Q4 2022 VersaBank Earnings Call
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Good morning, ladies and gentlemen, welcome to <unk> fourth quarter and year end.
In fiscal 2022 financial results Conference call. This morning first the bank issued a news release a group working its financial results for the fourth quarter and fiscal year ended October 31.
That news release, along with the banks financial statement.
Mental financial information.
On the bank's website in the Investor Relations section basketball, that's on SEDAR at Pittsburgh.
Please note that in addition to the telephone dialing virtual banking's webcasting This morning conference call.
The webcast is listen only if you are listening on the webcast luck wish to ask a question in the Q&A session. Following Mr. Davies presentation. Please dial into the conference line details of which are included in this mornings 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.
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 release.
I would like to remind all listeners that these statements about future events made on this call are forward looking in nature.
Based on certain assumptions and analysis made by Bruce with Bank management.
Actual results could differ materially from our expectations due to various material risks and uncertainties associated with both the bank's businesses since you're afraid to boost the bank's forward looking statement advisory into today's presentation.
I would now like to turn the call over to David Taylor, President and Chief Executive Officer Bruce of Bank. Please go ahead Mr. Taylor.
Good morning, everyone and thank you for joining us for today's call.
With me is Sean 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 and our reporting currency of the Canadian.
Those interested we provide U S dollar translation for most of our financial numbers in our standard investor presentation, which will be updated on available on our website shortly.
Onto our results.
Our record fourth quarter across each of our key performance metrics capped off a record year for <unk> Bank.
And our digital banking operations continued strong year over year growth and our appointed sale loan and lease portfolio drove our loan portfolio.
So an all time high of just under $3 billion.
That was up 42% as.
As we maintained our overall net interest margin without trading or taking any additional credit risk there.
This drove record revenue record net interest income record net income saves for one outsized quarter.
In 2017 due to a large tax recovery.
Additionally, the cyber security services component and <unk> had a strong fourth quarter remains profitable.
Importantly, we achieved net income despite the significant transitory expenses incurred during the year on our account of strategic growth initiatives.
The returns are which we expect to begin to realize in fiscal 2023.
All of this positions the bank for continued growth in 2023.
Comparable in the knowledge that our bank has a track record of performing even a little better during economic slowdowns.
I'll discuss this more in a few minutes.
Looking more closely at our performance.
Fourth quarter was highlighted by the highest ever levels of revenue net interest income and net income even with a dampening effect on our bottom line that the transitory investments in multiple strategic growth initiatives.
Throughout the year.
Combined these investments totaled $1 8 million, the vast majority of which will run off during.
The current quarter.
Thanks, Sean will discuss we will also experience the temporary elevated provision for taxes in Q4.
Which further dampened our net income by $1 1 million.
We expect to reduce early in fiscal 2023.
Fourth quarter performance was driven mainly by continued outsized growth in the Canadian point of sale financing business, which increased 11% sequentially to the end of the year.
74% higher than fiscal 2021.
Again, I will note that we achieved this growth with essentially no impact on net interest margin and without relaxing our stringent credit policy.
Similar similar.
For the full fiscal year the outside growth in our Canadian point of sale drove record revenue net interest income and net income.
And like the fourth quarter record net income was dampened by expenses related to the transitory strategic investments, which for the year totaled $5 2 million.
Well the $1 1 billion dollar elevated tax in Q4.
These investments.
We will substantially dissipate throughout Q1.
Fiscal 2023, and our tax provision will reduce early in 2023.
I'd like to provide a quick update on our planned acquisition of Minnesota based Stearns Bank holding for a fully operational OCC charter National U S Bank.
I discussed on our last quarterly call. This acquisition is transformational next step and bursty bank's long term.
Both strategies that will enable us to bring our track record of innovative digital banking solutions to address unmet needs to one of the world's largest banking markets.
Specifically this acquisition will enable us to broadly rollout our receivable purchase program and the underserved U S market, which has been so successful in Canada.
Where we call it our point of sale financing business.
Although the process has taken a little longer than you initially thought I am pleased to report that earlier. This morning, we submitted the requisite filings to the OCC and the Federal reserve seeking approval of this acquisition with these filings complete we can now move ahead with our application to our Canadian regulators.
<unk>.
I'm also pleased to announce that Tom Ridge, former Governor of Pennsylvania, and the inaugural <unk>.
Secretary of the U S. After the South Homeland Security has agreed to become chair of our New U S subsidiary <unk> Bank USA.
We are targeting to close this acquisition early in calendar 2023.
On the topic of U S.
Theobald purchase program, our first partner a large north American commercial transportation financing business focused on independent owner operators have continued to expand their business with us.
With loans now nearly $50 million.
Number would have been even higher however.
However, we are somewhat constrained in this limited early rollout handoffs complete in the U S Bank acquisition.
Recently, we added a second partner the retail Finance Division.
40, plus billion dollar U S based financial services company.
And expect to begin taking on loans shortly.
And we continue to be very encouraged by our discussions we're having with other potential partners in the United States. They are repeatedly confirming our belief that we are a valuable alternative for point of sale financing.
And this one $8 billion and growing U S market.
And finally before I turn over the call to Sean and update on our revolutionary digital deposit receipts.
As I discussed last quarter.
Tremendous amount of turmoil in the sector and heightened regulatory awareness and scrutiny, which has been further exacerbated by FTE extra boxes.
The downside of course is that it has a negative repercussions and very very broadly in our industry the upside at least for us.
All of these events further underscore the importance of regulation on our belief that we share with <unk>.
Some of our regulatory Honda.
<unk> banks are the right answer these two reissuing digital currencies.
With the rapid evolution of the market and the regulatory environment.
Made the decision to substantially change our model such that our DDR accounts, our digital deposit received accounts, which are essentially E. Wallets are hosted by <unk> bank as opposed to being hosted by external third party.
We are now able to do this through the addition of our.
Viewers software.
We will develop exclusive fleet for our bank.
The new model in November we initiated an initial pilot program for the new offering, which we're calling <unk> CAD.
The pilot is restricted to burst the bank's directors executives.
From reside in Canada.
With this progression to a new model will further extend our time to launch our GDR program.
All of it has been a long term opportunity to grow low cost deposits, we still have access to abundant low cost deposits to fuel our growth in Canada, and I will discuss in a moment, we expect to return to robust growth in our bankruptcy deposit channel, resulting from a challenging and potentially more challenging.
Economic environment.
Finally, I will note that we continue to see some digital currency offerings trickle out here and there and each and every time, we do we're even more comps with respect to the significant competitive advantages that are offering brings.
I'd now like to turn the call over to Sean to review our financial results in detail.
Sure.
Thank you David and good morning, everyone.
Before I begin just a quick reminder, that our full financial statements and MD&A for the fourth quarter and full fiscal 2022 year are available on our website under the Investor The Investor Relations section is also on SEDAR and on Edgar and as David mentioned all the following numbers are reported in Canadian dollars as per our financial statements unless otherwise noted.
Starting with our balance sheet total assets at the end of the fourth quarter cost of $3 $3 billion, Mark up 35% from $2 4 billion at the end of Q4 of last year and up 6% from $3 1 billion at the end of the third quarter of this year.
Cash and securities at the end of Q4 were at $230 million or 7% of total assets down from $272 million or 11% of total assets at the end of Q4 of last year and up from $218 million or 7% total assets at the end of Q3 of this year.
Year over year decrease was the result of the bank deploying cash into higher yielding lending assets in low risk securities over the course of the quarter.
Our total loan portfolio at the end of the fourth quarter expand to another record balance of $2 99 billion, an increase of 42% year over year, 6% sequentially.
They sell into its component parts in a moment.
Book value per share increased 7% year over year, and 2% sequentially to another record of $12 37.
These increases were both a function of higher retained earnings resulting from net income growth, partially offset by dividends paid for the year over year increase was also impacted by our common share offering in the U S last September .
Our CET one ratio was 12% down from 15, 2% at the end of Q4 of last year and down from $12 five 1% at the end of Q3 of this year when our leverage ratio at the end of Q4 was nine 8% down from 12, 6% at the same point last year and $10 three 8% at the end of Q3 of this year.
Both our CET, one and leverage ratios remain comfortably above our internal regulatory ratio targets.
Turning to the income statement total consolidated revenue increased 33% year over year at 14% sequentially to a record $24 $3 million with the increase being driven primarily by higher net interest income derived from our digital banking operations, resulting from the strong growth in our loan portfolio that was discussed earlier.
Consolidated net income for Q4 increased 9% year over year, and 12% sequentially to a record $6 $4 million with exception of Q1 2017 during which we recorded a one time tax recovery, resulting from the amalgamation of a bank and Pwc capital in that same period.
Net income for Q4 was reduced by transitory costs totaling $1 8 million as David mentioned earlier incurred in the period related to our investments in several strategic growth initiatives, including U S Bank acquisition. The launch of the U S version of our point of sale offering our receivable purchase program and preparation for the launch of our digital deposit receipts. We expect these investments to begin to contribute to profit.
Ability over the course of fiscal 2023.
Net income was also reduced by $1 1 million of incremental tax provisions, which we also expect will reduce in fiscal 2023.
Consolidated earnings per share decreased 4% year over year to 23 with.
The decrease due primarily to the impact of the issuance of $6 3 million common shares concurrent with the bank's listing on the NASDAQ in September of last year.
Central basis, However, consolidated EPS was up 15%.
The impact for context, the impact of the change towards strategic investments and higher income tax on our 2022, EPS metric of $6 <unk> per share and <unk> per share respectively.
Primary driver of growth in our loan portfolio was once again, our point of sale financing business, which increased 74% year over year and 11% sequentially. So constant at $2 2 billion Mark.
This growth continued to be driven primarily by strong demand for home finance home improvement HVAC in our receivable financing our point of sale portfolio continues to expand as a proportion of the overall portfolio as per our strategy, representing now 75% of our total loan portfolio.
As at the end of the fourth quarter up from 71% at the end of the third quarter.
Our commercial real estate portfolio decreased 7% year over year, and 6% sequentially to $759 million at the end of the fourth quarter.
Noted for several quarters management has taken a more cautionary stance with respect to the commercial real estate portfolio due to expected volatility in the valuations within this asset class and a rising interest rate environment as well as concerns related to higher construction costs, resulting from supply chain disruptions in a very tight labor market.
We remain very comfortable with the risk profile of our commercial real estate portfolio based on our criteria working only with well established well capitalized development partners with excellent track records and restricting transaction to modest loan to value ratios.
Turning to the income statement for our digital banking operations net interest margin on loans that is excluding cash and securities and other assets decreased 28 basis points or 8% year over year, and four basis points or 1% sequentially to 2.0% to 2% due primarily to a shift in the bank's funding mix and rising.
Interest rates over the respective periods as well as the successful execution of our strategy to grow our financing portfolio.
These factors were partially offset by generally higher yields earned on our lending portfolio. During the period also as a function of rising interest rates.
And the margin for the quarter, which includes the impact of cash securities and other assets increased eight basis points or 3% year over year, and five basis points or 2% sequentially to $2, 81%.
Non interest expenses for the quarter was $13 8 million compared to $10 4 million for the same period last year and $13 2 million for Q3 of this year the year over year and quarter over quarter increases were substantially due to transitory costs related to the strategic growth investments I described earlier.
That's associated with the acquisition and integration of the operations of the U S Bank are anticipated to realize substantially by the end of the first quarter of 2023.
The year over year and quarter over quarter increases are also impacted by higher salary and benefits costs should lead to increased staffing levels to support expanded revenue generating business activity across the bank as well as higher costs associated with employee retention, it's very tight labor market.
Cost of funds for the fourth quarter was 245% of 114 basis points year over year, and up 51 basis points sequentially due primarily to our funding mix being comprised of a larger proportion of wealth management deposits relative to a lower cost insolvency professional deposits and the impact of course of rising interest rates.
Solvency professional deposit balances contracted slightly in Q4 compared to a year ago, Despite adding more partners and as we continue to expect as we continue to experience historically low bankruptcy activity, which remains well below pre pandemic levels. During the same period of wealth management deposits grew 65%.
Looking ahead to 2023, we do expect to sell these deposits to grow moderately throughout the year as a function of an increase in the volume of consumer bankruptcy and proposal restructuring proceedings and Mr challenging current and forecasted economic environment.
Our provision for credit losses, or <unk> in Q4 was again demonstrative of risk mitigation strategies inherent in our lending and credit risk management processes as well as the outstanding credit quality of our current loan portfolio.
<unk> in the current quarter were 205000 compared with the recovery of credit losses in the now turned 79000 same period last year.
If you sell a 166000 for Q3 of this year.
We recorded last year was attributable primarily to changes in the bank spending asset portfolio mix and changes in the forward looking information using the bank's credit risk models offset partially by higher lending balances sequential change. This year was a function primarily of higher lending asset balances and changes in the forward looking information that we used in our credit risk models.
Set partially by changes in the bank's lending asset mix.
Our PCL ratio remains one of the lowest in the Canadian banking industry at an average of zero percent over over the past 12 quarters, and then David will discuss in a moment the superior risk profile is expected to serve us well through an economic downturn materialize over the course of 2023.
Gross impaired loan balances in October 'twenty, one 'twenty October 31, 2022, Brazil.
Brazil $3 million, all of which will be paid on November $1, 22, compared to $1 4 million last quarter and a year ago.
Turning now to <unk> sales to generate almost exclusively through our cyber security services business digital boundary group increased 33% sequentially decreased 8% year over year to $2 8 million due primarily to timing of service engagements in those respective periods.
Gross profit increased 48% sequentially and decreased 19% year over year to $1 7 million. The sequential increases were driven primarily primarily the higher pricing charged on service as well as meaningful improvements in <unk> operational efficiency.
Key generated a net losses.
<unk> 5 million in the current quarter compared with a net income of $3 5 million in Q4 of last year and net losses of <unk> 7 million in Q3 of this year attributed the higher gross profit from TPG being partially offset by higher salary and benefit expense associated with employee retention and a highly competitive labor market.
I will note here that the net loss for DTC includes costs associated with strategic technology development investments for our digital banking operations. The operations of <unk> on a standalone basis continues to be profitable.
Finally, before I turn the call back to David in August we received approval from the TSA to undertake a normal course issuer bid for up to one 7 million common shares or just over nine 5% of our public float with the time of application.
Further in September we received approval of the NASDAQ to perceive an NCIC check on that exchange as well.
As of October 31 of this year, we've repurchased an aggregate 195300 shares under the <unk> program.
I'd now like to turn the call back to David for some closing remarks.
Yes.
Thank you Sean.
We entered 2023 with considerable momentum and confidence in our ability to continue to generate strong growth in our loan portfolio that is in line with pre 2022 levels. We begin the year with nearly three billings and loans in our Canadian digital banking operations, an annual revenue run rates of nearly 100 million.
Dollars.
At the same time, both Sean and I discussed, we expect our noninterest expenses to decline meaningfully as the expenses associated with the acquisition of the U S Bank and the setup of our receivable purchase program in the United States come to an end.
We expect that that will contribute to profitability margins on revenue.
Your line with those.
Prior to making these investments.
To be clear. This is just the starting point for fiscal 2023, despite forecast for moderation in consumer spending we expect to generate continued strong growth in our Canadian pointed sale business, while we expect the tough to repeat.
The 74% year over year growth that we saw in 2022, we do expect business.
The existing partners to expand along the additional.
To add additional partners, which should contribute to growth of this portfolio in line with the very healthy pre 2022 levels.
We also expect the investments we made in 2022 will provide meaningful additional upside to grow.
We continue to be very encouraged by the limited launch of receivable purchase program in the U S. Confirming both the value proposition of the offering on the market opportunity as we continue to plan for broad launch upon completion of our U S Bank acquisition.
We expect to see strong profitable growth in revenue and gross profits in our cyber security business as both.
<unk> continues to expand its business activities with existing clients, while adding new clients.
As it grows we expect our cyber security business to be increasing increasingly accretive to the bank's overall earnings.
On the deposit side, we expect our low cost and solvency deposits to return to growth expanding throughout fiscal 2023 as a function of an increase in the volume both consumer bankruptcy.
Over the same timeframe attributable primarily to the more challenging economic environment.
We also expect to continue to expand our diverse.
Broker network, which we source personal through personal wealth management deposits, mainly gic's and expand our business with existing partners recent data from one of our major banking partners bears this out.
Finally, and very importantly, as I noted earlier first the bank was designed specifically to perform well in any economic environment.
As I noted earlier the bank has a track record of performing even a little better in economic downturns as our banking peers are hunkering down for difficult times, our low risk model enables us to capitalize on opportunities that might not have otherwise been available to us.
With that I would like now like to open the call to questions.
Operator.
Thank you Joe are you there ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one you touched on phone Google here don't pump acknowledging a request either questions will be bold in their order they are received.
Should you wish to decline from the polling process with both the star followed by the number too.
Are you seeing a speaker phone please lift the handset before pressing in Q.
One moment. Please for your first question.
Your first question comes from.
Sorry, Rick Mcdonald from lower work research. Please go ahead.
Thanks, Good morning, Shawn Good morning, David how are you guys.
Alright, good Greg.
In London, Ontario today.
Yes.
Listen I wanted to ask there's been a lot of discussion on net interest margins this quarter.
With earnings season.
A little bit too David.
The mix of this banks a.
A little different than what most banks in Canada have can you talk about a couple of things. One is you make reference to the deposit mix.
Specifically bankruptcy deposits when we haven't really seen a whole lot of traction on that maybe that's been surprising to some.
Can you give us a sense of what you see in 2023 from that perspective.
And then I have a second question on loan growth.
The loan growth expectation on point of sale I think it is not a surprise to anyone is there anything that youre seeing in the mix within point of sale that you can comment on.
Or is that mix still relatively similar to what the growth in 2022 words.
Sure good questions, Craig with respect to our deposit mix.
Yes.
The deposits, we receive from insolvency industry or even a little lower than the previous year and I think that is the result, while no doubt result Chubb.
The various support payments that are government made to help health care and software.
Suffering with the pandemic, so we're coming off a 35 year, lower consultancies and theres a bit of a lag effect.
From that turning into deposits 1 million solvency increase.
So I expect but now of course, the support payments have ended and interest rates are going up and it's becoming more challenging environment for particularly for consumers and small businesses, but unfortunately, it will see a lot more.
Insolvencies in Canada, It will get back to sort of normal levels, maybe even exceed that.
That does bode well for us.
It means that our insolvency deposits will start growing again.
Could very well get to <unk>.
1 billion Mark the one year $600 million right now.
Coming off a 35 year low so the mix should.
Throughout 2023.
Increase.
Incentives to Consol.
On solvency deposits.
Now with respect to loan growth.
We're not really seeing much of.
A reduction in our point of sale growth.
Although I do expect a higher interest rates will dampen.
Loan growth, 10% to 2023.
The mix shift.
Primarily.
Smaller primarily about about two thirds of it spend in home improvement and home type financing.
And we loved that.
Represents a low risk segments of the market.
So.
In 2023, slightly a little more emphasis on the <unk>.
The home improvement side than there has been but it is already a big business for us.
We well committed.
It's a lower risk segments of the point of sale market.
And then with respect to the U S market. This was an opportunity to grow and point of sale as well.
I suspect the mix was a little bit different in the U S. But any general comments on what youre seeing in trends in the U S market so far.
With respect to growth opportunities in that segment.
Well thank.
Seems to be a tremendous growth opportunity.
I guess a huge market.
One trigger rehab was one eight.
Trillium.
As opposed to Calvert, maybe up.
Under the chance of that.
5% of that.
So a huge growth from from Pfizer.
And any one of the industries have refinancing Canada, we'd be happy to do in the state.
Just by chance the first one.
<unk>.
Customers, we got let's say.
Our large tractor trailer financing company.
And coincidentally that was the very first customer you got in Canada to not the same.
Company, but at the same industry, so tractor trailer financing.
So I don't really have a good a good visibility.
Visibility on that.
What segments will grow most rapidly and just the market is so big and our product seems to be so attractive.
Two these point of sale finance companies.
Once we've got our U S Bank, we expect.
Really big growth from that stage.
Okay. Thanks for that and then just final one for me and then I'll pass it on.
With respect to timing on bankruptcy deposit growth. Thank.
Thank you for the reference point of $1 billion.
You are you getting any indications from the trustees that you deal with in that side of things on timing is this something that you expect happening in the first half of the year as I suspect more so in the second half of the year.
Well this year.
We're all seeing the crocs senior economy right now the trustees that are seen increased volume already.
Sure.
Other banks are reporting a larger and larger provisions for losses.
Rates are going up so I was just just the way you would expect we're seeing the leading indicators.
So I would say.
Half of 2023.
It will be growing.
Unfortunately for.
So it would be growing like gangbusters.
Deposit start pouring in the door.
States are being wound up towards the end of metal say 2023, probably start seeing the type of growth we use our experience in this area.
Okay. Thanks, very much for answering my questions I'll pass it on thanks.
Thank you Greg.
Thank you.
Ladies and gentlemen, as a reminder, so you have a question misperceived as called for by the number one.
Your next question comes from Stephen Ruffini from University Bank. Please go ahead.
Good morning, David Thank you for a great quarter.
I've got.
Several questions, but I'm just going to ask two and then go back in the queue.
Last time, we talked you were thinking that you would have approval for your digital dollars.
Project by the end of October obviously that deadlines coming gone what are your current thoughts on that.
And secondly have you ever given any thought to off balance sheet structures to hold some of your loans could be more capital efficient.
And drive higher ROE for the bank.
Well, Stephen Thanks for logging in and.
I Wonder I wonder.
Just seeing the fondant rainy or whether that's just gone through London.
London here I imagine you saw just a bit earlier than we did or where youre located.
Yeah, it's pretty gray here in Ann Arbor.
Alright.
So what happened with the additional deposit receipts is the model that we had worked hard we called out the CAD.
Use the third party to hold the wallet.
It didn't seem to fit well with the various regulators that we were discussing it with.
So we've pivoted over too.
But different.
Model, but using all of the same technology, where we were closed we would host and we are hosting right now.
The wallets ourselves.
And hence the name change to category.
We think this is the model that.
We will have legs.
Frankly, I wouldn't be surprised every other bank will want to.
It has a lot of advantages over the original one.
For one thing the data for the deposits or maintain bulk from the stellar block chain and also in our tried and true what we called.
Deposit management system DMF.
So.
From two alleviates, our regulatory periods.
Something should happen to a blockchain, which I really really delta or whatever happens, but if it were the same.
That is maintained simultaneously on our existing deposit.
So sort of in reaction to the feedback we got from various regulators then NV.
What we noticed the happening in the world, we have covenant over too.
What we think is.
About.
About what's out there.
We're a bank that sell through is the host of the wallet.
And.
The digital deposit receipts.
Isn't really a coke.
It represents a real deposit with a real bank.
That goes through all the normal AML procedures, and all that but it did it did take time it.
It is fully functional now.
Amongst our directors on our employees.
But.
Well tactically wait to lift the curtain outcome.
To make it available to our.
Other deposits.
So with respect to utilizing off balance sheet techniques to Thunder alone.
We have a lot of capital.
So we're just using our own capital.
The loans and leases.
We are generating.
Time progressive though.
We are contemplating.
Our portfolio in these.
These assets so that they would be ready readily available for sale.
<unk>.
For two reasons, one increases the bank's liquidity and the other one as you say.
Improves the bank's return on common.
Common equity.
Okay, Great I've got two more questions, but ill get back in the queue and we will see if we get back to me. Thanks.
Okay Stephen.
Okay.
Thank you your.
Your next question comes from Brett next from quarter capital. Please go ahead.
Hello, gentlemen, how are you doing.
Very good Brad.
Good.
Hey.
Effective tax rate that $1 1 million in additional taxes for the quarter.
What was that specifically related to.
And are we going to go back to that 27% effective tax rate.
Going forward.
I think thats a good question for our CFO who has been.
On the on the line.
Waiting for a good question to answer so Sean I'll leave that one too.
Thanks, David Hope I'm off mute your folks good morning, Brad.
Yeah, that's a little high tax rate that we're seeing in the function of kind of three core variables, Brad that we're pointing to and we do expect it to diminish over the course of 2023.
I think we'll get back to our statutory rate of 27%, but we do think it will be south of 30% is these are.
The various elements of rationalized over the course of the year.
The comprised primarily of non deductible expenses associated with our stock options as.
As well as some nondeductible losses, we think this is going to be one that we'll be able to utilize early in the coming year.
Well as.
You're probably familiar with savvy tax with Canada, which will pay and it's a function of the foreign exchange gains.
<unk> realized over the last particularly over the last quarter on our on.
Our current U S lending operations to Universal finance. So those three elements there were some miscellaneous items VSAT, but those three items contributed about 90% of the increase that we.
In our public disclosure.
Okay, Great I've got several more here.
You guys have time.
Nowadays what type of rates are you getting on your point of sale loan financing.
What's the incremental cost.
To fund those.
Well.
Our rates are running.
And Canada about two 5% over the same term government accountable.
So.
Government canton bonds at say, 4% were up at least 657 is the yield on the.
On the point of sale in Canada, and the United States.
And about a 1% to that on the net interest margin.
With respect to incremental cost.
That may be a little bit of hiring necessary to take on the U S market.
Right.
Not very much.
In relation to the scale of the operation.
Very very scalable.
For the most part all the operations will be handled.
At the Tech center, which I'm sitting in today.
And in London.
There's no need to duplicate what we have here in London.
Take on the U S market so.
Martin marginal increases tiny increases.
Yes.
Few staff members to take on the U S market, but other than that the systems are capable of.
Many times.
Volume.
Presently dealing with.
Okay, great and if I heard that correct in the Canadian market Youre getting 250 basis points over treasuries.
And in the U S market Youre getting 350 basis points over treasuries.
Point of sale product be about right, it's about 1% better than we were getting Canada roughly.
Roughly speaking those numbers.
Okay, Great and can you update me on kind of the timing of the.
CAD XE rollout is you kind of see things play out next year.
Well I think.
So early in 2023 will be it will be in the <unk>.
<unk> to take <unk> to the open market.
It all depends on the regulatory regulator's perception.
Right now.
Thanks to.
Thanks to a certain following bombers.
We created a whole lot of nervousness in this era, even though of course.
Our digital deposits are received.
Entirely different animal than a month.
While it was being promoted at all of the Bahamas.
Alright.
Technically we'd be ready to go for as part of 2023.
But we are we are cognizant choppy.
Of the.
Caution.
Our concern that various regulators have about.
This use of a blockchain that's about the only similarity.
We're simply using stellar.
Two.
Count for our.
Actual deposits with our bank.
So not a whole lot of.
Not a whole lot of similarity to all the things that have gone wrong or even what the so called stable clients where they are.
Place deposit split with another financial institution.
As collateral for their client artist.
Represents a real deposit with a real bank and in fact, the data duplicated earlier.
Earlier.
On our own DMF deposit system and on stellar.
So that in effect, our deposits or has the ability to.
Use versus a view our view.
Software our <unk> app.
Because our deposit just like they would with any other bank Zynga intranet.
But you can look at on seller the bonus is of course.
Should you choose to move.
Move your digital deposit receipt premier wallet to somebody else's wallet side to affect a payment you can do it.
So what we've in fact done turn.
On Old School Bank account into the most modern type of checking account, where our cat beads become checks certified checks and factors that are drawn on our on our bank.
Move to somebody else and fee wallet say Amazon E wallet.
To affect a payment.
I would say that some folks say, but theyre already rail to do that David Thats already waits in the payments, but nowhere near as efficiently nowhere near its cost.
Cost attractive transact, some sellers and they order fractions of Samsung takes place instantaneously anywhere in the world.
Versus.
If you try to move money from Canada, the United States, you might be waiting three days.
That would be charged a hefty fee for that for that so we don't have fantastic revolutionary.
Option of blockchain technology.
We're hoping that our regulators on that.
This is all throughout the world.
We'll understand what we're doing.
And endorse it.
It's about as low risk as you.
You can imagine.
Uh huh.
Okay.
We pay attention to all the things that others don't seem to have paid attention to like say antibody laundry tariffs financing.
Lumpy beliefs.
Brad.
Sure.
We routinely excited about putting it out in Canada.
And hopefully.
Hopefully our regulators in the new year.
After we've had some good solid and traction with them will blend or sector.
Great. Thanks, a couple more here.
On digital boundary group, you had strong revenue increase in the quarter of $1 8 million is that sustainable or is that an anomaly or a seasonal boost in revenue or do you think thats more reoccurring.
I think that's more reoccurring and that we.
We received a large contract largest corporations in Canada to do App testing.
And that's very profitable.
Alright specialized type work that dbg as well.
Lets turn for this large corporate.
The only constraint really.
Is finding enough app testers, so we're actually trying to hire as many as we can.
To bolster that business so yes.
Yes, we're excited dbg.
Round numbers $10 billion in revenue.
586 million in gross gross profit.
That should just keep going up the same trajectory.
App testing I can say, it's a wonderful business for us and all the other other.
Other products, we have in Dbg budgets.
Specification penetration testing, there's always I think there is an increasing demand for it.
Absolutely you said $10 million in revenue I'm, showing $5 7 million for the year.
Does that show millions that expectation we show.
We show a gross profit on our on our statements and.
Total revenue Charles on the line.
Nine eight for the year, Sean total revenue that's right, David Yes, Brad Youre right Youre looking at.
Gross profit of $5 seven as published in David's talking about revenue topline revenue of sales there.
Oh, so it's in the income statement.
When I see noninterest income of one eight.
Million.
That's not revenue you said that.
Net.
On the quarter, Brad you're right $1 8 million and that is that's gross gross profits at TPG and the challenge there is integrating that with the bank statement. So it's the most intuitive way we can merge the.
The two income streams.
On what.
Sort of align with how the bank statements are structured so you are right when youre looking at is gross profit.
Okay, Sean what was revenue for the quarter.
Yeah.
But secondly, they reorder.
Probably around three.
Yes.
Yes.
Total $3 million.
Okay, So you're saying core revenue.
Digital down rounded group was $3 million and the $1 8 million you report in the income statement is.
The lower gross profit part of that.
About $2 $8 million in the quarter, Brad for sales and then two points at 1.8, because you meant for gross margin gross profit my apologies.
Okay.
It's something that you could present going forward that would definitely be helpful.
So I can differentiate that.
Let's see lastly, here when I when I.
Add back that $1 8 million and $1 1 million roughly <unk> 10, a share.
It comes up to one one <unk>, a 11% <unk> he kind of on a core basis.
So I imagine thats, a good starting place as I think about profitability.
Next year early next year.
How much leverage should I think you have in this model can continue to grow 20 plus percent.
Do you get to 15% Roe.
I know you do eventually but.
What's the timing of something like that.
So we do get 15 nuts, that's the number we use in our in our planning and.
Good questions on the timing.
Presently the point of sale business in Canada is still growing rapidly, which is quite surprising to me in that.
It's driven.
Bye bye.
Hi.
The actual cost per month, the item that person's purchasing and interest rates of course have huge bearing on that so you would think it would dampen down but presently it is still growing rapidly in Canada.
I was saying earlier not to the extent that.
We just completed.
<unk> percent growth.
In the states the model looks really attractive from the.
The real life customers, we've been dealing with in pitching to.
So the major constraint.
Get into that 15% ROE is how long it takes us.
Us too.
The grant to the acquisition of <unk>.
<unk>.
Although you're holding for the bank.
That's.
That's what's holding us back in the United States.
We created a sort of interim company, we call versus a finance to hold these assets and it's quite cumbersome.
So.
We've actually been.
Backing off until we've got tight U S. Like some so that's the gating item on.
Rapid growth.
Huge improvement in ROE.
No I'm, just saying that.
As you noted we ended the year at a run rate of about $100 million in revenue and.
Fixed costs are.
Traveling over at night, but.
Without any extraneous items are probably running around 55%.
We're already starting to that number you would have Sean yes.
Yes, Sir.
Yes, so we're already starting the year.
With a $45 million pre tax if we did nothing else shrink.
And we are growing rapidly fill the Canadian market.
So.
We really are heading into 2023 with a full head of steam.
If it turns out.
That the bankruptcies.
Increase there they seem to be already well at all that it helps our margin too because the what.
What we pay on the what are really operating accounts.
There's a lot less than we pay on GIC. So.
No.
I hate to be so optimistic with all my colleagues are looking at their boats in the weeping at times.
But are you, saying early our little banks are designed for those type of economy.
Okay.
Ill look at flexion really good.
You didn't hear us complaining about loan losses or cracks from the portfolio right.
All of these all we had in arrears paid off the next day and that's just a crazy anomaly in accounting that you show a loss compared to one day to the next day.
It paid off.
We're going into the market with.
A really solid portfolio, a full head of steam of existing loans and customers.
Growing.
And.
If the recession kicks in as everybody thinks of those probably that just means on.
An abundance of economic whole price deposits for us.
Got it thank you gentlemen, and happy holidays.
Thank you Brad.
Brian again, some time in the.
Sometime in the winter months I might be.
We spend a little time in my place in Florida, So I won't be too short of right to go up to where you are.
Sounds good just let me know.
Absolutely.
Thank you.
Your next question comes from Steve <unk> from University Bank. Please go ahead.
Yeah, Hey, guys.
Thanks for.
I have the chance to ask my last two questions. So I noticed in your financials that your average price per share on the buybacks that you did was $9 88.
<unk>.
Canadian right, which is actually.
Higher than the current price.
And I noticed that during the year you granted just under 1 million shares of options.
At $15.90 Canadian.
I guess, Mike My question to you is with the.
Stock currently trading at 77.
On the dollar of book value.
Why not get a little more aggressive in just by 195300 shares to least offset the stock option dilution.
Well good question Steven.
Okay.
Sure.
It took quite a while too.
To take the normal course, issuer bid them to United States and it wasn't anything other than just paperwork and regulatory approvals required.
Now as an in place Raymond James has our printing for us there.
Course been blacked out, but we all are.
After the blackout.
Youll see RJ in there.
We've got about one point.
5 million shares.
But we can buy and as you say it's fantastic.
Fantastic price, we might be able to buy them out at 70% a book.
So it will be we will be looking to pick up as much as we can.
Awesome.
And then my.
Last question is on net interest margin and changes in interest rates right.
Yes.
No.
In the short run the impact for a bank.
<unk> is not.
Fully reflective of what the longer term impacts are of a shift in interest rates as you know.
So.
Yes, I noticed that.
Sequentially you had I think it was five basis point rise in your net interest margin rate.
Yes.
Over a year since the bank of Canada rate Rose three 5% so far.
There is a bigger impact as assets continue to reprice.
Yes.
Can you can you quantify in dollars.
For every 1%.
Rising rates whats the immediate impact.
And then whats the say one term sorry, one year impact is on net interest margin.
Please.
Well.
Short answer of that.
Hardly any impact on us.
Rising.
Interest rate environment.
We're so precisely matched.
We only.
We're at about one four.
Here's asset duration, but about the same in liabilities.
We moved very.
Very precisely with the interest rate environment.
By design.
However, we do make held much better.
On the cash that we're holding for liquidity purposes. So that's why you would see.
The margin on our loans.
Pretty well the same maybe maybe decline even in trying to get the margins on the loans.
But the actual overall net interest margin of the bank improved to 281, which in Canada that would be the by far the highest net interest margin of any bank.
All of them are posting.
Decline.
So there will be.
<unk> continue to climb and I expect it will have a little bit more in Canada.
There's a positive impact on our profit and loss.
Our interest margin and that we earn more on our liquid securities.
Okay. Thanks, Thanks, so much and again.
Great work on a good quarter. Thank you.
Well, thank you and we'll look forward to get together in person.
Thank you.
Yes.
I can actually come to Canada now.
Yes, yes, we can go we can cross the border.
I crossed the Bluewater British so long ago.
We've got a nice welcome.
I don't think there's that many customers covered here.
That was well received.
The terrorism business is way down.
Yeah.
I will get back it'll get back looked forward to attaining that Teva and go off to have a nice lunch.
Yes, Thank you look forward to it.
Okay.
Thank you Mr. Taylor there are no further questions you can go ahead.
Well I'd like to thank everyone for joining us today and I look forward to speaking with you at the time of our first quarter.
That's called release.
Obviously, where we are.
Very excited the team of bankers here at <unk> Bank.
As opposed to maybe our colleagues here.
In our industry.
We designed our bank.
Sort of talked about in more detail on this call. We've designed our bank take advantage of.
What for other bankers.
Our challenges for us it tends to be opportunity.
And.
That was demonstrated I think quite readily and.
How fast.
We recovered.
Have a record year in 2022.
With the growth in our point of sale business that came off.
The pandemics.
Huge decline in volume.
So thats.
Sort of what you can expect with this.
This bank is setup to run.
<unk>.
When recessions.
<unk> come our competition tends to be.
Yeah.
More myopic, having to look at their own portfolios and.
Our source of deposits from the solvent industry, which.
No we've probably grown our.
Our client base.
Relevancy professionals to most of the industry most of the large.
Solvency practices in Canada Bell Bank. So we're in.
In good shape to take advantage of.
What might be a tougher time for others.
Again, thank you thanks for dialing in.
Forward to talking to you next quarter.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating.
Please disconnect your lines.