Q1 2025 VersaBank Earnings Call

Unknown Executive: Good morning, ladies and gentlemen. Welcome to VersaBank's first quarter fiscal 2025 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the first quarter ended January 31st, 2025. That news release, along with the bank's financial statements, MD&A, and supplemental financial information are available on the bank's website, in the Investor Relations section, as well as on CDER Plus and EDGAR. Please note that in addition to the telephone dial-in, VersaBank is webcasting this morning's conference. The webcast is listen-only.

Good morning, ladies and gentlemen, welcome to burst the banks first quarter fiscal 'twenty 25 financial results Conference call.

This morning, Bruce of Bank issued a news release reporting its financial results for the first quarter and get January 31st 2025.

That news release, along with the banks financial statements M DNA and supplemental financial information are available on the bank's website in the Investor Relations section as well as on SEDAR and Edgar.

Speaker Change: Please note that in addition to the telephone dialing especially to think its webcasting. This morning's conference call. The webcast is listen only if you are listening to the webcast, but wish to ask a question in the Q&A session. Following Mr. Taylor's presentation. Please dial into the conference line. The details of which are included in this mornings news release and onto <unk>.

Unknown Executive: If you are listening to the webcast but wish to ask a question in the Q&A session following Mr. Taylor's presentation, please dial into the conference line, the details of which are included in this morning's news release and on the bank's For those participating in today's call by telephone, the accompanying slide presentation is available on the bank's website. Also, today's call will be archived for replay both by telephone and via the internet beginning approximately one hour following completion of the call. Details on how to access the replays are available in this morning's news release.

Thanks website.

For those participating in today's call by telephone the accompanying slide presentation is 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 completion of the call.

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

Unknown Executive: I would like to remind our listeners that the statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by VersaBank Management. Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank's business model. Please refer to VersaBank's forward-looking statement advisory in today's presentation.

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 first a bank management.

Speaker Change: Actual results could differ materially from our expectations due to various material risks and uncertainties associated with Deutsche bank's businesses.

Speaker Change: Please refer to a burst of banks forward looking statement advisory and today's presentation.

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

David Taylor: Good morning, everyone, and thank you for joining us for today's call.

Speaker Change: Good morning, everyone and thank you for joining us for today's call with me is our Chief Financial Officer, John Asthma.

David Taylor: With me is our Chief Financial Officer, John Asma. Before I begin, I will note that you will see a change in a number of terms we use to describe our business. With the start of a new fiscal year and the context of the evolution of the bank, including the U.S. bank acquisition, we have taken the opportunity to update the manner in which we are describing our asset and deposit platform.

Speaker Change: Before I begin I will note that you will see a changed a number of tourists who used to describe our business.

Speaker Change: With the start of the new fiscal year in the context of the evolution of the bank, including the U S Bank acquisition, we have taken the opportunity to update the matter in which we are describing our asset and deposit classes.

David Taylor: The first quarter of fiscal 2025 has been a tremendously busy and eventful one in terms of moving our strategy forward. We signed our first RPP partner in the United States following the U.S. bank acquisition. We completed a very successful 86 million capital raise, including full execution of overlapment option to support our US RPP opportunity. We align the structure of DRT cyber to position our digital deposit receipts for renewed opportunity and our cyber security service business for planned divestment.

Speaker Change: The first quarter of fiscal 'twenty 25 has been a tremendously busy and eventful one in terms of moving our strategy forward.

Speaker Change: We signed our first our P. P partner in United States fly in the U S Bank acquisition.

Speaker Change: We completed a very successful 86 million capsule arrays, including full execution of overlap adoption to support our U S. R. P P opportunity.

Speaker Change: We align the structure of D. R T ciber to position, our digital deposit receipts for renewed opportunity and our cyber security services business for planned Divesture.

David Taylor: And we accomplished all of this as we achieved yet another record for total assets. Let me start with signing of our first U.S. partner post-U.S. bank acquisition. We are thrilled to partner with Watercross Financial, a rapidly growing point-of-sale originator of home improvement loans in the U.S. Watercress has proven track record of originating high quality consumer loans through its expanding network of contractors nationwide. It's no accident that our first partner finances home improvement sector, as that has been our biggest driver of significant growth in our Canadian business in recent years. Immediately following the agreement, we provided our first tranche of funding and shortly thereafter, our second.

Speaker Change: And we accomplished all of this as we achieved yet another record for total assets.

Speaker Change: Let me start with signing of our first U S partner Post U S Bank acquisition, we are thrilled to partner with Watercress financial a rapidly growing point of sale originator of home improvement loans in the U S.

Speaker Change: Watercrafts has proven track record of originating high quality consumer loans mature its expanding network of contractors nationwide.

Speaker Change: It's no accident that our first partner finances home improvement sector as that has been our biggest driver of significant growth in our Canadian business in recent years.

Speaker Change: Immediately following the agreement we provided our first tranche of funding and shortly thereafter, our second.

David Taylor: Importantly, the program is functioning just as it should and meeting both our partners and our expectations. We expect our funding with Watercraft to steadily expand throughout the year and contribute meaningfully to U.S. growth this year. We're working with multiple other firms in a robust pipeline to add them. as our next partners. And we are confident that these can be finalized quicker now that we have been through this once. Moreover, with the program now formally functioning in the United States under our US license, we have further evidence of its value for potential new partners.

Speaker Change: Importantly, the program is focusing just says it should and meeting both our partners and our expectations. We expect our funding with watercraft to steadily expand throughout the year and contribute meaningfully to U S growth this year.

Speaker Change: We're working with multiple other firms and a really robust pipeline to Adam.

Speaker Change: Our next partners. We are confident that these can be finalized quicker now that we have been through this once Moreover, with the programme now firmly functioning the United States under our U S license, we have further evidence of its value or for a potential new partners.

David Taylor: John will run through Q1 numbers in detail in a few minutes, but I want to highlight a few items to provide some perspective on the quarter. One, from a consolidated perspective, the Cord reflects the start-up nature of the U.S. operations. That is essentially full costs ahead of any generation of revenue and profits from our U.S. RPP. Specifically, we had close to a full cost load but a de minimis revenue as we signed our first US partner only at the very end of the quarter. Two, our Canadian digital banking operations continues to demonstrate the power of the operating leverage in the business, in particular, the power of receivable purchase program at scale to drive efficiency and return on common equity.

Speaker Change: John will run through Q1 numbers in detail in a few minutes, but I want to highlight a few items to provide some perspective on the quarter.

Speaker Change: One from a consolidated perspective, the quarter reflects the start up nature of the U S. Operations that is essentially full costs ahead of any generation of revenue and profits from our U S. R. P. P.

Speaker Change: Specifically, we had close to a full cost load, but a de minimis revenue as we signed our first U S partner only at the very end of the quarter.

Speaker Change: Two.

Speaker Change: Our Canadian digital banking operations continues to demonstrate the power of the operating leverage in the business in particular, the power our receivable purchase program at scale to drive efficiency and return on common equity.

David Taylor: I will note here that our Canadian banking operations bear the vast majority of our corporate overhead costs, including our public company costs. So, as an indicator of its true potential efficiency and return on equity of our US business, it is actually significantly understated. and as the U.S. business is expected to be even more efficient than the Canadian business at scale. Three, I noted on our last call that there are a number of favorable trends that we believe will support incremental expansion of our net interest margin in 2025. While NIM on credit assets continues to be dampened by the lag effect of the atypical inverted yield curve that existed throughout fiscal 24.

Speaker Change: I will note here that our Canadian banking operations bear the vast majority of our corporate overhead costs, including our public company costs. So as an indicator of its true potential efficiency and return on equity of our U S business. It is actually significantly understated.

Speaker Change: And as the U S business is expected to even more efficient than the catering business at scale.

Speaker Change: Three I noted on our last call that there are a number of favorable trends that we believe will support incremental expansion of our net interest margin in 2025.

Speaker Change: While NIM on credit assets continues to be dampened by the lag effect of the atypical inverted yield curve that existed throughout fiscal 'twenty four.

David Taylor: We began to see small sequential increases in NIM on credit assets in Q1. This was driven, to a large extent, by the cost of funds catching up to yields as market interest rates declined. Notably, with an outsized proportion of term deposits coming due in the near term, as well as continued expansion of our insolvency trustee deposits, we expect further declines in our cost of funds in the near term.

Speaker Change: We began to see small sequential increases in NIM and credit assets in Q1.

Speaker Change: Yeah.

Speaker Change: This was driven to a large extent by the cost of funds is catching up to yields as market interest rates declined.

Speaker Change: Notably with an outsized proportion of term deposits coming due in the near term as well as continued expansion of our insolvency trustee deposits. We expect further declines in our cost of funds in the near term.

David Taylor: And finally, our EPS for the quarter reflects the significantly higher number of shares outstanding in Q1, as a result of our December capital raise. In fact, the weighted average shares of Q1 was 12% higher than Q1 last year. And this is, of course, ahead of being able to put that capital to work, as we have now started to do. As a reminder, this provided a 30% increase in our capital base, which we deploy it approximately 12 times or more at around 2.5% spread. That is very accretive.

And finally, our EPS for the quarter reflects the significantly higher number of shares outstanding in Q1 as a result, our December of our December capsule race.

Speaker Change: In fact, the weighted average shares of Q1 was 12% higher than Q1 last year.

Speaker Change: And this is of course ahead of being able to put that capital to work as we have now started to do.

Speaker Change: As a reminder, this provided a 30% increase in our capital base, which we deploy it probably slightly 12 times or more that's around 2.5% spread.

Speaker Change: That is very accretive.

John Asma: I'd now like to turn the call over to John to review our financial results in detail, John. Thanks, 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 CDAR and EDGAR.

Speaker Change: I'd now like to turn the call over to John to review our financial results in detail.

Speaker Change: John.

Speaker Change: Yeah.

Speaker Change: Thanks, David.

Speaker Change: 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.

Speaker Change: As well as on SEDAR and Edgar all of the following numbers are reported in Canadian dollars as per our financial statements unless otherwise noted.

John Asma: All of the following numbers are reported in Canadian dollars as per our financial unless otherwise Starting with the balance. Total assets at the end of the first quarter of fiscal 2025 grew 15% year over year and 3% sequentially to a new high of just under $5 billion. Cash and Securities were $545 million or 11% up to the last. up from 6% in Q1 last year and level with Q4 of last year. ahead of expected deployment in Q3. book value per share increased to a record $16.03. Our CET1 ratio increased to 14.61% and our leverage ratio was 9.67%.

Speaker Change: Yeah.

Speaker Change: Starting with the balance sheet total assets at the end of the first quarter of fiscal 2025 grew 15% year over year and 3% sequentially to a new high of just under $5 billion.

Speaker Change: Cash and securities were $545 million or 11% of total assets.

Speaker Change: Up from 6% in Q1 last year and level with Q4 of last year.

Speaker Change: Ahead of expected deployment in Q2.

Speaker Change: Book value per share increased to a record $16.03. Our CET one ratio increased to $14 six 1% and our leverage ratio was 967% with both remaining above our internal targets.

John Asma: with both remaining above our internal targets. Total consolidated revenue was $27.8 million compared with $28.9 million last year. This small year-over-year decrease was driven by lower overall net interest margin as well as lower non-interest margin. Consolidated non-interest expense was $15.7 million, compared with $12 million in Q1 of last year, and $19.4 million for Q4 of last year, which included one-time expenses mostly related to acquisitions. The year over year increase reflects incremental operating costs associated with VersaBank USA operations.

Speaker Change: Total consolidated revenue was $27 8 million compared with $28 9 million last year.

Speaker Change: The small year over year decrease was driven by lower overall net interest margin as we.

Speaker Change: As well as lower non interest income.

Speaker Change: Consolidated non interest expense was $15 7 million compared with $12 million in Q1 of last year.

Speaker Change: And $19 4 million for Q4 of last year, which included one time.

Speaker Change: Expenses, mostly related to acquisition.

Speaker Change: The year over year increase reflects incremental operating costs associated with first bank USA operations and higher operating costs to support current and anticipated increased business activities of any ahead of any revenue generation.

John Asma: and higher operating costs to support current and anticipated increased business of any head of any revenue generation. As a reminder, DRT cyber expenses are included in consolidated net interest expenses. totaled $3 million for the quarter. which were elevated and I will describe.

Speaker Change: As a reminder, Dr. T. Cyber expenses are included in consolidated net interest expense.

Speaker Change: And totaled $3 million for the quarter.

Speaker Change: Which were elevated and I will describe in a moment.

Speaker Change: Yeah.

John Asma: Looking at the income statement on a segmented basis, the vast majority of revenue was of course driven by our digital banking operations. and within that, our Canadian banking operation. as we didn't fund our US partner until the end of the first Revenue for the Canadian business operations was $23.8 million, up slightly from Q4 of last Net income for the Canadian banking operations was $8.8 million or $0.30 per share. Revenue for U.S. banking operations was $2 million. and income from the US banking operations was $103,000. Within DRTC, the cyber security component generated revenue of $2 million, up from $1.9 million in Q1 of last year.

Speaker Change: Looking at the income income statement on a segmented basis. The vast majority of revenue was of course, driven by our digital banking operations and within that our Canadian banking operations.

Speaker Change: We didn't fund our U S partner until the end of the first quarter.

Speaker Change: Revenue for the Canadian business operations was $23 8 million up slightly from Q4 of last year.

Speaker Change: Net income for the Canadian banking operations was $8 8 million or <unk> 30 per share.

Speaker Change: Revenue for U S banking operations was $2 million.

Speaker Change: And income from the U S banking operations was 103000.

Speaker Change: With M D. R. T C. The cyber security component generated revenue of $2 million up from $1 9 million in Q1 of last year.

John Asma: Net loss was $757,000, impacted by higher operating expenses. related to the onboarding support costs for new cybersecurity offers. Within DRTC, Digital Meteor revenue was $342,000 and net income was $33,000. Our credit asset portfolio grew to a new record $4.35 billion at the end of Q1, driven once again by our receivable. which increased 10% year-over-year and 3% sequentially. to $3.4 billion. Our RPP portfolio represents 79% of our total credit asset portfolio at the end of Q1, up slightly from the end of Q4.

Speaker Change: Net loss was 757000 impacted by higher operating expenses related to the Onboarding support costs for new cyber security offerings.

Speaker Change: With M D. R. T C. Digital media revenue was 342000, and then net income was 33000.

Speaker Change: Our credit asset portfolio grew to a new record for three 5 billion at the end of Q1, driven once again by our receivable purchase program, which increased 10% year over year, and 3% sequentially to $3 4 billion.

Speaker Change: Our RP portfolio represents 79% of our total credit asset portfolio at the end of Q1 up slightly from the end of Q4.

John Asma: David previously mentioned changes to the naming of our asset categories. One of those changes was to simplify the commercial real estate portfolio and public sector and other portfolio to the combined multifamily residential loans and other Our multifamily residential loans and other portfolio grew 5% year over year to $928 million. We are seeing the ramp up of our CMHC insured loan program, which drove a 2% sequential. in multifamily residential. We currently have $231 million outstanding at the end of the year. As a reminder, our multifamily loans and other portfolio is primarily business-to-business mortgages and construction loans for residential property.

Speaker Change: David previously mentioned changes to the meaning of our asset categories. One of those changes was to simplify the commercial real estate portfolio and public sector and other portfolio to the combined multifamily residential loans and other portfolio.

Our models are multifamily residential loans and other portfolio grew 5% year over year to $928 million.

Speaker Change: We are seeing the ramp up of our C. MHC insured loan program, which drove a cheaper which drove a 2% sequential increase in multifamily residential loans and other portfolio.

Speaker Change: We currently have $231 million outstanding at the end of the quarter.

Speaker Change: As a reminder, our multifamily loans and other portfolio is primarily business to business mortgages and construction loans for residential properties, we have very little exposure to commercial use properties.

John Asma: We have very little exposure to commercial use products.

Okay.

John Asma: Turning to the income statement, our digital banking operations. Net interest margin on credit assets that is excluding cash and securities was 2.36%. That was 27 basis points or 10% lower on a year over year basis and two basis points or 1% higher on a sequential basis. primarily due to the lag effect of a typical inverted yield curve that existed throughout 2024, which dampened the RPP portfolio market. net net interest margin, including the impact of cash securities and other assets was 2.08%, which was primarily due to higher than typical liquidity in the first quarter of fiscal 2025, but still remaining among the highest of the publicly traded Canadian Schedule 1 banks.

Speaker Change: Turning to the income statement, our digital banking operations.

Speaker Change: Net interest margin on credit assets that yet that is excluding cash and securities was 236%.

Speaker Change: That was 27 basis points or 10% lower on a year over year basis, and two basis points or 1% higher on a sequential basis, primarily due to the lag effect of atypical inverted yield curve that existed throughout 2024, which dampened the RVP portfolio margins.

Speaker Change: Net net interest margin.

Speaker Change: The impact of cash securities and other assets was 2.08%, which was primarily due to higher than typical liquidity in the first quarter of fiscal 2025, it's still remaining among the highest of the publicly traded Canadian schedule One bank.

John Asma: Our provision for credit losses or PCL in Q1 increased this quarter to 0.09% on average credit assets compared to negative 0.01 last year and with a 12 quarter average of 0.02%. The increase this quarter was due to changes in forward-looking information used in our credit risk model.

Speaker Change: Our provision for credit losses, or PCL in Q1 increased this quarter, 2.09% on average credit assets compared to negative <unk> zero, one last year and with a 12 quarter average of <unk>.

Speaker Change: 0.0% to 2%.

Speaker Change: The increase this quarter was due to changes in forward looking information used in our credit risk models.

David Taylor: I'd now like to turn the call back to David for some closing remarks. Thanks, John. 2025 is off to a great start and unfolding on plan. Looking ahead, we expect another year of solid growth in credit assets. We will increasingly benefit from the operating leverage of our business model as those assets scale. We still expect minimum of low double-digit growth in our Canadian assets with potential upside from increased consumer spending in the lower interest rate environment. That said, we could see this growth dampened if the recent tariff situation is prolonged and it meaningfully impacts consumer spending in Canada.

Speaker Change: I would now like to turn the call back to David for some closing remarks David.

David Taylor: Thanks, John.

David Taylor: 2025 is off to a great start unfolding on plant looking.

David Taylor: Looking ahead, we expect another year of solid growth in credit assets.

David Taylor: We will increasingly benefit from the offer operating leverage of our business model as those asset scale.

David Taylor: We still expect minimum of low double digit growth in our Canadian assets with potential upside from increased consumer spending and the lower interest rate environment.

David Taylor: That said, we could see this growth dampened if the recent tariff situation is prolonged and meaningfully impact consumer spending in Canada.

David Taylor: We expect to begin to see a more meaningful contribution of our growing CMHC insured multifamily residential loan business in our opportunistic real estate portfolio. These zero risk weighted loans require no capital and generate a very attractive spread. We are still targeting a billion dollars in commitments by the end of fiscal 2025, although the pace of drawn downs on commitments to date has been slower than expected. Each of these will drive greater efficiency, growth and profitability and higher return on common equity as we continue to capitalize on the operating leverage of our business model. We also expect to see the continuation of several favorable trends that support net interest margins.

David Taylor: We expect to begin to see a more meaningful contribution of our growing CMA sea insured multifamily residential loan business in our opportunistic real estate portfolio. These zero risk weighted laws require no capital and generate a very attractive spread.

We are still targeting a $1 billion and commitments by the end of fiscal 2025, although the pace of drawn debt downs commitments to date has been slower than expected.

David Taylor: Each of these will drive greater efficiency growth and profitability and higher return on common equity as we continue to capitalize on the operating leverage of our business model.

David Taylor: We also expect to see the continuation of several favorable trends that support net interest margin.

David Taylor: The yield curve has returned to its normal upward slope. While there's still a lag effect in the very near term, we will see benefit thereafter increasing in 2025. In addition, we should continue to see the benefit of our low cost insolvency trust trustee deposit business as bankruptcy activity in Canada continues to increase. In the United States, we're off and running with our first partner, Post US Bank Acquisition, with the benefit of US dollars 86 million in capital we raised in December. We have a robust and growing pipeline as our discussions with both potential partners and others in the industry continue to validate that our RPP is both unique and very attractive solution for companies who finance big ticket goods and services at the point of sale.

David Taylor: The yield curve has returned to its normal upward slope, while there is still a lag effect in the very near term, we will see benefit thereafter, increasing in 2025.

David Taylor: In addition, we should continue to see the benefit of our low cost and solvency Trust trustee deposit business as bankruptcy activity in Canada continues to increase.

David Taylor: In the United States, we're off to a running with our first partner post U S Bank acquisition with the benefit of U S dollars 86 billion in capital we raised.

David Taylor: In December we have a robust and growing pipeline as our discussions with both potential partners and others in the industry continuing to validate that our P. P is both unique and very attractive solution for companies, who find that big ticket goods and services at the point of sale.

David Taylor: We will grow our USRP business as quickly as our balance sheet capacity permits. And I will note here, at this time, we do not expect tariffs to have any negative impact on the ramp up of our US RPP business. In fact, the uncertainty in the markets could make our RPP solution even more attractive as alternate sources of funding get more expensive.

David Taylor: We will grow our <unk> business as quickly as our balance sheet capacity permits.

And I will note here at this time, we do not expect tariffs to have any negative impact on the ramp up of our U S. R. P. P business in fact, the uncertainty in the markets could make her P. P solution, even more attractive as alternate sources of funding get or expenses.

David Taylor: Finally, we continue to be very encouraged by our favorable stance of the Trump administration on digital assets, which we believe will be very beneficial for our proprietary digital deposit receipts or DDRs for short. We are now actively pursuing this renewed opportunity. Our DDRs are highly encrypted digital assets based on a one-for-one on actual deposits that combine the safety of a traditional banking with the efficiency, cost savings, security and flexibility of blockchain technology. This uniquely provides superior security, stability, and regulatory compliance compared to conventional alternatives. Importantly, our DDRs are backed by the bank's very own military-grade cybersecurity technology, which we call VersaBank.

David Taylor: Finally, we continue to be very encouraged by our favorable stance of the Trump administration on digital assets, which we believe will be very beneficial for our proprietary digital deposit receipts are D D <unk> for short.

David Taylor: We are now actively pursuing this renewed opportunity.

David Taylor: Our G D ours are highly encrypted digital assets based on a one for one on actual deposits that combine the safety of a traditional banking and with the efficiency cost savings security and flexibility of blockchain technology.

David Taylor: <unk> uniquely provides superior security stability and regulatory compliance compared to conventional alternatives.

Importantly, our <unk> are backed by the banks very own military grade cyber security technology, which we call first of all.

David Taylor: We have tremendous head start having successfully completed the pilot program with our proprietary DDRs provided a secure representation of federally regulated bank deposits on the Algorand, Ethereum, and Stellar blockchain. Our DDRs have the potential to be an ultra low cost. source of deposits funding for VersaBank as well as any bank that uses our technology while enabling consumers and businesses to confidently engage in rapidly developing field of digital commerce. To pursue this opportunity, we have transferred the intellectual property and other resources related to DDRs to our wholly owned subsidiary exclusively for DDR athletes. The name Digital Meteor is indicative of the potential for DDRs to significantly disrupt the conventional banking deposit framework.

David Taylor: We have tremendous head start having successfully completed the pilot program with our proprietary DDR has provided a secure representation of a federally regulated bank deposits.

David Taylor: Al Grande exterior and stellar blockchain.

David Taylor: <unk> has the potential to be an ultra low cost source of deposits funding for <unk> bank as well as any bank that uses our technology, while enabling consumers and businesses to confidently engaged and rapidly developing field of digital commerce.

David Taylor: To pursue this opportunity we have transferred the intellectual property and other resources related to Ddr's to our wholly owned subsidiary of exclusively for DDR assets. The name digital meet here is to indicative of the potential for <unk> to significantly disrupt the conventional <unk>.

David Taylor: Banking deposit framework.

Unknown Executive: With that, I'd like to open up the call for questions. Operator. Thank you.

David Taylor: With that I'd like to open up the call for questions.

David Taylor: Operator.

Speaker Change: Thank you.

Unknown Executive: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the 2.

Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you will hear pumps that you had has been raised.

Speaker Change: Should you wish to decline from the polling question. Please press star followed by the channel.

Joe Yanchunis: And if you are using a speakerphone, please lift the handset before pressing any The first question comes from Joe Yanchunis at Raymond James. Please go ahead. Go ahead, Joe.

Speaker Change: And if you are using a speaker phone please lift the handset before pressing any keys.

Joe <unk>: The first question comes from Joe <unk> at Raymond James. Please go ahead.

Joe <unk>: Go ahead Joe.

Joe Yanchunis: Joe, please unmute your line. You are live. I apologize. Well, good morning.

Speaker Change: Joe Please on mute your line you are live.

Joe <unk>: Sorry, I apologize.

David Taylor: Let me start over. So the digital deposit receipts, it sounds like a very exciting opportunity. How should we think about that kind of in the near term? And can you quantify the level of. level these deposits by year-end that you would consider a success? Well, Joe, what we have in mind is piloting the project again in the United States. We completed the pilot project for what we call VCAD or CADVs, being a digital representation of deposits with our bank in Canada. And now that we have a national bank license in the United States, we plan to do a similar pilot very soon, actually.

Speaker Change: Well good morning, let me start over.

Speaker Change: So the digital deposit receipts it sounds like a very exciting opportunity.

Speaker Change: How should we think about that kind of in the near term and can you quantify the level of.

Speaker Change: Level of these deposits stay by year end that you would consider a success.

Speaker Change: Well, Joe what we have in mind is piloting the approach it again in the United States. We completed a pilot project for will recall, the CAD or CAD Gs being.

Speaker Change: Being a digital representation of deposits with our bank in Canada, and now that we have a national bank licensee United States, We plan to do a similar pilot.

Speaker Change: Very soon actually.

David Taylor: We're working with the regulators to put that together. Once we've had a successful pilot project, then we'll start. raising deposits in this fashion, probably towards middle to the end of the year. And I think it's, you know, extremely attractive product, it's sort of like the modern day checking account, where one of our depositors can pay for some good goods or services rather write an old fashioned paper check, but transferred additional deposit receipt that of course would be insured in that it's a deposit with a national bank to another person's wallet, and thereby change that business, sort of like having a certified check, because obviously they are drawn on our bank, and our bank's deposits attract FDIC insurance.

We're working with the regulators to put that together.

Speaker Change: We've had a successful path.

Speaker Change: Project, then we will start.

Speaker Change: Raising deposits in this fashion.

Speaker Change: Yes, probably towards middle to the end of the year.

Speaker Change: And I think it's.

Speaker Change: Extremely.

Speaker Change: Attractive product, it's sort of like the modern day checking account where.

Speaker Change: Well one of our depositors can pay for some good goods or services, rather rider old fashioned paper check, but transferred a digital deposit receipts that of course would be.

Speaker Change: Insured and that it's a it's a deposit with with a national bank to another person's wallet and thereby.

Speaker Change: Transact business.

Speaker Change: Sort of like having a certified check.

Speaker Change: Because.

Speaker Change: Obviously, they are drawn on our bank and and.

Speaker Change: Banks deposits attracts FDIC insurance.

David Taylor: So I think Towards the end of this year, you'll probably see it rolled out, but right now the plan is just to start a pilot in the United States.

Speaker Change: I think.

Speaker Change: Towards the end of this year, you'll probably see it rolled out and but right now the plan is just to start a pilot in the United States.

Speaker Change: Okay.

Unknown Executive: Understood. Well, certainly look forward to seeing how that matures and grows over time.

Speaker Change: If I understood well.

Speaker Change: Certainly look forward to seeing how that matures and grows over time.

Unknown Executive: and then shout out for me.

Speaker Change: And then yeah.

Unknown Executive: We can just pivot over to the non-interest expenses.

Speaker Change: We could just pivot over to the non interest expenses should we think about you know.

John Asma: Should we think about, you know, This being the current run rate kind of moving forward where we're at right now. Yeah, I would, maybe even a little bit more.

Speaker Change: This being the current run rate kind of moving forward, where we're at right now.

Speaker Change: Yeah, I would maybe even a little bit more.

Speaker Change: The one thing that impacts our financial statement. It says there is the exchange rate and that.

John Asma: One thing that impacts our financial statements is the exchange rate, and that the expenses we have in the United States are a lot more expensive now in terms of Canadian dollars. And the salaries, of course, the salaries we were paying, we, on the 14 people we assigned to the US Bank, in terms of Canadian dollars, are a lot more expensive. But yeah, that's what I would do. I'd run today's rate plus a little more maybe, and that's a good number to estimate. God, I appreciate that.

Speaker Change: The expenses, we have in United States are a lot more expensive, though in terms of the Canadian dollars and the salaries personnel salaries were paying with.

Speaker Change: Of the 14 people, we're we assign to the to the U S Bank.

Speaker Change: In terms of the Canadian dollar is there are a lot more expensive, but yeah. That's what I would do it I'd run at today's rate plus a little more maybe that's a good number to to estimate.

Speaker Change: Got it I appreciate that and then last one for me here.

David Taylor: And then last one from me here. How should we think about, you know, this growth in the U.S. RVT volume as we move throughout the year? How quickly do you think you can ramp that up? Well, The first account we signed, Watercress, took a little while to plow through the legal work, but shortly after signing, we did the first draw about $10 million. We did another draw after that about $15 million, and I think it looks like there's a lot more to come. So I would look at it as gathering momentum. The next one's in the hopper and the legal work shouldn't take anywhere near as long.

Speaker Change: How should we think about you know this growth in the U S. RPT volume as we move throughout the year. How quickly do you think you can ramp that up.

Speaker Change: Well.

Speaker Change: The first the first account we assigned Watercress took a little while to plough through the legal work, but shortly after signing the first draw above 10 million, but then another driver to that about 15, and I think it looks like there's a lot more to come.

Speaker Change: So I would look at it is gathering momentum the next one's in the Hopper.

Speaker Change: There are legal work shouldnt take anywhere near as long.

David Taylor: So the original targets I gave for the year were in the order of, I think it was 290 million U.S. I think that's easily attainable just with a few RPP partners and there's quite a number lined up.

Speaker Change: So the original targets I gave for the year were in the order of I think it was 290 million U S. I think that's easily attainable.

Speaker Change: With a few R. R P P partners and theirs.

Speaker Change: There's quite a number lined up.

Joe Yanchunis: All right, I appreciate it. Thank you for taking my question. Thank you, Joe. Thank you.

Speaker Change: Alright I appreciate it thank you for taking my questions.

Speaker Change: Thank you Joe.

Speaker Change: Thank you. The next question comes from Tim Switzer at K B W. Please go ahead.

Tim Switzer: The next question comes from Tim Switzer at KPW. Please go ahead. Hey, good morning. Thank you for taking my questions. I have a follow up on kind of the trajectory of the US point of sale business and the originations there. Can you provide an update on how the conversation with some of your newer partners are going? And you know, what it's going to take for them to want to launch quicker and, you know, start originating loans as soon as possible? Well, it's sort of a matter of doing the paperwork. We have what we call a master purchase and sale agreement, and it's a fairly hefty document.

Tim Switzer: Hey, good morning, Thank you for taking my questions.

Tim Switzer: I have a follow up on kind of the trajectory of the U S point of sale business and the originations. There can you provide an update on how the conversations with some of your newer partners are going.

Tim Switzer: And.

Tim Switzer: What it's going to take for them to want to launch quicker and start originating loans as soon as possible.

Tim Switzer: Well, it's a serve a matter of doing the paperwork to we have what we call the best to purchase and sale agreement is a fairly hefty document.

David Taylor: Our partners and their lawyers have to become familiar with it and interact with us. That's sort of what we experienced in Canada, too. It's a unique new program, and it takes a little while to understand how it all operates. But it's just simply do the paperwork. Everybody seems keen and excited. In fact, we've talked to some partners who have huge potential. Some of them have dealt with us in the past in Canada, so they're familiar with the bank. They're familiar with the personnel, actually. So it'll just do like it did in Canada. It'll just start gathering momentum.

Tim Switzer: There's half and their lawyers have too.

Tim Switzer: Become familiar with it and interact with US that's sort of what we had experienced in Canada to the I'd say unique to your program and that takes a little while to understand how it all operates but it's just simply do the paperwork very very famous keen and excited in fact, we've talked with some.

Tim Switzer: <unk> partners' hubs.

Tim Switzer: Huge.

Tim Switzer: Potential.

Tim Switzer: Some of that dealt with us in the past in Canada.

Tim Switzer: So the bill they are familiar with a bank that familiar with the personnel actually.

Tim Switzer: So it'll just like.

Tim Switzer: Through like it did in Canada will he'll start.

Gathering momentum.

David Taylor: And we got a little bit of help. The alternative financing is securitizations. I guess, unfortunately, due to market conditions, securitizations are getting a little more expensive. It's sort of a flight to quality again, which plays into our hand. But, you know, it's not so good for the stock market and investors.

Tim Switzer: Got a little bit of help the alternate.

Tim Switzer: Alternative financing is.

Tim Switzer: Securitization.

Tim Switzer: I guess, unfortunately due to the large condition securitization or get a little more expensive to serve a flight to quality again, which which plays into our hand.

Tim Switzer: But.

Tim Switzer: Chris.

Speaker Change: Not so good if the stock market and our investors.

Unknown Executive: Okay, thank you.

Speaker Change: Okay. Thank you and as you begin to ramp up the originations and the U S business, how should we think about.

David Taylor: And as you begin to ramp up the originations in the US business, how should we think about, you know, the capacity of the balance sheet, which I think is pretty large now following the capital raise, versus the loans that you want to put in into syndication? And what does that mean for like the related fee income? package the participation into a security that hopefully has a decent bond rating. I'm looking for about a double A, considering our bank is single A unsecured, which gives a favorable risk weighting on a participant's balance sheet, about 20% versus 75%, 100%.

Speaker Change: The capacity of the balance sheet, which I think is pretty large and up on the capital rate versus the loans that you want to put it into syndication and what does that mean for like the related fee income.

Speaker Change: Well as we start to approach or are.

Speaker Change: Our budgeted figure.

Speaker Change: We'll we'll be sharing the loans through the syndication model with other community banks that maybe are some some.

Speaker Change: Some investment firms.

Speaker Change: Well well underway with that with a but the program. The software is developed software works and if they are able to look after it and we've been working with some large investment.

Speaker Change: Investment banking firms too.

Speaker Change: Package the participation into a security that hopefully.

Speaker Change: As a a decent bond rating.

Speaker Change: I'm looking for about a double eggs and certainly our bank is single a with unsecured.

Speaker Change: With <unk>.

Which has a favorable risk weighting on the on our participants balance sheet about 20% versus <unk>.

Speaker Change: 75 to 100.

David Taylor: So I'll make the product even more Attractive. With respect to management fees, we've been targeting around 1%. It remains to be seen. We haven't concluded a transaction yet. The more attractive the product is, i.e. bond rating and And risk-weighted at a very low level, the better fees we'll be able to earn, obviously, and the market conditions, too. You know, when the market's frothy, rates are narrow, and we have to sharpen our pencils. And when the rates, as it seems to be happening now, increase the plight to quality versus... versus higher risk debt, then we get we do better.

Speaker Change: So I'll make the productivity more.

Speaker Change: Attractive with respect to management fees, we've been targeting around 1%.

Speaker Change: That remains to be seen we havent concluded the transaction yet but.

Speaker Change: The more attractive to productivity I E bond ratings and.

Speaker Change: And risk weighted.

At a very low level of the better fees will builder, and obviously and the market conditions two of where the market's frothy rates are narrow.

Speaker Change: We have to sharpen our pencils and whether it's a is it seems to be happening no increase applied to quality versus.

Speaker Change: Versus higher risks that then we get we do better.

Unknown Executive: Okay, great. Thank you so Thank you.

Speaker Change: Okay, great. Thank you so much.

Speaker Change: Thank you and the next question comes from Andrew Scott at Roth Capital Partners. Please go ahead.

David Taylor: And the next question comes from Andrew Scott at Roth Capital Partners. Please go ahead. Hey, good morning, guys. Thank you for taking my questions. First one for me here, can you just kind of parse out a little bit more of the detail of the impact of the flattening of the yield curve? You kind of talked about the roll-off of some of the deposits on the book right now and just kind of what you see. you know. It's a 2025 trajectory. Yeah, thanks, Andrew. Yes, last year around this time, we were whining about our deposit rates, that would be Canadian deposit rates, increasing on a margin over the same term government cannabond, and they got to sort of historical highs, 80, 90 basis points, so same term government cannabond.

Andrew Scott: Hey, good morning, guys. Thank you for taking my questions.

Speaker Change: First one for me here can you just kind of.

Andrew Scott: I had a little bit more the detailed the impact of D. A.

Speaker Change: Flattening of the yield curve.

Speaker Change: Talk about the roll off of some of the deposits on the book right now.

Speaker Change: Kind of what you see.

Speaker Change: Yes.

Speaker Change: In 2025 trajectory.

Andrew Scott: Yeah. Thanks, Andrew Yes last year around this time, we're whining about.

Andrew Scott: Our deposit rates that'd be Canadian deposit rates, increasing as on a margin over the same term government of Canada bonds.

Andrew Scott: They've got to sort of historical highs 80, 90 basis points, So same turn government counterpoint.

David Taylor: So those GICs, again, they call them GICs or CDs, are going through the system now, they're maturing. So the unusually high margin we were paying over the risk-free rate is diminishing in 2025. So that gives us quite a tailwind on margin. So historically, we run around a 3% margin. And so you can start to see it inching up a little bit, but we've only had the beginning of the maturities of those higher priced GICs go through. The other thing that's helpful for us, but not so helpful for the rest of Canada, is that there's been a huge increase in bankruptcies, about 26% year over year, might even be a lot higher in the next few months.

Andrew Scott: So those gic's again, they call them J Caesars Cds.

Andrew Scott: Going through the system the other maturing.

Andrew Scott: So the unusually high margin, we were paying over the risk free rate is diminishing.

Andrew Scott: In 2025, so that gives us that gives us quite a tailwind on margin said.

Andrew Scott: And historically, we run around a 3% margin and so you just started to see it inching up a little bit, but we've only had at the beginning of the maturities of those higher priced.

Speaker Change: <unk> go through the other thing that's helpful for us, but not so helpful. For the rest of Canada is that there's been a huge increase in bankruptcies about 26% year over year might even be a lot higher in the next few months and.

David Taylor: And while that doesn't bode well for the Canadian economy dampens consumer enthusiasm to buy things and such, it certainly provides us with a lot more economically priced deposits. So all in all, keeping those things in mind, our margins should widen back up to where they used to be running around 3%.

Speaker Change: But it doesn't bode well for the Canada economy Dampens.

Speaker Change: Consumer enthusiasm to buy things and such it certainly provides us with a lot of lot more economically priced deposit so all in all keeping those things in mind, our margins should should widen back up to where they used to be running around three.

John Asma: Great, thanks for the caller there. And second one for me, a little bit of housekeeping. You guys took a bit of a provision in the quarter, I believe it was due to an accounting change. Can you just provide some details there? Yeah, we we have our provisions based on, as all the other banks do, on forward-looking models. It's a provision for expected losses, or possible losses, and it's driven by a lot of factors. And, you know, we're in a little more unstable credit environment, both sides of the border. So our models are producing higher provisions than they have historically.

Speaker Change: Great. Thanks for the color there and second one for me a little bit of housekeeping.

Speaker Change: You guys took a bit of a provision in the quarter I believe it was due to an accounting change can you just provide some details there.

Speaker Change: Yeah, we could.

Speaker Change: Have our provisions based on as all the other banks too.

Speaker Change: Forward looking models, it's a parisian for expected losses are possible losses, and that's driven by a lot of factors and here.

Speaker Change: We're in a little lower and stable credit environment to both sides of the border.

Speaker Change: So our models are producing higher provisions in the half historically.

Andrew Scott: Now, mind you, there's still only tiny basis points, one or two basis points, versus the industry is around 30, 40 basis points. But, you know, that's sort of what happens when you have disruptions in the credit markets that the models we use and all the other banks use start kicking up increased provisions for losses. No, they're not losses, but they're provisions for losses. Great. Well, thanks for the time this morning and thanks for taking my questions. Oh, thank you. Look forward to seeing you soon, Andrew, in California. I'll be seeing you in California, right? Thank you.

Speaker Change: Mind, you, there's still only tiny basis points water.

Speaker Change: One or two basis points versus the industry is around 30 or 40 basis points, but.

Speaker Change: You know, that's that's sort of what happens when you have disruptions in the credit markets that.

Speaker Change: The models, we use and all the other banks shoes.

Speaker Change: Start kicking up.

Speaker Change: Increased provisions for losses, there aren't losses, but there are provisions for losses.

Speaker Change: Okay.

Speaker Change: Great well thanks for the time this morning, and thanks for taking my questions.

Speaker Change: Thank you.

Speaker Change: Look forward to seeing you soon Andrew in California won't be seen in California right.

Speaker Change: Okay.

Speaker Change: Thank you we have no further questions I will turn the call back over to Mr. Taylor for closing comments.

David Taylor: We have no further questions. I will turn the call back over to Mr. Taylor for closing.

David Taylor: Well, I'd like to thank everybody for joining us today, and I look forward to speaking to you at the end of our second quarter. Thank you very much. Have a good day.

Speaker Change: Well I'd like to thank everybody for joining us today and I look forward to speaking to you at the end of <unk>.

Speaker Change: Our second quarter. Thank you very much have a good day.

Unknown Executive: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect.

Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.