VersaBank Q1 FY2023 Earnings Call

Good morning, ladies and gentlemen. Welcome to VersaBank's First Quarter Fiscal 2023 Financial Results Conference Call. This morning, VersaBank issued a news release reporting its financial results for the first quarter ended January 31, 2023. That news release, along with the Bank's financial statements, and supplemental financial information are available on the Bank's website in the Investor Relations section, as well as on SEDAR and EDGAR. Please note that in addition to the telephone dial-in, VersaBank is webcasting this morning's conference call. The webcast is listen-only. If you are listening on 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 provided in this morning's news release and on the Bank's website. For those participating in today's call by telephone, the accompanying slide presentation is available on the Bank's website. Also, today's call will be archived for replay, both by telephone and via the internet beginning approximately one hour following completion of the call. Details on how to access the replays are available in this morning’s news release. I 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 businesses. Please refer to VersaBank’s forward-looking statement advisory in today’s presentation. I would now like to turn the call over to Mr. David Taylor, President and Chief Executive Officer of VersaBank. Please go ahead, Mr. Taylor.

Good morning, everybody, and thank you for joining us for today’s call. With me today is Shawn Clarke, our Chief Financial Officer. Before I begin, I'd like to remind you that our financial results are reported and will be discussed on this call in our reporting currency of Canadian dollars. Those interested, we provide U.S. translations for most of our financial numbers in our standard investor presentation, which will be updated and available on our website shortly. Now to the results. The first quarter was not only another record quarter for VersaBank, but more importantly, one that was demonstrative of the true efficiency and return on equity generating capability of our branchless business-to-business digital banking model. And once again, this was complemented by the continued profitable contribution of our cybersecurity services business. Our digital banking operations reported very strong year-over-year growth in our loan portfolio at 46%, which drove our portfolio to an all-time high of just under $3.25 billion. Growth was again driven primarily by Canadian point-of-sale loan and lease portfolio, which was up 68% from Q1 last year. The combination of loan growth and stable net interest margin drove record revenue and record interest income. On the cost side, as we anticipated, the transitory costs related to our growth investments and our move to NASDAQ that temporarily elevated our noninterest expense and dampened our profitability in 2022 significantly normalized in the first quarter, putting our efficiency ratio back on track toward its full potential. We continue to expect further normalization in our noninterest expense, and importantly, we have hardly begun to realize the growth contributions from those investments we made last year. All this led to by far our best quarter ever in terms of net income and EPS, the first outside of Q1 2017 due to an accounting recognition when VersaBank amalgamated with PwC capital. Net income grew 69% year-over-year to $9.4 million, besting our previous record of $6.4 million by a full $3 million. EPS grew 79% or $0.15 year-over-year to $0.34. Looking more closely at our performance, as I noted a moment ago, the first quarter financial results were marked once again by our best ever revenue, net interest income, net income, and earnings per share. Outside of these record results, there are three metrics that I'd like to highlight. The first is our net interest margin. It's important to note that we have generated loan growth while maintaining our overall net interest margin and without taking on additional risk. This is something relatively unique compared to our peers. The second is our efficiency ratio. Now that we are through the bulk of our transitory costs for our strategic growth initiatives, the true scalability and efficiency of our model are emerging. The third is earnings per share growth, which outpaced net income growth as a result of our active share repurchase program. As we look ahead, in addition to the continued growth we expect in our Canadian loan portfolio, we also expect to generate significant long-term growth from the launch of the United States receivable purchase program. This is our high-value add financing offering for consumers and small business lenders based on our proprietary technology that provides them with a regular, reliable, inexpensive funding alternative to help them succeed in their businesses. As I discussed in our last quarterly call, this acquisition is transformational, the next step in VersaBank's long-term growth strategy. We have launched this program on a limited basis in the United States and have a broad national rollout plan upon completion of the acquisition of the Minnesota-based Stearns Bank Holdingford, a fully operational OCC-chartered national U.S. Bank. This acquisition will enable us to broadly roll out our receivable purchase program in the underserved U.S. market, which has been so successful in Canada, where we call it our point-of-sale financing business. In December, we submitted the requisite filings to the OCC and the reserves, seeking approval for the acquisition and have been continuing dialogue. We remain optimistic with respect to near-term approval. In terms of an update on timing, which ultimately is at the discretion of our regulators on both sides of the border, we anticipate receiving a decision regarding the approval of the proposed application from the U.S. regulators during the second quarter of the calendar year 2023. If favorable, we will proceed to complete the acquisition as soon as possible, subject to Canadian regulatory approval. In the interim, we continue to actively prepare for this significant opportunity to bring our differentiated and attractive financing solutions to U.S. partners. Regarding our U.S. Receivable Purchase Program, or RPP, our U.S. portfolio continues to expand with loans now nearly $44 million. As I discussed in our last call, we have limited lending of loans ahead of the full rollout upon completing the U.S. acquisition. And in fact, to date, demand has continued to outstrip our self-imposed short-term capacity restrictions. We are very comfortable with our progress, and with revised expectations for completion, we have made the decision to ramp up our U.S. RPP loans ahead of the closing of the acquisition. I'd now like to turn the call over to Shawn to review our financial results.

Thanks, David. Before I begin, just a quick reminder that our full financial statements and MD&A for the first quarter are available on our website in the investor section as well as on SEDAR and EDGAR. As David mentioned, all the following numbers are reported in Canadian dollars as per our financial statements unless otherwise noted. Starting with our balance sheet, total assets at the end of the first quarter of fiscal 2023 were just over $3.5 billion, up 46% from $2.4 billion at the end of Q1 last year and up 8% from $3.3 billion at the end of fiscal 2022. Cash and securities at the end of Q1 were $251 million or 7% of total assets compared with $155 million or 6% of total assets at the end of Q1 last year, and $203 million or 7% of total assets at the end of fiscal 2022. Our total loan portfolio at the end of the first quarter expanded to another record balance at $3.24 billion, an increase of 46% year-over-year and 8% sequentially. I'll break this out into its component parts in a moment. Book value per share increased 8% year-over-year and 3% sequentially to another record at $12.77. These increases were reported as a function of higher retained earnings resulting from net income growth, partially offset by dividends paid, and also benefited from the lower number of outstanding shares as a result of our active share buyback program. Our CET1 ratio was 11.2%, down from 14.8% at the end of Q1 last year and down from 12% at the end of fiscal 2022. Our leverage ratio at the end of Q1 of this year was 9.21%, down from 12.7% at the same point last year and 9.8% at the end of fiscal 2022. Both of our CET1 and leverage ratios remain well above our internal targets. Turning to our income statement, total consolidated revenue increased 42% year-over-year and 7% sequentially to a record $25.9 million, with the increase driven primarily by higher net interest income derived from our digital banking operations resulting from the strong growth in our loan portfolio that I mentioned earlier and the maintenance of our net interest margin. Consolidated net income for Q1 increased 69% year-over-year and 46% sequentially to a new record of $9.4 million, excluding Q1 2017, which is attributed primarily to a one-time recognition of deferred income tax assets pursuant to the amalgamation of VersaBank with PwC capital, as David mentioned earlier. In addition to the growth in net interest income, as expected, noninterest expense substantially reduced year-over-year and sequentially as the transitory costs related to our strategic investments in several growth initiatives, including the U.S. Bank acquisition and the launch of the receivable purchase program in the U.S. rolled off. Consolidated earnings per share increased 79% year-over-year and 48% sequentially to $0.34, with the increase benefiting from strong earnings and the lower number of outstanding shares due to our active share repurchase program. During the first quarter, we cancelled just over 822,000 shares, bringing the total number of shares purchased under the NCIB as of the end of Q1 to just over 1 million. The primary driver of growth in our loan portfolio was once again our point-of-sale financing business, which increased 68% year-over-year and surpassed the 2.4 billion mark. This growth continued to be driven mainly by strong demand for home improvement, HVAC, and our receivable financing. As we noted on our last call, although we expect very healthy growth from our point-of-sale business in 2023, we won't see the same outsized growth as last year. Q1 of this year saw sequential growth in the point-of-sale portfolio of 9% relative to Q4 of last year, and we believe sequential quarterly growth in the same range throughout the remainder of the year is achievable if consumer spending in the sectors on which we focus remains active. Our point-of-sale portfolio represents 75% of our total loan portfolio as of the end of Q1, which was unchanged from the end of fiscal 2022. Our commercial real estate portfolio expanded 5% year-over-year and 6% sequentially to $807 million at the end of Q1. As discussed in our last several quarterly calls, we have taken a more cautious stance with respect to our commercial lending portfolios due to the expected volatility and valuations in this asset class in a rising interest rate environment, as well as concerns related to higher construction costs resulting from supply chain disruptions in a very tight labor market. That said, we are seeing healthy demand for our construction term financing products in the form of very high-quality deal flow. We expect this to continue throughout 2023. We remain very comfortable with the risk profile of our commercial real estate portfolios based on our criteria, working only with well-established, well-capitalized development partners who demonstrate excellent track records, and of course, restricting transactions to modest loan-to-value ratios. Turning to the income statement for our digital banking operations, the net interest margin on loans that is excluding cash, security, and other assets decreased 20 basis points or 6% year-over-year, but was unchanged sequentially at 3.03%. The year-over-year decrease was due mainly to a shift in the bank's funding mix combined with rising interest rates for the respective periods, offset partially by generally higher yields from our lending portfolio. This margin overall, which includes the impact of cash, securities, and other assets, increased 6 basis points or 2% year-over-year, and 2 basis points or slightly less than 1% sequentially to 2.83%. This is attributed to higher yields earned on lending and treasury assets, offset partially by higher cost of funds. Now, interest expenses for Q1 were $12.3 million compared with $10.6 million for the same period of 2022. However, this is down meaningfully from the elevated levels of $13.8 million for Q4 2022. The year-over-year increase was due mainly to higher salary and benefits costs resulting from an increase in staffing levels to support expanded revenue-generating business activity across the entire bank, higher costs related to employee retention in a very tight labor market, and higher costs related to investments in the bank's business development initiatives, offset partially by lower insurance premium expenses due to adverse events listed on NASDAQ since September 2021, as well as lower capital tax expense. The sequential decrease is due to the expected significant reduction in transitory costs related to strategic growth investments and our listing on NASDAQ, as David and I both mentioned earlier, as well as lower capital tax expense. The cost of funds for Q1 was 2.95%, up 166 basis points year-over-year and up 50 basis points sequentially, with both increases due mainly to the larger proportion of wealth management deposits relative to our lower-cost solvency professional deposits versus the comparative periods, as well as the general increase in marketing interest rates. Even as our costs of funds remain significantly less than the Bank of Canada's increasing benchmark rate of 425 basis points at the beginning of fiscal 2021. Insolvency professional deposits once again contracted slightly in Q1 on both a year-over-year and sequential basis due to historically low bankruptcy activity Canada has experienced, primarily as a result of government support for both individuals and small businesses extended during the pandemic. Wealth management, or personal deposits expanded 87% year-over-year and 14% sequentially. They will talk a little bit more about our expectations around funding mix in just a moment. Our provision for credit losses or PCLs in Q1 once again evidenced the prudent risk mitigation strategies inherent in our lending models and the outstanding credit quality of our loan portfolio, especially evident given the product expansion and PCL ratio we are reporting. The provision for credit losses for Q1 was $385,000, compared with a provision for credit loss of $2,000 in Q1 of last year, and a provision for credit losses of $205,000 for the fourth quarter of 2022. Sequential and year-over-year changes were a function primarily of changes in the forward-looking information used by the bank in its credit risk models, as well as higher lending asset balances. PCL as a percentage of average loans for Q4 was 5 basis points and our average for the past 12 quarters was zero. Our PCL ratio continues to remain one of the lowest in the Canadian banking industry. Turning now to DRTC. I would like to remind you that DBG's gross profit amounts are included in DRTCs consolidated revenue, which in turn is reflected in non-interest income in VersaBank's consolidated statements of income and comprehensive income. DBG's revenue for Q1 decreased 3% year-over-year and 19% sequentially to $2.3 million as a function of lower service work volume in the current quarter. Historically, Q1 is softer for DBG, attributed to the impact of the slower holiday period which typically results in lower revenue generating activity. Gross profit, however, increased 70% year-over-year and decreased 6% sequentially to $1.6 million, with a year-over-year increase driven primarily by higher pricing on engagements, and improved operational efficiency. DBG remained profit on a standalone basis this quarter. DRTC consolidated revenue for the quarter, that is including revenue generated through the provision of various technologies support and consultation services provided to VersaBank's digital banking operations, increased 3% sequentially and 29% year-over-year to $1.8 million. DRTC recorded a net loss of just over $0.5 million compared to net income of $150,000 in Q1 last year, and a net loss of just under $0.5 million in Q4 last year. The year-over-year trend was a function primarily of higher interest expense attributed to higher salary and benefits expenses due to higher staffing levels to support expanded business activity and higher costs associated with employee retention in the current challenging labor market. And now let's turn the call back to David for some closing remarks.

Thanks, Shawn. As many of you know, I'm an avid pilot, and we aviators have a term that describes the absolute best conditions for flying, being 'capital K,' which means ceiling and visibility are okay. As I look out to the foreseeable future for VersaBank, we have 'capital K.' Sidenote, I'm sitting here at London Airport looking out my window, and today it is indeed 'capital K.' Our comps for Canadian digital banking operations will benefit throughout 2023 from the outsized loan portfolio growth of 2022. We continue to see sequential quarterly growth in the neighborhood of 8%. We expect net interest margin on loans to remain robust. We expect meaningful additions to our loan portfolio through our U.S. receivable purchase program. With each passing month, as we engage in more discussions with our existing and potential customers for our RPP offering in the United States, we are growing more confident in the uniqueness and attractiveness of our offering. Case in point: Last week, we attended the KBW Fintech conference in New York City, providing us with an opportunity to discuss our solution with a number of potential partners, and the response was overwhelmingly positive. Although the approval process for our U.S. bank acquisition is taking longer than expected, it has not in any way changed our belief in the size of the opportunity. In the interim, we made the decision to expand our limited pre-acquisition rollout to better capitalize on the near-term demand I described earlier. As we await the opportunity for broad rollout, notably, we expect to generate a larger spread compared to Canada when we roll it out broadly. Last quarter, I discussed how I specifically designed VersaBank to perform well in good times and even better in more challenging times. A core component of this model, in addition to risk mitigation, is our high-value insolvency professional deposit business. As a reminder, we have almost singularly addressed the unserved market opportunity to provide integrated technology to easily enable bankruptcy trustees to park deposits with us. We have the vast majority of the market for personal and small business bankruptcies in Canada. Insolvencies plummeted during the pandemic due to government financial support, reduced consumer spending, and a halt to collection activity, hitting a low of over 7,500 per month for the period April 2020 to February 2022. This compares to an average of over 11,300 per month in the two years preceding the pandemic. As expected, we are now seeing those numbers begin to climb. Now up to 9,000 for January 2023, an obvious leading indicator regarding our insolvency deposit growth. We are also very recently seeing this flow through in terms of account openings and quite dramatically. At the same time, we are continuing to add new trustees and partners, further expanding our already impressive market share. This obviously bodes well for the low-cost deposits moving forward. To conclude, as discussed at the outset of this call, we view our results for the first quarter as clear evidence of the operating leverage inherent in our branchless business-to-business digital banking model and the resulting return on equity generating capability. We continue to grow our loan portfolio in Canada and add significant additional long-term growth we expect in the United States. We expect to continue to see the torque in our operating leverage. Notably, our U.S. receivable purchase program will be serviced by the same technology centers in London, Ontario and Saskatoon, Saskatchewan that service our Canadian point-of-sale portfolio, and essentially the same personnel, that's operating leverage. With that, I'd like to open the call to questions.

Your first question will come from David Feaster at Raymond James.

I'm just wanted to start on appreciating all the color on the loan growth front. I just was hoping to get maybe some more detail on the U.S. expansion. Glad to hear you're kind of going to be accelerating that. I'm just curious about how you've had good reception thus far. But how is demand in the states, the pipeline of new partnerships, and just kind of the roadmap for the U.S. expansion? And maybe where do you think that portfolio gets to by the end of the year? I don't know if you had any targets for that?

Well, David, that sort of ties into the comments we had purposefully limited our lending activity in the United States pending receipt of the approval to acquire the Stearns Holding Bank. We just wanted to test the market, get the legal documentation in place, and prepare our internal systems accordingly. And we were expecting that we would be able to operate the bank around now, so we just sort of slowed it down. But it looks like it'll be a little longer before we're able to operate the U.S. Bank. So we've made the decision to lend directly from our Canadian bank for the time being, so as not to lose the momentum we’ve been gathering by talking to various potential partners. To answer your question, there's a huge number of what I won't call them point-of-sale financing partners in the states, but let's call them receivable purchase program partners that are really keenly interested in partnering with us. In fact, from my last visit to New York City and the KBW event, I met many potential new partners who were very interested in signing up. That's why we made the decision to fund it from Canada for the time being; I didn’t want to disappoint them, and I want to keep the momentum going. We do not have any year-end targets. Quarter by quarter, you'll start seeing growth. I expect we'll have the approvals soon, and then we can really ramp up with the U.S. Bank.

And maybe touching on the CRE book, you talked about some of the cautiousness that you might have had in the past few quarters. I'm just curious, maybe what changed? Is it the availability of credit in the market? Where are you seeing demand that provides good risk-adjusted returns for you? And I mean, have you tightened underwriting standards in that segment at all?

We operate with a guiding principle that bad loans tend to occur during prosperous times. Therefore, quarter after quarter, I have emphasized our cautious approach because we have recognized, correctly, that there was a real estate bubble across much of North America, with prices being excessively high. As a result, we maintained a conservative lending strategy during that time. Now, we've observed prices adjusting to what can be considered reasonable levels, which reassures us. Additionally, as is often the case, our competitors are usually facing challenges at this time due to over-lending on various properties. This is why we are feeling optimistic about our commercial real estate portfolio again—competition and pricing have stabilized, and we also have a robust collection of clients in the industry.

And then maybe the last one for me. I mean, you've been extremely active repurchasing stock, and we're still trading well below tangible. You've got plenty of capital. I'm just curious about your appetite for repurchasing stock here and how you think about capital when you've got such strong organic growth at the same time. Just curious about your thoughts on capital return, capital priorities, and yes, supporting the organic growth?

Well, we just love buying back our stock at these prices. I mean, it's about the best investment. Warren Buffett said it’s his very best investment at zero risk; we buy it back, we get the return. I kind of doubt we're going to have that opportunity much longer. I think the market is probably wondering if we had something to do with the crypto industry and I got sort of treated the same way as others have. There’s no reason why our stock should drop below book value given our earnings. This quarter, I think we’ve shaken that misconception off. Obviously, our model is very powerful, it works extremely well, and the earnings we've just produced leave most of the industry in the dust. So I'd love to keep buying back the stock, but I can’t see it standing at this level for much longer with these numbers coming out.

Well, congrats on a great quarter. I appreciate all the questions.

Thanks, David. I look forward to seeing you sometime in Florida. I'm still in the frozen north here, but I hope to turn the airplane 180 degrees and head back.

Your next question will come from Mike Rizvanovic at KBW Research.

I wanted to just ask a couple of quick questions on the numbers here. So first on the POS hold back, I think you're down about 5.5%. You were, I think, well north of 10 or a little bit north of 10 in the depths of the pandemic. Do you have any insight as to how low that number might go, and are there any ranges? Is it range bound? Can you get much lower from here? How do you sort of look at that number going forward?

Well, the number depends on the quality of the receivables that we're purchasing. So it's 100% dependent on the quality. So we don't have any particular overall target; it just so happened to settle around 10% for a while. The portfolio has migrated over to lower risk assets. That might be something to do with the impending recession. We’re seeing less riskier assets than we did in the past, i.e., now it's moving towards home improvement type loans, which generally are a lot less risky than, say, hot tubs, motorcycles, and RVs. So we're seeing a migration towards the lower risk asset classes, as consumers maybe spend less on luxury items; items they don't really need, like a new motorcycle when a recession might be coming. But maybe they really need to look at their house and ensure it’s insulated properly and that they have an energy-efficient furnace, especially now that energy costs are higher. That's the reason; it’s simply a lower risk portfolio than it was when times were buoyant.

Okay. Is it fair to assume that you've incorporated the same level of diligence to reflect a potential downturn, like the 5.5% is low? It doesn't mean that you're necessarily not including a bit of a buffer because of the macroeconomic environment? Maybe not looking so robust anymore? Is that fair?

Absolutely. We generally run around at least three times the amount of losses that our clients would show, so and that's what we had at the depths of the pandemic; the intrinsic losses that our models pointed to for our portfolio were around, just for round numbers, $30 million, and we were holding about $100 million in cash holdbacks. And that’s generally where we run. But these are ballpark figures. It's done a lot more scientifically than that; each individual portfolio is looked at and reviewed on a continuous basis. We're always adjusting the cash holdbacks, depending on our view of what's in store for our partner and the overall economy.

And Mike, one other piece of color you might want to keep in mind is that, as David mentioned, there's no change in our risk assessment process or the management process there. But in some cases, some of our seller partners post LCS as opposed to cash. So the risk fee, the volume there is still there, and the protection is still there, but just the structure of the holdback has been modified slightly with some of our partners.

And then just a quick one on your insolvency deposit down in the quarter. We have seen the number take up both on business and consumer, and it is gradually normalizing. I think I was a little surprised that the number wasn't up sequentially, just given that trend. Or is it maybe just the nature of the assortment, maybe the size of an average insolvency is smaller today than it was? What's driving the number coming in lower? And then as a quick follow-up to that, how important is this as a funding mix shift on your margins going forward?

The good news for us is that we're opening more new accounts to receive deposits as businesses and consumers go bankrupt. These accounts are essentially empty and take about two years to fill up before they are used to serve creditors. We're experiencing a lag effect, seeing more insolvencies now than in previous figures, and we're increasing the number of accounts. Most of the trustees in Canada are now working with us, and since the end of our fiscal year, we've seen a significant increase in the volume of new accounts being opened. This lag is important. I expect insolvency deposits will reach a record high for us because we have a larger market share than we did a few years ago. New accounts are being opened at a faster rate. Regarding our net interest margin, these accounts are quite important, as we pay around prime minus 2.8 on insolvency deposits, which is a stable, low-cost funding source. However, I don't expect this to negatively impact our margins; they have consistently been about 1% higher than most banks and I believe they will remain stable. Something that could slightly affect the margin, which is actually positive because it significantly boosts return on equity, is our upcoming instant mortgage app. This will allow access to lower-margin conventional and CMHC mortgages. These would decrease margins a bit, but it won't adversely affect return on equity; we expect return on equity to continue growing rapidly.

Your next question will come from Stephanie Woo at LodeRock Research.

I'm Stephanie on for Greg. So this quarter, I see surprising sequential growth in point of sale loans, given the economy backdrop, and I think you guys also alluded to in the comments that going forward probably won't see the same type of growth. Maybe just a little bit more color on the Canadian side of point of loan growth? That's my first question. And second, is it correct for me to assume that the U.S. expansion is going to be helpful for the NIM to go back to 3% going forward?

I appreciate that people are likely surprised that our loan growth is continuing at 8% per quarter, while other banks in Canada are struggling. That's probably because the market that we're targeting, our partners are focused on in the home improvement area. As I was saying earlier, with energy costs going up, folks are quite rightly looking at updating their homes, whether it’s new siding, insulation, or a new furnace for more efficiency. That’s been a prime area for our partners to provide that type of financing. Discretionary purchases, I was saying earlier, like boats, cars, motorcycles as well, that activity has really dialed down. Thankfully, we’re nicely diversified across the country and across industries, and we're seeing significant growth in the point-of-sale in the home improvement sector in particular. As for loan growth in Canada, remember that we’ve been working for quite a while on our innovative program called Instant-Mortgage. It’s an app that enables a developer selling homes to have potential buyers enter their numbers and receive very quick approvals for their conventional or CMHC mortgages. So we expect to see some growth in that area as well. We are slightly comforted by the fact that housing prices in certain communities have dropped to relatively reasonable levels, unlike other lenders who were lending in a bubble, maybe their loan-to-value ratios have gotten a lot higher than they were. We’re entering at the right time, but carefully. So that will boost Canadian loan growth too. The cost of funds in the United States is significantly less than in Canada, relative to the risk-free rate. So we see 4% net interest margins as quite possible. As time progresses, that will further boost our overall NIM. Just keep in mind our NIM on loans is overall north of 3%, and on our treasury assets, it’s about 1%. So as rates continue to rise, or if rates go up, we will gain a little bit more on our treasury assets, so the overall NIM improves. But I should say depending on the mix of CMHCs and conventional mortgages, as we service this part of the market, we could see a slight dip in NIM, but it should have a negligible effect on return on equity, which should continue to grow dramatically.

Okay. Thank you so much. Best of luck on the U.S. expansion.

U.S. expansion. Basically, Stephanie, the approval to get the U.S. Bank is a little slower than we'd expected. We're working well with our U.S. regulators and the Canadian regulators. We expected this to be resolved halfway through this calendar year. But in the meantime, there was so much interest for our product among U.S. point-of-sale companies that we thought, well, we should just roll it out anyways directly from Canada and satisfy the demand. We hate to see ideal partners wanting to deal with us, and us not being able to, so we made a strategic decision to capitalize on the extraordinary demand for our product.

Your next question will come from Trevor Reynolds at Acumen Capital.

Just a couple of quick ones. I think most of them have been touched on, but in terms of the asset classes that you're seeing demand for in the U.S., would they be similar to what you're seeing in Canada, or just maybe a little bit of insight on that?

There isn't a specific theme to our approach since the U.S. market is vast. We are interested in all types of asset classes, similar to our experiences in Canada. Currently, we have a trucking company on board and another one upcoming in the medical equipment sector. We're also exploring recreational products. Our focus is not limited by asset types; instead, we emphasize the expertise of our partners in lending. If they are effective and reputable lenders, the asset class they are involved with is irrelevant. However, if they are not competent lenders, we won’t collaborate with them unless they have their credit evaluation processes in order.

And then just on the instant mortgage app, you mentioned that it's close to being ready. What's the timeline on that being rolled out? And what sort of growth are you expecting from that?

The app itself was developed many months ago, and the systems are in place; people are ready to go. However, there have been a few regulatory issues that we’ve been working through, and we hope to have those resolved in about a month. We have partners lined up for mortgage administration. This is a wonderful partner that has worked with us in other areas. So everybody is all set to go, and there's a fair amount of demand. It's in the order of hundreds of millions of dollars. So, just by starting, I’d look for at least a couple of hundred million within the year.

And just remind me, who would be the primary people looking at this instant mortgage?

Usually, new homebuyers. This app is designed to reside in the sales office of the developer selling the units. It’s designed as a sales tool, an adjunct to our point-of-sale program. We developed this app to aid in the point-of-sale financing for residential units. When someone wants to buy a house and they haven't negotiated a mortgage with one of the traditional banks, we offer them a solution: punch their numbers here, and before you know it, they'll be approved for one of those types of mortgages. No one else in North America currently offers such a convenient solution.

Great. And then just last one, just on the digital currency, maybe just some insight on where that sits, whether it's on the back shelf for now or what the plan is with that moving forward?

It's on the back shelf. The digital deposit receipt that we developed is fully developed. We think eventually, banks will use blockchain as a new channel for deposits. I think it's inevitable. But given the regulatory environment, north and south of the border, and given all the busy good work we have on our point-of-sale business, we decided to leave this one on the shelf, and we don’t have any specific timeline to take it off. It may be some time in the future when regulators decide the market is ready for such convenience. We always prioritize our core businesses while we explore new technological opportunities.

Your next question comes from Brad Ness at Choral Capital.

Hey guys, how are you doing?

Very good, Brad. Although I'm in the frozen north right now, but I got my really warm socks on.

Sounds good. Well, I'm going to jump into things. You had quarterly expenses, noninterest expenses at $12.3 million in the quarter. Is there any one-time kind of transitory expenses in there?

There's a little bit left from the previous year but not a whole lot anymore. That $12.3 million is probably the run rate for us now. It’s like I said, there’s a little bit of hangover from the past, but there are pluses and minuses going forward.

And what type of growth should we see in that number, excluding the U.S. acquisition?

Well, we're not looking for any growth in the upcoming year.

Do you think it will hold flat for the whole year?

Yeah. We've already absorbed the additional salary increases that came about through hiring some new employees, and Kia is, of course, also just the general wage increases that post-pandemic have given us all inflationary increases. So that's already in the numbers. I wouldn’t think about it that way because there are kind of a lot of moving parts involved.

And in light of continued upward pressure on interest rates, do you think you can continue to maintain that interest margin on loans above 3%?

So saying this, there are a few factors; generally speaking, yes. You note that our cost of funds is about 1.5% less than the same term government in Canada. We have a really nice efficient gathering network. And we’ve got, sooner or later, we know that those buckets I was talking about, those insolvency accounts we’ve opened, are going to fill up with cheap deposits. So that helps. The thing that could depress NIM a little, which is kind of good, really good actually, is the instant mortgages and CMHCs versus conventionals. Because they have lower NIMs, they’re around 2% all in after administration costs. That would depress NIM on a weighted average basis, but because of very little capital they have, it boosts ROE. So henceforth, you're going to start seeing me talk more and more about ROE. I mean, we all know that with banks, ROE is highly correlated to this 2% book value, market value presented percent of book and highly correlated. The last analysis we did was 0.8; 0.6 was the figure. So my mission is to move ROE up as fast as it can so that our stock starts trading where it should be. In fact, I’d like to see us positioned as an outlier on the positive side in terms of trajectory. So NIM covering around 3% could go up a little, down a little; but ROE should really start moving.

And when I do think about ROE at the end of this year, it sounds like you're excited about artificial intelligence and what it can do to improve efficiency in the back room. You’re excited about capital efficiency with the Instant-Mortgage. And with continued strong loan growth and limited expense growth. I mean, is 17% ROE something that we should be looking for by the fourth quarter?

Well, let me say this to you, Brad. I brought a team down to Fort Lauderdale for a strategic planning session. The key metric I had on probably every slide was ROE and the target I gave the staff was 18%. Some of them choke at that. The building of the bank days are over; we’ve got the bank built now, and that’s a realistic number. Whether we get that by the end of this year, the last month, October whether we can week, the month shows 18 or not, I don’t know. But it’s going to be moving up every month now because it has to take costs the same and revenue is growing by 8% as our loans have grown by that; there’s a little plus and minus in there saying what central bankers do and how high they put rates. It could dampen demand. But as I was saying earlier, Canadians and I think their U.S. counterparts are quite rightly looking at energy costs and saying to themselves, how do we save a few bucks on heating their house? That’s a wonderful market for our point-of-sale business.

Last question here. Regarding your cybersecurity initiative, I'm anticipating a breakout quarter where revenues significantly increase and maintain a strong trajectory. I'm still waiting for that. Can you provide an update on what's happening with cybersecurity and what growth expectations we should have?

Well, the breakout is coming; I’m waiting for it as well. Here’s what you can expect: Next quarter and the quarter after, there'll be good growth in DRTC based on the new products and customers, and how we're onboarding new customers. But to get a breakout, frankly, I think we've got to have a reseller signed up, somebody who’s got a huge customer base and wants to resell these products for us. We don’t have a sales force that can produce ten times revenue growth, but someone else could. The products we have are state-of-the-art; they work for our bank and are fantastic. Some of the customers we’ve onboarded are the who's who in North America. We’ve got a first-class product with a fully developed suite of wonderful capabilities. However, we’ve only grown a few people, and right now our focus is mainly on growing the bank's NIM business. Well, Brad, it’s really good to hear from you. Are you still in the D.C. area?

I am. Let me know when you're here.

There are no further questions from the phone lines. At this time, I'll turn the conference back to David Taylor for any closing remarks.

Well, I just would like to thank everybody for dialing in and listening to us. It's an exciting quarter for us, and I very much look forward to talking to you next quarter. Stay tuned; VersaBank is centered on airport, I'll say a passenger safety belt. So we're cleared to take off. Thank you, goodbye.

Ladies and gentlemen, this does conclude the conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.