Good morning, ladies and gentlemen. Welcome to VersaBank's Second Quarter 2022 Financial Results Conference Call. This morning VersaBank issued a news release reporting its financial results for the second quarter and year-to-date ended April 30, 2022. That news release, along with the Bank's financial statements and supplement financial information are available on the Bank's website in the Investor Relations section, as well as on SEDAR and EDGAR. Please note that in addition to the telephone dial-in, VersaBank is webcasting the 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 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's management. Actual results could differ materially from our expectations due to various material risk and uncertainties associated with VersaBank's business. Please refer to VersaBank's forward-looking statements 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.

Thank you, Michelle. Good morning, everyone. And thank you for joining us today's call. With me is Shawn Clarke, our Chief Financial Officer. For those who have been following VersaBank for a number of quarters or more will know that some small, but we think important adjustments to the way we are describing our business and our quarterly results. First off, we are more definitively referring to our Digital Banking operations when describing our deposit and lending business, and to DRTC when describing our cybersecurity services as well as certain banking and financial technology development. Further, we have begun breaking out our non-interest expense into its component Digital Banking and DRTC parts to provide a more fulsome view of each operational segment. We believe this better serves our shareholders and prospective investors, providing a clearer picture of the individual performance of each of our Digital Banking and DRTC operations and enabling better comparison to our peers in each sector. Within our Digital Banking operations, we are presenting net interest margin based on total assets that is including cash and other assets as we have done historically and is the convention with publicly traded banks in Canada. However, we are also presenting net interest margin with cash and other assets excluded as per the practice of U.S. Banks. In addition, we are now reporting our efficiency ratio for only our Digital Banking operations, which excludes the impact of DRTC. Again, we believe these adjustments will enable the investment community to better compare our results to those of our peers, including our U.S. peers. And finally, a quick reminder here that we report our financial results in Canadian dollars and all amounts in today's call will be in Canadian dollars unless otherwise stated. Now, on to the results. For the second quarter…

Thanks, David. Just a quick reminder that our full financial statements and MD&A for the second quarter and year-to-date 2022 are available on our website under the investors section, as well as on SEDAR and on EDGAR. And as David mentioned, all of the following numbers reported are in Canadian dollars as per our financial statements unless otherwise noted. We do offer U.S. dollar translations of our key metrics in our standard investor presentation, which will be updated for the second quarter numbers and posted to our website very shortly. On to Slide 9, the balance sheet. Starting with our balance sheet, total assets at the end of the second quarter were 2.7 billion, up 26% from 2.1 billion at the end of Q2 last year, up 11% from the end of Q1 of this year. Our cash balance at the end of Q2 was 198 million or 7% of total assets, down from 272 million or 13% of total assets at the end of Q2 last year and up from 155 million or 6% of total assets at the end of Q1 this year. The year-over-year decrease is a result of deploying our temporarily elevated cash balance into our loan portfolios, while the sequential quarter-over-quarter increase was in preparation to fund new loans in our short-term pipeline. Our total loan portfolio at the end of the second quarter grew to another record balance of 2.45 billion, which as David mentioned earlier represents an increase of 34% year-over-year and 11% sequentially. Book value per share increased 8% year-over-year and 1% sequentially to $11.94 with a year-over-year increase due primarily to the impact of our common share offering in September of 2021 and higher retained earnings attributable to net income earned in the current period offset partially by the payment of…

Thanks, Shawn. The second quarter was once again demonstrative of the accelerated growth of our Digital Banking loan portfolio led by our point of sale financing business, which demand for types of goods and services, our finance using our solution remain very strong in Canada, and we expect continued momentum throughout the remainder of the year. We also expect to see continued near-term growth in our commercial mortgage portfolio, specifically related to financing for residential housing properties as the macro conditions remain favorable. That said, we expect the growth to be somewhat moderated from our view earlier this year. With anticipated continued strong portfolio growth in Canada, we expect the investments we've made in Q2 to begin to yield results in the second half of the year. Notably, we expect to begin to see the contribution of the rollout of our point of sale financing offered in the United States, which we believe has even more potential for near term contribution than our previous call at the end of February. When we were first analyzing the potential for our offering in the United States, we viewed it as an attractive third option for consumer financing firms alongside their existing bank and public market finance. With public capital much harder to come by, we believe there will be even more demand for our point of sale offering. On the deposit side of Digital Banking, we anticipate continued growth in deposit funding of the remainder of the year, driven primarily by insolvency professionals offering as the volume of consumer bankruptcies and proposal restructuring proceedings is forecasted to increase significantly due to continued tightening of monetary policy by the Bank of Canada. In fact, some experts have predicted that we may move from a period of record low bankruptcies to a period of very high bankruptcies. We are already seeing a significant increase. In our cybersecurity services business, we have a solid momentum, more than 40% year-over-year growth in revenue, as I mentioned earlier, and we expect this will continue in 2022. All of this points to a solid back half for 2022 and outsized growth potential for 2023 and beyond. And with that, I'd like to open the call to questions. Michelle?

Thank you, sir. [Operator Instructions] Your first question comes from Greg MacDonald of LodeRock Research. Please go ahead.

Thank you. Good morning, David. Good morning, guys.

Good morning.

Hi, Greg.

Guys, I want to – I have two questions. The first is kind of a macro one, we just came through earnings season for the big six banks as well, big bank CEOs who were normally conservative seem to be a little more optimistic on the economic outlook than the market is. I wonder, David, if you could speak to that overall as an issue, i.e. are you seeing things differently than what some of the economists are? And then secondly, in context, of course, your main area of growth focus in terms of point of sale, and multi-unit residential real estate loans?

Well, thanks, Greg. Well, in our, sort of limited scope offering, we are still seeing a lot of growth obviously this year and probably leading into 2023 in the point of sale financing area as big ticket consumer item seem to be still in high demand. However, as we lead into 2023, I would expect these tightening measures bank account is, in fact, probably say another 50 basis points will start to take their toll. And I would expect to see a dampening of demand for these big ticket items having lived through. quite a number of recession [saved to say that] [ph] the [R word] [ph]. You don't tend to see people buying hot tubs of motorcycles when a recession hits. And that's what we finance in our point of sale business. So, even though we're growing at [50 odd percent] [ph] now and I don't see any end to that this year, but leading into 2023 depending on what the economy does. I would say that would be dampening. With respect to our real estate construction, there's still a very high demand for residential units on the periphery of the major centers and [indiscernible] just a small player in that area. I would think that our portfolio, we sort of maintained the size of this with a little bit of growth.

Yes. And there are longer cycles involved in that area as well. Okay. Thanks for that color. The second question specifically on point of sale, really good growth sequentially up 12% to your point. Can you talk a little bit about the trends within – in terms of, in terms of consumer spending. Can you talk specifically to the decision to be more aggressive in pricing in the Q2? I think you defined it in the press release going after certain high growth opportunities? Thanks.

Yes. And so primarily our growth in this area is in the [Technical Difficulty] around and thinking about home improvements and that's what's carrying through. So, that's the component of our point of sale that we see the largest growth. Now, going forward, I think that will probably start to dissipate too. And leading into 2023 as I said earlier, I would expect that will slow down somewhat. The pricing concessions that we've given to some of major partners are primarily in that area. And what we're doing now is for expanding our market share in Canada. I think we're very close to being the largest point of sale for point of sale financing company in Canada. So, it was a little bit of pricing concession, but it results in a lot of volume and we expect we'll have a lot more volume going forward due to that pricing concession.

I see. So that was a strategic decision made based on funding partner relationships and things like that. Is that the way I should read it?

Yes, absolutely. It was with a slight reduction in pricing it gave rise to significant increase in volume. And as you know, we have a lot of capacity, our balance sheet capacity, almost double our size with the capital we have for those types of assets, and we like them. It's whatever is designed for it's highly scalable, very low risk. So, that's the Canadian market and then we've got the U.S. market of course it’s about the beachhead transaction. We're looking at another one fairly soon, and the thesis that we walked into the states with that, we thought this would be a popular new product. It's holding very well. In fact, pricing is better in the states than Canada. Partially it’s a result of the meltdown in the capital markets area where a lot of point of sale companies were getting cheap money. And partially as the convenience of being able to hitch directly up to our bank and get timely economical, reliable financing.

Okay. Thanks, David. That's good color.

Thank you, Greg.

Your next question comes from William Wallace of Raymond James. Please go ahead.

Hi, thanks for taking my question. I had a few questions I wanted to ask this morning, if I could, and maybe just straight away following up on the previous sign of questioning. I'm guessing since you only have one partner, you probably aren't willing to quantify where you are with U.S. point of sale as of the end of the fiscal quarter, but what I am wondering is, if we kind of just think about this conceptually, if you are going to try to enter U.S. more aggressively, you're also pricing more aggressively in Canada, can the U.S. pricing offset the negative impacts of the Canada pricing or are we more likely to see as rates rise in your trusty deposit to come off of their floor? It seems like we could be setting up for margin compression rather than stability or even expansion in the near term. So, can you just kind of help us, I mean, we see the growth potential. I'm just trying to kind of get a sense of the bottom line impact once we start to see this transition into the U.S. versus what you're doing in Canada with pricing?

Well, so it's a good question, Wally. This has, of course, competing forces at play on our net interest margin. One is, the sort of bonus that we get in that as the Bank in Canada increases its overnight rate. We're positioned to gain a little bit of more net interest margin. I think our statement showed approximately $5 million additional income – net interest income in the 12-months period with a 100 basis point increase. And we've seen it – I think as of today, we'll probably see the 100 basis point increase. So that tends to widen our net interest margin somewhat. The U.S. market as you said is wider than the Canadian margin and [only given] [ph] up a few basis points when we talk about aggressive pricing. So, looking at those components, it tends to mean a wider margin. And as you know, we've started reporting as U.S. banks do. So, I'm thinking around a 3%, 3% plus margin is in the works, although the other forces of play could move it around temporarily quarter-by-quarter. With respect to the Trustee deposits, even though they're coming off their floor, I think on average now we're paying about 30 basis points, I expect the volume of Trustee deposits will increase dramatically and that we're coming off of 35 year low bankruptcies. And we've still been building deposits as we've been signing up the last few insolvency firms in Canada, but it could very well be going into a 35-year high for insolvencies. That would mean a lot more deposits coming out of that area. As I say, today there are only 30, 40 basis points in total. So, it really is still a very economical way for us raise the key deposits and the volumes could double in the upcoming year. It would be hard to see with the market penetration we now have in that industry. And I'd say we're already seeing the signs of the increased interest rates on the marginal borrowers in this country. You're starting to see credit card debt attract higher provisions. You're starting to see subprime attracting higher provisions. it's already coming in. So, on one side, I'm not a happy guy for [Canada’s economy] [ph], but on the other side, it means a lot of deposits from the Trustees.

Those deposits, how are they priced? New deposits that come on.

They're priced over [prime] [ph], so they're floating rate and there's various pricing kind of which we're dealing with, I think, what's evolved. But on average, I would say, prime minus three, prime minus 2.75, somewhere around there, all-in. So, you know, an economical source of deposits.

So, the way you can get benefit to margin is, if the acceleration in growth in those deposits is able to offset the need to fund out of your wholesale channel, it's pricing, and even though it [floats] [ph] with a beta of one, you get higher spread on those versus the wholesale?

Yes, absolutely. Yes. That's right. We expected the trustee to average around a billion and it's only 600 million, 700 million right now. So, this is a historic low for those types of deposits in Canada and there's a bit of a lag effect, of course, when you come up with [35-year low] [ph], it takes six, seven months before you start to see the insolvency deposits. So…

Okay. Now, in the U.S. entry, you mentioned, I believe you said you feel like you have one potential new partner. to aggressively grow in the U.S. how many new partners do you need? And what does the pipeline look like? It seems like it's taking a while to sign one partner as we thought maybe after the first one, you'd kind of have the model and the agreements, the master purchase agreement would be good for all the interstate, commerce rules, etcetera. Can you talk a little bit about your expectation of how that partner base might grow in the U.S. and why it seems to be a longer pipeline than maybe we had anticipated, as far as getting these deals signed up?

Mainly the slowdown was just the haggling over the legal documentation issue. In Canada, we have, what we call a master purchase and sale agreement, just kind of a central document. And that did take a while to get sorted out to comply with the U.S. Law. and that we did sign the first deal. And I think we've got about 35 million right now on that deal. The next one is right behind it. The documentation holds. So, the next one will be signed up very soon and then be funded shortly afterwards. So, it's coming along. These are just sort of beachhead transactions for us to get used for the U.S. long and our lawyers to tidy up the documentation. I think with the lack of funding coming out of the capital markets. This is what we experienced in Canada too when we initiated this program many years ago. It means that there's a huge demand for alternative source of funding for point of sale companies. So, now we've got the paperwork taken care of. We've got a couple of example transactions. I can see opening up the floodgates and I expect will be a huge demand for us. The kind of the constraint will be human resources and putting it together kind of funding source in the United States, of course. And I think everybody knows that we're planning to acquire U.S. Bank to enable the funding and U.S. dollars for these types of transactions. So, we get the beachheads done, established, and then thankfully, again, I sound like a grim reaper here, capital markets are not providing the economical funding or the very cheap funding or the unbelievably cheap funding they were providing for point of sale companies. So that just means tremendous opportunity for us. So, I would say, you're going to see it rapidly increase towards the end of this year as our point of sale team [ranks it] [ph] up in the states.

Okay. You mentioned the [Technical Difficulty] commitment as a potential drag to, you know, quickly being able to sign on partners. Let's move on to the expense line. So, you highlighted in the prepared remarks both you and Shawn that you had all these transitory expenses related to VCAD and U.S. point of sale entry, but it hasn't been quantified yet. So, there was also the comment about some expectation of elevated expenses around the pursuit of a U.S. Bank Charter. So, help us peel back the onion, like, what is the base expense? Let's take out any elevated expense that should be one time for M&A and take out the stuff that's one time for VCAD and point of sale entry? What is the run rate expense and how should we expect that to grow moving forward?

Shawn, you've got some number on that, I think.

Sure. Sure. Well, if you look at – or 25% of our costs are quarter-over-quarter or the increase quarter-over-quarter could be attributable to some of the new initiatives that David and I discussed over the course of the call. Do we expect those costs as we mentioned are expensive to ramp down, but currently we expect expenses associated with our pursuit of a U.S. acquisition to ramp up. We expect those costs, you'll see incremental increases quarter-over-quarter through the third quarter, the fourth quarter and we expect, if we’re successful, including the acquisition or closing the acquisition. By the end of our fiscal period, we would expect to see those costs drop off mid to late Q1 of 2023.

Right. But drop off to what? To 25% of the increase in the second quarter? So, we take out 250,000 roughly to get to a run rate of about 11.5 million?

That'd be a decent level. One of the issue will be though, as David mentioned, we're still working on in terms of our projections is, what will be additional staffing requirements be as a function of our potential U.S. acquisition and of course in supporting the U.S. POS initiative. So, I think in terms of run rate of 25% of where we are, right now, quarter-over-quarter would be a very, very conservative view in terms of where our NIEs will be over the course of 2023. Again, you'll see it ramp up over the course of 2022 ramp back down, but I think we're still trying to come to [grips] [ph] with it in terms of what the resource requirements will be to support the existing POS business, the growth of that business, and the integration of that business with a potential U.S. bank acquisition.

Okay. Okay. So, if I take, I just want to make sure I'm 100% understanding. The expenses went from 10.6 to 11.8. 25% of that increase is what you would consider transitory. So, 75% of that increase is staffing, etcetera that's here to stay. And from there, once we get past whatever costs are around pursuing a U.S. bank charter, you're trying to figure out how much growth from there will be required to support growth in the U.S?

That's correct.

And then obviously if you buy a charter, that will come with more expense. Sure. I understand that. I'm just trying to get to the base run rate to think about from a modeling perspective. So, the pressures are pretty meaningful. Last quarter, you suggested that the first quarter run rate was probably a decent run rate. So, where's all the creep coming from? Is it U.S. point of sale? Is it – are you expanding resources in Canada? You're having to pay people more to keep people, just kind of help quantify why there's so much creep.

All the above. So, a big thing for us is, we're seeing across the Defense Services industry's retention of people. It's very difficult in hiring new folks terms of incremental wage increases to bring new staff on board. We are struggling to acquire new staff as it is in seeing, in our view notable increases in base wages in terms of bringing those folks on board, signing bonuses, etcetera, and retention amounts for folks that are already with this key, while all of our staff in general to maintain, make sure that those staff remain with us key to our success in the future. So, salaries and benefits certainly are a big driver of those – of that cost base. So the [indiscernible] is quite frankly investing in new and maintaining existing staff, as well as trying to – the cost associated with [indiscernible] researching, sourcing, and working to identify and potentially acquire a U.S. charter has been little more expensive than anticipated, but we think those – the benefits on the other side will be disproportional.

Okay. And I've kind of hijacked this call. I'm sorry, I just have one last question. David, why is it taking so long to get VCAD launched officially? It just seems like every time we talk, it should be any week now, it’s taking months. So, any comments there?

Yeah. That's a good question, Wally. I had believed that it would be fairly soon, but it is taking longer. I guess one of the factors is with the meltdown in the stable coin industry has created a fair amount of obviously say, nervousness or concern amongst regulators. And even though our Digital Deposit Receipts [saw] [ph] apples to orange comparison to the stable coins that have turned out not to be that stable. We're in an atmosphere of nervousness that has slowed down the final launch of the program. Ironically, considering our Digital Deposit Receipt, is positioned to be the safe harbor for folks that have misguidedly thought they were putting their money in something stable, but nevertheless there's a fair amount of nervousness out there.

So, is that just a guess that there's a chance that the regulators just don't allow it to launch?

I think that is always a chance. I certainly hope not, and that I think the generation [indiscernible] millennials and [x's even] [ph] have shown that they really want this, kind of deposit vehicle as they've gone to non-bank issuers to get something they thought was stable. And a statistic that I saw recently was that there’s a tiny bit of retention when a baby boomers wealth moves on to the [zed SynXis millennials] [ph], when we've baby boomers finally expire. So, the new generation wants this type of deposit deals. They want to do this kind of banking. and the mainline old school, kind of banks really haven't reacted to that. There are some banks in the states, but of course they are definitely the same way we do, but it's left kind of avoid in the marketplace for those – these younger people who want to – don't want their grandfather's banking. And we have the product we believe is ideally suited for them. So, I hope the regulators see that, because unfortunately, if you don't, the baby boomers and such are the [zed’s] [ph] find themselves going to unregulated entities and then in some cases suffering.

Hey, well, fingers crossed I guess. I'll step out and let somebody ask the questions. Thanks, Dave.

Well, thanks Wally. Good questions.

Your next question comes from Bradley Ness of Choral Capital. Please go ahead.

Yes. Hello, guys. Just following – hello. Yes, following Wally's question line here. So, on the VCAD, what do you think it'll take to get the regulators comfortable. You guys have a great relationship with your regulators, so you should be pretty dialed in here?

Well, frankly, Brad, I think it will take some time and that [indiscernible] that I spoke about that's prevalent throughout the world, of course, has pervaded Canada too, but I think it's just a matter of time. We're providing our regulator with as much information as we can about the product. We believe it is a safe secure place for Canadians to put their hard earned money and not have to risk it with other unregulated, suppose it's stable coins or areas where they've – some of them of course they lost their money. So, we think it [indiscernible] our regulator and [indiscernible] ourselves a bank to be able to provide the positives with that safety and security, but we did enter into a period of time where there’s a ton of nervousness and it was bit of a shock to see some of these so-called stable coins one truck to almost nothing. So that's a shock to the entire world's regulatory community.

Okay. I don't know why they were so concerned about the algorithmic stable coins when they're not really regulating stable coins, because your stable coin is not algorithmic, so I don't know why regulator would be concerned. But let me just jump on…

Yeah. Let me emphasize for a second if you like. Yes. Ours isn't stable coin, and so to speak, it is a Digital Deposit Receipt. It can function as a stable coin if it becomes prevalent, unpopular. But it's issued by a bank. And all of our deposits are Digital. We've been digital since I created that method of issuing deposits in 1993 with telephone modems. So, rudimentary systems. They're all Digital. It's just these are highly encrypted Digital Deposit Receipts, and then, you know, they get that appalachian crypto, which some people think is wrong. It's something wrong with that. No, it's highly encrypted, and that's what we like. And all our data is encrypted, but this is more instructed. Sorry to interrupt there, Brad, but for anybody else listening, that's our point of view as a bank. We're planning to issue something super secure and super encrypted.

Got you. Thank you. Remind me what I should think about like profitability goals. Let's just say in fiscal 2023, it seems like recently I've been involved for a year and the more you grow, the lower your profitability get. So, just remind me what I should expect for like 2023. What are your goals?

Well, a net interest margin north of 3% calculated the way U.S. Banks do I think is reasonable and should be slightly better than that, but I think that's a reasonable margin for us to hold on to in the point of sale business where we're expanding. And as we've seen from the past results, we're adjusting Canada, we've been growing 50%. Moving into the states, and it's all dependent on our success in acquiring a U.S. lending platform. I would say 50% growth would be easy for us to do even despite perhaps an impending recession, as I was saying earlier, for the market in the United States is so large, and the point of sale companies are – a lot of them are finding themselves the well is dry when it comes to funding. So, I would say you could expect that type of top line growth in assets, mainly point of sale, of course, with that type of 3% type spread. As Shawn was saying earlier, the dampening effect is primarily associated with our endeavors to launch VCAD to acquire U.S. Bank, to list on the NASDAQ, retain staff. So, those are things that you do to build your business. And so yes, we're spending money to build the business. for the future, which I think should be heartening. In the past, those types of expenses might have been capitalized years ago, but now [they're right for us to expense] [ph]. So, it does hit our income statement, but these are expenses that we're incurring for future growth. If we were to stand still, yes, you wouldn't see any of that. We probably wouldn't have to have as many staff either. No.

Okay. So, what I'm hearing is the major profitability metric you're focused on in 2023 is the net interest margin above 3%. And a lot of banks talked about, like, they would rather, you know, they're focused on, like, return equity here. It brings for sure growth. So, it sounds like that's not as important, so maybe the sub 6% ROE is something we should expect going forward?

Well, as we utilize our excess balance sheet capacity ROE, of course, it goes up, goes way up. We’ve got about approximately to grow on the asset mix, but we can grow about double our size. So that has a dramatic impact on ROE. So, what you're seeing is due to basically what we said we'd do. We'd go into the states. We would launch our point of sale program. We did. Yeah, we've worked on the legal [indiscernible] and we're just through a bit of marketing there and travel and now we've got our sights on the U.S. Bank acquisition to round out the lending platform that provide economical U.S. dollar denominated deposits, a platform still lending throughout the states. And that doesn't come without expenses. just travel and consulting fees and tons of legal.

Brad, I think you're comment about 67% ROE is not in a reasonable target as we move through this development phase. We would think that we would start to see those returns start to expand in the backend of 2023, assuming we're a key driver there would be in terms of, we were successful in the completion of a U.S. acquisition and able to get that business online and contributing to the consolidated results. So, not ignoring ROE by any means and very aware of shareholders concerning for that metric, but one that we think we'll see some compression as we move through this, [but we] [ph] think is a material growth phase.

Okay. Thank you, gentlemen.

Thank you, Brad.

There are no further questions. I will now turn the conference back over to Mr. David Taylor for closing remarks.

Well, thank you. I'd like to thank everybody for joining us today and I look forward to speaking to at the time of our third quarter results at the end of the summer. Thank you again.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you for participating and ask that you please disconnect your lines.