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 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. 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 in 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 1 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 today is our Chief Financial Officer, John Asma. 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 the risk of starting a sum repeat up on the call, the second quarter results once again showed the operating leverage in 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 cost 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…

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 SEDAR 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 and 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 due to transition of a portion of the real estate portfolio to CMHC-insured loans. Consolidated noninterest expenses were 12.2 million, down from 12.7 million last year and up slightly from 12 million…

Thanks, John. The outlook for strong near and long-term growth in diverse bank remains very favorable. We expect improved sequential growth in our point-of-sale financing portfolio with the benefit of seasonally higher summer sales as well as a ramp-up in loan originations in our CMHC insured finance facilities in our real estate portfolio in the third and fourth quarters. As of April 30, we had commitments of nearly 440 million, which is a very solid start and a number we expect to continue to steadily grow. Notably, only a small amount of these commitments has yet been drawn down actually, by our loan partners, meaning that we expect to begin to see the growth in this portfolio starting in the second half of this year and accelerating into 2025. Notably, as the Canadian banking industry sees the impact of sustained elevated interest rates and some softness in the economy, the advantage of our branchless business-to-business digital banking model really comes into focus. For several quarters now, you have heard me give the caveat that any comments around our short-term growth potential of our point of sale business with economic impact, we may be seeing some of that now. While this may slightly delay reaching our next total asset milestone of 5 billion to Q1 of next year, it doesn't impact the resulting operating leverage or the benefit to the return on common equity as we expand our portfolio. On the deposit side, in the solvency deposits grew sequentially for the fourth consecutive quarter as Canadian consumer and small business insolvencies continues to increase. According to Statistics Canada and the solvencies in Canada in April of this year were up 24% from April last year. Consumer insolvencies were up 23%, while business insolvencies were up more than 60%. Accordingly, we are…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of David Feaster with Raymond James. Please go ahead.

Hi, good morning, everybody.

Good morning, David.

I just wanted to start out on the organic growth side. You talked about the softness in Canada, some of the risks to achieving that $5 billion asset level this year, but you're also pretty bullish on partner additions in Canada, expansion in the U.S. and the pipeline is healthy. I'm just curious, how do you think about the organic growth trajectory within that point of sale business, the pipeline of partner additions in both Canada and the U.S.? And then are you looking to expand products? I know HVAC has kind of been a key driver, but is there opportunity to expand the product set to potentially help accelerate growth? Just kind of curious your thoughts on that side.

Well, first of all, in Canada, there tends to be a dampening effect of the winter months on consumer purchases and even in the HVAC projects that people undertake. So, this half, we saw the impact of that. In previous years we've had such rapid growth in several overwhelmed the tendency of Canadians not to get under car lots and entertain new purchases, hot tubs and barbecues and such. So the second half of the year I do expect to see a resurgence in the consumer purchases. And we're already seeing that in May. It's up fair amount from April. So that's just sort of a typical Canadian thing. The other thing about the Canadian consumer is for the stats people they tend to have some savings so they tend to be a little more enthusiastic about buying in what might be seen as recessionary times than otherwise. So for the half year coming I see a bit of a resurgence. It would be a better half than the last half. Now with respect to new products yes indeed we are having a lot with new partners that have some innovative point of sale type financing products really cool ones, I won't -- I'll talk about exactly what they are now, but really cool ideally suited for our Bank's model. So we're looking at that going forward too in Canada. And in the states as I was saying we're hopeful the regulator comes to a decision by the end of this month, but if not it's -- there's a fair amount of moving factors in the United States now. I just saw a recent report from the Fed about a large huge quantity of large bad loans in the portfolio also. So I hope to come to a positive conclusion by the end of this month. And that, of course, allows us to bring our product to United States where we think there's tremendous demand for it.

Okay. That's great. And then you did touch on some of the softness in the labor market in Canada and some of the softness there. I'm curious obviously your credit is phenomenal, but I'm curious about how is credit of the underlying receivables for your partner been. Has there been any change there? And how are the retailers your partners doing just given some of the softness that you talked about. Are you having any issues from the health of their balance sheets just as the consumer may be weakening a little bit?

Yes, we definitely are seeing that. Our partners are experiencing higher than they have in the past of defaults and in various sectors retail purchases slowed down which translates through to us to less volume. And it also has another sort of ironic impact on us that is sort of odd characteristic of our bank versus all the other banks. When our partners experience more defaults given the way we structured the arrangement that means we put the defaulted loans back to them more rapidly than we would otherwise. So it reduces the net increase in the portfolio because defaults to us mean repayments as we're repaid as loan defaults. So we've experienced higher than average repayments in this last half than we would otherwise because of the higher than average defaults in our partners portfolios. So that certainly illustrates how our model is different than other banks. Other banks presently are winding about credit issues and they're putting up larger provisions as they should for the credit losses. And we don't because we have our partners' cash standing guard against a loss for us, but that does mean more rapid repayments as someone's going to see how we debit their account and see a reduction in portfolio. So that had an impact on the growth in Q2 also.

Okay. All right. That's helpful. And then maybe last one just could you touch on the funding side. I'm curious what you're seeing there. You talked about some of the tailwinds on the trustee side which is great, but funding costs are continuing to rise. I'm curious where do you think we are there? Are you seeing things starting to stabilize just kind of curious how you think about funding your growth trajectory looking forward and ultimately the impact on the margin?

Well, I hate to use the word kind of great with respect to insolvencies because obviously that means a lot of core folks are 60% increase in small business insolvencies and 20% odd increase in consumers not good for this -- for the economy, but it's very good for our deposit growth. That's -- I was saying earlier it's a leading indicator. The more accounts we open, the more insolvency there are the greater that portfolios of deposits growth, it's going to record levels now. But I see that continuing on for the next year or two because there is certain lag effect. The accounts are opened and then they fill up with the proceeds of the liquidation of the estates that usually takes about 1.5 years, 2 years. So we're starting to see the beginning of it and I would expect the insolvency deposits to peak out around a billion dollar Canadians over the course of next say 8 months, 9 months, 12 months it's sort of getting back to normal levels. Sad times for Canadians, but we designed this deposit business as a counterbalance to recessionary times for our bank.

Makes sense. Thanks everybody.

Thank you. Your next question comes from the line of Mike Rizvanovic with KBW Research. Please go ahead.

Good morning David. I wanted to ask you a quick question about the mortgage renewal cycle not in terms of the direct impact obviously, but just the indirect impact if we do have higher rates for longer or just maybe call the rates settling at a higher level even if the Bank of Canada starts a cutting cycle there's no necessary guarantee that mortgage renewals won't be painful for a lot of borrowers. So in the context of a deleveraging cycle potentially in Canada on the consumer side, what are your thoughts on how that could impact the demand for POS for you? Obviously, it's been a very resilient book. Your growth has been phenomenal there. A little bit of a slowdown this quarter, but if we do get this dynamic where Canadians are just not borrowing as much, what's the downside on your view with respect to how much you could grow POS?

Well, we definitely have a dampening effect. Last year we grew POS by about 30%. At the beginning of this year I was hoping for around 20%. I'd say it'd be a little less than that even -- so yes those factors do dampen POS purchases just anecdotally going to the motorcycle shop to buy a motor bike if you just had to renew your mortgage at twice the rate in the past before. So it definitely has a dampening effect. But we still have the potential to grow in the order of around 15% year-over-year. Mind you, that's half of the last year.

That's helpful. And then maybe just a quick one, a numbers question on the margin. A bit of compression, I think, five straight quarters now, you've seen it come down quite a bit here. What is your -- and I apologize if I missed it in your prepared remarks, but any color you can provide on margin trajectory, just in light of what you're seeing on the deposit side the gross yields? Are you looking at some sort of level of stability in the coming quarters? Or is there upside and more downside? What are your thoughts on then?

Well, there's a number of factors, some expanding margins contracting the margin. The CMHC mortgage portfolio serves to contract our margin. And that we're probably averaging only 175 basis points on our CMHC construction mortgages vis-à-vis conventional construction that will be, say, 300 basis points. So the faster we book CMHC mortgages, the more compression that we'll see mind you concern there's no capital used in the CMHC loan, the return equity figure does well with the addition of the CMHC. So that serves to compress our margin. And then as we move more into the higher the percentage of point-of-sale is of our total lending portfolio that serves to compress our margin too. Now on the other side, the inverted yield curve that we've suffered with for quite a few years down in Canada, they may be coming -- that may -- you may just wishful thinking here, but that might be just paying a little bit, when I say the yield curve flattening out a little bit. And we tend to fund in the short end of the yield curve and our loans tend to duration on the longer end. So we get pinched on that a little. So I'm -- if there's a God over there that looks after bankers would be that yield curve sometime in the future start sloping upward again. And that helps. So you have those two factors that compress the margin, which actually pretty good because the more CMHCs be booked, keeping though the margin is down, that's a wonderful low-risk new source of net interest income for the Bank and more POS is better, too. But the -- if the yield curve would straighten out ahead as it traditionally does, it would be positive for us.

That's very helpful. Thanks for your insights.

You're very welcome.

Thank you. And there are no further questions at this time. I would like to turn it back to Mr. David Taylor for closing remarks.

Well, I'd like to thank everybody for joining us today, and I look forward to speaking to you at a time of our third quarter. Today, I've actually very lucky and blessed. I'm sitting here in New York City, speaking to you from the New York Athletic Club. I'm looking forward to meeting some potential investors here in this is fabulous city. It's a beautiful day looking at over Central Park. So I hope you all have a wonderful day. And if you have any further questions, you want to ask me, you could drop me an e-mail. I will always happy to talk to my investors and potential investors. And thank you again.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.