Good morning ladies and gentlemen. Welcome to VersaBank’s second quarter fiscal 2023 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the second quarter ended April 30, 2023. That news release along with the bank’s financial statements and supplemental financial information are available on the bank’s website in the Investor Relations section, as well as on SEDAR and EDGAR. Please note that in addition to the telephone dial-in, VersaBank is webcasting this morning’s conference call. The webcast is listen-only, so if you are listening to the webcast but wish to ask a question in the Q&A session following Mr. Taylor’s presentation, please dial into the conference line, the details of which are included in this morning’s news release and on the bank’s website. For those participating in today’s call by telephone, the accompanying slide presentation is available on the bank’s website. Also, today’s call will be archived for replay both by telephone and via the internet, beginning approximately one hour following the completion of the call. Details on how to access the replays are available in this morning’s news release. I would like to remind our listeners that the statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by VersaBank management. Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank’s businesses. Please refer to VersaBank’s forward-looking statement advisory in today’s presentation. I would now like to turn the call over to David Taylor, President and Chief Executive Officer of VersaBank. Please go ahead, Mr. Taylor.

Good morning everyone and thank you for joining us for today’s call. With me is Shawn Clarke, our Chief Financial Officer. Before I begin, I’d like to remind you that our financial results are reported and will be discussed on this call in our reporting currency of Canadian dollars. For those interested, we have provided U.S. dollar translations for most of our financial numbers in our standard investor presentation, which will be updated and available on our website shortly. Now for the results. Second quarter of fiscal 2023 was very much like the first, was yet another record quarter for VersaBank which, as importantly, once again demonstrated the power of the significant operating leverage in our branch-less business to business digital banking model. Q2 2023 saw another record loan portfolio of $3.4 billion, another very solid step closer to our next major milestone of $4 billion, and the significant efficiency and return on common equity gains that go along with it. I will discuss these a little later in the call. In addition, Q2 results also benefited from profitable growth in our cyber security services business. Looking more closely at our Q2 performance, there are a couple of specific highlights I’d like to note. The first is our efficiency ratio. That is what it costs us to generate a dollar of revenue. The lower the number, the more efficient we are in terms of generating revenue. With the significant year-over-year growth in our loan portfolio, relatively stable net interest margin and substantial normalization of our non-interest expenses compared to last year, our efficiency ratio improved to 43%. This is a very low number for a bank, a direct function of our digital branch-less model and evidence of our trajectory towards our target to be in the 30s, which is pretty…

Thanks David and good morning everyone. Before I begin, I’ll remind you that our full financial statements and MD&A for the second quarter are available on our website under the Investors section, as well as on SEDAR and EDGAR, and as David mentioned, all of the following numbers are reported in Canadian dollars as prior financial statements, unless otherwise noted. Starting with the balance sheet, total assets at the end of the second quarter of fiscal 2023 were just over $3.7 billion, up 39% year-over-year from $2.7 billion at the end of Q2 last year and up 6% sequentially from $3.5 billion at the end of Q1 of this year. Cash and securities at the end of Q2 were $263 million or 7% of total assets, compared with $198 million or 7% of total assets at the end of Q2 last year and $251 million or 7% of total assets at the end of Q1 this year. Our total loan portfolio at the end of second quarter expanded to another record balance of $3.4 billion, an increase of 40% year-over-year and 6% sequentially in what is typically the seasonally lightest quarter of the year for loan growth, as David mentioned earlier. I will break loans out into its component parts in a moment. Book value per share increased 10% year-over-year and 3% sequentially to another record of $13.19. These increases were a function of higher retained earnings resulting from net income growth and the impact of a lower number of shares due to our active share repurchase program, all partially offset by dividends paid. Our CET-1 ratio was 11.21%, down from 13.66% at the end of Q2 last year and up two basis points from the end of Q1 of this year. Leverage ratio at the end of Q2 this…

Thanks Shawn. There are two items I’d like to address before opening the call to questions. They are the two items that combined fundamentally create any investment proposition - risk and reward. Starting with risk, the North American banking industry, and especially the U.S. banking industry is going through a challenging period. A number of high profile failures and the subsequent closer looks at many balance sheets have revealed some cracks in the system. These cracks are exactly why I created VersaBank the way I did and exactly why I believe VersaBank stands apart from much of the sector in terms of risk, with the additional benefit of outsized earnings growth we are demonstrating. You’ve heard me speak often about risk mitigation being part of our DNA, especially with respect to our rigorous technology-based loan approval and continuous real time monitoring of credit performance, and of course our innovative point of sale [indiscernible]. But another aspect of our bank model that has had its value especially highlighted in recent months is the quality, stability and stickiness of our deposit base. All of our deposits come to us via deposit partners. We do not directly take deposits from individuals, and we certainly don’t have an expensive award-winning website that allows depositors to withdraw their funds at a click of a button should the latest rumors spook them. Our insolvency deposits come by way of bankruptcy trustee firms, to which we provide a high value-add custom banking solution that is fully integrated with our systems. We are an assessee to their operations; in fact, we have 100% track record of account retention through to wind-up. As Shawn noted earlier, we are seeing a return to growth in this deposit channel as bankruptcies in Canada return to normalized levels post-pandemic. Our wealth management…

Thank you sir. Ladies and gentlemen, we will now begin the question and answer session. [Operator instructions] Your first question will come from David Feaster at Raymond James. Please go ahead, sir.

Good morning everybody.

Good morning David.

Maybe if we could start on the point of sale business in Canada. Appreciate the color. We’re going into a seasonally stronger quarter, but you also talked about some potential slowing on consumer spending at the same time. Appreciate the guidance about back half is going to be at least in line with the first half, but I was just curious if you could touch on maybe just the health of the consumer in Canada, any details you can provide there, and then as you dig into it, last quarter we talked about seeing some underlying changes, maybe a shift towards more home improvement. I was just curious, is there any interesting shifts as you look at where the point of sale demand is coming from?

Thanks David. This is the way I see it. We Canadians are coming out of sort of a deep freeze and there always tends to be a lot of consumer activity in the warmer months. Despite maybe interest rates going up and putting a little damper on the consumer enthusiasm, personally I think folks are still going to buy the hot tubs and the cars and the motorcycles and, as you were saying, endeavors on home improvement, such as decks and fences and all those things that you do in the summertime. I don’t think the marginal increases in interest rates translating to payments will deter them all that much at this point, so we’re sort of hedging our bets if you view it like a tug-of-war, where interest rates are pulling consumer demand down a bit, but that exuberance that comes with being in the sunshine pulling it the other way, and historically that’s the way it’s been. A good percentage is in home improvement, and I think it will just continue that way, as I was saying earlier, the outside activities that people finance in the summer, and then there’s still this need to economize on heating bills and such by changing furnaces and insulation and siding and all that. Generally speaking, I’m looking forward to growth in the second half that exceeds the first with all those factors taken into consideration.

Okay, and then maybe touching on DRT cyber, it was a nice quarter there. You had a nice win in the States last quarter. I’m just curious, what’s the pipeline look like in DBG, and you talked about improving efficiency there, can you just talk about some of the initiatives that you have in place? Was the improvement in the profitability more a function of just the scalability of the business and continued revenue growth, or are there other specific initiatives that you’ve put in place?

Well, the scalability is a big factor. We’re bringing in some automated penetration testing that isn’t anywhere near as human intensive of our specialized penetration testing, so it has tremendous scalability. As you know, DBG, a wholly owned subsidiary of DRTC, has at least 400 of the who’s who in North America’s customers, where it provides this high value penetration testing. It’s still our objective to cross-sell our other products to this existing customer base. We continue to believe there’s tremendous growth opportunity, the 50% increase in revenue. I think it’s sort of a drop in a bucket of what’s available for a company like DRTC and the products that we have lined up to bring to the market.

Okay, that’s helpful. Then maybe lastly, just touching on the deposit side, obviously--you know, you talked about the potential increase. We saw the trustee business maybe decline a little bit this quarter, but structurally it feels like there’s some tailwinds there. Most of the deposit growth was driven by the wealth management network. What do you think your ability to drive deposit growth is within the wealth management side? I mean, do you expect that to be a governor for loan growth going forward, or do you really have the capacity to get out of that what you need, just depending on--you know, is it really a function of what rate you’re providing, you can drive whatever deposit growth you need?

It’s the latter. It’s extremely sensitive to the rates we pay. A few basis points brings a deluge of deposits, so we tend to keep our rates as low as we can in that area. But from our perspective, just being close to $4 billion, it’s almost unlimited supply of deposits coming from that area, extremely liquid and priced economically too. As you noted, the trustee business, that channel is--we’re still seeing our deposits diminish faster than new ones are coming in, as we’re sort of lagging behind the lack of insolvencies or dramatic reduction in insolvencies during the COVID times. But what bodes well for us is year-over-year, we’re up about 10% in new accounts. It doesn’t bode for Canada, it’s a leading indicator that insolvencies are on the risen. In fact, one recent statistic was that they’re coming back to pre-pandemic levels, but that bodes well for our more economically priced deposits. There will still be a bit of a lag as the various new accounts fill up with the proceeds from the wind-up of the various estates.

Okay, that’s helpful. Thanks everybody.

Thank you David. It must be baking hot where you are.

Your next question comes from Stephen Lange Ranzini at University Bank. Please go ahead.

Congratulations David and your whole team on achieving a 12.1% return on equity in the quarter - it’s a great result, thank you. A question, you mentioned that as you approach $5 billion in loans, you can get the return on equity up to 20%. Do you have the capital now to do that, or are you starting to look at off-balance sheet structures where you can profitably unload loans and not be capital intensive to grow the balance sheet further?

Well, good question, Stephen. I’m looking forward to seeing you at the annual picnic here in London, Ontario.

Yes, that will be fun.

The short answer is yes, we do indeed have the capital. The key capital ratio to look at is our leverage ratio, and it’s about twice that of the industry, so theoretically we could go up to $8 billion from where we are today, depending on the risk weighting of the various loans. Yes, we have the capital to go to 5, and the math is really simple - $5 billion at 3% leaves $150 million in revenue, and our fixed costs are running around 50, so pre-tax we’re about 100, tax rate say at 70, we make about $70 million divided by about $350 million in common equity, gets the 20% return. That’s how the math works in our little business, and as I was saying earlier, it’s just a matter of putting the loans on. If we put them on quickly, we’ll get to those targets faster; if we put them on more slowly, it gets there slowly, but the numbers are just driven by the model.

That’s fantastic. As I say, your lips to God’s ears! Have you considered looking at some off-balance sheet structures, because that would also further drive your return on equity higher and maybe free up capital that you could use for more aggressive stock buybacks. Your stock is trading under book value.

Oh, absolutely. Our stock is down, what, 30%--it’s on 30% from book value. We’ve been buying all we can, but we have to go back in August and reload. We get to ask our regular for permission to buy more stock once a year, so we’re--I guess one part of me is hoping that we can still keep buying back stock at this reduced rate. With respect to filling up some of the assets that we generate, there is an emerging opportunity for us in the CMHC - that’s our insured mortgage market. We’re seeing some opportunities to book CMHC mortgages that don’t attract CET capital, so don’t attract capital in the normal way, which--and the spread we’re looking at is about 240 basis points. There’s an opportunity for us to book those types of mortgages and they are very saleable, so to your point, if that unfolds, that gives us an opportunity to book the mortgages with the expertise and the real estate department that we have, and then sell them and make a little profit and free up some capital too.

Excellent, well thanks so much, David, and I look forward to seeing you again at the annual picnic.

Thank you for traveling to see us. That will be wonderful.

Your next question comes from Abhilash Shashidharan at KBW Research. Please go ahead.

Hi David. Congrats on the strong quarter. Just a follow-up on your comments on the CMHC stuff. Have you launched the instant mortgage app, and--

No, we haven’t

--what is the status of that?

No, we haven’t launched it yet. We actually had a key hire recently in that area, and now we’re looking for a launch early in the new fiscal year. What I was referring to with the CMHC is in the commercial banking area, where we would be doing large CMHC mortgages on apartment blocks.

Okay. On the U.S., the acquisition side, how important is that for ramping up [indiscernible] growth, and can you provide some insights on how you are thinking about it in terms of funding the growth there as well?

Sure, well obviously in Canada, we’re growing, I think, faster than any bank’s ever done with 14.5% in previous half, and probably the same for the upcoming. Canada still provides tremendous growth from our perspective in the point of sale program, so those numbers I talked about, the $4 billion milestone, the 5, those are easily achievable in Canada alone. Adding the U.S. market to it, I used the word supercharged, and that’s it- it’s a market that’s maybe 100 times bigger than Canada. It’s ripe for our product in that the traditional lenders, being smaller community banks, have got some--some of them have some issues and their ability to fund a point of sale finance company is somewhat hampered. Of course, the capital markets are much more difficult than they used to be - they used to be exuberant with funds for securitizations. Looking south of the border, maybe 100 times bigger than Canada, ripe considering the economic times. You’d have to dream in Technicolor to what it could do for our growth. With respect to the funding, we fund as other banks do in the United States through the wholesale deposit broker market - that’s part of the reason why we’d like a U.S. bank license, then we can fund in U.S. dollars from the U.S. market to fund the U.S. loans.

Okay, just to follow-up on that, is there anything stopping the growth in the U.S. right now before the acquisition is complete, at least on the loan side, or is the pick-up independent of that?

Well, we have Versa Finance as the lending vehicle in the United States, and we are funding a few tranches through that, but it’s nowhere near as effective as having a U.S. bank license and funding with U.S. dollar deposits. Those loans will be funded through Canada and swapped into U.S. currency. We have some U.S. dollars on the stock, but--yes. It is fairly cumbersome to operate with a finance company. It’s much, more efficient to operate with a U.S. bank license and fund directly in the United States.

Okay, thank you. That’s it for me.

No problem. Will you be at our picnic too, on July 8?

I’ll try and make it up there.

Well, hopefully we have some good weather.

Ladies and gentlemen, once again, if you would like to ask a question, please press star, one now. There are no further questions from the phone lines. I will turn the conference back to your hosts for any closing remarks.

Well, I’d like to thank everyone for joining us today, and I look forward to speaking to you at the time of our third quarter fiscal results. Have a good day in smoky Toronto, if that’s where you are, and if you’ve got some time on July 8, we hold our annual picnic at my farm in Ilderton and you’re welcome to join us. Thank you.

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