VersaBank Q2 FY2024 earnings call

• Second quarter results showed operating leverage in the branchless B2B digital banking model with loan portfolio growth. Total assets had 18% YOY growth, net income up 15% YOY. Digital banking efficiency ratio at record 38%, average return on common equity at 12.4%. • Point-of-sale receivable purchase program expanded 1% sequentially, HVAC sector is largest component. Transition of real estate portfolio to CMHC-insured loans. • Net interest margin affected by growth in lower-yielding point-of-sale portfolio and transition to CMHC loans. Transitory items impacted Q2 profitability, but pretax profitability of digital banking operations was up sequentially. • DRTC had Q2 revenue and profit growth but net loss due to higher expenses.

Total assets at the end of the second quarter of fiscal 2024 grew 18% year-over-year and 2% sequentially to a new high of $4.4 billion. The loan portfolio saw growth with the point-of-sale receivable purchase program increasing 23% year-over-year and 1% sequentially to $3.1 billion, representing 78% of the total loan portfolio at the end of Q2. The real estate portfolio expanded 1% year-over-year and was flat sequentially at $828 million. On a stand-alone basis, Digital Boundary's Group's Q2 revenue increased 8% year-over-year to $2.8 million, and gross profit increased 5% to $2 million, but DRTC had a net loss of $162,000 in Q2 compared to a net income of $433,000 last year.

• Expect improved sequential growth in point-of-sale financing portfolio with summer sales seasonality. Ramp-up in CMHC-insured loans in third and fourth quarters, with $440 million in commitments. • Hopeful for U.S. regulator decision by end of month to expand into U.S. market. • Insolvency deposits continuing to increase.

• Seasonality impacting Q2 growth. • Transition to CMHC-insured loans affecting net interest margin. • Macro point-of-sale financing market softness due to high interest rates and consumer early repayments. • Credit issues in partners' portfolios leading to higher repayments.

Q: Hi, good morning, everybody. I just wanted to start out on the organic growth side. You talked about the softness in Canada, some of the risks to achieving that $5 billion asset level this year, but you're also pretty bullish on partner additions in Canada, expansion in the U.S. and the pipeline is healthy. I'm just curious, how do you think about the organic growth trajectory within that point of sale business, the pipeline of partner additions in both Canada and the U.S.? And then are you looking to expand products? I know HVAC has kind of been a key driver, but is there opportunity to expand the product set to potentially help accelerate growth?

A: Well, first of all, in Canada, there tends to be a dampening effect of the winter months on consumer purchases and even in the HVAC projects that people undertake. So this half, we saw the impact of that. In previous years we've had such rapid growth in several overwhelmed the tendency of Canadians not to get under car lots and entertain new purchases, hot tubs and barbecues and such. So the second half of the year I do expect to see a resurgence in the consumer purchases. And we're already seeing that in May. It's up fair amount from April. So that's just sort of a typical Canadian thing. The other thing about the Canadian consumer is for the stats people they tend to have some savings so they tend to be a little more enthusiastic about buying in what might be seen as recessionary times than otherwise. So for the half year coming I see a bit of a resurgence. It would be a better half than the last half. Now with respect to new products yes indeed we are having a lot with new partners that have some innovative point of sale type financing products really cool ones, I won't -- I'll talk about exactly what they are now, but really cool ideally suited for our Bank's model. So we're looking at that going forward too in Canada. And in the states as I was saying we're hopeful the regulator comes to a decision by the end of this month, but if not it's -- there's a fair amount of moving factors in the United States now. I just saw a recent report from the Fed about a large huge quantity of large bad loans in the portfolio also. So I hope to come to a positive conclusion by the end of this month. And that, of course, allows us to bring our product to United States where we think there's tremendous demand for it.

Q: Good morning David. I wanted to ask you a quick question about the mortgage renewal cycle not in terms of the direct impact obviously, but just the indirect impact if we do have higher rates for longer or just maybe call the rates settling at a higher level even if the Bank of Canada starts a cutting cycle there's no necessary guarantee that mortgage renewals won't be painful for a lot of borrowers. So in the context of a deleveraging cycle potentially in Canada on the consumer side, what are your thoughts on how that could impact the demand for POS for you? Obviously, it's been a very resilient book. Your growth has been phenomenal there. A little bit of a slowdown this quarter, but if we do get this dynamic where Canadians are just not borrowing as much, what's the downside on your view with respect to how much you could grow POS?

A: Well, we definitely have a dampening effect. Last year we grew POS by about 30%. At the beginning of this year I was hoping for around 20%. I'd say it'd be a little less than that even -- so yes those factors do dampen POS purchases just anecdotally going to the motorcycle shop to buy a motor bike if you just had to renew your mortgage at twice the rate in the past before. So it definitely has a dampening effect. But we still have the potential to grow in the order of around 15% year-over-year. Mind you, that's half of the last year.