Good morning, ladies and gentlemen. Welcome to VersaBank’s Third Quarter 2022 Financial Results Conference Call. This morning, VersaBank issued a news release reporting its financial results for the third quarter and year-to-date ending July 31, 2022. That news release, along with the Bank’s financial statements and supplemental financial information, are available on the Bank’s website in the Investor Relations section, as well as on SEDAR and EDGAR. Please note that in addition to the telephone dial-in, VersaBank is webcasting this conference call live over the Internet. The webcast is listen-only. If you are listening to the webcast but would like 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, for today’s call will be archived for replay, both by telephone and via the Internet, beginning approximately one hour following completion of the call. Details on how to access the replays are available in this morning’s news release. I would like to remind our listeners that the statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by VersaBank management. Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank’s business. Please refer to VersaBank’s forward-looking statement advisory in today’s presentation. I would now like to turn the call over to Mr. David Taylor, President and Chief Executive Officer of VersaBank. Please go ahead, Mr. Taylor.

Good morning, everyone, and thank you for joining us Q3 call. With me today is Shawn Clarke, our Chief Financial Officer. Before I begin, just a quick reminder regarding the adjustments we made last quarter to the way we are describing our business and our quarterly results. These include breaking out non-interest expense into its component Digital Banking and DRTC parts to provides a clear picture of the individual performance of each of the operations and enabling better comparison to our peers in each sector. In addition, within our Digital Banking operation, we now present net interest margin based on both total assets as this convention with publicly traded banks in Canada, as well as excluding cash securities and other assets from total assets as is the practice of U.S. banks. Finally, we began report our efficiency ratio for only our Digital Banking operations, which excludes the impact of DRTC. Now onto the results for the quarter, which are reported and will be discussed on this call in our reporting currency of Canadian dollar. I will note that we provide U.S. dollar translations for most of our financial numbers in our standard investor presentation, which will be updated and available on our website shortly. The third quarter saw outstanding loan growth in our core Digital Banking operations as a 75% year-over-year and 24% sequential increase in our Canadian Point-of-Sale financing business drove our loan portfolio to another new high at more than $2.8 billion. And I will note that 75% year-over-year growth betters very healthy 51% year-over-year growth in the Canadian Point-of-Sale portfolio last quarter. It is worth mentioning here that we feed this growth with essentially no impact on our interest margin and without relaxing our stringent credit. The continued growth in our loan portfolio drove record quarterly revenue…

Thank you, David. Before I jump in folks, just a quick reminder that our full financial statements and MD&A for the third quarter and year-to-date 2022 are available on our website under the Investor Relations section, as well as on SEDAR and on EDGAR. And as David mentioned, all of the following numbers are reported in Canadian dollars as per our financial statements, unless otherwise noted. Starting with an overview of the balance sheet, total assets at the end of the third quarter surpassed the $3 billion mark for the first time, $3.1 billion, up 35% from $2.3 billion at the end of Q3 last year and up 14% from $2.7 billion at the end of the second quarter of this year. Cash and securities at the end of Q3 was $218 million or 7% of total assets down from $297 million or 13% of total assets at the end of Q3 last year, and up from $198 million or 7% of total assets at the end of Q2 of this year. These trends as a result of the bank deploying cash into higher-yielding lending assets and low risk securities over the course of the quarter. Our total loan portfolio at the end of the third quarter grew to another record balance of $2.81 billion an increase of 44% year-over-year and 15% sequentially. I’ll come back to this in moment. Book value per share increased 8% year-over-year and 2% sequentially to $12.14, which is also a record for the bank. These trends were both a function of higher retained earnings resulting from net income growth, partially offset by dividends paid with a year-over-year increase also being impacted by our common share offering in the U.S. last September. Our CET1 ratio was 12.51% up from 11.94% at the end of Q3…

Thanks, Shawn. Finally, before I opened the call up for questions, a quick update on our Canadian Digital Deposit Receipts, which I know is of great interest many of you, and which represents a significant opportunity with our low cost deposit funding strategy. But before I do that, I want to be clear with respect to VersaBank’s exposure to the so-called cryptocurrencies. Quite simply, we have not. We hold no such assets. We never have. Accordingly, our balance sheet has in no way been impacted by the meltdown in the cryptocurrency market. If anything, we expect to benefit from this meltdown. Our Digital Deposit Receipts represents an attractive alternative to the unregulated stable coin market. With the goal of providing individuals and businesses with a highly encrypted interest earning digital deposit with a federal regulated bank that can also be used for transactional purposes. Recently, the Canadian Office of the Superintendent of Financial Institutions published an advisory entitled Interim arrangements for the regulatory capital and liquidity treatment of crypto asset exposures. VersaBank applaud OSFI’s leadership in this regard, as we fundamentally believe that a regulated industry is the best interests of the users of the digital currency. We are confident that our Digital Deposit Receipt model is consistent with the content of OSFI’s advisory as we continue to evolve our model amidst the changing macro environment. We look forward to providing updates on our progress towards commercial launch as we continue our constructive discourse with OSFI to ensure their prudential comfort. Our cybersecurity business and DRTC continues to accretive to the Bank’s overall earnings, although still relatively small part of our P&L. DRTC overall plays a critical role in our competitive advantage as a digital bank, combining technology development for our own internal benefit with a significant growth opportunity and…

Thank you, Mr. Taylor. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Greg MacDonald, LodeRock Research. Please go ahead.

Thank you. Good morning, David. Good morning, Shawn. How are you guys?

Pretty good. Thanks, Greg.

Hey, I just have two questions and then I’ll pass it on to the others. First is on DRTC. You talk about a sequential decline in revenue and then the press release itself talks also about growth continue to be expected in that business, specifically benefiting from investments made in 2022. Can you just talk overall about the business outlook there? And is that specifically the issue, it’s getting a number of products in the suite, that kind of sets that business up for growth? Is that still a business that we should expect double digit growth on a sustainable basis? And then I have a second.

Well, there is some seasonality in the DRTC’s business particularly with DBG our digital penetration tester. So we expect towards the end of the year, it’ll come back as it does normally. Some of the new products that we’ve been working on have now been launched and have been quite well received. I think we’ve got at least one contract signed and maybe two more to go. So we’re pretty excited about that positive and that some of these products took a little while to develop. There’s another aspect to the testing we do that we’ve been engaged by a very large Canadian corporate. And there’s a lot of revenue associated with that. So generally speaking, what we’ve been working on speaking the skunk works [ph] has now coming to market ready products. And in fact has been contracted by some parties already. So it looks very good for DRTC.

And is pen testing still the major demand in that business?

It is now, but there’s another aspect to pen testing, app testing is an area that we’re growing in quite rapidly. And then this compliance with anti-SPAM legislation software that we developed is very popular too. So that’s something we developed internally and seems to be very well [indiscernible] by the marketplace.

Okay. Thanks for that. And the second is on the insolvency deposit strategy. This is something that’s interesting to me. I would’ve expected more small business failures to drive more insolvency growth. And we haven’t really seen that, but increased interest rates is certainly – almost certainly going to drive consumer insolvency. Can you talk, you stated specifically that you expect growth in early 2023, which suggests to me that you’re getting some signals from the market. I know you’re adding partners, but can you talk generally about what you’re seeing there, and the level of growth you expect in that part of the deposit structure?

Well, we are still the first – Statistics Canada’s reporting, we’re still about 10% less than normal insolvency Canada, but that’s often 35-year low. So the 10% less tends to dampen the deposits that we raise in that area. And also there’s quite a lag effect. So we’re still seeing a little contraction in our deposits, even though we’ve signed up some new partners, the 35-year low is still sort of impacting our deposits now. I expect, I think as most people do [indiscernible] increasing interest rates going to create a fair amount of hardship for people and small business living on the edge. And that’s – there’s 10% below normal insolvencies and proposals will probably get up to 10%, 15% above normal and with about a six months lag put to 2023 within – with significantly increasing deposits.

Okay. That’s helpful. Thanks, David. I’ll pass it on.

[Operator Instructions] Your next question will come from Bradley Ness of Choral Capital. Please go ahead.

Hello gentlemen, can you hear me?

Sure, can, Brad.

Great. I just wanted to delve a little bit into these $3 million of the transitory costs. Can you break that down for me a little bit?

Yes, certainly, Brad. About 60% of it would be legal and consulting primarily to do with the Stearns acquisition and the refinement of the U.S. receivable program. That’s about 40% or so that’s associated with savings we got renewal of our directors and officers liability insurance. But when we listed on the NASDAQ, we agreed to our premium of about $3.6 million per year for the – for that insurance and we subsequently renewed it with about a $2.1 million savings in August just now. So those are real – they’re really transitory costs and certainly, we can look forward to about a $500,000 per month reduction in D&O expenses to do with the NASDAQ. There was also some NASDAQ costs that we had used to outside parties to do the reporting. And now, we’re doing that internally.

Okay, great. Thank you. And I’m just trying to look at my math here. You said the $500 reduction per month, so that’s $3 million right there. And that just related to the D&O expense?

No, sorry. That’s $500 per quarter. It was $2.1 million.

Oh, you said per quarter.

Yes.

Okay. Per quarter. Got it. So that should fall off in August. And would the other 60% of that $3 million basically fall off once you complete the acquisition you think?

Absolutely. Yes. It may tail off a little bit in the quarter room now and that we’re very close to submitting the application, the OCC in the Fed for the acquisition. But I can’t say for sure with legal expenses we know what will occur a little bit, but we believe we’re sort of at the tail end now of the creation of the application and the consulting fees and the legal should tail off and diminish in first part of 2023.

Okay, great. Thanks. And regarding the DRTC, it seems like revenues been flat, but expenses have grown $1 million versus the year ago quarter. It does seem like you’re incurring some VCAD expenses in there. Is that correct?

VCAD expenses and expenses respect to the sort of skunkworks type projects that we’ve got going on in DRTC. So yes, we’ve got some – we think some exciting projects, but we’re not ready yet to reveal it.

Okay. And when I think about how you divided up the bank with the digital bank and DRTC and financial reporting, if you’re incurring a fair amount of costs from VCAD in DRTC, is that where the VCAD is going to show up entirely is in DRTC is it just going to be partially in DRTC?

It would show up in the bank, it’s a bank product, but DRTC is providing the service. So there’ll be a service agreement between DRTC and the bank. Basically the DRTC owns, we call VersaVault and VersaVault is a key technology for the issuance of these Digital Deposit Receipts. It’ll host some [indiscernible]

Okay. Okay. Maybe as a recommendation, if you could break out kind of the VCAD related expenses from DRTC, it would clean it up for me would definitely be appreciated. But let’s see two more and then I’ll open up to someone else. So what is the balance of the U.S. Point-of-Sale loans now?

I think it’s $39 million right now.

$39 million. Okay. Thank you. And lastly, here on the VCAD commercial launch, now that you are totally within the OSFI guidance, what’s the timeframe then, as you’re thinking about that launch?

Well, I’m thinking about it before the end of our fiscal year, which is October 31. And yes, as I said in the presentation, I was very pleased that OSFI came out with the definitive guideline, because it’s now fairly easy for us to pick the boxes with our Digital Deposit Receipt. They’ve given a nice list of a group one crypto asset, they call it, but from our perspective, it’s crypto liability. So we’re very pleased to see OSFI come out with that clear direction. So presently we’re just going over our product and ensuring that it meets OSFI’s guidelines completely.

Okay. You think that’s a two month process? I know you guys were ready to go six months ago or so maybe even longer.

It might be less the – we’re working with OSFI, FINTRAC and CDIC to ensure they’re comfortable with it. And some say with the wine, no wine before it’s time for who said that I’d like to go of course a lot faster. I live in a fast pace world, but we think it’s a wonderful product. It’s that product that the market wants definitely wants since the stablecoin industry melt down. And we think it also provides huge increase in the security of a bank’s positive utilizing distributed ledger and highly encrypted. So it’s a quantum leap, I think, in the banking industry over what is presently being used. So, I mean, I’d love to go faster, but hedge my bet a little bit by the end of the year.

Okay. Thank you, gentlemen.

Thank you, Brad. Look forward to seeing him sometime.

Thank you. Got it.

Okay.

Mr. Taylor, there are no other questions from the phone line, sir. I’ll turn the call back to you for closing remarks.

All ready. Well, I’d just like to thank everybody for dialing in and those to ask me questions and look forward to talking to you again at the end of our fiscal year. Thank you,

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