Q1 2024 VersaBank Earnings Call

Operator: Microsoft Office Word Title Microsoft Office Word Document MSWordDoc Word. Document.8 Good morning, ladies and gentlemen. VersaBank's first quarter, 15 minutes. Financial Results. Good morning, VersaBank, issuing your... Presenting its financial results for the first quarter and January. That news release, along with the bank's financial statements and DNA and supplemental financial information, is available on the bank's website. The Investor Relations, as well as on CDER Plus and MMS. Please note that in addition to the telephone dial-in, VersaBank is webcasting this morning's meeting. The webcast is listening. Thank you for listening to the webcast, but I have just one question.

Good morning, ladies and gentlemen, welcome to the Hershey banks first quarter fiscal 'twenty 'twenty four financial results conference call.

First the bank.

Regarding its financial results for the first quarter ended January 31st 2024.

That news release, along with the financial statements and DNA and supplemental financial information.

On the bank's website in the Investor Relations section.

Well as on SEDAR and Edgar.

Please note that in addition to the telephone dial in for Citibank is webcasting this mornings conference call.

The webcast is listen only.

And then on the webcast, but wish to ask a question in the Q&A session. Following Mr. <unk> presentation. Please dial into the conference line.

Operator: In the Q&A session, following the presentation, please dial into the, the details of which are included in this morning's, and Underbank. For those participating in today's call by telephone, the accompanying slide presentation is available on the bank website. Also, for a replay, we will participate in this call both by telephone and via the internet. All details on how to access the replays are available in this morning's newscast. I would like to mind a list of the statements about future events.

The details of which are included in this morning's news release and on the bank's website.

Participating in todays call by telephone the accompanying slide presentation is available on the bank's website.

Also today's call will be archived for replay both by telephone and via the Internet.

Beginning approximately one hour following completion of the call.

Details on how to access the replays are available in this morning's news release.

I'd like to remind the listeners that statements about future events on this call are forward looking in nature and are based on certain assumptions and analysis made by management.

Operator: On this call are the following... They are based on certain assumptions and analysis made by VersaBank managers. However, actual results could differ.

Actual results could differ materially from expectations due to various material risks and uncertainties associated with <unk> businesses.

Operator: For more information, call 1-866-436-7483, and I'm... So she did with VersaBank, for looking at today's presentation. I'd now like to turn the call over to David, President and Chief Executive Officer of VersaBank. Go ahead, Mr. Taylor.

Please refer to first events forward looking statements in.

In today's presentation.

I would now like turn the call over to David Taylor, President and Chief Executive Officer of first Bank. Please go ahead Mr. Taylor.

David Roy Taylor: Good morning, everyone. And thank you for joining us on today's call. With me for the first time on these calls is our new Chief Financial Officer, John Asma, who was appointed to that role in December. Before I begin, I'd like to remind you that our financial results are reported and will be discussed on this call in our Reporting Currency of Canadian dollars. For those interested, we provide U.S. dollar translations for most of our financial numbers in our Standard Investor presentation, which will be updated and available on our website shortly. Now for the highlights.

Good morning, everyone and thank you for joining us for today's call with me for the first time on these calls as our new Chief Financial Officer, John Asthma.

He was appointed to that role in December.

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 Canadian dollars.

For those interested we provide U S dollar translations for most of our financial numbers in our standard investor presentation, which will be updated and available on our website shortly.

Now for the highlights of our first quarter results continued to demonstrate the significant and increasing operating leverage and our highly efficient branchless business to business digital banking model.

David Roy Taylor: Our first quarter results continue to demonstrate the significant and increasing operating leverage of our highly efficient branchless business-to-business digital banking model. 22% year-over-year growth in total assets generated 35% year-over-year growth in net income, marking another new quarterly record for profitability. And that, combined with our continued focus on management of our fixed costs, drove both year-over-year and sequential improvement in our efficiency ratio to a new record of 40% and a 24% year-over-year increase in average return on common equity to 13.4%. Notably, Q1 was a solid quarter for our points of sale receivable purchase program business, which expanded by a healthy 7% sequentially as the HVAC home improvement sector, which makes up the largest components of our points of sale portfolio, continues to see robust consumer activity.

22% year over year growth in total assets generated 35% year over year growth in net income, marking another new quarterly record for profitability.

And that combined with our continued focus on management of our fixed cost drove both year over year and sequential improvement in our efficiency ratio to a new record of 40%.

And 24% year over year increase in average return on common equity to 13, 4%.

Notably Q1 was a solid quarter for our points of sale receivables purchase program business, which expanded by a healthy 7% sequentially as the HVAC home improvement sector, which makes up the largest components of our point of sale portfolio continues to see robust.

Consumer activity.

David Roy Taylor: That contributed to another record high for total assets of $4.3 billion, another meaningful step towards our next milestone of $5 billion, and the continued outsized positive impact of our efficiency, our profitability, and our return on equity. Taking a closer look at Q1 numbers, even with continued very healthy year-over-year growth, I will highlight that our Q1 numbers were dampened slightly by a temporary contraction of our non-core real estate lending portfolio compared to the end of Q4. You have heard me say on prior calls that we will always look to be opportunistic with our real estate portfolio, expanding and contracting our portfolio depending on opportunities and risks within the market. You have also heard me say that we would be happy to trade lower net interest margin for return on equity if such opportunities arise. Such a situation recently emerged in the evolving regulatory environment has created an opportunity to transition the focus of our real estate portfolio from higher yielding, higher risk-weighted real estate loans to zero risk-weighted CMHC insured real estate loans.

That contributed to another record high for total assets of $4 3 billion another meaningful step toward our next milestone of 5 billion and the continued outsized positive impact of our attrition see our profitability.

And our return on equity.

Taking a closer look at Q1 numbers, even with the continued very healthy year over year growth I will highlight that our Q1 numbers were down slightly by a temporary contraction of our noncore real estate lending portfolio compared to the end of Q4.

You have heard me say in prior calls that we will always look to be opportunistic with our real estate portfolio, expanding and contraction of our portfolio depending on opportunities and risks within the market. You've also heard me say that we would be happy to trade lower.

Net interest margin for return on equity if such opportunities arise.

Such a situation recently emerged and the evolving regulatory environment has created opportunities to transition the focus of our real estate portfolio from higher yielding higher risk weighted real estate loans to zero risk weighted CMA sea insured real estate law.

David Roy Taylor: We are trading net interest margin for return on equity. This is a great example of our ability of our bank to be flexible and agile to drive additional shareholder value. As we began this transition in Q1, we saw our real estate portfolio temporarily contract from Q4 as we ran off old loans ahead of deploying capital to new zero-risk-weighted loans. We expect that this strategic adjustment will enhance the return on equity and contribute to stronger growth in subsequent quarters throughout the year. With our very low cost source of funds throughout the insolvency professional deposits, we have a distinct competitive advantage in the CMHC market.

We are trading net interest margin for return on equity.

This is a great example of our ability of our bank to be flexible and agile to drive additional shareholder value.

As we begin this transition in Q1, we saw a real estate portfolio template temporarily contract from Q4 as we ran out of old loans ahead of deploying capital to news zero risk weighted loans, we expect.

That this strategic adjustment will enhance the return on equity and contribute to stronger growth in subsequent quarters throughout the year.

With our very low cost source of funds throughout the insolvency professional deposits, we have a distinct competitive advantage and the CMA sea market.

David Roy Taylor: The other item I would note is some ongoing softness in our net interest margin. This is a natural outcome of the growth of the point of sale portfolio, which has lower margins but higher risk-weighted returns than our real estate portfolio. So as our point of sale portfolio grows, we are in a less net interest margin, but we make up the profitability on volume. This is also a natural outcome of the growth of our wealth management deposits relative to our lower cost insolvency professional deposits, which fund strong growth in our loan portfolio. The good news, at least for us, less for Canadians, is that our low-cost and insolvency professional deposits, as expected, are expanding as the number of consumer And, in fact, both the size of these deposits and the number of accounts are now at an all-time high.

The other item I would note and some ongoing softness in our net interest margin. This is a natural outcome the growth of the point of sale portfolio, which has lower margins, but higher risk weighted returns that our real estate portfolio.

So as point of sale portfolio grows we have less net interest margin, but we make up the profitability on volume.

It's also a natural outcome of the growth of our wealth management deposits relative to our lower cost and solvency professional deposits to fund the strong growth in our loan portfolio.

The good news at least for us last for Canadians.

Is that are low cost and solvency progression of deposits as expected are expanding as the number of consumer and small business insolvencies continues to increase.

And in fact, both the size of these deposits and the number of accounts is now at an all time high.

David Roy Taylor: And this is, as we continue to see, a significant increase in insolvencies based on recent data, which is a leading indicator for our insolvency deposits. According to statistics, insolvencies in Canada in January were up 34% from the prior year and up 14% from December. We have seen that reflected in our insolvency deposit accounts, which are opened by trustees ahead of being filled with actual deposits, which were up 18% year-over-year and 6% sequentially. This will go some way towards supporting stronger net interest margins going forward. As our Canadian point of sale receivable purchase program business continues to see steady growth, we are increasingly encouraged by the very positive feedback we continue to receive from potential US partners for this unique and attractive solution.

And this is as we continue to see the significant increase in solvency is based on recent data, which is leading indicator for our insolvency deposits.

Accordingly.

According to statistics, Canada Insolvencies in Canada in January were up 34% from the prior year and up 14% from December.

We have seen that reflected in our insolvency deposit accounts, which reopened but which are open by trustees ahead of being filled with actual deposits, which were up 18% year over year and 6% sequentially.

This will go some way towards supporting stronger net interest margins going forward.

Yeah.

That's our Canadian point of sale receivable purchase program business continues to see steady growth. We are increasingly encouraged by the very positive feedback we continue to receive from potential U S partners for this unique and attractive solution.

David Roy Taylor: In fact, we just returned from the annual KBW FinTech conference in New York City last week, where we once again had the opportunity to introduce ourselves to a number of potential partners. Our meetings continue to confirm that there is a massive unmet need for our solution, and potential partners are eager for us to enter the U.S. market. With respect to the approval process for our proposed acquisition of U.S.-based Stearns Bank Holdingford, the process does continue to move forward.

In fact, we just returned from the annual K B W. Fintech Conference in New York City last week, where we once again had the opportunity to introduce ourselves to a number of potential partners.

Our meetings continue to confirm that there is a massive unmet need for our solution and potential partners are eager for us to enter the U S market.

With respect to the approval process for our proposed acquisition of U S. Based during this bank holding FERC. The process does continue to move forward. We continue to have productive engagement with the U S regulators and we remain optimistic as we have been.

David Roy Taylor: We continue to have productive engagement with the U.S. regulators and remain optimistic, as we have been at any time throughout this entire process, about the prospects for a favorable outcome. With three weeks left in the calendar quarter, we still think it's possible that we could receive a decision before March 31st. We have adjusted our expectations to the second calendar quarter of this year. We continue to do everything we can to advance the process as quickly as possible but respect the need for regulators to be thorough.

At any time throughout this entire process about the prospects for a favorable outcome.

With three weeks left in the calendar quarter, well, we still think it's possible that we could receive a decision before March 31, we have adjusted our expectations to the second calendar quarter of this year.

We continue to do everything we can to advance the process as quickly as possible, but respect the need for regulators to be thorough.

John: And we continue to appreciate the patience of our shareholders. I'd now like to turn the call over to John to review the financial results in detail.

And we continue to appreciate the patience of our shareholders.

And now I'd like to turn the call over to John to review the financial results in detail.

John.

John: Thank you, David. Before I begin, I will remind you that our financial statements and MDF..., quarter are available on our website, as well as on CDAR. And as David mentioned, all of the following numbers are reported in Canadian dollars as per our financial statements, unless noted otherwise. Now, turning to the balance. Starting with the balance sheet, total assets at the end of the first quarter of fiscal 2024 grew 22% year over year and 3% sequentially to a new high of $4.3 billion. Cash Insecurities were $260 million, or 6% of total assets, down slightly from 7% from both Q1 last year and Q4 of last year. Book value per common share increased to a new high of $14.46.

Thank you David.

Before I begin I will remind you that our financial statements and MD&A for the first quarter are available on our website under the investors section.

As well as on SEDAR and Edgar.

And as David mentioned all of the following numbers are reported in Canadian dollars as per our financial statements unless noted otherwise.

Now turning to the balance sheet.

Starting with the balance sheet total assets at the end of the first quarter of fiscal.

2024 grew 22% year over year, and 3% sequentially to a new high of $4 $3 billion.

Cash and securities were $260 million or 6% of total assets down slightly from 7% from both Q1 last year in Q4 of last year.

Okay.

Book value per common share increased to a new high of 40 up $14.46.

John: Our CET1 ratio increased to 11.39%, and our leverage ratio was 8.44%, both well, both well above our internal. Turning to the income statement. Total consolidated revenue increased 11% year over year, but decreased 1% sequentially to $28.9 million. The year-over-year increase was driven primarily by higher net interest income as our digital banking loan portfolio continues to grow. While the sequential decrease was mainly due to the impact of lower gross profits from Digital Boundary Group, attributable to seasonally lower service engagements in the current quarter. Consolidated net interest expense was $12 million, down from 12.3 million for Q1 of last year and 12.4 million for Q1 of last year, or sorry, Q4 of last year.

Our CET one ratio increased to $11, three 9% and our leverage ratio was 844%.

Both well, both well above our internal targets.

Turning to the income statement.

Total consolidated revenue increased 11% year over year, but decreased 1% sequentially to $28 9 million.

The year over year increase was driven primarily by higher net interest income as our digital banking loan portfolio continues to grow while the sequential decrease was mainly due to the impact of the lower gross profits from digital boundary group.

<unk> attributable to our seasonally lowest service engagements in the current quarter.

Consolidated net interest expense was $12 million down from $12 3 million for Q1 of last year and $12 4 million for Q1 of last year. We started Q4 of last year I'm sorry, as management continues to focus on managing the fixed expenses line across the business.

John: As management continues to focus on managing the fixed expenses lying across, Consolidated net income for Q1 increased 35% year over year to a record $12.7 million and was up 2% from Q4 of 2023. However, as David mentioned, notwithstanding the healthy growth, Q1 profitability was slightly dampened by the temporary impact of the transition of real estate loans to higher return opportunities. Consolidated earnings per share increased 41% year over year and 2% sequentially to $0.48.

Yes.

Consolidated net income for Q1 increased 35% year over year to a record $12 7 million.

And was up 2% from Q4 of 2023.

As David mentioned, notwithstanding the healthy growth Q1 profitability was slightly dampened by the temporary impact of the transition of real estate loans to higher return opportunities.

Consolidated current consolidated earnings per share increased 41% year over year, and 2% sequentially to 48.

John: Also, a record with a year over year increase benefiting from a lower number of shares outstanding due to the buyback program we had in place during fiscal. The loan portfolio grew just shy of $4 billion at the end of Q1, driven once again by our point of sale receivable purchase program, which increased 28% year over year and 7% sequentially to $3.1 billion. Our point-of-sale portfolio represents 78% of our total loan portfolio at the end of Q1, up slightly from the end of fiscal 2020. Our commercial real estate portfolio expanded 9% year over year but was down 7% sequentially to $831 million at the end of Q1, with the sequential decline due to the recalibration of our real estate portfolio. As a reminder, our real estate portfolio is primarily mortgages and construction loans for residential property. We have had very little exposure to commercial use.

Also a record with year over year increase increased benefiting from a lower number of shares outstanding due to the buyback program. We had in place during fiscal 2023.

The loan portfolio grew just shy of $4 billion at the end of Q1.

Driven once again by our point of sale receivable purchase program, which.

Which increased 28% year over year, and 7% sequentially to $3 1 billion.

Our point of sale portfolio represents 78% of our total loan portfolio at the end of Q1 up slightly from the end of fiscal 2023.

Our commercial real estate portfolio expanded 9% year over year, but was down 7% sequentially to $831 million at the end of Q1.

With the sequential decline due to the recalibration of our real estate portfolio.

As a reminder, our real estate portfolio is primarily mortgages and construction loans for residential properties.

We have very little exposure to commercial use properties.

John: Turning to the Income Statement for Digital Banking Operations, the net interest margin on loans, that is, excluding cash and securities, was 2.63%. [inaudible] The net interest margin overall, including the impact of cash and securities and other assets, decreased 35 basis points year over year or 12% and decreased six basis points or 2% sequentially to 2.48%. As David discussed, Q1 net interest margin was lower primarily due to the strong growth of the POS financing portfolio, which is comprised of lower risk weighted, lower yielding, but higher return on common equity assets and Commercial Real Estate, as well as the transitory impact of the transition of the real estate loans to higher returns. With respect to cost of funds, cost of funds for Q1 was 3.99%, up 104 basis points year over year and up 13 basis points sequentially.

Turning to the income statement for digital banking operations.

Net interest margin on loans that is excluding cash and securities was 263%.

That was 40 basis points or 13% lower on a year over year basis, and six basis points or 2% sequentially.

Net interest margin overall.

Including the impact of cash and securities and other assets decreased 35 basis points year over year, or 12% and <unk> decreased six basis points or 2% sequentially to $2, 48%.

As David discussed Q1, net interest margin was lower primarily due to the strong growth of the.

POS financing portfolio, which is comprised of lower risk weighted lower yielding but higher return on common equity assets than commercial real estate.

As well as the trans transitory impact of the transition of the real estate loans to the higher return opportunities.

With respect to cost of funds cost of funds for Q1 was $3, 99% up 104 basis points.

Year over year, and up 13 basis points sequentially.

John: Cost of funds, again, was somewhat elevated in Q1 due to the elevated rates for term deposits. Going forward, we expect to increasingly benefit from the continued expansion of our insolvency professional deposit, as insolvency activity in Canada continues to steadily increase. Our provisions for credit losses or PCL in Q1 remained negligible at negative 0.01% on average loans compared to 0.05% last, and with a 12 quarter average of zero.

Cost of funds again was somewhat elevated in Q1 due to the elevated rates for term deposits.

Going forward, we expect to increasingly benefit from the continued expansion of our insolvency professional deposits.

Insolvency activity in Canada continues to steadily increase.

Our provisions for credit losses, or PCL in Q1 remained negligible at negative 0.0% to 1% on average loans compared to 0.05% last year.

And with a 12 quarter average of zero percent.

John: I'll now briefly turn to DRTC. On a standalone basis, Digital Boundary Group Q1 revenue increased 24% year-over-year to $2.9 million, and gross profits increased 31% to $2.1 million, both due to higher service engagement. DBG also remains profitable within DRG; total DRTC revenue, including that from services provided to digital banking operations, increased 36% year over year and was down 32% sequentially to 2.5 million. DRTC's net income of $435,000 was an improvement over the net loss of $516,000 a year ago, but down from a net income of $1.2 million in Q4 of last year.

I will now briefly turn to <unk>.

On a standalone basis digital boundary group Q1 revenue increased 24% year over year to $2 9 million and gross profits increased 31% to $2 1 million, both due to higher service engagements.

<unk> also remained profitable within Dr. T C.

Total <unk> revenue, including that from services provided to digital banking operations increased 36% year over year.

And down and was down 32% sequentially to $2 5 million.

<unk> net income of 435000 was an improvement over the net loss of 516000, a year ago, but down from a net income of $1 2 million in Q4 of last year.

David Roy Taylor: I'd now like to turn the call back to David. Thanks, John. Building on 2023, which was by far our best year in the history of the bank, fiscal 2024 is off to a very solid start. The year is unfolding slightly ahead of expectations for our point-of-sale receivable purchase program, providing continued confidence in our ability to surpass our next total asset milestone of $5 billion during the 2024 fiscal year and the efficiency and return on equity that naturally fall out of that as we hold increases in our fixed costs to Notably, we should achieve this $5 billion milestone before any potential contribution from the broad launch of the RPP in the US should we receive favorable regulatory approval for our proposed US acquisition. While we continue to see some signs of potential slowdown in the broader economy due to the current interest rate environment, we are seeing resiliency in the sectors in which we participate.

I'd now like to turn the call back to David for some closing remarks David.

Thanks, John.

Building on 2023, which was by far our best year in the history of the bank fiscal 'twenty 'twenty four is off to a very solid start the.

The year is unfolding slightly ahead of expectations for point of sale receivable purchase program, providing continued confidence in our ability to surpass our next total asset milestone of 5 billion during 2020 for our fiscal year and the efficiency and return on equity that naturally fall out of that.

As we hold increases on our fixed costs tomorrow left in line with inflation.

Notably we should achieve this 5 billion milestone before any potential contribution from the broad launch of the RP P and U S should be received favorable regulatory approval for our proposed U S acquisition.

Well we.

We do.

Continue to see some signs of potential slowdown in the broader economy due to the current interest rate environment, we arent seeing resiliency in the sectors in which we participate hence our confidence in our growth outlook for this year.

David Roy Taylor: Hence our confidence and our growth outlook for this year. Q1 positions VersaBank for another year of healthy growth and profitability. As I mentioned earlier, we expect to recapture the dampened profitability in Q1 throughout the year as we capitalize on the zero risk weighted CMHC insured mortgage opportunity. Again, we may trade some net interest margin for return on equity. The more successful we are with the zero-risk-weighted CMHC loan program, the more we still continue to have, by far, the highest net interest margin amongst Canadian banks, and unlike our peers, we give nothing back for loan losses. And, as noted earlier, we expect some favorable impact on cost of funds as the increased insolvency activity should drive continued expansion of this low-cost deposit source. Provisions for credit losses should, of course, remain low, with the start of the year tending to a negative provision as a result of our highly risk-mitigated lending practice.

Q1 positions versus a bank for another year of healthy growth and profitability as I mentioned earlier, we expect to recapture the dampening the profitability in Q1 throughout the year as we capitalize on the zero risk weighted CMA sea insured mortgage opportunity.

Again, we may trade some net interest margin for return on equity the more successful we are with the zero risk weighted so you may see loan program the more we still.

To continue to have by far the highest net interest margin amongst Canadian banks.

Unlike our peers, we give nothing back for loan losses.

And as noted earlier, we expect some favorable impact on cost of funds as the increased in our solvency activity should drive continued expansion of this low cost deposit source.

Provisions for credit losses should of course remained low with the start of the year tending to negative.

Provision as a result of our.

Finally risk mitigated lending practices.

Operator: In particular, the holdback model for the point-of-sale receivable purchase program and loans and leases. Finally, we are seeing solid momentum in our cybersecurity services subsidiary, which we expect to continue throughout the year. This remains a tremendous opportunity in a rapidly growing market, and we expect continued growth and success going forward. With that, I'd like to open the call to questions. Operator.

In particular, the hold back model for the point of sale receivable purchase program along some leases.

Finally, we are seeing solid momentum in our cyber security services subsidiary, which we expect to continue throughout the year.

This remains a tremendous opportunity and a rapidly growing market and we expect continued growth and success going forward.

With that I'd like to open up the call to questions.

Sure.

Operator: Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the number on your touch tone. If you would like to withdraw your question, please press the star followed by the X. If you have a phone, please leave your handset before pressing any number. Please stay afloat.

Thank you ladies and gentlemen, so do you have a question. Please press the star followed by the one on your Touchtone phone.

Like to withdraw your question. Please press the star followed by the two.

Using a speaker phone. Please proceed handset before pressing any keys.

One moment. Please for your first question.

David Pipkin Feaster: The next question comes from David Feaster from Raman James. Please go ahead. Hey, good morning, everybody. Good morning, David. Um, I just wanted to start out maybe, you know, with all the moves that you guys have done. You talk about kind of..., you know, shifting towards lower risk, lower yielding, but lower risk, less capital-intensive lending. You've done a great job driving operating leverage and taking expenses out, just kind of giving it the scalability of the platform. I'm just curious, how do you think about the profitability profile as we look forward, you know, in the next year or two? Where do you think profitability kind of shakes out? Well, it probably grew at the pace that we've been seeing in the last year, and this quarter improved somewhat.

Your first question comes from David Feaster from Raymond James. Please go ahead.

Hey, good morning, everybody.

Good morning, David.

I just wanted to start out maybe with all the moves that you guys have done and you talk about kind of.

Shifting towards lower risk.

Lower yielding but lower risk less capital intensive.

Lending.

You've done a great job driving operating leverage and taking expenses out.

Kind of given the scalability of the platform I'm just curious how do you think about the profitability profile as we look forward you know in the next year or two where where do you think profitability kind of shakes out.

Well it probably grow at the pace that you've been seeing in the last year and in this quarter improved somewhat.

David Roy Taylor: The ROE will increase fairly dramatically. We're shooting for about 16.5% once we get to $5 billion. And that's because these CMHC mortgages absorb no capital, and they're easily matched against the insolvency portfolio.

The ROE, we will increase fairly dramatically we're shooting for about 16, 5% once we get to the $5 billion.

Milestone.

And that's because the CMA sea mortgages absorbed no no capital and they're easily matched against the insolvency portfolio. The insolvency portfolio is priced at.

David Roy Taylor: The insolvency portfolio is priced at approximately prime minus two, and these CMHC construction mortgages average around Prime minus, say, 25 basis points. So it nets the bank 175 basis points with a perfect match, and that's sort of free from a return on equity point of view. That's helpful. And maybe just touching on the point of sale growth, you know, growth accelerated this quarter. Curious if we could talk maybe a bit about some of the drivers behind that, you know, how much demand is from existing partners, you know, adding new new partners, additional growth in the US, and just kind of any health, color on the health of the consumer in Canada, and kind of how you think about the breakdown between Canadian growth and US growth, even exclusive in

Approximately prime minus two.

Now these CMA sea construction mortgages average around pipe prime minus.

Slide 20.

25 basis points, so it nets, the bank 175 basis points.

With a perfect match.

And that sort of free from.

Return on equity point of view.

Well that's helpful and then maybe just touch.

That's on the point of sale growth growth accelerated this quarter curious if we could talk maybe a bit about some of the drivers behind that you know how much demand from existing partners, adding new new partners additional growth in the U S and just kind of any help.

Color on the health of the consumer in Canada, and kind of how you think about the breakdown between Canadian growth in U S growth even exclusive them sterns.

David Roy Taylor: Well, that was primarily from existing partners in Canada, and the biggest driver was the HVAC home improvement area, which tends to be super prime or prime Canadians looking to replace inefficient furnaces and such with new energy efficient furnaces and more insulation. So about 70 odd percent of our portfolio now flows from that area, and that's what sort of dampened the impact of sort of a recessionary time or higher interest rates.

Well.

That was primarily from existing partners in Canada.

And.

The biggest driver was the.

The HVAC home improvement area, which tends to be Oh.

Yeah.

Super Prime or Prime Canadians are looking to replace.

An efficient furnaces and such with the new energy efficient furnaces.

More installation so it's yes.

It's about 70 odd percent of our portfolio and outflows from that area and that's what sort of dampened.

The impact.

Impact of.

Oh, sorry, a recessionary type or higher interest rates folks are still quite rightly, believing that Asia. It makes economic sense to replace an old furnace.

David Roy Taylor: Folks are still quite rightly believing that it makes economic sense to replace an old furnace, so that's helping. Now this is normally a down quarter for us at the point of sale. In Canada, you know, there's a little less activity when it's winter than there is in the spring, summer, and fall.

So that's helped.

No. This is normally a down quarter for us on point of sale.

In Canada, there's a little less activity when it's winter.

There is in the spring and summer and fall.

David Roy Taylor: So this bodes well with 7% sequential growth quarter over quarter, and we, you know, we're not into the springtime warmer climes that tend to bring people out to use car lots and new car lots and all the things you buy in the summertime. So it bodes well, but that's strictly the Canadian market. We haven't done much in the U.S. market. We're just sort of waiting patiently for our U.S. banking license so that we can expand that market. Okay, and then just wanted to get an update on DRT Cyber. It sounds like, you know, revenues are seasonally slower as expected, and there's a little less intercompany work. But curious how the pipeline is, how's demand trending, and just any new products or, you know, additions or just kind of expansion of that business that you're working on? In the cybersecurity business, it is growing 20-30%. And, you know, with the rate we're at now, it probably ends up in US dollars around 10 million in revenue this year. It's getting pretty close to that in the down quarter.

So this bodes well, but the 7% sequential growth quarter over quarter.

W.

Not in the springtime.

Warmer climes.

That tends to bring people out to used car lots.

New car lots and and all the things you buy in the summertime, so it bodes well, but that's strictly the Canadian market.

Haven't done much in the U S market, we're just sort of.

Waiting.

Patiently for R.

Our U S banking license so that we can.

Expand that market.

Hey, Jeff.

And then just wanted to get an update on <unk> cyber it sounds like revenues are seasonally slower as expected was a little less intercompany work.

But curious how the pipeline is how is demand trending and just any new products or our.

Additions or just kind of expansion of that business that youre working on.

In the cyber security business is growing 20%, 30% and.

Now with the rate right now it probably end up in U S dollars around $10 million revenue this year.

It's getting pretty close to that in a down in the seasonally down quarter.

David Roy Taylor: We always work on improving our product offering in the cybersecurity area, but there are some products that we have in DRT Cyber, such as the VersaVault that we talked about a few years ago. I think we're the first in the world to create a digital vault that's ideally suited for storing cryptocurrency keys and such, like Bitcoin keys, and that is empty. The vault is empty, and we see that as being an incompatible business with our banking operations.

We are always working on improving our product offering the cyber security area.

But there are some products that we Havent D. R T cyber such as the birth of all that we talked about.

A few years ago I think we're there first in the world to create a digital fault that's ideally suited.

For storing crypto currency.

Keys in such a big piece and that is empty the vault is empty and that.

We see that as being incompatible business with our our banking operations.

David Roy Taylor: But that vault is, you know, if it was, it was to be used by somebody else, perhaps it would be ideal for this, this resurging interest in, in Bitcoin. It's, that's what it was designed for, to facilitate the storage of those. But again, it's a very high-value digital asset. That's great. That was good, David. Thank you. I'm in Florida, by the way.

Of that vault is a yeah. If it was it was to be used by somebody else perhaps.

It would be ideal for this this researching interest is.

And bitcoin.

But it was designed for it to.

To facilitate the storage of those.

But again to be very high value digital assets.

That's great. Thank you all.

That's good David Thank you I'm in Florida by the way.

In your neck of the woods.

Operator: Ladies and gentlemen, as a reminder, should you have a question..., followed by the question comes from Mike Rizvanovic from KBW. Please, a good morning. Just wanted to start. Good morning, David. A quick question on the POS in Canada.

Ladies and gentlemen, as a reminder, sue do you have a question. Please press the star followed by the one your next question comes from Mike, Chris Benno Vik from K B W. Please go ahead.

Hey, good morning, just wanted to start.

Good morning, David a quick question on the Western Canada, and thanks for the color I think you've given us a pretty good sense of demand and how trends are moving directionally, but just in terms of your partnerships do you have capacity to add anything that would be meaningful I'm just thinking through.

Mehmed Rizvanovic: And thanks for the color. I think you've given us a pretty good sense of demand and how trends are moving directionally. But just in terms of your partnerships, do you have capacity to add anything that would be meaningful? I'm just thinking through perhaps a potential slowdown with your existing partner base. Can you supplement that with some sort of growth that comes from additional partners?

Perhaps a potential slowdown with your existing partner base can you supplement that with some sort of growth that comes from additional partners or have you sort of run the gamut on that and you're saturated in the key market.

David Roy Taylor: Or have you sort of run the gamut on that, and you're saturated in the Canadian market? No, we think there are some ideal partners that should be dealing with us that aren't yet. So, I'd like them to sort of try it and see if they like it.

No. We think Theres some are ideal partners that should be dealing with us that arent yet so.

I'd like them to sort of try it and see if they like it then.

David Roy Taylor: And as has been the past with the others, they probably will like it and start utilizing us. But there are still some partners left in Canada for us to deal with. In the States, there's a huge number sort of lined up at the door.

This has been in the past where the others are theyre, probably will like it doesn't start utilizing us, but theres still some partners left in Canada.

For us to deal with.

In the states. This is a huge number sort of lined up at the door. The Kb there'll be your conference.

David Roy Taylor: The KBW conference that you guys sponsored, and thank you for the invitation to New York City, must have met at least a dozen ideally suited partners, some of whom are actually very familiar with our operations in Canada and are keenly interested. So, in Canada, we've still got some room to grow with partnerships, and in the United States, we have a tremendous opportunity. Okay, and you're but is it fair to say that you're not really seeing anything in the near term in the pipeline in Canada; you're sort of running with the existing partner base? That's true. We are working on some new partnerships that are actually in the States because they're so sort of keen that despite us not yet having the U.S. license, we're sort of cobbling together a Canadian solution for them, even despite them operating in the States. Okay, that's helpful. And then just one quick one on Sterns and the timing of the close.

But you guys sponsored and thank you for the invitation in New York City.

I must have met at least a dozen ideally suited partners that some.

Some are actually very familiar with.

With our operations in Canada and.

We are keenly interested so in Canada, we still got some room to grow with partnerships.

In the United States, we have.

Tremendous opportunity.

Okay.

Is it fair to say that Youre, not really seeing anything in the near term in the pipeline in Canada, you're sort of running with the existing partner base.

That's that's true we are working on some new partnerships that actually are in the states.

Because they are so.

Sorry Keene.

Despite us not yet have in the U S license.

We're sort of Cobbling together a Canadian.

Solution for them.

Even despite them offering in the states.

Okay. That's helpful. And then just one quick one on Stearns and the timing of the close and I fully understand why there has been such a long delay just given what happened last year with the U S regional banking sector.

Mehmed Rizvanovic: And I fully understand why there has been such a long delay, just given what happened last year with the US regional banking sector. And I'm just wondering, you sound confident on the closing, and I appreciate the conservative viewpoint on saying that it probably lands in the second calendar quarter, but is there any risk at all that this does not get approved, in your view? I'm not sure if you can even make that commitment in that commentary, but is there any potential roadblock that could derail the acquisition altogether? Well, I'd never say never. I think there's a tiny risk that it wouldn't close. But you know, being a sort of a quantitative guy, I give it a 99.9% chance it would close.

And I'm just wondering you sound confident on closing and I appreciate the conservative viewpoint on saying that it probably lands in the second calendar quarter, but.

Is there any risk at all that this does not get approved in your view I am not sure. If you could even make that commitment on that commentary, but is there any potential roadblock that could derail the acquisition altogether.

Well no.

Never say never.

I think there's.

Tiny risk.

Close.

Being a sort of a quantitative guide go 99, 9% chance it would close I don't know of any impediments to the close.

David Roy Taylor: I don't know of any impediments to the deal. I think the product we're offering to the United States is unique and will have a huge benefit for the US economy. The point of sale companies that we're talking to, you know, provide a good portion of point of sale financing in the States. And what we're providing them with is an economical alternative source of funds. They already have sources of funds, of course, but ours is kind of a new mousetrap. It's efficient, probably will have to have less equity and less liquidity, and we can buy loans and leases on almost a real-time basis.

I think the product, we're offering to the United States.

Unique and will have a huge benefit for the U S economy, the point of sale of companies that we're talking to.

I'll provide a good portion of the point of point of sale financing in the states and what we're providing them with us and economical alternatives.

Alternative source of funds. They are to help source fast of course, but ours is kind of a new mouse trap.

It's sufficient to probably probably have to have less less equity and less less liquidity and that we can buy loans and leases.

Almost a real time basis, so it's a very attractive product.

David Roy Taylor: So it's a very attractive product. I think the US regulators realize that we're bringing something to their economy that they'll be very helpful. And, you know, in the final analysis, it means more economical pricing for small businesses and consumers as our funds flow through the model.

I think the U S regulators realize that the.

We're bringing something to their economy.

That'd be very helpful and.

The final analysis it means Marek.

Or economical pricing for small businesses and consumers.

David Roy Taylor: I appreciate that. I'll take that 99.9% to reflect a very confident view at this stage. Thank you. Thank you, David. Yeah, that's, you know, like I say, in the banking world, you don't ever want to say 100%. Right. I would say it's pretty close to that. I can't think of any reason why the US regulators wouldn't want us to present this product to their consumers and small businesses

Uh huh.

Our funds look.

Flow through the model.

Okay I appreciate that I'll take that 99, 9% to reflect the very confident you are at this stage. Thank you. Thank you David.

Yeah that's.

Let's just say in the banking World you don't ever want to say, 100%.

It's I would say, it's pretty close to that.

I can't think of any reason why are why the U S regulators would want us to present this product to their consumers and small businesses.

David Roy Taylor: You know, it's worked well in Canada for the last dozen years, and it will work just as well, maybe even a little bit better, given the size of the market and the solution that we're providing has been refined over the last few years. Thank you. Thank you, David. I really appreciate the color.

Where it's falling cash the last dozen years and.

I think it works.

Just as well, maybe even a little bit better given the size of the market and the.

Solutions that we're providing is.

David Roy Taylor: No problem, Mike. Good. Hey, Mike, you're up in Toronto, right? Don't feel bad, but I had to come down here to Florida to catch up on a few things. You always have to work that out, don't you?

<unk> has been refined over the last few years.

Okay. Thank you. Thank you David I really appreciate the color.

No problem, Mike Good Hey, Mike Youre up in Toronto, right. So don't feel bad, but I had to come down here to Florida to catch up on a few things.

Yes.

You always have that or don't you.

David Roy Taylor: Heheheh, Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the number. Our next question comes from Stephen Ranzini from University Bank. Please go ahead. Hi David, congratulations to you and your team on another great quarter. I was just curious if you could provide some color around the status of getting approval for buying back more shares. Well, Steve, it's not on the list of our things to do right now. We put that program on pause because of that.

[laughter].

Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one.

Your next question comes from Steven <unk> from University Bank. Please go ahead.

Hi, David Congratulations to you and your team on another great quarter I was just curious.

Could you provide some color.

Around the status of getting approval for buying back more shares.

Well, Steve it's not on the list of our things to do right now we put the program on pause in that.

Stephen Lange Ranzini: As our share price is tending to go over book value, the great opportunity we had in the past, that three-quarters of a book isn't there anymore, and it's quite likely, I think, you know, I'm a little bit prejudiced about this, I think the stock price should continue to go upward to well over book value. Secondly, we're sort of in a static scenario while our application is in to finish the purchase of Stearns Holdenford and, you know, not looking to introduce another variable into our capital. All right, thanks so much, David, and keep up the great work. Well, thank you, Steve. Yeah, hopefully it's warming up in Michigan. Well, it was 75 the other day; it was like summer in the middle of winter.

As our share price is tending to go over book value.

The great opportunity, we had in the past that three quarters of book.

Isn't there anymore and it's it's quite likely I think.

Just having a little bit prejudice.

I think the stock price should continue upward.

Well over well over book value Secondly.

We're sort of in a static scenario.

Our application and send to finish the year.

The purchase of stern hold incurred and.

We're not looking too.

To enter this another variable into our capital.

Alright, thanks, so much David and keep up the great work.

Well. Thank you Steve is the whole play it's warming up in Michigan.

Well it was 75 the other day it was like somewhere in the middle of the winter.

David Roy Taylor: Wow. Bring on that global warming. Very, very unusual weather.

Wow.

Bringing on that global warming.

Very very unusual weather.

Stephen Lange Ranzini: Yes, yes. We'll take it. Every day in Michigan that it doesn't snow is a good day.

Yes, yes.

Well, it's every day in Michigan that it doesn't snow is a good day.

David Roy Taylor: Indeed. Well, it's good talking to you. Thank you. And there are no further questions at this time.

Indeed.

Good talking to.

Thank you.

There are no further questions at this time I will turn the call back over to David for closing remarks.

Operator: I will turn the call back over to David for closing. Well, thank you again to everybody for signing in to join us for this call. And I look forward to speaking to you at the time of our second quarter results. Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.

Well. Thank you again for everybody for finding out to join us for this call.

And I look forward to speaking to you at the time of our second quarter results.

Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.

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