Good morning, ladies and gentlemen, and welcome to VersaBank's First Quarter 2022 Financial Results Conference Call. This morning, VersaBank issued a news release reporting its financial results for the first quarter ended January 31, 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 the additional 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 one 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 analysts made by VersaBank's management. Actual results could differ materially from our expectations due to various material risk and uncertainties associated with VersaBank's businesses. Please refer to VersaBank's forward-looking statements advisory in today's presentation. I would now like to turn the call over to Mr. David Taylor, President and Chief Executive Officer, VersaBank. Please go ahead, Mr. Taylor.

Thank you, Chelsea. Good morning, everyone. And thank you for joining us for today's call. I had the pleasure of hosting this morning's call from New York City, where I'm participating in Keith Burnett and Woods Synteq payments conference. And yesterday, spoke on a panel entitled how technology can advance fundamental banking. I can't think of a better panel topic to speak on. A recording of that panel will be available on our website later this week. Joining me today for today's call at our headquarters back in London, Ontario is Shawn Clarke, our Chief Financial Officer. The first quarter of fiscal 2022 saw the continuation of the momentum that drove a record year for VersaBank in 2021 as, once again, our core banking operations delivered strong year-over-year growth in both loans and net income. We achieved another record loan portfolio at quarter-end of just over $2.2 billion, up 24% year-on-year and 5% sequentially, while net income grew 5% year-on-year. And 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. Some other headline results for Q1. Total revenue increased 18% year-over-year, and was essentially unchanged from Q4. Cost of funds decreased 13 basis points year-over-year, and two basis points sequentially to 1.29%. And net interest margin was down nine basis points year-over-year, but up four basis points sequentially to 2.77%. Notably, our cash balances returned to historic levels in the first quarter as we continue to deploy funds to interest-generating loans. Shawn will discuss the financials in more details in a moment. Q1 also saw a number of other highlights. Most notably, we completed our closed ecosystem testing of VCAD. The bank's Canadian Dollar version of its revolutionary, highly encrypted digital deposit…

Thank you, David. Just a quick reminder, folks, that our full financial statements and MD&A for the first quarter of 2022 are available on our website on the Investor Relations section, as well as on SEDAR and EDGAR. And as David mentioned, all the following numbers will be noted in Canadian dollars as per our financial statements, unless otherwise noted. We do offer U.S. dollar transformations of our key metrics in our standard investor presentation, which will be updated for the first-quarter numbers, and posted to our website very shortly. Starting with an overview of the balance sheet, total assets at the end of the quarter was $2.4 billion, up 18% year-over-year and unchanged from last quarter. Our cash balances, again, in Q1 were a $155 million, returning to more typical historical levels at 6% of total assets, down from $272 million or 11% of total assets last quarter, and down from $212 million or 10% of total assets last year. The decrease was the result of the bank deploying our temporarily elevated cash balances into higher yielding loans. Loans were up 24% year-over-year and 5% sequentially to $2.22 billion, representing another record for loan balances. I will note that the bank has achieved continuous quarter-over-quarter loan growth since Q3 of fiscal 2020, shortly after the onset of the pandemic. Looking a little more closely at the composition of our loan growth, our point-of-sale financing portfolio was up 43% year-over-year and up 13% sequentially to $1.4 billion. The increase continued to be driven primarily by strong demand for home finance, auto, and home improvement receivable financing. For additional context, point-of-sale financing represents 65% of our total loan portfolio as that January 31, 2022, up from 61% total loans last quarter. Our commercial loan portfolio contracted 2% year-over-year and 6% sequentially…

Thanks, Shawn. Q1 was a very solid start to fiscal 2022. We saw the continued momentum or existing digital banking operations, as well as a strong year-over-year growth from DRT Cyber. We expect this momentum to continue throughout the remainder of the year with a baseline of growth from these operations in line with 2021 with some potential upside. Demand for these types of goods and services that are financed to our point-of-sale business remains strong in Canada, and we are noting what appears to be a resurgence in commercial spending. On the deposit side, we expect a return to sequential growth of our insolvency deposits as the pandemic-related government support payments end. And I want to note here that the bank additionally benefits in the short-term during a period of rising interest rates. In our cybersecurity service business, we have a solid momentum that we expect to continue into 2022. You will note that a moments ago I referred specifically to existing digital banking operations. That is because in 2022 is a year in which we expect to meaningfully expand our point-of-sale finance business. On our last call, I talked about the opportunities to bring to our unique point-of-sale financing model, which has been so successful in Canada to the 1.8 trillion US consumer finance market. It's a market where we see same potential for success that we did in Canada a decade or so ago. But obviously, many, many times larger, and with a proven solution that we know addresses the unmet needs. We are steadily making progress with our plans. And with that, I'd like to open the call for questions. Operator.

Thank you. Ladies and gentlemen, we will now begin the Q&A session. [Operator Instructions]. You will then hear through tone prompt, acknowledging your request and your questions will be pulled in the order that they are received. [Operator Instructions] One moment, please for your first question. Your first question comes from William Wallace, from Raymond James. Please go ahead.

Good morning, guys. Thanks for taking my call, I mean my questions. Dave, maybe just starting with where you ended. You said you're making steady progress, I believe, on your plans to enter the U.S. with your point-of-sale business. Could you provide some more specific commentary around what needs to occur for an actual entry into the U.S. and where you stand from a timeline perspective and how maybe that industry might look?

Yeah. Thank you, William Wallace. Wonderful weather here in New York City. Well, we've incorporated a company we call Versa of finance to serve as a lending platform. We've identified at least three potential new customers and our team has been working with the lawyers on documenting our program. There's some differences between the Canadian law and U.S. law, and that's sort of what slowed it down, but we're just in the stage now of finalizing the legal documents. So it shouldn't be too much longer before you see us book the first deal and the same. There's a few more in the hopper that will follow after that now that we've settled on the legal documentation.

So do you think that could be a fiscal this quarter announcement?

Yes. We're looking for this --

Okay.

I was hoping it would be the first quarter, but [Indiscernible] through the legal new launches take a little longer than we expected.

Okay. But you feel like you've gotten through that process now and we could expect to see some sort of announcement, this quarter with your first partner, at least your first partner in the U.S.

That's right. Well, and then after that, it's not only about the legal work sorted out. And then it's up to our team's marketing efforts.

And based on -- it sounds like you have identified three customers, just based on their volumes, any willingness to give us a sense as to how big of a splash you could, you could enter the US with from a volume perspective or is that putting the cart in front of the horse?

Little early to say. With the -- as I said in the comments, what we're calling our baseline growth is about the same as we experienced last year and that was about 43%. That's based on the Canadian customers. U.S. will all be incremental to that. And it's hard to put a figure on it right now, but next quarter or I should be able to do that and that we'll have some real live customers.

Okay. And then you also mentioned towards the end in your commentary, I think you said what looks like a resurgence in commercial spending. Are you referencing the commercial real estate business or are you talking about small business or something in the point-of-sale side? You are talking about the point-of-sale.

Commercial equipment. Yes. It was quite a sensation in small business spending with the pandemic. There's more in the offset of course by a lot of spending in the retail area primarily on home improvement that sort of thing. But now we're starting to see some commercial spending coming back, finally, this pandemic certainly taken its toll on small business in Canada.

Okay. Great. And then I just wanted to shift gears and talk a little bit about VCAD and the SOC 2 audit. we're delayed on the launch the SOC 2 audit is a pretty structured and formalized process. Is that correct?

Yeah. Absolutely.

So where are you in the audit process itself, and how soon do you anticipate completing the audit?

[Indiscernible], if you'd asked me that last quarter, I get a [Indiscernible] fewer heaps [Indiscernible]. I'm still saying a few weeks. It's taken a lot longer than I had expected. However, I ask your [Indiscernible] who was in-charge that area. And he is looking for a few more weeks. This was a self-imposed requirement that we placed for ourselves thinking that for brand-new product for the world [Indiscernible], that it would be good that our customers and our regulators would know that a third-party reviewed it with a stringent SOC requirements. So, yeah, maybe a few more weeks. There was a delay in actually physically reviewing our facility that the COVID restrictions in Canada brought about. But that's behind us now.

Okay. And then -- so assuming this is done within the next several weeks, what does the commercial launch look like? Will you launch with multiple customers that will be offering your VCAD Stablecorp alternative? Will it be all launched at once or will you just say we're launching, and then you have to go and start working on the customer agreements, etc. Just help us think about what the launch might look like once this audit is complete.

Our partners, Stablecorp, has already lined up customers to purchase the VCAD. So that's -- they are just still waiting for us to be able to issue the VCAD to them. So immediately, when we're ready to go, we will be issuing VCAD to Stablecorp. And they in turn will be issuing VCADs to their customers. They also announced some time ago that their QCAD s would swapped into our VCADs. So as soon as we're ready to go, Stablecorp's ready to go. So that's the first. And there's some others that have contacted us about also distributing our VCADs for USD and perhaps case sterling and the euro. So soon as we get them the green light, I'm sure Stablecorp's -- they have an account open with us and they're all set to ago.

Okay. And then as it relates to the USD, that would just be a potential kind of tack on offering, right? You wouldn't need to undergo a whole additional audit for that specific DDR?

That's --

Would you?

Yeah. That's exactly right. It's -- in fact, we already have the USDs on the block chains for the close of testing. Now we only issue in Canada of course. So you know the denomination is U.S. or it could be sterling in Europe too. It's just issued in Canada to Canadian purchasers via Stable Corp to start with. Thereafter, we are looking into United States to acquire a bank this year, we are engaged in discussions on that topic, but presently, the coins are just being issued in Canada.

Okay. Great. So it seems like this quarter could be I guess hopefully and potentially a quarter with some kind of meaningful progress on these two new sort of initiatives that we've been talking about --

Yeah.

Since the IPO.

Exactly William Wallace. Sorry, it's taking longer than I expected, but with legal work and accountants, doing the SOC audit and COVID with the second shutdown or restrictions in Canada, it slowed it down a bit. The other one that we didn't mention was our Instant Mortgage. That seems finally we may have a mortgage administration company lined up to look out to the administration for us. That may very well get this quarter too.

Okay. Great, I have a few more questions, but I'm going to hop out and let somebody else ask some of that. If they don't get asked, I will come back later. Thank you very much for your time. I appreciate it Dave.

Thank you William Wallace.

Thank you. [Operator Instruction] And your next question comes from Greg MacDonald from LodeRock Research. Please go ahead.

Thanks. Good morning, guys. How are you, David?

Very good, Greg. It's a nice, sunny day here in New York, and thankfully, I am overlooking Central Park.

[Indiscernible] and the temperature is probably a little warmer there.

[Indiscernible]

Thanks for taking my question. I wanted to ask one on DRT. You talked about -- so revenue growth, 36% year-over-year, you talked about the sustainability of that, and "heightened threat alert " makes us all come back to this as an important topic and realize that this is possibly a scenario where demand is outpacing ability to provide service for cyber security companies. Can you talk a little bit, just give us a little bit of an update on DRT? I'm sensing demand must be great, but this is a human resources business at the end of the day. Give us just an update on how things are going with respect to growth, with respect to ability to staff, things like that.

Well, you're absolutely right that the penetration testing side is dependent on people. And I think everybody in the IT software industry, knows it's been harder and harder to retain and acquire new IT people. We've done fairly well. London is a popular spot for people to live. So we've got that going for us. We introduced options for our staff, which has become standard in the software industry to encourage people to stay with us and prosper with the increasing value of the shares. So we're -- we, I suppose, we, the industry, we're doing much better with retention and obtaining staff. But on the penetration side of our key business, it is somewhat human dependent. We have other cybersecurity products that are highly scalable. So that isn't so human dependent and we're hoping that folks who are, as you say, subject to higher degree of tax will take us off on our machined [Indiscernible] products. Basically, give them a heads up that someone's trying to hack into their systems. So we continue to see a tremendous growth area for DRTC. One area is subject to -- dependent on hiring in human, so we think we've got that covered with an attractive for compensation package. The other products we have are highly scalable and not very dependent on human.

Okay, thanks for that. And sense of growth profile on the topline, is this still primarily a Canadian business, i.e., Canadian corporations serving Canadian government agency serving or have you made success moving into the U.S. market yet?

We have a lot of U.S. customers. A number of states are using us for their 911 service. A lot of police departments here in United States are using us. And above the 350 or so customers that we have, a good portion are in United States and it's just what you'd expect, it's critical services, the utility companies, rail lines that use. So we're quite prevalent in the United States.

Okay, thanks for that. And then just a quick question on the instant mortgage products. You've expressed some opportunity for attractive growth there in the past, and it's nice to see that from an administrative perspective that products ready to roll. Any sense of -- From what your loan origination partners are talking about, any sense of change in optimism for growth there? Is it an avenue that you think you're more optimistic about now? It's a new product, right? So any updates that would be helpful for us?

Well, we are very optimistic about it. The hold-up for the Instant Mortgage itself was finding a mortgage administration company that could look after the mortgages for us. As you know, our modus operandi are to partner out those types of activities. And it looks like we have one that's came to work with us. It's hard to say what the growth potential is, but it looks like a lot of demand. Mind you, that could end pretty quickly. As you know, Greg, in Canada, we're looking at a highly unusual increase in property values, and very well could be a settling back or pricing, and maybe the demand for mortgages will settle back. But right now, it's a huge demand.

Also a highly unusual increase in immigration which works in its favor.

Yeah, absolutely. And this is primarily what is the mortgage is aimed at for those that want a convenient way to obtain mortgage financing at the point-of-sale, of course. So --

Yeah.

It's designed for new Canadians.

Great. I'm curious to see how that product rolls out it's imaginative and I think it's very interesting. Thanks very much, David, I appreciate the answers to the question. I'll pass it on.

Thank you, Greg.

Thank you. [Operator Instructions] And your next question comes from William Wallace, from Raymond James. Please go ahead.

Hey Dave, good to see again.

Yes.

I just wanted to maybe follow-up a little bit on interest rates just for us, Americans, who maybe are unfamiliar with the interest rate policy in Canada. As we look at the U.S. Fed likely starting to increase rates this month, how typically does the interest rates in Canada follow? And remind us how the point-of-sale loans are priced and what you would expect from a margin perspective, whether it's NII percent growth or a margin basis point expansion for every move that we see in rates, whether it's [Indiscernible] Canada or Fed or whenever, however you would.

Well, I think there's a long history of banking in Canada following the Fed for they were an interest rate increases. So it's not a certainty, but there's high probability that Fed increases rates, banking will increase too. Our portfolio is structured so that about a 155 basis point increase. A lot of that goes straight to our bottom lines and that we -- a good portion of our deposits are priced at prime minus four. So it takes about a 165 basis points before we start paying additionally on our deposits, but we have like $6, $700 million of prime-based loans that go up immediately. So we're positioned, I think it might like most banks, but I think an increasing interest rate environment is positive for us. Secondly, like all banks, we hold a lot of liquidity and Merrill earning next to nothing on the liquid assets so we'll benefit on that. For as usual, rates are extremely low now at a take. Move up a little bit. 150 basis points, say, [Indiscernible] next year to, and that's all good for us. With respect to the point-of-sale financing, they're priced over government Canada bonds, which tend to correlate highly with our fixed rate deposits. So the margins should stay about the same. They'll participate any compression should positive rates go up at the same rate as government Canada bond yields do to so margins there should stay the same. The other portfolio I was referring to is the real estate portfolio, the prime-based portfolio. And that's the one where you get to boost.

How often do the real estate loans re-price?

Well, they're almost all prime-based, so they re-price instantly. If the government kind of puts the rates up that day, bonus for [Indiscernible] over it, but for quite a few years now, we banks have suffered with having rates extremely low. So if rates move up a little bit, it means that our net interest margin will go back to historic levels around 3%.

Okay. Perfect, that's very helpful. Thanks very much. And then I believe Shawn mentioned in his remarks something about on-site visits being delayed, was that around -- was that specific to what's going on with DRT Cyber should we expect a bounce back in fee income or was that specific to something else, I apologize for missing --

No, that is a -- you've got it right, with DRT Cyber and with the penetration testing, our guys do a lot of on-site visits that's why it's human-intensive, the penetration side of the business and two things would have slowed that down this quarter. One is the holiday season. Folks don't tend to invited them to do our penetration testing during the festive season. And the other thing with these COVID lock-downs we encountered here in Canada, that slowed down the on-site visit. It's also what slowed down the SOC audit -- SOC 2 audit in that the auditors wanted to physically visit our facility and where it's located there was some stringent pandemic lock down, but that's all behind us now. Hopefully it's behind us for good. These lock downs have been quite disrupting.

Thanks for that commentary. So in the DRT Cyber, any delayed site visits due to COVID lockdowns, can you catch back up on that in one given quarter or is the nature of staffing, etc., such that everything just kind of gets pushed back.

I think we'd be catching it up this quarter. Some seasonality to it that those mentioned are brought by the holiday season. For this, typically, Q1 for DRTC is lower revenues and activities and then Q2, Q3, and Q4, it should make it back and then we've got these other products too that we're introducing. We have the ongoing cyber surveillance so that when we do identify weakness in a corporation or government's cyber security, we can present them with a solution, not just to patch it, but also to give them the assurance that henceforth, that someone is trying to get in, they'll know about it while they're knocking on the door.

Okay. Thanks so much for taking on my questions. I really appreciate your time. That's all I have. Take care, Dave.

No problem at all, Willy. Where abouts are you calling me from?

I'm sitting in Richmond, Virginia.

Perfect. So pretty close to where I am, I suppose. You're getting the nice weather too.

Yes, sir. Yes, sir, it's nice.

Excellent.

Thank you. Your last question comes from Trevor Reynolds from Acumen Capital. Please go ahead.

Good morning, Dave.

Good morning, Trevor

Just I think most of the questions have been covered. I was just wondering if you could give us an update on the Indigenous Infrastructure and Housing initiatives that you've rolled out in the summer.

Yeah. We're sure working on it. It is taking longer than expected too. I would love to get some home financing on the books for indigenous Canadians, so we think that's a huge demand forward. Robert Falcon Ouellete is our man on the job there and he's involved in the project and they are all keen to get it started. No loans yet, which is at this point for me particularly in the Arctic, as I was telling the guys the other day, if we don't hurry up and get something going the ice roads are going to melt they're going to fail to deliver the materials. So if anybody is listening on the line there, they know what I'm talking about. We'd love to provide you with financing, get you homes, but they've got to speed it up a bit.

So definitely taking longer than you'd anticipated when you rolled this out?

Yeah. This progress is [Indiscernible]. Our team is working on it with their counterparts. And are working -- sorry, if they can't. It's just everything seems to take a little longer and a little longer. So there's sure a huge event for an instant mortgage works quite well. It's adaptable to serve the Indigenous Community with mortgage financing. So that's what Roberts 's got going. With some other counterparts aside, we've got some good partners working with Robert on this.

How big do you think this could get?

Well, it's hard to dream. I'd say they'd be at least $600 million of indigenous from financing. That's the demand. Whether we get it all or not is another question. But in the past, we provided a lot of finance, particularly the Canadian Arctic. As you've mentioned, infrastructure projects since the schools and hospitals, some pipelines and lines, all kinds of good projects we did in the past. But some reason, it takes a little longer to fire that backup, longer than I would like.

Got it. And then maybe apologies if I missed this, but just on the DRT side has it -- maybe just an update on how those reseller agreements are working.

They are working well. Some of those products have alluded to come through our reseller arrangements. And it gives almost a complete suite of Cyber security products. There's is a couple of more add - ons I'd like to get. I will talk about that maybe in another quarter, but yeah, we have a wonderful relationship with our partners in relations.

Perfect. I appreciate it. That's good for me. Thanks.

Well, Thank you. Thank you, Trevor. What's it like in Calgary?

It's warmed up a bit, but probably it doesn't sound like it's as nice as where you're sitting today.

I will be back to the frozen North pretty soon, probably tomorrow.

[Operator Instructions] And there are no further questions at this time, Mr. Taylor, you may proceed.

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 year-end -- well, next quarter results come out. Those we're talking, look forward to some press releases this quarter on these key projects that we've been working on. Thank you again.

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines. Have a good day.

Thank you.