Q1 2023 VersaBank Earnings Call
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Speaker 2: Good morning ladies and gentlemen. Welcome to VersaBank's first quarter fiscal 2023 financial results conference call.
Speaker 2: This morning, Versabank issued a news release reporting its financial results for the first quarter ended January 31, 2023.
Speaker 2: 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 Cedar and Edgar. Please note that in addition to the telephone dial-in,
Speaker 2: VersaBank is webcasting this morning's conference call.
Speaker 2: Actual results could differ materially from our expectations due to various material risks and uncertainties associated with Versabank's business. Please refer to Versabank's forward-looking statement 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. Thank you everybody and thank you for joining us for
Speaker 3: financial results are reported and will be discussed on this call in our reporting currency Canadian dollars. For those interested, we'll provide US translations for most of our financial numbers in our Standard Investor presentation, which will be updated and available on our website shortly.
Speaker 3: reported and will be discussed on this call in our reporting currency Canadian dollars. To those interested, we'll provide U.S. translations for most of our financial numbers in our Standard Investor presentation, which will be updated and available on our website shortly. Now to the results.
Speaker 3: The first quarter was not only another record quarter for Versabank, but more importantly one that was demonstrative.
Speaker 3: of the true efficiency and return on equity generating capability of our branchless business-to-business digital banking model.
Speaker 3: And once again, this was complimented by the continued profitable contribution of our cybersecurity services business.
Speaker 3: which drove our portfolio to an all-time high of just under three and one-quarter billion dollars. Growth was again driven primarily by Canadian point of sale on the lease portfolio, which was up 68% from Q1 last year. The combination of long growth and stable net interest margin drove record revenue and record interest income. On the cost side, through anticipated, the transitory costs related to growth and investments.
Speaker 3: and our move to NASDAQ that temporarily elevated our non-interest expense and dampened our profitability in 2022, substantially normalized in the first quarter.
Speaker 3: putting our efficiency ratio back on track towards its full potential.
Speaker 3: We continue to expect further normalization as our non-interested expense.
Speaker 3: And importantly, we haven't only barely begun to realize the growth contributions of those investments we made last year.
Speaker 3: our best quarter ever in terms of net income and EPS.
Speaker 3: Net income grew 69% year over year to $9.4 million, besting our previous record of $6.4 million by a full $3 million. And EPS grew 79%, or 15 cents year over year, to 34 cents. Looking more closely at our performance, as I noted a moment ago, the first quarter financial results were marked once again by our best ever revenue, net interest income and net income and earnings per share.
Speaker 3: highlight. The first is our net interest margin.
Speaker 3: This is something relatively unique compared to our peers. The second is our efficiency ratio. Now that we are through the bulk of our transitory costs for our strategic growth initiatives, the true scalability and efficiency of our model is emerging. The third, earnings per share growth, which outpaced net income growth as a result of our active share repurchase program.
Speaker 3: As we look ahead, in addition to the continued growth we expect in our Canadian loan portfolio, we expect to generate significant long-term growth from our launch of the United States competition forantasy 7.1 since Travis Kalin toy story.
Speaker 3: As we look ahead, in addition to the continued growth we expect in our Canadian loan portfolio, we expect to generate significant long-term growth from our launch of the United States Receivable Purchase Program.
Speaker 3: based on our proprietary technology that provides them with a regular reliable inexpensive funding alternative to help them succeed in their businesses. As I discussed in our last quarterly call this acquisition is transformational. A next step in VersaBank's long-term growth strategy 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.
Speaker 3: We have launched this program on a limited basis in the United States.
Speaker 3: of the broad national rollout planned upon completion of the acquisition of the Minnesota-based Stearns Bank, Holdingford, a fully operational OCC-chartered national U.S. bank.
Speaker 3: Specifically, this acquisition will enable us to broadly roll out our Receivable Purchase Program to the underserved U.S. market, which has been so successful in Canada, where we call it our point of sale financing business.
Speaker 3: In December , we submitted the requisite filings to the OCC and to the Reserve seeking approval of the acquisition and based on continuing dialogue remain optimistic with respect to near-term approval.
Speaker 3: In terms of an update on timing, which is ultimately the discretion of our regulators on both sides of the border, we anticipate receiving a decision with respect to its approval of the proposed application from the US regulators during the second quarter of the calendar year.
Speaker 3: an update on timing, which is ultimately the discretion of our regulators on both sides of the border, we anticipate receiving a decision with respect to its approval of the proposed application from the US regulators during the second quarter of the calendar 2023.
Speaker 3: and if favourable, we will proceed to complete the acquisition as soon as possible, subject to Canadian regulatory approval.
Speaker 3: In the interim, we continue to actively prepare for the significant opportunity to bring our differentiated and attractive financing solutions to US partners.
Speaker 3: topic of US Receivable Purchase Program.
Speaker 3: our US portfolio continues to expand with loans now nearly $44 million. As I discussed in our last call, we have limited boarding of loans ahead of the Folsom rollout upon completing the US acquisition.
Speaker 3: And in fact, command-to-date has continued to outstrip our self-composed short-term capacity restrictions. Very comfortable with our progress, and with the revised expectations for completion, we have made the decision to ramp up our US RPP phones ahead of closing the acquisition.
Speaker 3: Command today has continued to outstrip our self-composed short-term capacity restrictions. Very comfortable with our progress and with the revised expectations for completion, we have made the decision to ramp up our US RPP loans ahead of closing the acquisition. For this moment.
Speaker 3: I would like to turn the call over to Sean to review our financial results.
Speaker 3: to turn the call over to Sean to review our financial results. Thanks, David.
Speaker 3: Before I begin, just a quick reminder that our full financial statements and MD&A for the first quarter are available on our website under the investors section as well as on CEDAR 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 our balance sheet.
Speaker 4: Total assets at the end of the first quarter of fiscal 2023 were just over 3.5 billion, up 46% from 2.4 billion at the end of Q1 last year and up 8% from 3.3 billion at the end of fiscal 2022.
Speaker 4: Cash and securities at the end of Q1 were 251 million or 7% of total assets, compared with 155 million or 6% of total assets at the end of Q1 last year, and 230 million or 7% of total assets at the end of fiscal 2022.
Speaker 4: Our total loan portfolio at the end of the first quarter expanded to another record balance of $3.24 billion, an increase of 46% year-over-year and 8% sequentially. I'll break this out into its component parts in a moment.
Speaker 4: Book value for share increased 8% year over year and 3% sequentially to another record at $12.77.
Speaker 4: These increases were both a function of higher retained earnings resulting from net income growth, partially offset by dividends paid, and also benefited from the lower number of outstanding shares as a result of our active share buyback program.
Speaker 4: Our CET1 ratio was 11.2%, down from 14.8% at the end of Q1 last year, and down from 12% at the end of fiscal 2022, where our leverage ratio at the end of Q1 of this year was 9.21%, down from 12.7% at the same point last year, and 9.8% at the end of fiscal 2022.
Speaker 4: Both of our CET1 and leverage ratios remain well above our internal targets. This is according to our income statement.
Speaker 4: Total consolidated revenue increased 42% year over year and 7% sequentially to a record $25.9 million with the increase driven primarily by higher net interest income derived from our digital banking operations resulting from the strong growth in our loan portfolio that I mentioned earlier and the maintenance of our net interest margin.
Speaker 4: Consolidated net income for Q1 increased 69% year over year and 46% sequentially to a new record of 9.4 million excluding Q1 2017 which is attributed primarily to a one-time recognition of deferred income tax assets pursuant to the amalgamation of VersaBank with PwC Capital as David mentioned earlier.
Speaker 4: In addition to the growth in that interest income, as expected, non-interested expense substantially reduced year over year and sequentially, as the TransStory cost-related to our strategic investments in several strategic growth initiatives, including the U.S.-bank acquisition and the launch of the Receivable Purchase Program in the U.S. rolled off.
Speaker 4: Consolidated earnings per share increased 79% year-over-year and 48% sequentially to 34 cents, with the increase benefiting from strong earnings and the lower number of outstanding shares due to our active share repurchase program. During the first quarter we were purchased and cancelled just over 822,000 shares, bringing the total number of shares purchased under the NCIB as at the end of Q1 to just over 1 million.
Speaker 4: The primary driver of growth in our loan portfolio was once again our point of sale financing business, which increased 68% year-old year-olds are passing the 2.4 billion mark. They continue to be driven.
Speaker 4: This growth continued to be driven mainly by strong demand for home, home improvement, HVAC and auto-receivable financing. As we noted on our last call, although we expect very healthy growth from our point of sale business in 2023, we won't see the same outsize growth as last year.
Speaker 4: Q1 of this year saw sequential growth in the Pornosale portfolio of 9%. We all did a Q4 last year and we believed sequentially, quarterly growth in the same range throughout the remainder of the year is achievable, is consumer spending in the sectors on which we focus remains active. Our Pornosale portfolio represents 75% of our total loan portfolio as of the end of Q1.
Speaker 4: which was unchanged from the end of fiscal 2022. Our commercial real estate portfolio was expanded 5% year over year and 6% sequentially to 807 million at the end of Q1. As discussed in our last several quarterly calls, we have taken a more cautionary stance with respect to our commercial lending portfolios, to the expected volatility and valuations within the SASC class, you know, rising industry environment, as well as concerns laid to higher construction costs resulting from supply chain disruptions and a very tight labor market.
Speaker 4: That said, we are seeing healthy demand for our construction and turn financing products in the form of very high quality deal flow. We expect this to continue throughout 2023.
Speaker 4: We remain very comfortable with the risk profile of our commercial real estate portfolios based on our criteria of working only with well-established, well-capitalized development partners to demonstrate excellent track records and of course restricting transactions 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, securities and other assets.
Speaker 4: Decreased 20 basis points of 6% year-over-year, but was unchanged sequentially at 3.03%. Year-over-year decrease was due mainly to a shift in the bank's funding mix combined with rising interest rates or the respective periods, offset partially by generally higher yields or non-erlending portfolio. And it's smart and overall which includes the impact of cash, securities and other assets.
Speaker 4: Increase 6%, or two, sorry, increase six basis points, or two percent year over year, and two basis points are slightly less than 1% sequentially to 2.83%. This is a tribute to higher yields learned on lending and treasury assets offset partially by higher cost of funds. 9.6 expenses for Q1 will cost 1.3 million compared with 10 points.
Speaker 4: across the entire bank, higher cost-related to employee retention in the very tightly-remarket, and higher cost-related to investments in the banks' business development initiatives offset partially by lower insurance premiums of the Chibiru Diversive Enx listing on the NASDAQ September 2021, as well as lower capital attacks expense.
Speaker 4: The sequential decreases due to the expected significant reduction in trans-story cost related strategic growth investments and are listing on NASDAQ that David and I have both mentioned earlier, as well as lower capital tax expense.
Speaker 4: Cost of funds for Q1 was 2.95% up 166 basis points year over year and up 50 basis points sequentially with both increases due mainly to the larger proportion of wealth management deposits relative to our lower cost and solvency professional deposits versus the comparative periods as well as a general increase in market interest rates.
Speaker 4: The increase in our cost of funds remains significantly less than the Bank of Canada's increase in the benchmark rate of 425 basis points to the beginning of fiscal 2021. Insolvency professional deposits once again contracted slightly in Q1 on both a year-over-year and sequential basis to the historically low bankruptcy activity Canada has experienced primarily as a result of government support for both individuals and small businesses extended during the pandemic.
Speaker 4: Our provision for credit launches or PCLs and Q1 once again evidence that prudent risk mitigation strategies inherent in our lending models and outstanding credit quality of our loan portfolio, especially evident given the broader expansion and PCL ratio that are our peers are reporting.
Speaker 4: Provision for credit losses for Q1 was 385,000, prepared for the provision for credit losses of 2,000 in Q1 last year, and the provision for credit losses of 205,000 for the fourth quarter of 2022.
Speaker 4: As the sequential and new rear changes were a function primarily of changes in the forward looking information used by the bank and its credit risk models as well as higher lending asset balances. PCL is the percentage of average loans for Q4 was five basis points and our average more the past 12 cores was zero.
Speaker 4: Our PCL ratio will continue to remain one of the lowest in the Canadian banking industry.
Speaker 4: Traying out a DRTC, I would like to remind you that DBG's gross profit amounts are included in DRTC's consolidated revenue, which in turn is reflected in non-interest income and first-evanced consolidated statements of income and comprehensive income.
Speaker 4: DBG's revenue for Q1 decreased 3% year over year and 19% sequentially to $2.3 million as a function of lower service work volume in the current quarter. Historically, Q1 is softer for DBG attributed to the impact of the slower holiday period which typically results in lower revenue generated activity. Gross profit, however, increased 17% year over year and decreased 6% sequentially to $1.6 million.
Speaker 4: Services provide diverse of bank digital banking operations, increase 3% sequentially, 29% year-rear to 1.8 million.
Speaker 4: The RTC recorded a net loss of just over a half a million dollars compared to net income of 150,000 in Q1 last year And net loss of just under half a million in Q4 last year The year-rear trim was a function primarily hired on just expenses attributed to higher salary and benefits expense due to higher staffing levels to support expanded business activity
Speaker 4: and higher costs associated with employer retention amidst the current challenging labour market. And now I'd like to turn the call back to David for some closing remarks. David? Well thanks Sean.
Speaker 3: As many of you know, I'm an avid pilot and we aviators have a term that describes the absolute best conditions for flying at being Cabo K.
Speaker 3: Look out to the foreseeable future for VersaVanc. We have Cabo K. As a side note, I'm sitting here at London Airport looking out my window. And today it is indeed Cabo K.
Speaker 3: Our comps for Canadian Digital Banking operations will benefit throughout 2023 from the outsized loan portfolio growth of 2022.
Speaker 3: and we continue to see sequential cordially growth in the neighborhood of 8%. We expect net interest margin on loans to remain robust.
Speaker 3: We expect meaningful ad for our loan portfolio through our US Receivable Purchase Program. With each passing month, with more discussions with our existing and potential customers for our RPP offering in the United States.
Speaker 3: was overwhelmingly positive.
Speaker 3: Although the approval process for our U.S. bank acquisition is taking longer than expected, it has not in any way changed our belief on the size of the opportunity. In the interim, we made the decision to expand our limited pre-acquisition rollout to better capitalize on the near-term demand I described earlier.
Speaker 3: And as we await the opportunity for broad rollout, notably, we expect to generate a larger spread compared to Canada when we roll it out broadly.
Speaker 3: Last quarter, I discussed how.
Speaker 3: I specifically designed Versabank to perform well in good times and even better in more challenging times. A core component of this model, in addition to risk mitigation being at the core of everything we do, is our high value insolvency professional deposit business.
Speaker 3: As a reminder, we have almost singularly addressed the UNSERVED market opportunities to provide integrated technology to easily enable bankruptcy trustees to park deposits with us.
Speaker 3: Insolvencies plummeted during the pandemic due to government financial support, reduced consumer spending, and a halt to collection activity.
Speaker 3: hitting a low of over 7,500 per month for the period April 2020 to February 2022. This compares to an average over the two years preceding the pandemic of over 11,300 per month.
Speaker 3: As expected, we are now seeing those numbers begin to climb. Now up to 9,000 for January 2023, an obvious leading indicator of the respect to our insolvency deposit growth.
Speaker 3: And we are now very recently seeing disc flow through in terms of account openings and quite dramatically. At the same time, we are continuing to add new trustees and partners further expanding our already impressive market share. This obviously boasts well for the low cost deposits moving forward.
Speaker 3: To conclude, as discussed at the outset of this call, we view our results for the first quarter as clearly evidence of the operating leverage inherent in our branchless business-to-business digital banking model.
Speaker 3: grow our loan portfolio in Canada and add the significant additional long-term growth we expect in the United States.
Speaker 3: We expect to continue to see the torque in our operating leverage.
Speaker 3: Notably, our US Receivable Purchase Program will be serviced by the same technology centres in London, Ontario and Saskatoon, Saskatchewan that service our Canadian point of sale.
Speaker 3: portfolio and essentially the same number of personnel.
Speaker 2: That's operating leverage. With that I'd like to open the call to questions. Michelle. Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad.
Speaker 2: Your first question will come from David Feaster at Raymond James. Please go ahead. You're welcome.
Speaker 5: to get maybe some more detail on the US expansion. Glad to hear you're kind of going to be accelerating that. I'm just curious how you've had good reception as far, but how's demand in the states, the pipeline of new partnerships and just kind of the roadmap for the US expansion? And maybe, where do you think this, that portfolio gets
Speaker 3: receipts of the approval to acquire the Sterns-Holingford Bank. We just wanted to test the market and get the legal documentation in place and our internal systems in place. And that we did. And we were expecting that we would be able to operate the bank around now. So...
Speaker 3: We just sort of slowed it down, but it looks like it'll be a little longer before we're able to operate the U.S. bank. So we've made a decision to...
Speaker 3: lend directly from our Canadian bank for the time being so as not to lose the momentum that that we've been gathering by by talking to various potential partners.
Speaker 3: So to answer your question, there's a huge number of pointy points, well they won't call them point of sale, fine and see in other states, but let's call them the resubile purchase program partners in the United States that are really really keenly interested in itching up to our
Speaker 3: just did and signing up. That's why I made the decision to fund it from Canada for the time being. I didn't want to. I'll disappoint them and I like to keep them momentum going. We don't have any year end targets. But quarter by quarter you'll start seeing it grow. And I expect we'll have the approvals and I will be able to.
Speaker 5: Really a rampant with the US Bank That makes sense And maybe maybe touching on the CRE book you talked about some of the cautiousness that you might have had past Few quarters. I'm just curious. Maybe what changed is the availability of credit?
Speaker 5: you know, in the market, where are you seeing demand that, you know, that provides good risk adjusted returns for you? And I mean, have you have you tightened underwriting standards in that segment at all?
Speaker 3: Well, we operate with a sort of a mantra and it goes like this. Ad loans are made in good times. So in court over court, you'd see me saying we're being quite cautious because we believed and quite rightly so that...
Speaker 3: There was somewhat of a real estate bubble in Canada and probably all of North America.
Speaker 3: prices were way too high and so we were very cautious in our lending during that period of time. Now we've seen the prices reset and getting down to Bentley Choi off above behind the wheels for electrical
Speaker 3: which gives us a bit of comfort. And secondly, as usual, as usual, as they are tactic, are competitors, so usually licking their runes around about this time from finding themselves overlent on various properties.
Speaker 3: So that's the reason why the resurgence now in our optimism in the Cree portfolio.
Speaker 3: lack of competition and pricing coming to reasonable levels. And of course, we have the who's who in the industry is as clients. So this is typical for us. I've done this every year, every coming out every recession, my 45 years, been a banker.
Speaker 5: Okay, that makes sense. And then maybe last one for me, I mean, you've been extremely active in purchasing stock. We're still trading well below tangible. You know, you've got plenty of capital. I'm just curious, your appetite for purchasing stock here and how you think about capital when you've got such strong organic growth at the same time. Just curious your thoughts on it.
Speaker 3: on capital return, capital priorities, and yeah supporting the community will get a growth. Well, we just love buying back her stock at these prices. I mean, it's about the best and as warm buck, it was very about some investment. It's zero risk. Yeah, we buy it back. We get the return. Yahoo.
Speaker 3: I kind of doubt we're going to have that opportunity much longer. I think the market probably wondered if we had something to do with the crypto industry and we got sort of...
Speaker 3: the earnings we've just produced are most of the industry in the dust. I'd love to buy back keep buying back the stock, but I can't see the stock staying down this level much longer with these kind of numbers coming out. That makes sense. Well, congrats on a great quarter. I appreciate all the questions. Thanks David. Look forward to seeing you sometime in Florida. I'm feeling the frozen north here, but I hope to turn the airplane south 180 degrees and head back. It's sunny and beautiful. So come on down. Yeah. My wife tells me that too.
Speaker 2: Your next question will come from Mike Rizanovich at KBW Research. Please go ahead.
Speaker 5: Good morning. I wanted to just ask a couple of quick questions on the numbers here. So first on the POS hold back. I think you're down about 5.5%. You were I think well north of 10 or a little bit north of 10 in the depths of the pandemic. Do you have a wine of sight as to how low that number might go?
Speaker 3: So, migrated over to lower risk assets. There might be something to do with the impending perhaps recession. We're seeing less riskier assets than we did in the past. IE, now it's moving towards home improvement type loans, which generally are a lot less riskier than...
Speaker 3: say hot times of motorcycles and RVs and that sort of thing. So we're seeing a migration towards the lower risk asset classes as consumers, maybe spend less in the
Speaker 3: what you call luxury items, items they don't really need. Do they really need a new motorcycle and a recession might be coming? Maybe not. But maybe we really need to look at our house and make sure it's insulated properly and our, we've got a really energy efficient furnace now that price of energy costs are higher. So that's the reason. It's just simply a lower risk portfolio than it was when times are the buoyant.
Speaker 5: Okay, is it fair to assume that you've incorporated the same level of diligence to reflect a potential downturn? Like the 5.5% is low because it makes, but it doesn't mean that you're necessarily not including a bit of a buffer because of the
Speaker 3: you know, macroeconomic environment, maybe not looking so robust anymore. That fair? Well, yeah. Absolutely. We generally run around at least three times the amount of losses that our clients would show. So, and that's what we had the depths of this burden in the pandemic.
Speaker 3: the intrinsic losses that our model has pointed to for our portfolio.
Speaker 3: but it'd been around just around numbers 30 million and we were holding about 100 million in cash fullbacks and that's generally where we run but that
Speaker 3: These are ballpark figures. It's done a lot more scientifically than that. Each individual portfolio was looked at and reviewed on continuous basis. Some were always...
Speaker 3: adjusting the cash holdbacks, depending on our view of what's in store for our partner and the overall economy.
Speaker 4: Okay, thanks. One other piece of color, you might want to keep in mind is that as David mentioned, no change in our risk assessment process or the management process there. But in some cases, some of our seller partners post LCs is a post cache. So the risk, the volume there is still there. The protection is still there, but just the structure of the whole bag is modified slightly with some of our partners. Okay, thanks.
Speaker 5: Okay, okay, that's super helpful. Thanks for that color and then just a quick one on your Insolvency deposits Down in the quarter and we have seen the number take up both on business and consumer It is gradually normalizing. I think I was a little bit surprised that the number wasn't up sequentially just given that trend
Speaker 5: Or is it maybe just the nature of the, maybe the size of an average insolvency smaller today than it was? What's driving a number coming in lower? And then if the quick fall up to that, how important is this as a funding mix shift on your margins going forward?
Speaker 3: The good news for us, the bad news for Canada is that we are opening more new accounts to receive the deposits on liquidation of the unfortunate businesses and consumers that are going bankrupt. So we're opening more accounts, but these are sort of empty buckets.
Speaker 3: that take about two years to fill up and then they're used to, they're first to the creditors. So really, you've just seen the lag effect.
Speaker 3: We're seeing more insolvencies now, even in the figures earlier, and we're opening up a lot more accounts. Now we have most of the trustees in Canada dealing with us, so kind of the leading indicator is what's the new volume of account opening, and a lot more have been open since...
Speaker 3: since the close of our fiscal year. So it's just simply the lag effect. I expect the insolvency deposits will reach a record high for us because we have a larger piece of the market share now than we had a few years ago, quite a larger piece.
Speaker 3: and already we're seeing the new accounts be opened at an increasing pace. So it's just simply the lag. Now how important are these to our net interest margin? Well, they're pretty important. We pay on average about prime minus
Speaker 3: 2.8 on the insolvency deposit, something like that. That's a good stable low-cost funding source.
Speaker 3: Frankly, I don't see that impacting our margin. Our margin has always been industry-leading margin in Canada. We're at 1% higher than most banks.
Speaker 3: I think the margin will stay the same. What could impact the margin, which is really positive because it has a tremendous boost to return on equity, is our instant mortgage app is getting ready to roll out. And that gives us access to lower margin conventional mortgages and CMHC mortgages.
Speaker 3: They're lower margin, but the risk weighting of course, CMHC is 0, 35% on conventional. So you might see that possibly, as of course, to come depressed margin a little, but it won't be to repress from returning equity. Return equity will continue to grow at the rapid pace to use.
Speaker 3: to see it growing up. Okay thank you for the color. You're very welcome. Thanks for getting your note out so quickly. Mike, what time do you get up in the morning?
Speaker 5: Not a bit too early these days with bank earnings, but I hope that that's all the prizes. Yeah.
Speaker 2: Ladies and gentlemen, once again, if you would like to ask a question, please press star one at this time.
Speaker 2: Your next question will come from Stephanie Wu at Load Rock Research. Please go ahead. Hello, good morning guys. Stephanie on to our Craig.
Speaker 6: Hi, Stephanie. Hi, congrats on the quarter. So this quarter, I see surprising sequential growth in the point of cell loans given the economy backdrop. And I think you guys also alluded to in the...
Speaker 6: comments that going forward probably won't see the same type of growth going forward. Maybe just a little bit more color on the Canadian side of point of long growth, that's my first question. And second, is it correct for me to assume that the US expansion is going to be helpful for the NIMS?
Speaker 3: That's probably because the market that we're targeting, our partners are targeting, is in the home improvement area. As I was saying earlier, with energy costs going up, folks are quite rightly looking at some of the
Speaker 3: getting new-siding, new insulation, new furtive, more efficiency. And that's been a sort of a financial for our partners to provide that type of financing. So discretionary purchase of saying earlier boats, cars, motorcycles. Well, that's really dialed down.
Speaker 3: But thankfully we're nicely diversified across the country and across all the industries and we're seeing substantial significant growth in the in the point of sale on the home improvement in particular so that's Canada and
Speaker 3: In Canada for long growth too, keep in mind that we've been working for quite a while on this innovative new program we call Instant Mortgage. That's an app that enables a developer who's selling homes to...
Speaker 3: to have his potential purchasers, punch the numbers in and come back with a very quick approval.
Speaker 3: for their conventional mortgage or those same HC mortgage inside. So we expect to see some growth in that area. And we're comforted somewhat in the market price of housing in certain communities seems to drop back to relatively reasonable prices. So unlike other land-resistant forests, and we're lending in the bubble.
Speaker 3: and maybe their loan devalued ratios have gone a lot higher than they were open for. Now we're getting in at the right time, but carefully. So that'll boost Canadian loan growth too.
Speaker 3: In the US, the cost funds in the United States is a good bit less than vis-a-vis Canada, relative to the risk-free rate. So we see 4% net interest margins as being quite possible. And that will...
Speaker 3: as time progresses that will boost our overall nymph. Just keep in mind our nymph on on longs overall nymph on longs of north to 3%.
Speaker 3: And on our treasury assets it's about 1%.
Speaker 3: on our treasury assets, it's about 1%.
Speaker 3: rates continue to go up, rates went up. We get a little bit more in our treasury assets, so they're overall them improves. But then again, as I was saying, depending on how much and CMHCs and conventionalists are in some early job delivers, that will tend to depress Nimm.
Speaker 3: but it will increase our lead because these are
Speaker 3: really really high RWE type assets they absorb.
Speaker 3: and see if it's case no capital and then conventional mortgage case 35% risk waiting. So even then might slide back a bit depending on all these factors might hold. Won't change much, but our release should be increasing periodically.
Speaker 6: Okay, thank you so much. Best of luck on the US expansion.
Speaker 3: U.S. expansion, basically, the approval to get the U.S. bank is a little slower than we expected. We're working.
Speaker 3: well with our US regulators and Canadian regulators and we expect it to be through this calendar year. But in the meantime, there was so much interest for our product amongst US Point of Health companies.
Speaker 3: We thought, well, you know, we should just roll it out anyways, directly from Canada and fast-by.
Speaker 3: the demand, just get it going. We hate to see really ideal partners.
Speaker 3: wanting to deal with us and not doing it. We made a strategic decision to slow it down, but now we said, you know what? We'll hit our program up to...
Speaker 3: some of our U.S. partners and let it get going. Great. Thank you so much. Congrats again.
Speaker 3: No problem, Stephanie. Look forward to seeing you visit tomorrow.
Speaker 3: I'll be in Toronto.
Speaker 3: Thank you. You've got a video camera. You want to get a picture of me or something? Yeah. Ha ha.
Speaker 2: Your next question will come from Trevor Reynolds at Acumen Capital. Please go ahead. We did the test.
Speaker 3: Good morning. Just a couple quick ones. I think most of them been touched on, but in terms of the asset classes that you're seeing demand for in the US, would they be similar to what you're seeing in Canada or just maybe a little bit of insight on that? There's no real theme to it. US coast is a huge market.
Speaker 3: and we are interested in all AFTIC classes. It's just what we're seeing Canada too. We've got a trucking firm now on board. We've got another one coming up to medical equipment. We're looking at recreational products.
Speaker 3: For us, we're sort of agnostic to asset classes. We look very carefully at the skill of our partners with respect to landing.
Speaker 3: diagnostic classic classes. We look very carefully at the skill of our partners with respect to landing. So basically
Speaker 3: for good lenders.
Speaker 3: They ask to go out to somebody or irrelevant. If they're not good lenders, it doesn't matter what else you're clashing, we don't have to do with them. There's no saving them.
Speaker 3: if they haven't got their credit adjudication sorted out.
Speaker 5: Okay. And then just on the instant mortgage app, like is it, you mentioned it's close to being ready, what's the timelines on that being rolled out and what sort of growth are expected on that?
Speaker 3: That was it. The app itself has developed many, many months ago in the systems are on place. People are going to go. But there's been a few regulatory issues that we've been working through with the regulators and we hope to have those resolved in about a month. And we have a partner lined up to the Morgant Administration for as a wonderful.
Speaker 3: just starting up. I mean, I'd look for...
Speaker 3: As long as we can we can get it going about a month. I look for at least a couple a hundred million in the year
Speaker 5: Got it. And just remind me who would be the primary people looking at this, the instant mortgage.
Speaker 3: Got it. And just remind me who would be the primary people looking at this, the instant mortgage. Usually new home bars.
Speaker 3: This is the apps designed to be resident in the sales office of the of the developer selling the units So it's designed as a sales tool. It's It's an adjunct to our point of sale program. It's we just thought
Speaker 3: Now, the app is designed to be resident in the sales office of the developer, some of the units. So it's designed as a sales tool. It's an adjunct to our point in sale program. We just saw it real estate.
Speaker 3: home purchases was the largest point of sale market in Canada and the States. So we would develop this app to aid in that program, to aid in the sales process. So you know, in so many months to buy a house and they haven't negotiated a mortgage with one of their traditional banks, we say not to worry, a bunch of numbers in here and
Speaker 3: before you know it should be approved for one of the most types of mortgages. So it's designed to help our customers that we already deal with the most part by doing their financing for the construction of the residential units. It's designed to help them in their sales process by taking that...
Speaker 3: to closing a deal, i.e., I haven't got financing yet. And we say, okay, here we are. Here's your thing. Thank you.
Speaker 3: So it's this there was nothing like that in North America when we came up with it. It's still nothing like it can't do, but there's something like a United States that works really well. And just this point to me that it took so long to get all the regulators on side to.
Speaker 3: So let Canadians enjoy this sort of convenience and again the mortgage committed a bit earlier at the point of sale Great and then just last one just on the the digital currency Maybe just in some insight on where that sits whether it's on the back shelf for now or what what the plan is with that moving forward
Speaker 3: It's on the back shelf. The additional deposit receipt that we developed is fully developed. We think eventually banks will use blockchain as a new channel for deposits. I think it's inevitable. Given the regulatory environment north and south of the border and given all the
Speaker 3: the busy, busy, good work we have on our pointed-sale business that really really pays. We decided to leave this one on the shelf and...
Speaker 3: We don't have any particular time to take it off the shelf. It would be sometime, maybe in the future when regulators say, hey, maybe that was a pretty good idea.
Speaker 3: You guys want to bring out to market? I'd be always a regular is asked me to do it Rather than because you know, obviously we love we love diversifying our deposit base and we embrace technology But we've sure got a lot to do with our core business our spread business at Scorland reliefs and bounds
Speaker 3: We're actually using artificial intelligence work to enhance the efficiency in our bank. For me, that is the layup. There are areas in our bank that artificial intelligence seems ideally suited. So we're working with artificial intelligence people to improve our bank's overall efficiency so we can scale even faster.
Speaker 3: torque I was talking about. I think we'll be putting numbers out maybe in a year that I thought were impossible.
Speaker 3: Understood. Yep. Thanks a lot for your time. Thanks for taking my questions. Well, thank you Trevor. We'll look forward to seeing you later on to EGM. We'll send you an invite out for that. That's coming up.
Speaker 2: Your next question comes from Brad Ness at Coral Capital. Please go ahead.
Speaker 3: Great thanks. Hey guys how you doing? Very good Brad. Although I'm in the frozen North right now that I got my willy socks on.
Sounds good. Well, I'm going to jump into things. You had quarterly expenses, non-interest expenses, a $12.3 million in the quarter.
Is there any one time kind of transitory expenses in there?
There's a little bit left from the previous year, but not a whole lot anymore.
12.3 probably a run rate for us now.
It's like a say a little bit of hangover from the past, but it's this plus is a minus going forward. Okay. And what type of growth should we see in that number kind of excluding a US acquisition?
Well, we're not looking for any growth in the upcoming year. It's, you think holds flat in the whole year? Yeah.
We've already observed the additional salary increases that came about when I hired some new employees in key areas, of course. Also, just the general wage increasing increases that, I guess, post-pandemic gave us, gave us all, in place to increases. So that's already in the numbers.
I mean, there's a potential for a little bit of a decline in that 12.3, but I think I wouldn't think about that way because there's kind of a lot of moving parts involved.
Okay, got it. And in light of continued upward pressure on interest rates, do you think you can continue to maintain that interest margin on loans above 3 percent?
Yeah, I was also saying there's a few factors.
Generally speaking, yes, you know that our cost funds is about 1.5% less than the same term government canabond. We have a really nice, efficient...
gathering effort in Kent. And we've got sooner or later we know that those buckets I was talking about those insolvency accounts that we've opened are going to fill up with cheap deposits. So that helps.
The thing that could depress Nim a little, which is kind of good, really good actually, is in some mortgage CMHCs and conventional, because they have less Nim. They're approximately 2% all in after administration costs.
So that would depress Nim on a weighted average basis, but because the very little capital they have, it really boosts ROE. So if Ken's fourth, you're going to see me talk more and more about ROE. I mean, obviously, we all know.
that know about banks that R&W is highly correlated to percentage of book value, market value, percent of book, and highly court. I get last announced this was 0.86 was the ARC.
So my mission is to move our we up as fast as that. So that's Doc's straight where it should. In fact, I like to see as an outlier on the positive side because of the trajectory. So him, you know, him hovering around three could go up a little bit down a little bit.
But our research really, really, really, we start moving. Great. And when I do think about ROE, at the end of this year, it sounds like you're excited about artificial intelligence, what it can use due to your efficiency in the back room. You're excited about capital efficiency and to stimulate digital intelligence and hepatitis.
and with continued strong loan growth and limited expense growth.
I mean, is 17% ROE something that we should be looking forward to in the fourth quarter?
Well, let me say this to you, Brad. I brought the team down to lovely for a lottery day for a strategic planning session. And there was one metric I had in probably every slide, and it was our way. And the target I gave this to was 18%.
Some of them choked, some fell off their chairs and such. But the building of the bank days are over. We've got the bank built now. And that's a realistic number. Whether we get that by the end of this year, I.E. the last month, October .
October , whether we can, we can, the month shows 18 or not. I don't know, but it's going to be moving up every month now because it has to. It takes costs to stay the same and revenue is growing by, uh, well, 8% a quarter, right? Um, because our loans are growing by a lot. Um, thought it was a little plus and minus there too.
I was telling what central bankers do and how high they put race. It could just dampen demand. But without saying earlier, Canadians and I think their US counterparts are quite rightly looking at energy costs and saying to themselves, hey, how do we save a few bucks on the heat in our house? And that's a wonderful market for our point of sale business. So all in, Brad, yeah, realistically, I said 18 and 18 looks...
Definitely what our model will turn so 2024
You know, we should be clicking our glasses together and saying, uh, the team, the team did it for me.
Great, thanks. Last question here. On your cyber initiative, or I'll just call it the cyber security initiative, I'm always waiting for a breakout quarter where revenues just jump exponentially and kind of continues on a really strong path.
And I continue to wait for that. What's going on with cybersecurity and what type of growth expectations should we assume? Well, the breakout quarter.
I'm waiting for two and So here's what you can expect Next quarter and a quarter quarter after it'll be it'll be good growth in DRTC based on the new products and the customers and Sort of probably onboarding new customers, but to get a breakout frankly I think we've got to have a reseller signed up somebody who's got a huge customer base
And once we resell these products for us, we don't have a sales force that can produce 10 times revenue growth. Somebody else could. The type of products we have are state of the art. They work for our bank. They're fantastic. I mean, some of the customers we've on board are the who's who in North America, of course, things. And they che.
you know some of them. So you've got a first-class product, all that stuff, in-house developed suite of wonderful products. I think other app files throughout North America would be really happy with our suite. We've only a few people and right now our focus is mainly on the bank, growing the banks Nimbus.
Great, pretty soon. Sounds great. Thank you. Okay. See you.
There are no further questions from the phone lines. At this time I'll turn the conference back to David Taylor for any closing remarks.
Well, I'd just like to thank everybody for dialing in and listening to us. It's an exciting quarter, of course, and I very much look forward to talking to you next quarter. Stay tuned. This little bank is, I'm going to consider it on your port. I'll say, passing your safety belt, so we're cleared to take off.