risks, particularly currency risks. So the entire proceeds of the U.S. dollar raise is sitting in U.S. dollars in a Canadian bank account. So we're naturally hedged from that respect. We're hoping that we can deploy at least that amount fairly soon into U.S. dollar receivables, again, naturally hedging, but affording us a much higher yield than we're presently getting as a cash deposit. We think there's a huge opportunity in the United States for our point-of-sale program, but it's early days. We're working on a couple of beachhead transactions presently, and thereafter we'll look to expand our product offering in a few states that are seem close by and easy to access.
spk03: Perfect. And then can you touch a little bit more just on that your cash position and you did kind of mention that you expect to be at normalized levels at the end of the year. Is that just maybe how you expect that to trend down over the next quarter or two? Well,
spk04: As the loans grow, point of sale loans and real estate loans, we'll be funding out cash and just letting the cash balances wind down. It was a bit of an anomaly at the end of the quarter in that we closed the support and debt offering on the last day. That bumps it up by about $92 million Canadian. And there was a few large commercial mortgages that we were thinking would be funded towards the end of the quarter, but have been deferred into the third quarter. So we would hold onto cash to fund those large mortgages, and they were deferred. So it's kind of a little bit of an anomaly at the end of the Q2. So with loan growth, we'll just let the cash balances reduce. Historic level, 6%, 7%, so almost half of what we have today.
spk03: Good. And have those two large mortgages gone through now or no?
spk04: No, I don't think so. I think one might have, and I think the other one's due to go. Pandemic things slow those types of things down, too. The other thing about pandemics is they speed up new home purchases. Folks are leaving major centers and they're kind of keen to buy residences on the outskirts of major centers. So we're seeing more rapid pay downs, which is good from a banker's perspective. We see our loans rolling over more rapidly than they would normally. Those folks are keen. When a condo is ready to be purchased, it is purchased. And then the pandemic itself slows down some of the process and funding logs. But hopefully most of that's behind us now in North America. Hopefully we can get to normal business. Oh, in all, I see the second half to be a better half than the first half, which first half was 11% growth. So second half should be better.
spk03: Perfect. And then just one more just on the insolvency market and kind of what you're, are you starting to see that pick up at all? Or do we really need to get to the end of the pandemic before that has, you know, start to see that really have an impact?
spk04: Well, no, we're not seeing any increase in insolvencies. It's still, I think, a 10-year low for insolvencies. But the balances are still growing in that the firms that adopted our software package are still transitioning their accounts over to us. So the balances in our insolvency portfolio of deposits is still going straight up in a straight line, which is very nice, but I expect it to swing up when the support payments finally are ended in that, unfortunately, there's a lot of businesses and people have been living on the edge that support payments have kept them out of insolvency.
spk03: Great. That answers my questions. I'll hand the line back. Thank you. Thanks, Jordan.
spk00: Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star 1. It appears we have a following question from Shihan Chunky with CIFOL. Shihan, please go ahead.
spk02: Yeah, guys, thanks. Just a couple of quick modeling related questions, if you don't mind. With respect to all the different initiatives you have going on, just wondering what we should expect for that efficiency ratio line relative to the back half of the year versus the first half of the year. Any color you can give us on that front would be helpful as well.
spk04: The efficiency ratio should improve in the second half in that the digital boundary group is moving into its most profitable part of the year and provides a fair amount of revenue. The other with the net interest income from the loan growth will help too, and there isn't much in terms of fixed cost increase. The back half, the efficiency ratio should drop below $0.50. I think April 30th's number was $0.48. Ideally, with a low growth, it should keep on going down to around $0.30, but that will take a number of years.
spk02: Thanks, Dave. And then just another one with respect to reserving. Looks like there was a release this quarter consistent with basically any bank in North America. How should we think about potential reserve releases going forward? I know that you've generally been, from a reserving perspective, it's never been a very large line item, but how can we, should we expect any more variabilities In that line as well, going forward?
spk04: Well, probably a little bit more to go. Our portfolio, of course, stands up very well, with no deferrals and no loans, even in arrears at the end of the quarter. It doesn't, generally speaking, attract very large reserves, so there's probably a little bit more to go. But as you say, in our case, reserves are a very small number to start with, the way we're structured. So they're not big numbers, but there's probably a little more to go.
spk02: Appreciate that. And just one last question, again, a modeling perspective on your funding costs, excluding the impact of the sub-debt issue in the U.S., How can we think about that going forward as well? I think it was around interest on deposits was average about just over 1.5% cost of funds. Is that potentially going lower for the back half of the year? Any color you can give us on that would be helpful too.
spk04: Well, excluding the impact of the subordinate debt, which is about a 20 basis point increase, it should keep going down. Overall, the quarter was 1.28%, and the insolvency deposits are still building nicely, and there could be that they'll spike when CERB payments and such come to an end. So you can still look forward to a decrease in our cost funds, excluding the 20 basis point impact of the sub-debt.
spk02: Thanks very much. That's it for me.
spk04: Alrighty. Well, Chad, thank you very much for those questions. And are there any more questions?
spk00: There are no further questions at this time. Mr. Taylor, you may proceed.
spk04: Alrighty. Well, I'd like to thank everybody for joining us today. And I look forward to speaking to you at the time of our next quarterly call. If you have any questions, Any questions that come to mind later on, don't hesitate to send me an email. I would be happy to fill the questions. Thank you very much for your interest. Have a good day.
spk00: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.
Disclaimer

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Q2VB 2021

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