Versabank (VBNK) 2024 Q4 法說會逐字稿

Good morning, Ladies and gentlemen.

Welcome to VersaBank fourth quarter and fiscal year 2024 financial results conference call this morning.

VersaBank issued a news release reporting its financial results for the fourth quarter and year ended October 31, 2024.

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 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 to the webcast, but wish to ask a question in the Q&A session following Mr. Taylor's presentation.

Please dial-in to the conference line.

The details of which are included in this morning's news release and 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 RSA Bank 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.

And I would like to turn the call over to David Taylor, President and Chief Executive Officer of VersaBank.

Please go ahead Mr. Taylor.

Good morning, everyone and thank you for joining us for today's call with me today is our Chief Financial Officer John Asma and incidentally, one of the beauties of being able to operate throughout all of North America is that I'm talking to you today from Fort Lauderdale.

Here we are here, turning to our financial results as expected as a result of preparation for the completion of the closing of our US Bank acquisition August 30th.

There was a significant amount of noise in the fourth quarter that impacted our earnings numbers.

We have done our best to describe and quantify those to provide a clear picture of the continuing underlying strength of our business model.

John will describe this in more detail in a few minutes, but at a high level, these fall into three buckets which in aggregate total approximately $5.6 million for the quarter and $6.5 million for the year and tax adjusted reduced EPS by an equivalent of $0.18 for the quarter and $0.20 for the year.

These were one time non interest expenses, a change in the base of the acquired assets of VersaBank USA and the impact of holding higher than typical cash balances ahead of the acquisition and funding the US Bank upon close of the acquisition.

We are also for the first time providing fully segmented financial results that is broken out by Canadian Banking operations, our US Banking operations and Drt Cyber, we believe this provides a clearer view of the profitability efficiency and return on common equity of the existing canadian Banking business.

While also allowing you to not only definitively track the growth of our receivable purchase program portfolio in the US, but also see the greater efficiency that we expect from that business as it wraps up when we remove the noise associated with the acquisition.

The underlying story for the fourth quarter is pretty straightforward and importantly, it paints a very positive picture heading into 2025 and the ramp up of our US RPP business Q4 saw yet another record high of total assets at $4.8 billion driven by 15% year over year growth in our Canadian RPP business, which expanded by 2% sequentially, even as discretionary spending in Canada generally remains soft growth continued to dampen by higher than typical putbacks of loans that have got 90 days in arrears to our partners due to higher defaults among the borrowers as could be expected in these tougher economic times as we've made whole as we're made.

Hold on these loans through our cash holdbacks.

This higher rate of put backs to our partners has no impact on our pre provisioning for credit losses, which for Q4 as it always is de minimis noninterest expenses were a typically high due to onetime costs associated mainly with the US acquisition.

We expect to return to normalized NIES in the first quarter of 2025.

With the addition of our US Bank with the addition of the US Bank expenses including the new leadership team.

It has been for nearly two years.

Net interest margin was dampened by the typically inverted yield curve which lowers our margin as we raise deposits in the short end of the curve and lend further out of the on the curve.

We are now seeing yield curve flattened and are very encouraged by this trend.

Net interest margin was also impacted by the one times noted above.

We'll feel good about the direction of our NIM in 2025 especially as we start to add us RPP loans where we expect to realize a meaningfully higher spread for the year.

We generated record net income excluding the one time impact of the US acquisition driven by the strong growth in our canadian point of sale receivable purchase program, you can see that reflected in our efficiency ratio and our return on common equity.

We expect to see new records for all of these metrics next year based on the continued growth of our RPP in Canada and the ramp up of the RPP in the United States as well as a couple of other meaningful opportunities that we'll discuss in a few minutes.

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

Thanks David.

Before I will remind you that our full financial statements and MDNA for the fourth quarter and full year are available on our website under the investors section as well as on CDAR and EDGAR.

All of the following numbers are reported in CAD as per our financial statements unless noted, starting with the balance sheet total assets at the end of the fourth quarter of fiscal 2024 grew 15% year over year and 7% sequentially to a new high of $4.8 billion cash and securities were $525 million or 11% of total assets up from 7% in Q4 last year and 9% in Q3 of this year.

Book value per share increased to a record 15.35. Our CET one ratio was 11.24% and our leverage ratio was 7.38% with both remaining above our internal targets.

Turning to the income statement, as David described, there were a number of one time items mostly related to the US Bank acquisition that impacted the fourth quarter and the full year results a number of one time non interest expenses, the expense of a deferred tax asset due to a change in tax base of the acquired assets of VersaBank usa maintaining higher than typical cash balances ahead of the closing of the acquisition, which was exasperated by the impact of a temporary dampening of net interest margin that usually occurs when interest rates decline and $90 million in funding provided to VersaBank USA.

At closing of the SBH acquisition, total consolidated revenue was $27.3 million compared to $29.2 million last year.

The year over year difference was driven primarily by lower non interest income from the Bank cyber security operations.

DRTC but was also impacted by higher cash assets associated with the funding of the US.

Bank consolidated non interest expense was $19.4 million compared to $12.4 million last year and $13.5 million for Q3 of this year.

The quarter included $3.3 million in one time costs that were mostly associated with US Bank acquisition.

The $3.3 million brought total acquisition related one time cost for the year to $3.7 million as a reminder D RT expenses, DRT cyber expenses are included in our consolidated NIES and total $2.6 million and $9.4 million for the quarter and year respectively respectively.

Finally, as David noted, we will see NIES return to a normalized level in Q1 excluding 11 time nies and other one time impacts the impacts.

I just described consolidated net income for the quarter was $10 million or $0.38 per share.

And consolidated net income for the year was $45 million or $1.69 per share.

Looking at our digital Banking operations, which with the close of the US acquisition October 30th now consists of our canadian Banking operations and our US Banking operations.

As David mentioned, these are broken out in our press release and MDNA.

But for the sake of brevity, I will discuss the combined results as the US Banking operations had little or had limited.

Although positive contribution, our loan portfolio grew to a new record of $4.24 million at the end of Q4 driven once again by our point of sale receivable purchase program which increased 15% year over year over year or 2% sequentially to $3.3 billion.

Our RPP portfolio represents 78% of our total loan portfolio at the end of Q4 down from 80% at the end of Q3.

As David noted RPP growth was dampened for both periods due to a higher amount of putbacks.

Our real estate portfolio contracted 12% year over year to $788 million.

As we continue to transition the portfolio towards CMHC insured loans.

We're starting to see a ramp up of the program which drove a 6% sequential increase in the real estate portfolio.

We are current, we currently have commitments of close to $600 million with the loans outstanding of over $210 million, which continues to grow monthly, almost doubling since the end of Q3.

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

We have little exposure to commercial use properties.

Turning to the income statement for our digital Banking operations, net interest margins on loans that is excluding cash and securities was 2.34%.

That was 35 basis points or 13% lower on a year over year basis and 77 basis points or 3%.

Sequentially mainly the result of an atypical inverted yield curve adversely affecting P OS margins and and the change in the real estate portfolio to CMHC insured loans, net interest margin including the impact of cash and securities and other assets was 2.12% which was impacted by the higher cash balances as well as the $90 million in capital provided to US digital Banking operations from the Canadian digital Bank net income excluding one time impacts for the digital Banking operations for the quarter was $10 million or $0.38 per share.

That income for the Canadian Banking operations was $9.5 million or $0.30, $0.36 a share and net income for the US Banking operations, which for the quarter included includes the contribution of only the acquired Stearns holding for Bank operations was half a million dollars or $0.02 per share.

Our po turning to our our our our credit losses, our provision for credit losses or PCL in Q4 remained negligible at negative 0.01% on average assets compared to negative 0.02 last year and with a 12 quarter, average of 0%.

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

Well, thank you John 2025 promises another year of growth in our loan portfolio and profitability, driving continued improvements in our efficiency ratio and returnal and common equity.

As we continue to capitalize on the operating leverage in our business model.

We have a strong foundation in our Canadian Digital Banking operations where we are very proud to lead the publicly traded Banks in net interest margin, which is even more impressive given that we don't give anything back for loan losses.

We expect continued steady growth in Canada with our receivable purchase program, expanding in line with 2024 and some upside should interest rates continue their downward trend as is forecast.

And we expect to begin to see the contribution of our growing CMHC insured loan business in our opportunistic real estate portfolio.

As a reminder, these are zero risk weighted loans requiring no capital and delivering a very nice spread.

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

As noted earlier, we are starting to see the flattening of the yield curve which will be beneficial to the spread of our RPP lungs.

In addition, we should continue to see favorable impact of our low cost insolvency, professional deposit business in Canada.

As Bankruptcies continue to steadily trend upward.

We're moving aggressively forward in US RPP opportunity.

We're in the process of moving our first us partners from our pilot program to VersaBank USA balance sheet.

More importantly, we expect to add our first post acquisition partner eminently and others to follow.

In due course, I will note that it does take some time to finalize these contracts and on board new partners.

However, we do expect the pace of new additions to accelerate going forward.

We have a robust and growing pipeline.

As for discussions with both potential partners and others in the industry continue to validate that our RPP is both unique and very attractive solution for a company who finance big ticket and service services at the point of sale to support what we expect to be very active ramp up in 2025.

Earlier today, we announced that we are transitioning the team responsible for the success of the Canadian RPP to the US opportunity.

This team of Nick Kristo appointed Chief Credit Officer for the US.

Mike Dixon appointed SVPRPP in the US have been fundamental to the growth and success of the RPP in Canada since inception 14 years ago.

And along with Mike Robinson, appointed VPRPP US who has been integral to the program for the last seven years are responsible for 27% compounded annual growth rate over the last five years, more than $9 billion in financing for point of sale lenders and of course no losses.

They joined a formidable team whose collective experience and expertise will be invaluable as we scale up the US RPP program in the multi trillion dollar US point of sale market.

As a reminder, overall, we expect our US RPP business to benefit from even greater efficiencies that we achieve in Canada due to lower personnel requirements on both the deposit and lending sides.

We have a lot of bench strength in Canada and we are proud to also announce the appointment of David Thomas as SVP point of sale financing, VersaBank, Canada and Chief Credit Officer, VersaBank Canada.

Congratulations guys.

We will grow our US RPP business as quickly as our balance sheet capacity permits.

Given the significant anticipated demand, we will at least initially be syndicating our PP loans to other US Banks.

Under this model, we earn our typical RPP spread on the portion of the loan and our partner earns the same spread on the other portion and we earn a fee expection be around 1% from our partner Banks.

The cash holdbacks will reside on our balance sheet and the risk profile is unchanged.

In fact, we gained some diversification as to our partners.

You can think of this simply as VersaBank additionally, white labeling RPP to generate greater profitability.

And just as a reminder, we do expect the RPP spread to be as much as 1% higher in the US than in Canada.

One final note before we open the call to questions, those of you who have followed VersaBank for some time will know that within our wholly owned Washington DC based Cyber security firm DRT Cyber, we developed what we believe to be the worlds first, in our opinion, the world's most secure digital vault.

First of all, as well as to our knowledge, the world's first digital deposit receipts which can be issued by Banks themselves.

We believe these technologies have a tremendous value enabling us Banks to provide state of the art access to the emerging world of digital commerce.

Thus, we are very encouraged by the favorable stance of President elect Donald Trump and his proposed administration with respect to digital occurs and what we will, it will mean for our made in America solution.

Our digital deposit receipts are on Algon at the and stellar blockchains and ares to type one compliant using.

First of all, with that, I'd like to open up the call to questions, operator.

Thank you, Mr Taylor.

(Operator instructions)

And your first question will be from Tim Switzer, KBW.

Please go ahead.

Hey, good morning guys.

Thank you for taking my questions.

Good morning, Tim.

Could you provide an update on how the conversations with new partners in the US are going?

And you know, how many partners should we expect to be kind of fully launched over the next few?

Well, we have very productive discussions with one US Bank as a partner and we've we've tested the data flow.

It works exceptionally well.

So we expect very soon to have our first RPP new, new point of sale partner.

And we'll also have a partner Bank sharing in those loans.

So I said eminently and it's just, we're just in the paper in the paper stage where those are, are working as hopefully as quickly as they can to put that one to bed.

With respect to addition, additional partners.

There's been about 30 or so that we've been talking to and I think the constraint has just been how fast we're going to be able to do the paperwork to to sign them up.

Okay, great.

And how, related to that, how should we think about the origination trajectory in the US and the balance sheet growth over the course of the year?

You know, it does, it is it a gradual acceleration kind of evenly each quarter or you know, is there, you know a point in the year where you think it really starts to significantly pick up.

Well, it's sort of quantum jumps in growth depending on how fast we sign up the partners.

Right now we're looking to have on balance sheet about $250 million by the end of the year.

And that would be sharing at least 50% with other Banks.

So in total as an administration about $500 million and it may grow a lot faster depending on how quickly we can get the paperwork done.

And if I can get one more, please.

What is the expense outlook for next year?

Once we exclude some of the one timers you guys reported are most of the costs associated with running the US business now in the run rate or is there kind of another lift, to the expense base of some of these customers?

Most of the expenses are now in the run rate in that.

We've hired almost everybody.

We need to run the US.

We may have a couple more to put on, but the heavy hitters are already on board.

Perfect.

Okay, that's all for me.

Thank you.

Thanks, Tim.

Next question will be from David Feaster, Raymond James.

Please go ahead.

David.

Hi, good morning, everybody.

Good morning, David.

One thing that you touched given the growth governors on the US expansion.

You all are going to be syndicating some loans out to be able to support the growth, but not necessarily have all on balance sheet.

I'm curious where you are in the build out in that process and the platform.

And whether you've started to test that yet?

Well, we built it, it's called AM S3 0.0. That's short for asset management system.

3.0 Canada, we use a MS 2.0 it's in the cloud facility in Des Moines Iowa at the Azure facility and it's fully functional.

Yeah, it's also on the syndication side, it's also able to parse each individual loan.

So the component parts so that we'd retain on our balance sheet, our partners would retain.

So that's all set to go.

We're just waiting for the finalized documentation for the first brand new point of sale partner.

Hopefully, that's very soon.

And then the data starts to flow, representing the loans being parsed for us and for our first community Bank partner.

Okay and then you touched on some of the differences too between kind of the small ticket opportunity and the larger ticket opportunity.

I'm curious maybe where are you focused in the US currently?

Like where do you see the most opportunity here?

Is it in the smaller ticket or maybe some of the larger stuff?

It's mainly the larger stuff.

Although our software is capable of dealing with it, tiny loans too.

But the sweet spot is the larger ticket items such as Home Improvement new HVAC systems, that sort of thing.

That's I think United States would be quite similar to what we experience in Canada.

About 50% of our point of sale portfolio is Home Improvement.

Okay.

And you talked about 100 basis point, better spread in the stage.

Do you see more opportunity?

Is that on the funding side or is it on the loan yield side?

And then, just kind to the funding side you touched on the election and the potential tailwinds maybe for some from digital currencies.

Curious, if there's any interest in bringing back CDV and that opportunity.

Well, good point.

We've seen on the test market we did in the United States, we got better yields and we got lower cost of funds to give rise to that approximately 1% additional spread.

So it was both on the yield and on the funding side with respect to DRTCS technology that we did, we announced about four years ago.

We were quite proud of it.

What we call VUSD and VCAD, our digital deposit receipts on Algo and Stellar and Ethereum.

And we had it so two reviewed and obtained SOC two type one rating.

So that technology is all set to go.

But Paul Masson, as George said, no wine before it's time.

I thought the regulatory environment wasn't mature enough to receive that product, but it appears with the Trump appoint or two pending appointees and the, it looks like a favorable environment for digital commerce that this product that we have that's been tested and actually fully functional would, would be sort of wonderful for the small five in the United States to use.

And we're ad RG stands ready to provide that service for them with respect to our own Bank.

We have such wonderful access to cheap deposits through the large brokerage firms.

There, there isn't a lot of need for us to adopt that.

And now we have our work sort of cut out for us expand the RPP program.

But DRT Cyber could provide that service to other small Banks, community Banks that don't have this, the water flex as we do to very cheap funding.

So it'd be a product for DRTC and sometime in the future, it may be something that you, we our US Bank adopts to, but there's any any burning need for our Bank to adopt it.

Okay.

And then maybe if I could squeeze one more in you, touched about increased, put backs to your partners in Canada and we're really validating your business model.

And that's great.

You've had no credit issues.

But I'm curious maybe how is this impacted the partners in Canada and the health of their balance sheet and their ability to absorb those losses so far.

Well, so touch wood.

They've all been able to do that.

We tend to pick the strongest point of sale partners.

We can and they've been dealing with it.

It's sort of the inevitable, downturn some people in Canada calling it a recession.

And considering our trustee deposits have increased by 20% year-over-year, that's a big number for that.

It's a 20% increase in Bankruptcies.

We probably are in a bit of a recession but our, our partners have stood up seem to be fine.

They're all sort of eagerly awaiting perhaps a jumbo decrease in the overnight rate in Bank in Canada.

That's got that might be announced on Wednesday.

So generally speaking, our model is held up wonderfully and it's a slow growth with a record high put backs is this year and our partners seem to be in good shape and if the Bank get drops the rates as people are hoping to predicting, then that might return us to that upward sloping yield curve again where we were scoring about 300 basis points in that interest margin.

So, sort of stay tuned.

I hope Wednesday is a good news for the case.

That's great color.

Thanks everybody.

Thank you.

(Operator instructions)

Next question will be from Andrew Scutt, Roth Capital Partners.

Please go ahead, Andrew.

Hey, good morning guys and thank you for taking my questions.

First one for me, you guys saw the return of growth in your CRE portfolio.

I know you guys been recently kind of right sizing that portfolio, maybe changing up the mix if you kind of talk about how you feel about the portfolio where it is now and then maybe provide some additional color on the CMHC portfolio.

Absolutely.

So this portfolio is almost all composed of loans on residential properties and there's two types one we call conventional loans.

So these are the normal loans that Banks have made over the years that are are risk rated fairly highly.

This would be multi family normally construction, apartment blocks, construction and some low rise and because of the high risk waiting and this is a little additional risk involved.

We're running a loan to value ratio around 60% on these.

We pivoted over to CMH C insured construction mortgages and this these are wonderful in that they're 0% risk rated.

So don't absorb any CT one capital and match really nicely against our, our floating rate trustee deposits on average, we pay about a prime minus 285 on those.

And we are in maybe prime minus 20 on the CMHC.

So we're making about 265 basis point spread on a zero risk weighted asset.

No capital required.

That's the portfolio that John talked about that.

We have a 600 million right now and committed facilities to draw down in 2025 almost double what we had last quarter.

We're looking at probably that figure increasing by the end of 2020-2025 say to $1.5 billion or maybe even two.

So it's a really wonderful opportunity for us to help with the construction in Canada, but not take hardly any risk for the government insured and get a really good right of return.

Great.

Well, thank you for the additional color.

And then second one for me, you've kind of expanded on this earlier, but you know, as you look out in 2025 can you kind of just talk through the pipeline of business activity for DRTC?

Well, PRTC, cyber security business has been growing quite by the sign up of new customers quite dramatically.

We've signed some really big well known names and that the revenue hasn't flowed into the statements yet, but are not all of it's starting to come in.

So this increased demand for dot C cyber security product amongst the big players, the brand name, retailers and and other financial institutions.

But the product that we have in DRTC that we just sort of kept under wraps for a while pending a more favorable regulatory environment is the ability to issue digital deposit receipts.

So this is the state of the art and I was just for the conference where we very smart individual pointed out there's a huge difference between a stable coin that's backed up by asset or a deposit held by somebody else and an actual digital deposit receipt which represents the deposit held by a real Bank.

And we developed this technology about four years ago and proved it all out and tested it and had it audited.

But we just kept on the shelf until the right time, but it looks like it is the right time.

So we could host this for, thousands of community Banks in the United States and bring them to this new state of the art way to raise deposits, let their customers have the deposits in wallets and such and transact business in almost negligible fees.

And it's almost instantaneous.

It's state of the art payment vehicles say they are deposits.

For example, they say you bought Bitcoin is 1,000 bucks and you see that 100,000 bucks and you like to swap it into a Bank deposit.

Well, that could be done seamlessly in your re wallet with our V, the USD product or V cabs, courtesy of our technology and our versal.

So I was quoting George Orwell a while back saying no wine before it's time.

And that's why we just did promoted or it just kept on the shelf because the regulatory environment had to mature and regulators had to get the rules in place.

And I think regulators would like Banks to issue these types of products rather than the unregulated entities that have in some cases, got into trouble in the past.

So it's a service for DRTC to provide and I pretty excited about it.

I think it's something that a lot of community Banks will want to take us up on.

All right.

Yeah, that sounds like a wonderful opportunity.

Congrats on the growth and thanks for taking my questions.

Oh, well, thank you, Andrew.

Look forward to talking to you later on.

(Operator instructions)

And at this time, Mr. Taylor, we have no other questions.

Please proceed.

Oh, really?

Well, I'd just like to thank everybody for joining the call and look forward to talking to you at the end of the next quarter.

Stay safe.

I'll have to put some Suntan lotion here being a cloud based Bank and a US operation.

Now, I've got the luxury of operating anywhere in North America and today it's a very sunny day in Lauderdale.

Thank you.

Bye.

Thank you, Sir, ladies and gentlemen, this does indeed conclude your conference call for today.

Once again, thank you for attending.

And at this time, we ask that you please disconnect your lines.