Versabank (VBNK) 2022 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the VersaBank's Second Quarter 2022 Financial Results Conference Call. This morning, VersaBank issued a news release reporting its financial results for the second quarter and year-to-date ended April 30th, 2022. That news release, along with the bank's financial statements and supplement 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 the conference call live over the Internet. 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 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 1 hour following the 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.

Thank you, Michelle. Good morning, everyone, and thank you for joining us today's call. With me is Shawn Clarke, our Chief Financial Officer.

For those who have been following VersaBank for a number of quarters or more, we'll note that some small, but we think important adjustments to the way we are describing our business and our quarterly results. First off, we are more definitively referring to our digital banking operations when describing our deposit and lending business, and to DRTC, when describing our cybersecurity services as well as certain banking and financial technology development.

Further, we have begun breaking out our noninterest expense into its component digital banking and DRTC parts to provide a more fulsome view of each operational segment. We believe this better serves our shareholders and prospective investors providing a clearer picture of the individual performance of each of our digital banking and DRTC operations and enabling better comparison to our peers in each sector.

Within our digital banking operations, we are presenting net interest margin based on total assets, that is including cash and other assets as we have done historically and is the convention with publicly traded banks in Canada. However, we are also presenting net interest margin with cash and other assets excluded as per the practice of U.S. banks.

In addition, we are now reporting our efficiency ratio for only our digital banking operations, which excludes the impact of DRTC. Again, we believe these adjustments will enable the investment community to better compare our results to those of our peers, including our U.S. peers.

And finally, a quick reminder here that we report our financial results in Canadian dollars and all amounts in today's call will be in Canadian dollars unless otherwise stated.

Now, on to the results. For the second quarter of 2022, Q2 saw continued momentum across our business and was highlighted by yet another record loan portfolio in our digital banking operations, which increased 34% year-on-year and 11% sequentially to just shy of CAD 2.5 billion. Importantly, this growth was driven to a large degree by our strategic focus on point-of-sale financing portfolio, which grew 51% year-over-year.

Consolidated net income for Q2, however, was dampened by expenses related to a number of investments that we believe will continue to drive portfolio growth in both the short and long term. Most notably, transitory costs associated with the preparation for the launch of the roll out of the point-of-sale offering in the United States and preparation for the launch of the Canadian dollar version of our revolutionary digital deposit receipts.

We also saw a dampening effect from the successful execution of our strategy to expand point-of-sale portfolio on the net interest margin in our digital banking operations. As a reminder, we are in slightly lower margins on average from our point-of-sale loans than we do on our commercial real estate loans. From a sheer growth opportunity, however, the point-of-sale market represents our far greatest opportunity to drive sustained long-term profitability and also a considerably more efficient use of our capital.

In DRTC, we continue to see strong growth, which delivered year-over-year increases in revenue and gross profit of 41% and 57%, respectively. Although profitability here was dampened by investment for VCAD launch, including completion of the SOC2 audit. I'll remind you here that the gross profit amount for DRTC is included in noninterest income in VersaBank's consolidated income statement. Shawn will discuss the financials in more detail in a moment.

A significant highlight of the second quarter was the launch of point-of-sale business in the United States, and the addition of our first U.S. point-of-sale customer on March 31. That customer is a large North American commercial transportation financing business focused on independent owner operators and a great example of the inherent value of our offering, addressing an unmet need in a market by providing a highly flexible and economically superior technology-based alternative. We're off to a great start. Discussions with our other potential partners are very encouraging, confirming our belief that our offering is unique and very much in demand.

The other highlight of the quarter, as I've noted earlier, was the completion of the SOC2 compliance audit for proprietary blockchain technology that is the foundation of our digital deposit receipts. Our own internally developed versatile technology, in essence, the voluntary SOC2 audit conducted by an independent national chartered professional accountancy and advisory firm verified the nonfinancial reporting controls relating to security, availability, processing, integrity, confidentiality and privacy of our VersaVault, which we believe will be a significant advantage from both an end user and a regulatory perspective now and well into the future.

Our digital deposit receipts were borne out of the recognition of the fundamental long-term evolution towards rapid frictionless transactions and the digital realm. We continue to advance towards launch of our VCAD in Canada. VersaBank has a long and proud history of being at the leading edge of banking, especially related to technology. Sometimes that can be protected. What we are already are conservative time lines as we ensure that we are stakeholders fully understand these initiatives.

I'd now like to turn the call over to Shawn to review our financial results in detail. Shawn?

Thanks, David. Just a quick reminder that our full financial statements and MD&A for the second quarter and year-to-date 2022 are available on our website under the Investors section, as well as, on SEDAR and on EDGAR. And as David mentioned, all of the following numbers reported are in Canadian dollars as per our financial statements, unless otherwise noted. We do offer U.S. dollar translations of our key metrics in our standard investor presentation, which will be updated for the second quarter numbers and posted to our website very shortly.

On Slide 9, the balance sheet. Starting with our balance sheet, total assets at the end of the second quarter were CAD 2.7 billion, up 26% from CAD 2.1 billion at the end of Q2 last year and up 11% from the end of Q1 of this year. Our cash balance at the end of Q2 was CAD 198 million or 7% of total assets, down from CAD 272 million or 13% of total assets at the end of Q2 last year and up from CAD 155 million or 6% of total assets at the end of Q1 this year. The year-over-year decrease is a result of deploying our temporary elevated cash balances into our loan portfolios, while the sequential quarter-over-quarter increase was in preparation to fund new loans in our short-term pipeline.

Our total loan portfolio at the end of the second quarter grew to another record balance of CAD 2.45 billion, which, as David mentioned earlier, represents an increase of 34% year-over-year and 11% sequentially. Book value per share increased 8% year-over-year and 1% sequentially to CAD 11.94 with a year-over-year increase due primarily to the impact of our common share offering in September of 2021, and higher retained earnings attributable to net income earned in the current period, offset partially by the payment of dividends over the same timeframe and a sequential increase being due primarily to higher retained earnings attributable to net income earned in the current quarter, offset partially by the payment of dividends over the same period.

Our CET1 ratio was 13.66%, up from 12.52% at the end of Q2 of last year and down from 14.83% at the end of Q1 this year. Finally, our leverage ratio at the end of Q2 was 11.63%, up from 10.46% at the end of Q2 last year and down from 12.69% at the end of Q1 of this year. The year-over-year increases in our regulatory capital levels and ratios, as well as, changes in our leverage ratio were a function of a number of factors, including our common share offering in September 2021 for total net proceeds adjusted for tax effected issue costs in the amount of CAD 75.1 million, retained earnings growth year-over-year and in the case of our capital ratios, changes to our risk-weighted assets and composition. Both our CET1 and leverage ratios remain well above regulatory thresholds.

On to Slide 10, consistent with David's earlier comments on reporting, I will begin with an overview of our consolidated results and then proceed to discussing digital banking operations and DRTC, individually. Total consolidated revenue increased 17% year-over-year and 2% sequentially to CAD 18.6 million, with the increase driven primarily by higher net interest income in our digital banking operations, which in turn was driven by strong growth in our loan portfolio. We also generated higher noninterest income at DRTC, I will discuss each of these in more detail in a moment.

As David noted earlier, consolidated net income for the quarter was dampened by what were predominantly transitory costs associated with specific growth initiatives, including our U.S. point-of-sale launch and preparation for the launch of VCAD. As a result, net income was down 14% year-over-year and down 11% sequentially to CAD 4.9 million. Net income was also impacted by higher salary and benefits costs and higher office expenses incurred as our team returned to work at our offices. While these specific transitory costs recognized in Q2 will reduce materially in the back half of the year, we expect to see additional expenses associated with our pursuit of an acquisition of a U.S. Bank, the magnitude and timing of which will depend on our progress toward achieving this objective.

Earnings per share for Q2 were CAD 0.17, which was down 32% year-over-year and 11% sequentially. The year-over-year decrease in EPS but disproportionately larger than that of net income due to the higher number of shares outstanding resulting from the issuance of 6.3 million common shares under our U.S., IPO in September of last year.

Strong growth in our loan portfolio were driven predominantly by growth in our point-of-sale portfolio and, to a lesser extent, growth in our commercial real estate portfolio. Point-of-sale loans grew 51% year-over-year and 12% sequentially to CAD 1.6 billion. The increase continues to be driven mainly by strong demand for home finance, auto and home improvement receivable financing.

As David noted earlier, point-of-sale continues to expand as a proportion of the overall portfolio, now representing 66% of our total loan portfolio, up from 65% in Q1, 2022. Our commercial real estate portfolio increased 10% year-over-year and 8% sequentially to CAD 796 million. The increase -- this increase is primarily the result of growth in residential mortgage financing.

Turning to the income statement for digital banking. Net interest margin, which as David mentioned earlier, we are now presenting as a function of only interest-bearing loans, which is excluding the impact of cash and other assets for Q2 was at 3.11% compared to 3.22% last quarter and 3.55% for the same period a year ago. These declines are primarily the result of our strategy to grow our point-of-sale portfolio for sharing lower average net interest margins in the commercial real estate portfolio. We were also more aggressive with the point-of-sale pricing in Q2 this year in order to take advantage of certain growth opportunities that presented themselves.

Net interest income in our digital banking operations for the second quarter was CAD 17.2 million, up from CAD 15.1 million in Q2 last year and up 2% from CAD 16.9 million for the same period a year ago. The increases were both primarily a function of higher interest income earned on higher lending assets, offset partially by lower fees earned on the bank's CRE mortgage portfolio and higher interest expense on -- higher interest expense on deposits.

The year-over-year trend also reflects higher interest expense in the current quarter attributable to subordinated notes, which were issued at the end of April of last year. Noninterest expenses for the quarter were CAD 11.8 million compared to CAD 8.3 million for Q2 last year and CAD 10.6 million for Q1 of this year. Both increases were due primarily to higher costs related to the launch of the point-of-sale business in the U.S. in preparation for the commercial launch of VCAD. We also incurred higher salary and benefits expense attributed to higher staffing levels to support expanded business activity across the bank, higher costs associated with employee retention and higher office and facility-related costs attributable to our return to work strategy. The year-over-year increase also reflects higher insurance premiums attributable to our listing on NASDAQ in September of 2021.

Turning to cost of funds. Cost of funds for Q2 was 1.38%, which is up 10 basis points year-over-year and 9 basis points sequentially, with the increase due to higher deposit balances and change in our deposit portfolio mix. Credit quality of our loan portfolio remains very strong. We once again finished the second quarter with no impaired loans and no loans in arrears, which continues to be the case today. For Q2, we recognized a provision for credit losses or PCL in the amount of CAD 78,000 comparing to a provision for credit losses in the amount of CAD 312,000 for the same period a year ago and a provision for credit losses in the amount of CAD 2,000 in Q1 of this year. Our PCL ratio or specifically PCLs as a percentage of average loans was 0.01% for the current quarter compared with a 12-months average of negative 0.01% and which continues to be amongst the lowest of the publicly traded Canadian federally licensed banks.

Turning to DRTC's income statement. Our cybersecurity services and banking and financial development operations, DRTC revenue and gross profit, which are generated entirely by Digital Boundary Group's cybersecurity services increased 41% and 57% year-over-year and 3% and 1% sequentially to CAD 2.4 million and CAD 1.4 million, respectively.

DRTC as a whole leverage generated a net loss of CAD 0.5 million in the current quarter, which is impacted by the costs associated with the technology development initiatives that are not yet revenue generating. This continues -- this compares to a net loss of CAD 0.2 million in the second quarter of 2021 and net income in the amount of CAD 0.1 million in the first quarter of 2022. The loss in the current quarter was attributable to higher costs related to investment in specific growth initiatives, including the preparation for commercial launch of the Canadian dollar version of the bank's digital deposit receipts, as well as, higher salary and benefits expense and higher business development costs.

Finally, before turning the call back to David, I thought it's important to note that we remain very mindful of the continuing evolution of the pandemic, the current geopolitical unrest -- the current geopolitical unrest and the volatility in both Canadian and U.S. macroeconomic conditions. And as a result, we continue to operate at a heightened level of awareness to ensure that our origination and underwriting practices, as well as, our broader risk management practices remain highly disciplined and focused.

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

Thanks, Shawn. The second quarter was once again demonstrative of the accelerated growth of our digital banking loan portfolio, led by our point-of-sale financing business, which demand for types of goods and services are financed using our solution remain very strong in Canada, and we expect continued momentum throughout the remainder of the year.

We also expect to see continued near-term growth in our commercial mortgage portfolio, specifically related to financing for residential housing properties as the macro conditions remain favorable. That said, we expect the growth to be somewhat moderated from our view earlier this year.

With anticipated continued strong portfolio growth in Canada, we expect the investments we've made in Q2 to begin to yield results in the second half of the year. Notably, we expect to begin to see the contribution of the rollout of our point-of-sale financing offered in the United States, which we believe has even more potential for near-term contribution than our previous call at the end of February.

When we were first analyzing the potential for our offering in the United States, we viewed it as an attractive third option for consumer financing firms alongside their existing bank and public market finance. With public capital much harder to come by, we believe there will be even more demand for our point-of-sale offering.

On the deposit side of digital banking, we anticipate continued growth in deposit funding of the remainder of the year, driven primarily by the solvency professionals offering as the volume of consumer bankruptcies and proposal restructuring proceedings is forecasted to increase significantly due to continued tightening of monetary policy by the Bank of Canada. In fact, some experts have predicted that we may move from a period of record low bankruptcies to a period of very high bankruptcies. We are already seeing a significant increase.

In our cybersecurity services business, we have a solid momentum, more than 40% year-over-year growth in revenue, as I mentioned earlier, and we expect this will continue in 2022. All of this points to a solid back half for 2022, an outsized growth potential for 2023 and beyond.

And with that, I'd like to open the call to questions. Michelle?

(Operator Instructions) Your first question comes from Greg MacDonald of LodeRock Research.

I have 2 questions. The first is kind of a macro one. We just came through earnings season for the big 6 banks as well, big bank CEOs who are normally conservative seem to be a little more optimistic on the economic outlook than the market is. I wonder, David, if you could speak to that overall as an issue, i.e., are you seeing things differently than what some of the economists are?

And then secondly, in context of course, your main area of growth focus in terms of point-of-sale and multiunit residential real estate loans?

Well, thanks, Greg. Well, in our sort of limited scope offering -- we are still seeing a lot of growth, obviously this year and probably leading into 2023 and the point-of-sale financing area as big-ticket consumer items seem to be still in high demand. However, as we lead into 2023, I would expect these tightening measures Bank of Canada is in fact, probably say another 50 basis points, we'll start to take their toll. And I would expect to see a dampening of demand for these big ticket items that having lived through quite a number of recessions to say that they are word. You don't tend to see people buying hot tubs and motorcycles when a recession hits. And that's what we've financed in our point-of-sale business. So even though we're growing at 50 odd percent now, and I don't see any end to that this year, but leading into 2023, depending on what the economy does, I would see that would be dampening.

With respect to our real estate construction, there's still a very high demand for residential units on the periphery of the major centers. And concerned, we're just a small player in that area. I would think that our portfolio is sort of maintained the size it is with a little bit of growth.

Yes. And there are longer cycles involved in that -- in that area as well. The second question, specifically on point of sale -- really good growth sequentially up 12% to your point. Can you talk -- and you talked a little bit about the trends within -- in terms of consumer spending, can you talk specifically to the decision to be more aggressive in pricing in the Q2? I think you defined it in the press release as going after certain high-growth opportunities.

And so primarily, our growth in this area is in the home improvement, home financing area as it was a few quarters ago, sort of an aftermath of the pandemic, people are likely spending more time at home looking around and thinking about home improvements. And that's what's carrying through. So that's the component of our point-of-sale that we see the largest growth.

Now, with -- going forward, I think that will probably start to dissipate, too. And leading into 2023, as I said earlier, I would expect that will slow down somewhat. The pricing concessions that we've given to some of our major partners are primarily in that area. And what we're doing now is we're expanding our market share in Canada. I think we're very close to being the largest point-of-sale per point-of-sale financing company in Canada. So it was a little bit of pricing concession, but it results in a lot of volume and we expect, we'll have a lot more volume going forward due to that pricing concession.

I see, so that was a strategic decision made based on funding partner relationships and things like that. Is that the way I should read it?

Yes, absolutely. It was with a slight reduction in pricing. It gave rise to a significant increase in volume. And as you know, we have a lot of capacity or balance sheet capacity and almost double our size of the capital we have for those types of assets. And we like them. It's whatever designed for, it's highly scalable, very low risk. So that's the Canadian market. And then we've got the U.S. market, of course, we're about the beachhead transaction. We're looking at another one fairly soon. And the thesis that we walked into the States with that, we thought this would be a popular new product. It's holding very well. In fact, the pricing is better in the States than Canada partially as a result of the meltdown in the capital markets area where a lot of point-of-sale companies were getting cheap money. And partially, because of the convenience of being able to [hit] directly up to our bank and get timely economical reliable financing.

Your next question comes from William Wallace of Raymond James.

I had a few questions, I wanted to ask this morning, if I could. And maybe just straight away following up on the previous line of questioning. I'm guessing since you only have one partner, you probably aren't willing to quantify where you are with U.S. point-of-sale as of the end of the fiscal quarter. But what I am wondering is, if we kind of just think about this conceptually, if you are going to try to enter U.S. more aggressively, you're also pricing more aggressively in Canada. Can the U.S. pricing offset the negative impacts of the Canada pricing? Or are we more likely to see as rates rise and your trustee deposits come off of their floors. It seems like we could be setting up for margin compression rather than stability or even expansion in the near term. So can you just kind of help us, I mean, we see the growth potential. I'm just trying to kind of get a sense of the bottom line impact once we start to see this transition into the U.S. versus what you're doing in Canada with pricing?

Well, it's a good question, Wally. This is, of course, competing forces at play on our net interest margin. One is the sort of bonus that we get in that as the bank in Canada increases its overnight rate, we're positioned to gain a little bit of more net interest margin. I think our statement showed approximately CAD 5 million additional income -- net interest income in the 12-month period with a 100 basis point increase. And we've seen it, I think, as of today, we'll probably see the 100 basis point increase. So that tends to widen our net interest margin somewhat. The U.S. market, as you said, is wider than the Canadian margin and only given up of a few basis points when we talk about aggressive pricing. So looking at those components, it tends to mean a wider margin. And as we've started reporting as U.S. banks do. So I'm thinking around 3% -- 3% plus margin is in the works, although the other forces at play could move it around temporarily quarter-by-quarter.

With respect to the trustee deposits, even though they're coming off their floor, I think on average now, we're paying about 30 basis points. I expect the volume of trustee deposits will increase dramatically and that we're coming off of a 35-year low bankruptcies. And we've still been building deposits as we've been signing up the last few and solvency firms in Canada. But we could very well be going into a 35-year high for insolvencies, and that would mean a lot more deposits coming out of that area. As I say, today, they're only 30, 40 basis points in total. So it really is still a very economical way for us to raise sticky deposits and the volumes could double in the upcoming year it would be hard to see with the market penetration we now have in that industry.

And I'd say we're already seeing the signs of the increased interest rates on the marginal borrowers in this country. You're starting to see credit card debt attract higher provisions. You're starting to see subprime attracting higher provisions. It's already coming in. So on one side, I'm not a happy guy for Canada's economy. But on the other side, it means a lot of deposits from the trustees.

Those deposits, how are they priced, new deposits that come out?

They're priced over prime. So they're floating rate and the various pricing in which we're dealing with in what's involved. But on average, I would say prime-minus 3, prime-minus 2.75, somewhere around there all-in. So an economical source of deposits.

So the way you can get benefit to margin is, if you're -- if the acceleration in growth in those deposits is able to offset the need to fund out of your wholesale channel, it's pricing and even though it floats with the beta of 1, you get a higher spread on those versus the wholesale.

Yes, absolutely. Yes. We expected the trustee to average around CAD 1 billion, it's only CAD 600 million, CAD 700 million right now. So this is a historic low for those types of deposits in Canada -- and there's a bit of a lag effect, of course, you're going to come off a 35-year low. It takes 6, 7 months before you start to see the insolvency deposits.

Now in the U.S. Century, you mentioned -- I believe you said you feel like you have one potential new partner to aggressively grow in the U.S., how many new partners do you need? And what does the pipeline look like? It seems like it's taking a while to sign on partners. We thought maybe after the first one, you'd kind of have the model and the agreements -- the master purchase agreement would be good for all of the interstate commerce rules, et cetera. Can you talk a little bit about your expectation of how that partner base might grow in the U.S. and why it seems to be a longer pipeline than maybe we had anticipated, as far as, getting these deals signed up?

Well, mainly the slowdown was just the haggling over the legal documentation is showing kind of we have what we call a master purchase and sale agreement is kind of the central document. And that did take a while to get sorted out to comply with the U.S. Law. And we did sign the first deal. And I think we have about CAD 35 million right now on that deal. The next one is right behind it. The documentation now holds. So the next one will be signed up very soon, and that will be funded shortly afterwards. So it's coming along. These are just sort of beachhead transactions for us to get used to the U.S., law and our lawyers to tidy up the documentation.

I think with the lack of funding coming out of the capital markets, this is what we experienced (inaudible) when we initiated this program many years ago. It means that there's a huge demand for alternate source of funding for point-of-sale companies. So now, we've got the paperwork taking care of. We've got a couple of example transactions. I can see opening up the floodgates and I expect it will be a huge [one] for us. Kind of the constraint will be human resources and putting it together and a funding source in the United States, of course.

And I think everybody knows that we're planning to acquire U.S. Bank to enable the funding in U.S. dollars for these types of transactions. So we get the beachheads done, established. And then thankfully, again, I'd sound like a grim reaper here. Capital markets are not providing the economic funding or the very cheap funding or the unbelievably cheap funding they were providing for point-of-sale companies. So that just means [tremendous] of opportunity for us. So I'd say you're going to see it rapidly increase towards the end of this year as our point-of-sale team cranks it up in the States.

You mentioned the resource commitment as a potential drag to quickly being able to sign on partners. Let's move on to the expense line. So you highlighted in the prepared remarks both you and Shawn that you had all these transitory expenses related to VCAD and U.S. point-of-sale entry, but it hasn't been quantified yet. So there was also the comment about some expectation of elevated expenses around the pursuit of a U.S. bank charter. So help us peel back the onion like what is the base expense? Let's take out any elevated expense that should be onetime for M&A and take out the stuff that's onetime for VCAD and point-of-sale entry. What is the run rate expense? And how should we expect that to grow moving forward?

Shawn, you've got some numbers on that.

So, I think, Wally, if you look at over 25% of our costs quarter-over-quarter -- the increase quarter-over-quarter could be attributable to some of the new initiatives that David and I discussed over the course of the call. We expect those costs, as we mentioned, are expenses to ramp down. But concurrently, we expect the expenses associated with our pursuit of a U.S. acquisition to ramp up. We expect those costs, you'll see incremental increases quarter-over-quarter through the fourth -- through the third quarter, to the fourth quarter, and we expect if we're successful, including the acquisition or closing the acquisition by the end of our fiscal period, we would expect to see those costs drop off mid to late Q1 of 2023.

Right. Drop off to what? 25% of the increase in the second quarter. So we take out 250,000 roughly to get to a run rate of about CAD 11.5 million.

That would be a decent level. While the issue will be, though, as David mentioned, what we're still working on in terms of our projections is what will the additional staffing requirements, be as a function of the -- of our potential U.S. acquisition, and of course, in supporting the U.S., POS initiative. So I think in terms of a run rate of 25% of where we are right now quarter-over-quarter would be a very, very conservative view in terms of where our NIEs will be over the course of 2023. You'll see it ramp up over the course of 2022 ramp back down. But I think we're still trying to come to [grace] with it in terms of what the resource requirements will be to support the existing POS business, the growth of that business and the integration of that business with a potential U.S. Bank acquisition.

So if I take -- I just want to make sure I 100% understand, the expenses went from 10.6% to 11.8%. 25% of that increase is what you would consider transitory. So 75% of that increase is staffing, et cetera, that's here to stay. And from there, once we get past whatever costs there are around pursuing a U.S. bank charter, you're trying to figure out how much growth from there will be required to support growth in the U.S.

And then obviously, if you buy charter, that will come with more expense sure. I understand that. I'm just trying to get to the base run rate to think about from a modeling perspective. So the pressures are pretty meaningful. Last quarter, you suggested that the first quarter run rate was probably a decent -- a decent run rate. So where is all the creep coming from? Is it U.S. point-of-sale? Is it -- are you expanding resources in Canada? Are you having to pay people more to keep people? Just kind of help quantify why there's so much creep?

All of the above Wally. So a big thing for us is, we're seeing it across the [finance] service industry is retention of people. It's very difficult in hiring new folks in terms of incremental wage increases to bring new staff on board. We are struggling to acquire new staff as it is and seeing, in our view, notable increases in base wages in terms of bringing those folks on board, selling bonuses, et cetera, and retention amounts for folks that are already with is key, all of our staff and in general to maintain, make sure that those staff remain with us key to our success in the future.

So salaries and benefits certainly are a big driver of those -- of that cost base. So the creep is quite frankly, investing in new and maintaining existing staff, as well as, trying to -- the costs associated with researching sourcing and working to identify and potentially acquire a U.S., charter has been a little more expensive than anticipated, but we think those -- the benefits on the other side will be disproportional.

Okay, and I've kind of hijack this call. I'm sorry -- I just have one last question. David, why is it taking so long to get VCAD launched officially. I just -- it seems like every time we talk, it should be any week now it's taking modes. So any comments there...?

Yes, that's a good question, Wally. I had believed that it would be fairly soon, but it is taking longer. I guess, one of the factors is with the meltdown in the stable coin industry as [crude] at a fair amount of what we would say, nervousness or concern amongst regulators. And even though our digital deposit receives sort of apples-to-oranges comparison to the stable coins that have turned out not to be that stable. We are in a -- we got an atmosphere of nervousness that has slowed down the final launch of the program. Ironically, our digital deposit receipt is positioned to be the safe harbor for folks that have misguidedly thought they were putting their money in something stable. But nevertheless, there's a fair amount of nervousness out there.

So is that to suggest that there's a chance that the regulators just don't allow it to launch?

I think that is always a chance. I certainly hope not in that I think the generation [Zen's] and Millennial's and [X] is even have shown that they really want those kind of deposit vehicle as they've gone to nonbank issuers to get something they thought was stable. And a statistic that I saw recently was that there's a tiny bit of retention when a baby boomers wealth moves on to the [Zen, X], Millennials, when we baby boomers finally expire. So the new generation wants this type of deposit [vehicle]. They won't do this kind of banking. And the mainline old-school kind of banks really haven't reacted to that. There are some banks in the States but, of course, that are definitely the same way we do. But it's left kind of a void in the marketplace for those -- these younger people who want -- don't want their grandfather's banking. We have the product that we believe is ideally suited for them. So I hope the regulators see that. As unfortunately, if you don't, the baby boomers and such are the vets find themselves going to unregulated entities and then in some cases, suffering.

Your next question comes from Bradley Ness of Choral Capital.

Just following Wally's question line here. So on the VCAD, what do you think it will take to get the regulators comfortable. You guys have a great relationship with your regulators. So you should be pretty dialed in here.

Frankly, Brad, I think it's just -- it will take some time in that, [nervousness] that I spoke about, that's prevalent throughout the world, of course, has pervaded Canada, too. But I think it's just a matter of time. We're providing our regulator with this much information as we can about the product. As you know, we believe that it is a safe, secure place for Canadians to put their hard-earned money and not have to risk it with other unregulated suppose it's stable coins or areas where they've -- some of them unfortunately lost their money. So we think it (inaudible) ourselves as a bank to be able to provide depositors with that safety and security. But we did enter into a period of time where there's a ton of nervousness. And it was a bit of a shock to see some of these so-called stable coins. Well, one [drops] almost nothing [pauperized]. So that's a shock to the entire world's regulatory community.

Okay. I don't know why they were so concerned about the algorithmic stable coins when they're not really regulating stable coins -- because your stable coins is not algorithmic. So I don't know why regulators be concerned. But let me just jump on -- remind me…

Emphasized for a second, if you like. Yes, ours isn't a stable coin and so to speak. It is a digital deposit receipt. It can function as a stable coin, if it becomes prevalent popular. But it's issued by a bank. And all of our deposits are digital. They've been digital since I created that [much of issuing parts] in 1993 with telephone modems sort of rudimentary systems. They're all digital. It's just these are highly encrypted additional deposit receipts and then they get that Appalachian Crypto, which some people -- it's wrong. It's something wrong with that. No, it's highly encrypted and that's what we like. And all our data is encrypted, but this is a little more and shortened. Sorry to interrupt there, Brad, but for anybody else listening, that's our point of view as a bank. We're planning to issue [some goods], super secure and super encrypted.

Got you. Remind me what I should think about like profitability goals. Let's just say in fiscal 2023. It seems like recently, I've been involved for a year and the more you grow, the lower your profitability gets. So just remind me what I should expect for like 2023? What are your goals?

Well, net interest margin north of 3%, calculated the way U.S. banks do, I think, is reasonable, it should be slightly better than that. But I think that's a reasonable margin for us to hold on to in the point-of-sale business we're expanding. And as you've seen from the past results, just in Canada, we've been growing 50% -- moving into the States, and it's all dependent on our success in acquiring a U.S. lending platform. I would say 50% growth would be easy for us to do, even despite perhaps an impending recession, as I was saying earlier, for the market in the United States is so large, and the point-of-sale companies are -- a lot of them find themselves, the well is dry when it comes to funding. So I would say you could expect that type of top line growth in assets mainly point-of-sale, of course, with that type of 3% type spread.

As Shawn was saying earlier, the dampening effect is primarily associated with our endeavors to launch VCAD to acquire U.S. Bank to list on the NASDAQ retain staff. So those are things that you do to build your business. And so, yes, we're spending money to build the business for the future, which I think should be heartening. In the past, those types of expenses might have been capitalized years ago. But now the IFRS or expense. So it does hit our income statement, but these are expenses that we're incurring for future growth. If we were to stand still, yes, you wouldn't see any of that. We probably wouldn't have to have as many staff either.

So what I'm hearing is the major profitability metric you're focused on in 2023 is the net interest margin above 3%. A lot of banks talked about like they rather focused on like return on equity, earnings for share growth. So it sounds like that's not as important, so maybe the sub 6% ROE is something we should expect going forward.

Well, as we utilize our excess balance sheet capacity, the ROE, of course, goes up -- goes way up. We've got about proximity to grow depending on the asset mix, but we could grow about double our size. So that has a dramatic impact on ROE. So what you're seeing us do is basically what we said we'd do with going to the States. We would launch our point-of-sale program we did. Yes, we have heard on legal expenses to do fast, and we're through a bit of marketing there and travel. And now we've got our sights on a U.S. bank acquisition to round out the lending platform that provide economical U.S. dollar-denominated deposits platform to lending throughout the states and that doesn't come without expenses. Just travel and consulting fees and tons of legal...

Brad, I think your comment about 6% to 7% ROE is not an unreasonable target as we move through this development phase, we would think that we would start to see those returns start to expand in the back end of 2023, assuming we're a key driver there would be in terms of -- we were successful in the completion of a U.S. acquisition and able to get that business online and contributing to the consolidated results. So not ignoring ROE by any means and very aware of shareholder concern for that metric, but one that we think will see some compression as we move through this -- we think is a material growth pace.

There are no further questions. I will now turn the conference back over to Mr. David Taylor for closing remarks.

Well, thank you. I'd like to thank everybody for joining us today, and I look forward to speaking to you at the time of our third quarter results at the end of the summer. Thank you again.

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