Q2 2024 VersaBank Earnings Call
Speaker Change: [music].
Okay.
Operator: Good morning, ladies and gentlemen, and welcome to VersaBank's second quarter fiscal 2024 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the second quarter ended April 30, 2024.
Speaker Change: Good morning, ladies and gentlemen, and welcome to the voice of banks second quarter fiscal 2024 financial results Conference call.
Speaker Change: This morning birthday Bank issued a news release reporting its financial results for the second quarter ended April 32020 for.
Operator: That news release, along with the bank's financial statements, MD&A, and supplemental financial information, is available on the bank's website in the Investor Relations section, as well as on CDERplus and EDBAR. Please note that in addition to the telephone dial-in, VersaBank is webcasting this morning's conference call. The webcast is listen-only.
Speaker Change: That is really just allow me the bank's financial statements MD&A and supplemental financial information are available on the bank's website in the Investor Relations section.
Speaker Change: That's all that I see that blocked and edmar.
Speaker Change: Please note that in addition to the telephone dial in basic banking webcasting This mornings conference call.
Operator: If you are listening to the webcast but wish to ask questions in the Q&A session following Mr. Taylor's presentation, please dial in to the conference line, the details of which are included in this morning's news release and other bank subs. For those participating in today's call by telephone, the accompanying slide presentation is available on the Bank's website. Also, today's call will be archived for replay, both by telephone and by the internet, beginning approximately one hour following the completion of the call. Details on how to access the replays will be available in this morning's news release.
Speaker Change: The laptop just listen only if you are less link to the webcast that wish to ask a question in the Q&A session. Following Mr. Taylor specialization piece now and into the conference line it out the details.
Speaker Change: I included this morning's news release and on the bank's website.
Speaker Change: For those participating in today's call by telling following the accompanying slide.
Speaker Change: And is it available on the bank's website.
Speaker Change: Also today's call will be archived for replay both by telephone and via the Internet beginning approximately one hour following the completion of the call.
Speaker Change: Details on how to access the replays are available in this morning's news release.
Operator: I would like to remind our listeners that the statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by VersaBank management. However, 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 David Taylor, President and Chief Executive Officer of VersaBank. Please go ahead, Mr. Taylor.
Speaker Change: I would like to remind our listeners that statements about future events made on this call are forward looking in nature and are based on certain assumptions and analysis made by both the bank management.
Speaker Change: Actual results could differ materially from our expectations due to various material risks and uncertainties associated bad burst of banks disappear.
Speaker Change: Please refer to burst the bank's forward looking statement advisory in today's presentation.
Speaker Change: I would now like to turn the call over to David Taylor, President and Chief Executive Officer up It's a bank. Please go ahead Mr. Taylor.
David Roy Taylor: Good morning everyone, and thank you for joining us for today's call. With me today is our Chief Financial Officer, John Asma. Before I begin, I'd like to remind you that our financial results are reported and will be discussed in this call in our Reporting Currency of Canadian dollars. For those interested, we provide U.S. dollar translations for most of our financial numbers in the Standard Investor Presentation, which will be updated and available on our website shortly. Now on to the highlights.
David Roy Taylor: Good morning, everyone and thanks for joining us for today's call with me today is our Chief Financial Officer, John Asthma.
David Roy Taylor: Before I begin I'd like to remind you that our financial results are reported and will be discussed in this call and our reporting currency of Canadian dollars.
David Roy Taylor: For those interested we provide U S dollar translations for most of our financial numbers.
David Roy Taylor: Our standard Investor presentation, which will be updated and available on our website shortly.
David Roy Taylor: At risk of starting to sound repetitive on the calls, the second quarter results once again show the operating leverage in our highly efficient branchless business-to-business digital banking model as our loan portfolio continues to grow. 18% year-over-year growth in total assets generated 15% year-over-year growth in net income, and that, combined with a continued focus on management of our fixed costs, drove both a year-over-year and sequential improvement in the digital banking efficiency ratio to a record new 38% and a 2% year-over-year increase in average return on common equity to 12.4%.
Speaker Change: Now onto the highlights at the risk of starting to sound repetitive upon the calls.
Speaker Change: Second quarter results. Once again showed the operating leverage and our highly efficient branchless business to business digital banking model as well.
Speaker Change: Loan portfolio continues to grow.
Speaker Change: 18% year over year growth in total assets generated 15% year over year growth in net income.
Speaker Change: And that combined with a continued focus on management of our fixed costs drove both a year over year and sequential improvement.
Speaker Change: The digital banking efficiency ratio to a record 38%.
Speaker Change: And a 2% year over year increase in average return on common equity to 12, 4%.
David Roy Taylor: Notably, Q2 was a solid quarter for our point-of-sale receivable purchase program business, which expanded by a healthy 1% sequentially, as the HVAC Home Improvement sector, which continues to make up the largest component of our point-of-sale portfolio, continues to see robust consumer activity. That contributed to another record high for total assets of $4.4 billion, another meaningful step towards our next milestone of $5 billion, and the continued outsized positive impact on our efficiency, our profitability, and our return on equity.
Speaker Change: Notably Q2 was a solid quarter for our point of sale receivable purchase program business, which extent expanded by a healthy 1% sequentially as H back home improvement sector, which continues to make up the largest component of our points of sale portfolio continues to see robust.
Speaker Change: Consumer activity.
Speaker Change: That contributed to another record high for total assets of $4 4 billion.
Speaker Change: They're a meaningful step towards our next milestone of 5 billion.
Speaker Change: Continued outside outsized positive impact our efficiency our profitability on our return on equity.
David Roy Taylor: Quarters 1 and 2 combined for a strong first half of 2024 with year-over-year growth in net income and EPS of 25% and 29%, respectively. Looking more closely at our Q2 numbers, I will note here that the second quarter is historically the softest quarter for the bank. This is something that hasn't been readily apparent in the last few years due to the hyper growth in our point of sale portfolio. However, due to the nature of the types of purchases our point of sale partners are financing, we historically see lower activity during the winter months. A milder-than-normal winter here in Canada, and in particular our most populous market, Ontario, further dampened the number of winter-related purchases.
Speaker Change: Quarters, one and two combined for a strong first half of 2024 with a year over year growth in net income and EPS of 25% and 29% respectively.
Speaker Change: Looking more closely at our Q2 numbers I will note here that the second quarter is historically the softest quarter for the bank. This is something that hasn't been readily apparent to the last few years due to hyper growth at our point of sale portfolio.
Speaker Change: Due to the nature of the types of purchases or point of sale partners. So I'd financing, we historically see lower activity during the winter months.
Yes.
Speaker Change: A milder than normal winter here in Canada, and in particularly our most popular smart, Ontario further dampened the number of winter related purchases.
David Roy Taylor: And in our cybersecurity service business, Q2 reflects the start of a fiscal year for many of its clients, in contrast to Q1, which, due to the bank's fiscal year-end being October, historically benefits from calendar year-end spending by our customers. As was the case in Q1, Q2 also reflected our planned strategy to transition a component of our real estate portfolio from higher-yielding, higher-risk-weighted loans to lower- As we ramp up these activities, you'll see the percentage of CMHC loans increase, quarter over quarter. There will be a little more on this later.
Speaker Change: And in our cyber security service business Q2 reflects the start of our fiscal year for many of its clients in contrast to Q1, which due to the bank's fiscal yearend being October historically benefits from calendar year end spending by our customers.
Speaker Change: As was the case in Q1 Q2 also reflected our planned strategy to transition that component of our real estate portfolio from higher yielding higher risk weighted loans to lower yielding lower risk weighted CMA sea insured loans.
Speaker Change: As we ramp up these activities.
You'll see the percentage of CMA sea loans increase quarter over quarter.
Speaker Change: There'll be a little more on this later.
David Roy Taylor: We are also seeing what appears to be some softness in the macro point-of-sale financing market due to the elevated interest rate environment and softness in certain parts of the economy. This is the result of a combination of slower growth and origination by our partners as well as a higher than typical level of early repayments by our consumers. I'll provide more color on what remains a very positive outlook for our point-of-sale business in a few minutes.
Speaker Change: We're also seeing what appears to be some softness in the macro point of sale financing market due to elevated interest rate environment.
Speaker Change: Asked us in certain parts of the economy.
Speaker Change: This is the result of a combination of slower growth in the rich nation by our partners as well as higher than typical level of early repayments by our consumers.
Speaker Change: I'll provide more color on what remains a very positive outlook for our point of sale business in a few minutes.
David Roy Taylor: The second item I want to call out in Q2 is net interest margin, which to a large degree reflects the success of our focus on growing our point-of-sale financing portfolio. That portfolio is lower risk-weighted and has lower yielding loans than our real estate portfolio. Over the past 24 months, the proportion of our point-of-sale financing portfolio has expanded from 66% to now 78%. That said, Q2 net interest margins are below our near-term expectations. On the lending side, we believe there is still some room for expansion in our Canadian point-of-sale business.
The second item I want to call out in Q2, as net interest margin, which to a large degree reflects the success of our focus on growing point of sale financing portfolio.
Speaker Change: Portfolio is lower risk weighted has lower yielding loans than our real estate portfolio over the past 24 months the proportion of our point of sale financing portfolio has expanded from 66% to now 78%.
Speaker Change: That said Q2 net interest margins are below our near term expectations on the lending side. We believe these this is fun.
Speaker Change: There is still some room for expansion in our Canadian point of sale business and the.
The deposit side, we expect higher than normal broker spreads in our wealth management deposits to moderate.
Speaker Change: We expect to benefit from continued expansion of our lower cost and the solvency deposit portfolio.
David Roy Taylor: On the deposit side, we expect higher-than-normal broker spreads in our wealth management deposits to moderate. While we expect to benefit from continued expansion of our lower-cost insolvency deposit portfolio The third item of note is that despite the very strong year-over-year growth in net income and EPS, Q2 profitability was dampened slightly by a number of transitory items that masked the underlying performance of your digital banking operations. A significant component of the 7% sequential decrease in net income reflects higher provisions for taxes and a modest increase in non-interest expenses primarily due to lower than typical expenses in the first quarter of fiscal 2024 at DRT Cyber.
Speaker Change: The third item of note is that despite the very strong year over year growth in net income and EPS Q2 profitability was dampened slightly by a number of transitory items that mask the underlying performance of your digital banking operations.
Speaker Change: Significant components of other 7% sequential decrease in net income reflects higher provisions for taxes at <unk>.
Speaker Change: A modest increase in non interest expenses, primarily due to lower than typical expenses in the first quarter of fiscal 2024 at DRG cyber.
David Roy Taylor: When we strip away this noise, pre-tax profitability for our digital bank operations was actually up sequentially. And notably, non-interest expenses in our digital banking operation were down 6% year-over-year and down 4% sequentially. I'd now like to turn the call over to John to review our financial results in detail. John?
Speaker Change: When we strip away this noise pre tax profitability story digital bank collaborations was actually up sequentially.
Speaker Change: And notably noninterest expenses, and our digital banking operation was down 6% year over year and down 4% sequentially.
Speaker Change: I'd now like to turn the call over to John to review, our financial results in detail John.
Speaker Change: Yeah.
John W. Asma: Thanks, David. Before I begin, I will remind you that our full financial statements and MD&A for the second quarter and first half of the year are available on our website under the Investors section, as well as on CDAR and EDG. And as David mentioned, all of the following numbers are reported in Canadian dollars, as per our financial statements, unless otherwise known. Starting with the balance sheet, total assets at the end of the second quarter of fiscal 2024 grew 18% year-over-year and 2% sequentially to a new high of $4.4 billion.
John W. Asma: Thanks, David before I begin I will remind you that our full financial statements and M. DNA for the second quarter and first half of the year are available on our website under the investors section as well as on SEDAR and Edgar.
John W. Asma: And as David mentioned all of the following numbers are reported in Canadian dollars as per our financial statements unless otherwise noted.
John W. Asma: Starting with the balance sheet total assets at the end of the second quarter of fiscal 2024 grew 18% year over year, and 2% sequentially to a new high of $4 4 billion.
John W. Asma: As David noted earlier, Q2 is historically the slowest quarter for growth due to seasonality in both the digital banking operations and cybersecurity services business. Additionally, we continue to experience some temporary dampening of our results due to our strategy to transition a portion of the real estate portfolio to CMHC insured mortgages, which will contribute to higher return on common equity. Cash and securities were $303 million or 7% of total assets, which was consistent at 7% in Q2 of last year and up slightly from 6% in Q1 of this year.
Speaker Change: As Dave as David noted earlier Q2 is historically, the slowest quarter for growth due to seasonality on both the digital banking operations and cyber security services businesses.
Speaker Change: While we continue to experience some temporary dampening of our results due to our strategy to transition a portion of the real estate portfolio to CMA sea insured mortgages, which will contribute to higher return on common equity.
Speaker Change: Cash and securities were $303 million or 7% of total assets.
Speaker Change:
Speaker Change: Consistent at 7% in Q2 of last year and up slightly from 6% in Q1 of this year.
John W. Asma: Book value per share increased to a new high of $14.88, our CET1 ratio increased to 11.63%, and our leverage ratio was 8.55, both remaining above our internal target. Turning to the income statement, total consolidated revenue increased 7% year over year but decreased 1% sequentially to $28.5 million. The year over year increase was driven primarily by higher net interest income as our digital banking loan portfolio continues to grow, while the sequential decrease was mainly due to seasonality, as well as the temporary dampening of revenue, excuse me, due to the transition of a portion of the real estate portfolio to CMHC insured loans.
Speaker Change: Book value per share increased to a new high of $14.88.
Speaker Change: CET one ratio increased to 11.63%.
Speaker Change: And our leverage ratio was $8 five 5% both remaining above our internal targets.
Speaker Change: Okay.
Speaker Change: Turning to income statement total consolidated revenue increased 7% year over year, but decreased 1% sequentially to $28 5 million.
Speaker Change: Year over year increase was driven primarily by higher net interest income as our digital banking loan portfolio continues to grow well. So while sequential decrease was mainly due to seasonality as well as the temporary dampening of revenue.
Speaker Change: Excuse me due to transition of.
Speaker Change: The portfolio of a portion of the real estate portfolio to see MHC insured loans.
John W. Asma: Consolidated net non-interest expenses were $12.2 million, down from $12.7 million last year and up slightly from $12 million for Q1 of this year, as management continues to focus on managing the fixed expenses line across the business.
Speaker Change: Consolidated net interest income non interest expenses were $12 2 million down from $12 7 million last year and up slightly from $12 million for Q1 of this year as management continues to focus on managing the fixed expenses line across the business.
Speaker Change: Okay.
John W. Asma: Consolidated net income for Q2 increased 15% year-over-year to $11.8 million and decreased 12% sequentially. As David mentioned, notwithstanding this healthy year-over-year growth in Q2, profitability was slightly dampened by a number of transitory items that mask positive sequential growth in the pre-tax profitability for a digital banking operation. Consolidated earnings per share increased 18% year over year to 45%.
Speaker Change: Consolidated net income for Q2 increased 15%.
Speaker Change: Year over year to $11 8 million and decreased 12% sequentially.
Speaker Change: As David mentioned, notwithstanding that's healthy year over year growth Q2.
Speaker Change: Profitability was slightly dampened by a number of transition transitory items that mask positive sequential growth in the pre tax profitability for our digital banking operations.
Speaker Change: Consolidated earnings per share increased 18% year over year to 45.
John W. Asma: Benefiting from a lower number of shares outstanding due to the buyback program we had in place during fiscal, loan growth grew to just over $4 billion at the end of Q2, driven once again by our Point of Sale Receivable Purchase Program, which increased 23% year-over-year and 1% sequentially to $3.1 billion. Our point of sale portfolio represented 78% of our total loan portfolio at the end of Q2, up slightly from the end of Q1.
Speaker Change: <unk> from a lower number of shares outstanding due to the buyback program. We had in place during fiscal 2020 I'm sorry.
Speaker Change: Okay.
Speaker Change: The loan growth grew to just over $4 billion at the end of Q2.
Speaker Change: Once again by our point of sale receivable purchase program, which increased 23% year over year, and 1% sequentially to $3 1 billion.
Speaker Change: Our point of sale portfolio represents 78% of our total loan portfolio at the end of Q2 up slightly from the end of Q1.
John W. Asma: Our real estate portfolio expanded 1% year over year and was flat sequentially at $828 million as we transitioned to CMHC insured loans. As a reminder, our real estate portfolio is primarily mortgages and construction loans or real estate properties. We have very little exposure to commercial property.
Speaker Change: Our real estate portfolio expanded 1% year over year and was flat sequentially at $828 million as we transitioned to see MHC insured loans.
Speaker Change: As a reminder, our real estate portfolio is primarily mortgages and construction loans or real estate properties, we have very little exposure to commercial use properties.
John W. Asma: Turning to the income statement for digital banking operations, net interest margin on loans, that is, excluding cash from securities, was 2.52%. That was 47 basis points or 16% lower on a year over year basis and 11 basis points or 4% sequentially. Net Interest Margin Overall, including the impact of cash, securities, and other assets, decreased 33 basis points year over year or 12% and decreased 3 basis points or 1% sequentially to 2.45%.
Speaker Change: Yes.
Speaker Change: Turning to the income statement for digital banking operations net interest margins.
Speaker Change: On loans that is excluding cash from securities was 2.52% that was 47 basis points or 16% lower on a year over year basis, and 11 basis points or 4% sequentially.
Speaker Change: Net interest margin overall.
Including the impact of cash securities and other assets decreased 33 basis points year over year or 12%.
Speaker Change: And decreased 3% or three basis points or 1% sequentially to $2 four 5%.
John W. Asma: As David discussed, Q2 Net Interest Margin reflects the strong growth of the POS financing portfolio, which is comprised of low risk weighted, lower yielding but higher ROCE assets than commercial real estate, as well as the transitory impact of the transition of the real estate loans to higher return opportunities. Cost of funds for Q2 was 4.21%, up 94 basis points year over year and up 22 basis points sequentially. The cost of funds was again somewhat elevated in Q2 due to the raised rates for term deposits.
David Roy Taylor: As David discussed Q2, net interest margin reflects the strong growth of the P O S.
David Roy Taylor: Financing portfolio.
David Roy Taylor: Is comprised.
David Roy Taylor: Which is comprised of low risk weighted lower yielding but higher our oce assets than commercial real estate.
David Roy Taylor: As well as the transitory impact of the transition of the real estate loans to higher return opportunities.
David Roy Taylor: Okay.
David Roy Taylor: Cost of funds for Q2 was 4.21% up 94 basis points.
David Roy Taylor: Year over year, and up 22 basis points sequentially cost of funds was again somewhat elevated in Q2 due to the raised rates for term deposits.
John W. Asma: We continue to expect to increasingly benefit from the continued expansion of our insolvency professional deposits. As insolvency activity in Canada continues to steadily increase, are provisions for credit losses or PCLs, in Q2 remain negligible at 0% of average loans compared to 0.03 last year and with a 12 quarter average of 0.01. I'll now briefly turn to DRT. On a standalone basis, Digital Boundaries Group Q2 revenue increased 8% year over year to $2.8 million, and gross profit increased 5% to $2 million, both due to higher service engagement.
David Roy Taylor: We continue to expect to increasingly increasingly benefit from the continued expansion of our insolvency professional deposits.
David Roy Taylor: Salton Sea activity on the Canada continues to steadily increase.
Yeah.
David Roy Taylor: Okay.
David Roy Taylor: Our provisions for credit losses, or <unk> in Q2 remained negligible at zero percent of average loans compared to 2.03 last year and with a quarterly or a 12 quarter average up 0.0%.
Speaker Change: I will now briefly turn to Dr. T C on a standalone basis digital boundaries groups Q2 revenue increased 8% year over year to $2 8 million.
Speaker Change: Gross profit increased 5% to $2 million, both due to higher service engagements.
John W. Asma: So sequentially, both were down, reflecting seasonality in the business, as our fiscal Q2 coincides with the start of many customers' fiscal years, during which they are often in the planning and ramping stages of their budgets, projects, and deliverables. DBG remained profitable within DRT. DRTC's net loss of $162,000 in Q2 of this year compares with a net income of $433,000 last year, with the difference mainly due to higher expenses and higher staff costs to support past and expected expansions in business activity.
So sequentially, both were down reflecting the seasonality in the business as our fiscal Q2 coincides with the start of many customers' fiscal years during which they are often planning and ramp and ramping stages of their budgets projects and deliverables.
Speaker Change: Dbg remained profitable with M D. R T C.
Speaker Change: Dr T six net loss of 162000.
Speaker Change: In Q2.
Speaker Change: Of this year compares with a net income of 433000 last year.
Speaker Change: With the difference mainly due to higher expenses and higher people costs to support past and expected expansions in business activity.
John W. Asma: The decrease from net income of $435,000 in Q1 of this year was primarily due to some positive compensation adjustments in the comparable quarter. I'd like to turn the call back to David for some closing remarks.
Speaker Change: The decrease from net income.
Speaker Change: 435000 in Q1 of this year was primarily due to some positive compensation adjustments in the comparable period in the comparable quarter.
Speaker Change: I'd like to turn.
Speaker Change: The call back to David.
David Roy Taylor: For some closing remarks.
David Taylor: Good.
David Roy Taylor: Thanks, John. The outlook for strong, near, and long-term Groton VersaBank remains very favorable. We expect improved sequential growth in our point of sale financing portfolio with the benefit of seasonally higher summer sales as well as a ramp up in loan originations in our CMHC insured finance facilities in our real estate portfolio in the 3rd and 4th quarters. As of April 30th, we had commitments of nearly 440 million, which is a very solid start and a number we expect to continue to steadily grow. Notably, only a small amount of these commitments has yet been drawn down.
David Taylor: Yes.
David Roy Taylor: Thanks, John the outlook for strong near and long term growth versus bank remains very favorable.
David Roy Taylor: We expect improved sequential growth in our point of sale financing portfolio with the benefit of seasonally higher summer sales as well as a ramp up in loan originations and our CMA Sea insured finance facilities and our real estate portfolio.
David Roy Taylor: And the third and fourth quarters.
David Roy Taylor: On April 30, we had commitments of nearly $440 million.
David Roy Taylor: As a very solid start in a number we expect to continue to steadily grow.
David Roy Taylor: Notably only a small amount to these commitments has yet been drawn down actually.
David Roy Taylor: Firewall and partners, meaning that we expect to begin to see the growth in this portfolio starting in the second half of this year and accelerating into 2025.
David Roy Taylor: Notably as the Canadian banking industry, you see as the impact of sustained elevated interest rates and some softness in the economy the advantage of our branchless busy.
David Roy Taylor: The business-to-business digital banking model really comes into focus. For several quarters now, you have heard me give the caveat that any comments around our short-term growth potential of our point-of-sale business have an economic impact. We may be seeing some of that now.
David Roy Taylor: Business to business digital banking model really comes into focus.
Speaker Change: For several quarters now you've heard me.
Speaker Change: Give the caveat that any comments around our short term growth potential of our point of sale business with economic impact.
Speaker Change: We may be seeing some of that now.
David Roy Taylor: While this may slightly delay reaching our next total asset milestone of $5 billion to Q1 of next year, it doesn't impact the resulting operating leverage or the benefit to the return on common equity as we expand our portfolio. On the deposit side, insolvency deposits grew sequentially for the fourth consecutive quarter as Canadian consumer and small business insolvencies continued to increase. According to Statistics Canada, insolvencies in Canada in April of this year were up 24% from April last year. Consumer insolvencies were up 23%, while business insolvencies were up more than 60%.
Speaker Change: While this may slightly delay breaching our next total asset milestone of $5 billion to Q1 of next year. It doesn't impact the resulting operating leverage are the benefit to the return on common equity as we expand our portfolio.
Speaker Change: On the deposit side and the solvency deposits grew sequentially for the fourth consecutive quarter as Canadian consumer and small business insolvencies continues to increase.
Speaker Change: According to statistics, Canada in the Solomon facing Cat in April of this year were up 24% from April last year consumer insolvencies were up 23%, while business insolvencies were up more than 60%.
David Roy Taylor: Accordingly, we are continuing to see the number of accounts in our insolvency deposits increase from already record high levels by 18% year-over-year and 4% sequentially. As a reminder, these accounts are opened prior to the funds being deposited, so they are a very solid leading indicator of future expansion of our deposit base. As we continue to benefit from the operating leverage from growth in Canada, we look forward to a decision from the U.S. regulatory authorities with respect to our proposed acquisition of a U.S. bank.
Speaker Change: Accordingly, we are continuing to see the number of accounts that are installed in the sea deposit increase from an already record high levels by 18% year over year and 4% sequentially.
As a reminder, these accounts are opened prior to the funds being deposit. So they are very solid leading indicator of future expansion of our deposit base.
Speaker Change: Yes.
Speaker Change: As we continue to benefit from the operating leverage from growth in Canada. We look forward to a decision from the U S regulator authorities with respect to our proposed acquisition of a U S Bank.
David Roy Taylor: A favorable decision will be transformational, enabling us to drive our assets to multiples of growth from Canada alone and fully capitalize on the operating leverage of our branchless B2B digital banking model. I am pleased to report that I do not have an update on the potential timing of a decision from a U.S. regulator. That's because, based on the information we have to date, we continue to anticipate a decision before the end of this month. That said, the timeline remains at the discretion of the regulators, and we respect their prerogative to adjust it as necessary for the integrity of the process. With that, I'd like to open up the call for questions.
Speaker Change: Favorable bold decision will be transformational, enabling us to drive our assets to multiples of growth from Canada.
Speaker Change: Hello, and fully capitalize on the operating leverage of our Branchless b to be digital banking model.
Speaker Change: I am pleased to report that I do not have an update on the potential timing of a decision from the U S regulator.
Speaker Change: Because based on the information we have to date, we continue to anticipate a decision before the end of this month that said the timeline remains at the discretion of the regulators and we respect their prerogative to adjust as necessary for the integrity of the process.
Speaker Change: With that I'd like to open up the call for questions.
Speaker Change: Later.
Operator: Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star, then the number one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then the number. One moment, please for your first question. Your first question comes from the line of David Feaster with Raymond James.
Speaker Change: Thank you and ladies and gentlemen, we will now begin the question and answer session to ask a question you May Press Star then the number one on your Touchstone phone.
Using a speakerphone please pick up your handset before pressing any Keith let me divide your question. Please press Star then the number two.
Speaker Change: Navin. Thanks for your first question.
Speaker Change: Yeah.
Speaker Change: And your first question comes from the line of David Feaster with Raymond James. Please go ahead.
David Pipkin Feaster: Hey, good morning everybody.
David Pipkin Feaster: Hey, good morning, everybody.
David Roy Taylor: Good morning, David.
Speaker Change: Good morning, David.
David Roy Taylor: I just wanted to start out on the organic growth side. You know, you talked about the softness in Canada and some of the risks to achieving that $5 billion asset level this year. But you're also pretty bullish on partner additions in Canada, and expansion in the U.S., and the pipeline's healthy. I'm just curious, what do you think about the organic growth trajectory within that point of sale business, the pipeline of partner additions in both Canada and the U.S.?
Speaker Change: I just wanted to start out on the organic growth side, you know you talked about the softness in Canada. Some of the risks to achieving that 5 billion dollar asset level. This year, but you were also pretty bullish on partner additions in Canada expansion in the U S and in the pipeline is healthy I'm. Just curious how do you think about the organic growth trajectory within that point of sale business.
Speaker Change: Is the pipeline of partner additions in both Canada and the U S.
David Roy Taylor: And then, are you looking to expand products? I know HVAC has kind of been a key driver, but is there opportunity to expand the product set to potentially help accelerate growth? Just kind of curious about your thoughts.
Speaker Change: And then are you looking to expand products I know HVAC has kind of been a key driver, but is there opportunity to expand the product set.
Speaker Change: You know potentially help accelerate growth just kind of curious your thoughts on that side.
David Roy Taylor: Well, first of all, in Canada, there tends to be a dampening effect of the winter months on consumer purchases and even on the HVAC projects that people undertake. So this half year, we saw the impact of that.
Speaker Change: Well first of all.
Speaker Change: In Canada, there tends to be a dampening effect of the winter months on consumer purchases and event in the HVAC projects that people undertake.
David Roy Taylor: In previous years, we've had such rapid growth that it sort of overwhelmed the tendency of Canadians not to get onto car lots and make new purchases, hot tubs and barbecues and such. So for the second half of the year, I do expect to see a resurgence in consumer purchases. And we're already seeing that in May. It's up a fair amount from April. So that's just sort of a typical Canadian thing.
Speaker Change: So this this half year, we saw the impact of that in previous years, which had such rapid and girls that server overwhelmed the a.
Speaker Change: Tennessee, if Canadian it's not to get out and he was on the car lots in an entertaining purchases Thompson barbecues and such.
Speaker Change: So the second half of the year I do expect to see a resurgence in the end consumer.
Speaker Change: Consumer purchases and.
Speaker Change: We're already seeing that in may.
Speaker Change: It's a fair amount from Bob.
Speaker Change: From April so.
Speaker Change: That's just sort of a typical Canadians and I think the other thing about the Canadian consumer as a.
David Roy Taylor: The other thing about the Canadian consumer is, according to the stats people, they tend to have some savings. So they tend to be a little more enthusiastic about buying in what might be seen as recessionary times than otherwise. So for the coming half year, I see a bit of a resurgence. It would be a better half than the last half.
Speaker Change: Alright.
Speaker Change: That's people they tend to have some savings so they tend to be a little more.
Speaker Change: Whose jaskot about buying and what.
Speaker Change: What might be seen as recessionary times and otherwise so for the half year coming.
Speaker Change: I see a bit of a resurgence.
Speaker Change: It would be a better half than the other.
Speaker Change: And then the.
Speaker Change: Last half now with respect to new products, yes. Indeed, we are having a look with some new partners that have some innovative.
David Roy Taylor: Now, with respect to new products, yes, indeed, we are having a look at some new partners that have some innovative point of sale type financing products, really cool ones. I won't talk about exactly what they are now, but really cool, ideally suited to our bank's model. So we're looking at that going forward, too, in Canada. And in the States, as I was saying, we're hopeful a regulator comes to a decision by the end of this month.
Speaker Change: Foreigners cell type financing products really cool ones have won.
Speaker Change: Talk about exactly what they are now, but really cool ideally suited for Fairbanks model.
Speaker Change: We're looking at that.
Speaker Change: Going forward too.
Speaker Change: In Canada.
Speaker Change: And.
Speaker Change: And the states that sort of thing.
Speaker Change: Or hopeful the regulator comes to a decision.
David Roy Taylor: But if not, there's a fair amount of moving factors in the United States now. I just saw a recent report from the Fed about a huge quantity of large bad loans in the portfolio. So I hope they come to a positive conclusion by the end of this month. And that, of course, allows us to bring our product to the United States, where we think there's tremendous demand for it.
Speaker Change: By the end of this month, but if not you know it's.
Speaker Change: This is a fair amount of.
Speaker Change: Moving factors in the United States style I just saw recently.
Speaker Change: Report from they've had about.
Speaker Change: About.
Speaker Change: Large huge quantity of large.
Speaker Change: Bad loans in the portfolio so.
Speaker Change: All right.
I hope to come to a positive conclusion by the end of this month and that of course allows us to bring our product to them.
Speaker Change: In the United States for everything Thats tremendous tremendous demand for it.
David Roy Taylor: You did touch on some of the softness in the labor market in Canada and some of the softness there. I'm curious, obviously, your credit is phenomenal, but I'm curious about how is the credit of the underlying receivables for your partner paid?
Speaker Change: Okay. That's great and then you did touch on.
Speaker Change: Some of the softness in labor market in Canada and in some of the softness there I'm curious you know obviously your credits phenomenal right, but I'm curious about how his credit of the underlying receivables for your partner Ben.
David Roy Taylor: Has there been any change there? And how are the retailers, your partners, doing, just given some of the softness that you talked about? Are you having any issues with the health of their balance sheets, just as the consumer maybe weakening a little bit?
Speaker Change: Has there been any change there and how are the the the retailers are your partners doing just given some of the softness that you talked about are you having any any issues from the health of their balance sheets, just as the consumer maybe weakening a little bit.
David Roy Taylor: Yeah, well, yes, we definitely are seeing that our partners are experiencing higher rates than they have in the past of default, and it's in various sectors. Retail purchases slow down, which translates through to us as less volume.
Speaker Change: Yeah, well, yes, we definitely are seeing that our partners are experiencing higher than they have in the past of defaults.
Speaker Change: And it's in various sectors retail purchase has slowed down.
Speaker Change: Sure.
Speaker Change: Which translates through to us to less volume and it also has another serve ironic.
David Roy Taylor: And it also has another sort of ironic impact on us that is sort of odd, an odd characteristic of our bank versus all the other banks. When our partners experience more default, Given the way we structure the arrangement, that means... we put the defaults and loans back to them more rapidly than we would otherwise. So it reduces the net increase in the portfolio because defaults to us mean repayments, as we, you know, are repaid as long as we're not defaulting.
Speaker Change: Impact on us that is sort of odd are on.
Speaker Change: Another characteristic of our bank versus all the other banks.
Speaker Change: When our when our partners experience more defaults.
Speaker Change: Again, given the way we structure the arrangement that means.
Speaker Change: We put the defaulted loans back to them more rapidly than we would otherwise.
Speaker Change: So it reduces the.
Speaker Change: The net increase in the portfolio because defaults to us mean repayments.
Speaker Change: We were repaid as long defaults, so we've experienced higher than average repayments in this last half than we would otherwise because of the higher than average defaults in our portfolio our partners' portfolios.
David Roy Taylor: So we've experienced higher than average repayments in this last half than we would otherwise because of the higher than average defaults in our partners' portfolios. So that sort of illustrates how our model is different than other banks. Other banks, you know, are presently whining about credit issues, and they're putting up larger provisions as they should for the credit losses. And we don't, because we have our partners' cash standing guard against the losses for us, but that does mean more rapid repayments as opposed to going to default. We debit their account and see a reduction in the portfolio. So that had an impact on the growth in Q2 also.
Speaker Change: Sorry illustrates how our model is different than other banks. Other banks presently are whining about credit issues and theyre, putting up larger provisions as they should for for the credit losses, and we don't because.
Speaker Change: They are our partners cash standing guard against the loss for us, but that does mean rapid more rapid repayments.
Speaker Change: I just want to see the rig count.
Speaker Change: And see a reduction in portfolio, so that that had an impact on the girls and are in the in Q2 also.
David Roy Taylor: Okay, all right, that's helpful. And then maybe the last one, could you touch on the funding side? I'm curious what you're seeing there. You talked about some of the tailwinds on the, you know, the trustee side, which is great. But you know, funding costs are continuing to rise. I'm curious, where do you think we are going with this? Are you seeing, are you seeing things starting to stabilize? Just kind of curious how you think about funding your growth trajectory, looking forward, and ultimately the impact on the margin.
Speaker Change: Okay, Alright, that's helpful. And then maybe last one just could you touch on the funding side I'm curious what you're seeing there you talked about some of the tail winds on the you know the the.
Speaker Change: Trustee side, which is great but.
Speaker Change: But you know funding costs continued to rise I'm curious where do you think we are there are you seeing are you seeing things starting to stabilize.
Speaker Change: But just kind of curious how you think about.
Speaker Change: Funding your growth trajectory looking forward and ultimately the impact on the margin.
David Roy Taylor: Well, I hate to use the word kind of great with respect to insolvencies because, you know, obviously that means a lot of poor folks. A 60% increase in small business insolvencies and a 20% increase in consumers. Not good for the economy, but it's very good for our deposit growth. As I was saying earlier, it's a leading indicator.
Speaker Change: Well.
Speaker Change: I hate to use the word China, great yeah with.
Speaker Change: Respects insolvencies.
Speaker Change: Because obviously that mean a sell off a lot of port folks are 60% increase in small business insolvencies and 20 odd percent increase in consumers.
Speaker Change: Not not good for this for the economy, but it's very good for our our deposit growth.
David Roy Taylor: The more accounts we open, the more insolvency there are, the greater that portfolio of deposits grows. It's getting to record levels now, but I see that continuing for the next year or two because there's a fair lag effect. The accounts are opened, and then they are filled up with the proceeds of the liquidation of the estates. It usually takes about a year and a half or two years. So, you know, we're starting to see the beginning of it, and I would expect the insolvency deposits to peak at around a billion dollars Canadian over the course of the next It's 8, 9, 12 months. It's sort of getting back to normal levels. Sad times for Canadians, but we designed this deposit business as a counterbalance to a recessionary time for our bank.
Speaker Change: So I was saying earlier, it's the leading indicators of the more accounts, we opened more insolvency or there.
Speaker Change: There are great.
Speaker Change: A greater that portfolio pull ups.
Speaker Change: That's gross.
Speaker Change: It's it's getting to a record level of snow, but I see that to continue for the next year or two because there's a lag effect. The accounts are opened and then they fill up with with the proceeds of the liquidation of the states that usually it takes about a year and a half two years. So.
Speaker Change: We're starting to see the beginning of it.
Speaker Change: And I would expect.
Speaker Change: Insolvency deposits to peak out around a one.
Speaker Change: $1 billion Canadian over the course of the next.
Speaker Change: Say eight or 912 months.
Speaker Change: Sort of getting back to normal <unk> levels sat times for Canadians, but yes.
Speaker Change: We designed this deposit business as a counterbalance to to recessionary times.
David Roy Taylor: For our bank, it makes sense.
Speaker Change: For our bank makes sense.
Speaker Change: Thanks, everybody.
Mehmed Rizvanovic: Thank you. And once again, if you would like to ask a question, please press star 1. Your next question comes from the line of Mike Rizvanovic with KBW Research. Please go ahead.
Speaker Change: Thank you and once again, if you would like to ask a question. Please press star one.
Speaker Change: Your next question comes from the line of Mike <unk>.
Nick: Nick with key BW research. Please go ahead.
Mehmed Rizvanovic: Hey, good morning David. I wanted to ask you a quick question about the mortgage renewal cycle, not in terms of the direct impact, obviously, but just the indirect impact. If we do have higher rates this quarter, but if we do get this dynamic where Canadians are just not borrowing as much, what's the downside, in your view, with respect to how much you could grow your POS?
Mike: Hey, Good morning, David I wanted to ask you a quick question about the mortgage renewal cycle.
Speaker Change: In terms of the direct impact obviously, but just the indirect impact if we do have higher rates for longer or just maybe call the rates steadily at a higher level.
Speaker Change: Even if the bank of Canada starts of cutting cycle, there theres no necessary guarantee that mortgage renewals will be painful for a lot of borrowers. So in the context of a deleveraging cycle potentially in Canada on the consumer side.
Speaker Change: What are your thoughts on how that could impact the demand for parts for you. Obviously, it's been a very very resilient book your growth has been.
Speaker Change: Phenomenal there a little bit of a slowdown this quarter, but if we do get this dynamic where neither just not borrowing as much what's the downside on your view with respect to how much you could grow P O S.
David Roy Taylor: Well, definitely have a damping effect. Last year we grew POS by about 30%; at the beginning of this year, I was hoping for around 20. I'd say it'd be a little less than that even. So yeah, those factors do dampen POS purchases, you know, just antidotally. You're not going to the motorcycle shop to buy a motorbike if you just had to renew your mortgage at twice the rate that it was before. So it definitely has a dampening effect. But you know, we still have the potential to grow on the order of around 15% year-over-year. Mind you, that's half the last...
Speaker Change: [laughter] well.
Speaker Change: But definitely have a dampening effect over the last year, where we grew by about 30%.
Speaker Change: At the beginning of this year I was hoping for around 20.
Speaker Change: I'd say it would be a little less than that even so yeah. Those factors do do dampen our Pos purchases artist to totally.
Speaker Change: You're not going to the motorcycle shop to buy by a motorbike. If I have here just had a great new year mortgage at twice the rate than it was before so it definitely has a dampening effect, but.
Speaker Change: Hey, you know, we still have the potential to grow in the order of around 15% Europe here mind, you that's half of last year.
David Roy Taylor: Yeah, that's helpful. And then maybe just a quick one, a numbers question on the margin, bit of compression, I think five straight quarters. Now, you've seen it come down quite a bit here. What is your, and apologies if I missed it in your prepared remarks, but any color you can provide on the margin trajectory, just in light of what you're seeing on the deposit side, the gross yields? Are you looking for some sort of level of stability in the coming quarters? Or is there more upside and less downside? What are your thoughts on this number?
Speaker Change: Yeah. That's that's helpful. And then maybe just a quick one a numbers question on the margin.
Speaker Change: Bit of compression I think five straight quarters now you've seen it come down quite a bit here what is your and I apologize if I missed it in your prepared remarks, but any any color you can provide on margin trajectory just in light of what you're seeing on the deposit side.
Speaker Change: The gross yields.
Speaker Change: Looking at some sort of level of stability in the coming quarters or is there upside and more downside what are your thoughts on the NIM.
David Roy Taylor: Well, there are a number of factors, some expanding margins, some contracting the margin. The CMHC mortgage portfolio serves to contract our margin, and we're probably averaging only 175 basis points on our CMHC construction mortgages, vis-à-vis conventional construction, which would be, say, 300 basis points. So the faster we book CMHC mortgages, the more compression that we'll see. Mind you, concern there's no capital used in the CMHC loan.
Speaker Change: Well, there's a number of factors some expanding margins subject a contraction in the margin.
Speaker Change: She may see mortgage portfolio serves to contract her margin and that were probably averaged only 175 basis points on our CMA sea construction mortgages.
Speaker Change: These would be conventional construction that we'd be say 300 basis points.
Speaker Change: So the faster, we we book CMA Sea mortgages, the more compression that will see mine too concerned installed capital.
Speaker Change: And the C M a C a long.
David Roy Taylor: The return equity figure does well with the addition of CMHCs, but that serves to compress our margin. And then as we move more into the higher, the percentage of point of sale is of our total lending portfolio, that serves to compress our margin too. Now, on the other side...
Speaker Change: The return on equity figure.
Speaker Change: It does it does well with us over the addition of the CMA She's got that serves to compress our margin.
Speaker Change: And then.
Speaker Change: As we as we move more into the higher the percentage of.
Speaker Change: Point of sale.
Speaker Change: Of our total lending portfolio that serves to compress our margin to now on the other side.
David Roy Taylor: The inverted yield curve that we've suffered with for quite a few years now in Canada, may be coming, that might, I'm just wishful thinking here, but that might be dissipating a little bit, you might say the yield curve is flattening out a little bit. And we tend to fund on the short end of the yield curve, and our loans tend to have a duration on the longer end. So we get pinched on that a little.
Speaker Change: The inverted yield curve that we've suffered with for quite a few years down in Canada.
Speaker Change: May be coming that might you might even just wishful thinking here.
Speaker Change: That might be.
Speaker Change: This spending a little bit right. So the yield curve flattening out a little bit and we tend to fund at the short end of the yield curve and our loans tend to have a duration longer and so we get pinched on that.
Speaker Change: A little so.
Speaker Change: If there is sort of as a guide over there that looks after bankers.
David Roy Taylor: So if there's a guy over there that looks after bankers, maybe that yield curve will start sloping upward again, and that helps. So you have those two factors that compress the margin, which is actually pretty good, because the more CMHCs we book, even though the margin is down, that's a wonderful low-risk new source of net interest income for the bank. And more POS is better, too. But if the yield curve would straighten out and head up as it traditionally does, it'd be positive for us. Yeah, that's very helpful. Thanks for your insight.
Speaker Change: It would be that youll careful sometime in the future start sloping upward again.
Speaker Change: That helps so you have those two factors that compress.
Speaker Change: Margin, which actually are pretty good because you know the more CMA CSP bookkeeping, though the March down that's a wonderful low risk.
Speaker Change: New source of net interest income for the bank and Smart P. O S is better too.
Speaker Change: But.
Speaker Change: If the yield curve would straighten out ahead of us.
Speaker Change: As it traditionally does.
Speaker Change: The positive for us.
Mehmed Rizvanovic: Yeah, that's very helpful. Thanks for your insights.
Speaker Change: That's very helpful. Thanks for your insights.
Speaker Change: You're very welcome. Thank you.
Speaker Change: Yeah.
Operator: And there are no further questions at this time. I would like to turn it back to Mr. David Taylor for closing remarks.
Speaker Change: And there are no further questions at this time I would like to turn it back to Mr. Taylor for closing remarks.
David Roy Taylor: Well, I'd like to thank everybody for joining us today, and I look forward to speaking to you at a time during our third quarter. Today, I'm actually very lucky and blessed.
David Roy Taylor: Well I'd like to thank everybody for joining us today and I look forward to speaking to at the time of our third quarter.
Speaker Change: Today I'm actually very.
David Roy Taylor: Very lucky and Blessed I am sitting here in New York City are speaking to you from the New York Catholic Club, but looking forward to meeting some potential investors are hitting this is fabulous city, it's a beautiful day looking out over Central Park.
David Roy Taylor: I'm sitting here in New York City speaking to you from the New York Athletic Club. I'm looking forward to meeting some potential investors here in this fabulous city. It's a beautiful day looking out over Central Park. So I hope you all have a wonderful day and if you have any further questions you want to ask me, you could drop me an email. I'm always happy to talk to my investors and potential investors. Thank you again.
David Roy Taylor: So I hope you all have a wonderful day and if you have any further questions you want to ask that you could drop me an email.
Bob: Bob We're always happy to talk to my investors and potential investors. So thank you again.
Operator: Thank you, presenters, and ladies and gentlemen. This concludes today's conference call. Thank you all for participating. You may now disconnect.
Speaker Change: Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you all for participating you may now disconnect.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.