VersaBank (VBNK) Earnings Call Transcript & Summary

Good morning. My name is David Taylor, and I am the President and CEO of VersaBank. I would like to welcome you to our meeting today. This is an unusual year amid the COVID-19 pandemic. It is also the first annual meeting which is being offered digitally. We hope that you find the format convenient, and thank you for staying safe and joining us remotely. I further wish to thank you for providing your advanced voting instructions by proxy, which will allow the meeting to proceed efficiently. The Annual Meeting of the Shareholders of VersaBank will now come to order. In accordance with the bylaws of the bank, I shall preside as Chairman of the meeting. Brent Hodge, General Counsel for VersaBank will act as secretary of the meeting. Before commencing the formal business of this meeting, I would like to introduce the Directors of Versabank. The Honorable Thomas Hockin. Tom is from London and currently resides in Rancho Mirage, California. He has been a Director of the bank since 2014. Gabrielle Bochynek. Gabrielle is from Toronto and has been Director of the bank since 2019. Robbert-Jan Brabander. Robbert-Jan is from Richmond Hill and has been a Director of the bank since 2009. David Bratton. David is from London and has been a Director of the bank since 1993. Dick Carter. Dick is from Regina and has been a Director of the bank since 2014. Colin Litton. Colin is from Oakville and has been a Director of the bank since 2010. Susan McGovern is from Gormley and has been a Director of the bank since 2011. Paul Oliver. Paul is from Markham and has been a Director of the bank since 2005. I would also like to introduce a prospective Director for 2020, Art Linton. Art joins us from Kitchener. He is an independent technology literate lawyer. He's a member of the American Bar Association and the Royal Canadian Military Institute. Art has written numerous articles on business law and cybersecurity. Avery Pennarun. Avery currently resides in Montreal and has been a Director of the bank since 2016. Avery is not standing for reelection as VersaBank Director at today's meeting, but was recently appointed as a Director of VersaBank's Washington D.C. subsidiary, DRT Cyber Inc. On behalf of the entire Board, I would like to thank Avery for his service and invaluable contribution to the bank. We are also pleased to introduce the officers of the bank. Shawn Clarke, Chief Financial Officer and Corporate Secretary; Mike Dixon, SVP, E-commerce; Ross Duggan, SVP, Commercial Lending; Nick Kristo, Chief Credit Officer; Jon Taylor, SVP Deposits and Chief HR Officer; Jean-Paul Beker, Vice President, Commercial Lending; Steve Creery, Vice President, Credit; Barb Hale, Chief Compliance Officer and Chief Anti-Money Laundering Officer; Joanne Johnston, Chief Internal Auditor; Wooi Koay, Vice President, Information and Technology; Aly Lalani, Chief Risk Officer and Treasurer; Andy Min, Vice President, Finance and Corporate Accounting; Scott Mizzen, Vice President, Commercial Lending; David Thoms, Vice President, Structured Finance. I would also like to introduce Wade MacBain, our Director of Investor Relations; Tel Matrundola, Executive Head, VersaBank Innovation Center of Excellence; and Gurpreet Sahota, Chief Architect of Cybersecurity. Thank you. The shareholders auditor, KPMG LLP, is present as represented by Jim Cassidy. In order to make the best use of our time, individuals were identified as movers, seconders in advance for the resolutions, which are set out in the notice of meeting. With the consent of the meeting, Daniela Munoz and [ James Baschik ] of Computershare Investor Services will act as Scrutineers of this meeting to report on the shareholders represented by proxy at this meeting and to report to me on these matters. Prior to the commencement of this meeting, the Scrutineers reported that on the basis of the proxies submitted, a quorum had been reached. In accordance with the bylaws of the bank, I declare the meeting regularly called and properly constituted for the transactions of business. I direct the Scrutineers' report to be annexed to the minutes of the meeting. The notice calling this meeting and the accompanying material have been mailed to all shareholders of the bank, who were shareholders of record on February 28, 2020, and the Secretary of the meeting has provided proof of the mailing of such material. In light of this year's unusual circumstances, a press release was issued on April 2, 2020, and amended notice of meeting was filed and made available to shareholders on SEDAR, permitting this meeting to be held by webcast. Accordingly, the reading of the notice of the meeting will be dispensed with and a copy of the notice with the proof of mailing and filed amended notice will be kept with the secretary of the meeting. I propose that we now proceed with the business of the meeting. The financial statements of the bank for the year ended October 31, 2019, together with the report of the auditors thereon, have been mailed to the shareholders of the bank. It is not proposed to ask shareholders to approve the financial statements. However, we'd be pleased to deal with any relevant questions concerning the statements during the general question period, which follows the formal business of this meeting. Copies of the report of the auditors on the financial statements are available for inspection at this meeting. The next item of business is the appointment of the auditors for the current year and the authorization of Directors to fix the remuneration of the auditors. Shawn Clarke and Andy Min agreed in advance to move and second the resolution appointing the auditors for the current year. The motion reads as follows. KPMG LLP charted accountants be appointed auditors of the bank to hold office until the close of the next annual meeting of the shareholders or until their successors are duly appointed and that the Directors of the bank be authorized to fix the remuneration of the auditors for the current year in such an amount as they may, in their discretion, determine. You have now heard the motion. In accordance with the results of the voting completed in advance of this meeting, I declare the resolution carried. We will now proceed with the election of the Directors. The number of directors of the bank is fixed at 10, and it is necessary for such number to be elected. In advance to this meeting, Jonathan Taylor agreed to nominate each of the individuals listed in the management proxy circular for election as Directors for the coming year, each of whom have agreed to serve as a director, if elected. Aly Lalani agreed in advance to second the nominations. In accordance with the results of the voting completed in advance of this meeting, I declare the resolution carried. Be it resolved that each of: Honorable Thomas Hockin, David Taylor, Gabrielle Bochynek, Robbert-Jan Brabander, David Bratton, Richard Carter, Colin Litton, Susan McGovern, Paul Oliver and Art Linton be elected as Director of the bank for the ensuing year or until a successor is duly elected or appointed. If any registered shareholder or a proxy holder is interested in the exact number of votes cast in respect of the resolution, he or she may obtain particulars after the meeting on inquiry to the Secretary of the meeting. This concludes the formal business of this Annual Meeting of Shareholders. In advance of the meetings, Shawn Clarke agreed to move the final resolution, terminating the formal business of the meeting, and Andy Min is seconding. The motion has been accepted, and I declare the formal business of the meeting terminated. Now we'll switch to my slide presentation, and we'll just take a moment here to switch screens. Perfect. All right, let's see how this works here. I've got the customary advisory slide up. Hopefully, everybody has a chance to read that. This Slide #10 was issued by our auditors, KPMG, and I thought it quite appropriate to lead our presentation. So VersaBank. VersaBank, the bank of the future and the bank of today. As I think a lot of you may know, it was a concept that I came up with in the early '90s to create a digital bank that can serve the needs of niche markets that may be underserved by the larger banks. And at the time, I thought I would use the newest in technology and that was PC technology and devise a bank that can operate without branches by using telephone modems to connect to, what I call, the existing distribution channel or a partner network, so as not to need to have an expansive branch network. As a lot of you know, the bank went through some growing pains in the beginning. I would say, probably, I was a little more than, say, 10 years ahead of time. In the early days, there wasn't an example of a digital bank, and it took various folks some time to get used to the idea that it was a viable model. But that's certainly changed now and I would say that this is probably the best time to be a digital bank, particularly with the challenges which the COVID-19 pandemic has brought upon us. So these are 4 factors that we thought we'd present to you as key factors in making our bank sort of ready to charge into the future. The -- of course, our clientele, people, folks throughout the world have become increasingly conversant with computer technology and perhaps, much less patient with the old way of banking that meant going to a branch or standing in the line. Our intermediaries have also become very conversant with computers and demand flawless connections and systems to service their clients. The technology has got better and better and better, and the time it takes now to bring a new product to market is much, much faster than it ever was in the past. And last but not least, in the lower right-hand corner, the regulatory environment now, I believe, is conducive to that of a full digital bank. In the early days, folks, when maybe made remarks in Ottawa such as Dave, people need to walk into a physical premises to hand over their money. And somewhat prophetically, I said, no, things are going to change, but that was a long time ago. And of course, that is the -- it's now the way of the world, and our regulators are certainly seeing that. Moving on to the next slide. So the power of a digital banking model: Capacity, velocity and efficiency. We sometimes say fast, friendly and flexible. What does it bring to the table? A state-of-the-art propriety technology platform. This is what we built from the very beginning and evolved and evolved over the years. That in itself gives us a tremendous advantage on our industry. It allows us to provide niche banking services very rapidly to modify them, change them, evolve them because we own the technology, and we have 25 or more software engineers on staff and then a lot more in support staff. In fact, today, I'm sitting at VersaBank's Innovation Center of Excellence. I love being here. I'm also the Chief Information Officer, that's my other hat. As a fellow that's been involved in the banking industry for 40-odd years, it's now a very pleasant, wonderful environment to be in, having access to this great technology that allows us to provide, we think, outstanding services to the niche markets that we've chosen to operate in. Of course, we've got the benefits of allowing for minimal investment in physical infrastructure and people. It's only 80-odd people on staff, and that gives us sort of tremendous operating leverage. The partnership model, at the very beginning, enabled us to reach our customers without going to tremendous expense. Later on, after our bank was launched in 1993 as a trust company in Saskatchewan. A few years later, a Dutch bank came to Canada. You all know the one I'm talking about, and spent a lot of money on orang billboards and a really cool Dutch guy talking about it or money. I didn't have the luxury of a big budget for advertising. So necessity being the mother of invention, I came up with this model whereby I would use partners who are already dealing with our target market, our customers to get our banking services through. This gives us tremendous cost savings. Of course, we're highly scalable, extremely agile, particularly as I was mentioning earlier, with the advancements in technology that we can create a new product so much more rapidly than we used to. And the technology also allows us to keep a very close eye on risk. This slide, Slide #14 is based on the year-end numbers. It just gives you an idea of how our financial model works. Last year, we paid approximately 1.9% for deposits. We earned about 4.9% on loans, with about $1.8 billion assets. That gave us $54 million in net interest income, $26 million of that covered our overheads and $28 million was left on the table for earnings for our shareholders and pay dividends and such. The next slide, Slide #15 shows you how our partnership network looks today. On the deposit side, we have basically 2 groups of partners. One of them insolvency professionals, and we have about 100 or so insolvency offices throughout Canada that use our software and bank with us and some of the logos I've got on the screen. And we also have another group of deposit partners that are in the wealth management field. We have about 120 or so of those, and we've got some of the logos up there for you. In total, our deposits were around about $1.5 billion. On the asset side, we've got about 156,000 or so borrowers, and they come to us through about 120 lending partners. Again, we have 2 groups. We have point of sale financing companies, and we also have commercial mortgage brokers. In total, our loans are about $1.7 billion. Moving to Slide #16. Being fast and flexible in a market that's evolving and changing gives us a distinct opportunity to look at new markets that we think, perhaps, are underserved by the larger banks. Maybe they have specific requirements. Maybe they're too small. Maybe they're remotely located. And the example I have on Slide 16 is where we created custom software for the insolvency professional industry, allowed the insolvency professionals to deal with our bank somewhat seamlessly using their administrative software. So we integrated our banking package with their administration package and provided them with a first-class service. That market now is serving us extremely well, of course. It's grown to about $440 million in deposits in the last 7 years. A good portion of the retail insolvency professionals are now using our services. Moving to Slide 17. This shows what opening up that new market has done for us. It reduced our emphasis on personal deposits. And by personal deposits, I mean GICs coming through the wealth -- primarily through the wealth management network. That market at the beginning, in 1993, was a wonderful market. In fact, for a while, our GICs were yielding a little less than the same term government Canada bonds. But as time progressed, virtually every small financial institution in Canada adopted that model, and it became a little crowded and the deposit rates moved up to beyond government Canada bonds. So a little more expensive than it used to be. So that was the impetus for us to look at other deposit markets, particularly, we call commercial deposit markets, they included the insolvency professionals. Those checking accounts that we have are operating accounts for insolvency professionals are now at a current rate of 0%. So this provides us with a low-cost source of very stable deposits. Turning to Slide 18. Another area that -- this was on the asset side. Another area that we thought was somewhat underserved was the point of sale finance people. These are finance companies that provide very quick and convenient financing for small businesses and consumers who are looking to buy something. And it could be everything from a hot water heater to signing for a house to heavy equipment, a hot tub, you name it, things that are purchased and require financing at the point of sale. So this is a very convenient way for consumers and small businesses to obtain financing. We sort of recognized in the liquidity crisis, these finance companies needed a economical and reliable source of funding for their loans and leases as they're generating, and we created the software to accommodate them in this market. Turning to Slide 19. Similarly to the insolvency professionals on the deposit gathering side, this lending category was very well received and grew to $1.1 billion. I've got a pie chart on the right side. Now it's become the majority of our assets. Now it's one thing to create a bank that has access to a vast supply of very, very economical deposits. And then on the other side, we also lend it into niche markets that due to the convenience that we're providing, accommodating, we're able to earn extra large net interest margins. But being a small bank, we can't expect to be thrown a life preserver, if got into trouble. We're not designated too big to fail as our large colleagues are. So we pay an extraordinary amount of attention to risk mitigation, and that's right from the very beginning. Our appetite for risk has been very, very low. So I put up 3 principal risks just to illustrate that: And apropos one, of course, in these trouble times is liquidity risk. And I can tell you that even during the liquidity crisis, we had no trouble raising deposits from our huge wealth management area, and we continue to have no trouble at all. We are increasing our liquidity ratio somewhat. It's now over 15%. That's a kind of an insurance policy. We're in relatively unstable touch. It's nice to have a little more cash around us than we had in the past, round about 7% or 8% in the past. Low credit risk has sort of been a mantra with us. We don't like taking credit risk. We sort of see ourselves as IT guys with white gloves, so to speak, and we tend to be the low-risk lender in the country. And over the 25-year history with almost no loan losses, I can't think of a loan loss, it's served as well. Our technology, of course, gives us a very close look at how our portfolio is behaving and other risk-mitigating techniques that we are using to ensure that we can still have that stellar record of very low credit risk. Low operational risk. Well, that's what comes with having a branch -- a branchless model and relying heavily on technology. That's, of course, serving us well in -- during this -- these troubled times. We are -- we have a very high asset to employee ratio. It could be much, much higher than it is today in that we have a lot of room for growth, which I'll get to later. And the low-cost funding model enables us to earn higher net interest margins than we would otherwise be able to turn, are 3%, which we've been averaging for some time is probably one of the highest in the banking industry. At the bottom of the slide, I added a little banner, which is a very significant risk mitigator. It gives the leverage percentage, which showing 11.86% at January 31. It's due to be a little higher than that, which is about 4x that required by the Basel Committee. So real capital 4x what's required and possibly depending what the others look like, maybe 3x what our colleagues in the large bank industry have. This next slide is a neat slide. It illustrates our emphasis on credit risk, very, very little credit risk. Provisions for credit losses over the last 5 years have averaged almost nothing in the last few years. Vis-à-vis, the industry, which has been running around 0.3%, 0.2%, and I'm expecting on April 30 for those figures to be considerably higher. Next slide illustrating the operating leverage. As you can see on the left, our cost to earn a dollar of revenue has continued to decline, down to $0.49. Again, that should get much better, too, as we continue to grow. On the right-hand side is another neat slide, we call it the technology advantage. As you can see, our fixed costs have stayed relatively the same over the course of 5, 6 years. And that's what we'd expect, but revenue has grown significantly during that period of time. What does this all add up to? Well, a slide that we shareholders are quite interested in, of course. About a 40% compounded average growth rate over the last 5 years of core cash earnings. When I say core cash earnings, this is the cash that you pay the bills with. This is the cash you pay dividends with. This is, in our case, our pretax earnings, but we're not paying cash taxes. So it's what's left over after we paid our fixed costs, as I illustrated in that slide earlier. So the question is, how are we going to keep it going? Looking over to Slide 25, here is the answer to that. So first and foremost, we're always looking for ways to reduce our cost of funds. So we're always exploring niche markets where we can bring our deposit accounts to solve maybe a certain challenge that a category of depositors might have, similar to what we did in insolvency professionals. And we're -- right now, we're in discussions with people on that front. The insolvency deposits, of course, are likely, unfortunately for Canada and throughout the world, are likely to grow and probably grow substantially. That will act as quite a counterbalance for our bank in that they -- a supply of presently 0 cost deposits, increasing supply will certainly enable us to maintain our healthy net interest margin. Looking at loan growth. In the near term, we're pivoting our construction lending team, our project finance team that has been primarily in the last few years involved in private projects, mostly condominium -- high-rise condominium, sub low-rise construction projects. We're pivoting that team back to a core business for us, which we -- is called public sector financing. In the early years, that was -- most of our balance sheet was composed of hospital, school boards, municipalities, relatively small projects, that would take place in the smaller communities in Canada, a lot of projects in Canada's north. And we're very proud of that. We're able to help these communities with these essential services. And now their cost of funds has dropped to almost record lows with the -- with this pandemic and the influx of the insolvency deposits. We can once again earn a decent spread in this market. So we've reinitiated our foray into this business, calling up our friends that are involved in this type of projects. And I'm looking forward to providing the service we're able to provide in the past, an essential service with relatively low risk, of course, going forward. In the longer term, when this virus has finally passed on, I expect there'll be somewhat of a rebound in the point of sale financing. Presently, point of sale finance is diminished to trickle as expected with people staying away from businesses and being quite conservative on their purchases. But these things pass, and we'd expect our point of sale business to get right back and probably rebound somewhat as the pent-up demand comes through. We've announced a little while ago about a direct connect to the mortgage business, and we're excited about that. But presently, with this COVID-19 pandemic, we've got that on the back burner until the pandemic has dissipated. Now the third avenue for growth has been something we've been looking at for a while. But in recent times, it's likely more possible to be a source for growth. And that is the acquisition of perhaps other banks, other lenders or even technology to enhance our bank and to accelerate its growth. Slide 26. I like this slide and when we talk about being a low-risk bank and having a low-risk appetite, where the rubber meets the road in a bank. And I'm somewhat paraphrasing Michael McKenzie, the first superintendent of us few years ago that introduced the asset, the capital multiple, which does ratio. There are this percentages you see on the screen really is inverted. What sort of dictates how much cushion a bank has against adversities is it's real capital. And in our case, we've amassed a lot of real capital. You can see from the bar chart there, that roughly, if you subtract liabilities from assets in our bank, what you're left over with is above 3x what most of the industry has in real capital and about 4x what the Basel Committee thinks banks should have. So that provides us with a lot of comfort. It certainly helps me sleep at night, knowing that we've got that much capital, but also gives us additional capital for acquisitions as they might appear. Looking over to Slide 27. This is where we leverage the technology that we have created for our bank. We created this company. I'm sure you're aware, DRT Cyber. It's chaired by Tom Ridge, first U.S. Secretary of Homeland, who made a very apropos statement, " We have been engaged in a fifth dimension of war, cyber war." And that war has intensified with people working remotely. The hackers of the world are taking advantage of that situation. So our DRT Cyber probably couldn't be in a better environment to deploy its cybersecurity techniques. Over to Slide 28. Another quote is that Canadian banks are likely leaders in the cybersecurity area. Of course, we have to be as Canadian banks -- banks in the world have to be in that we all have targets on our backs from those that would -- the modern day bank robbers, those that would try to find their way into our systems. So VersaBank, of course, takes this very, very seriously. And DRT Cyber is an outgrowth of that, where we believe we have some of state-of-the-art solutions in cybersecurity. A while back, we announced the creation of the world's first digital safety deposit box. We announced that Gurpreet Sahota, formerly Chief Architect of Blackberry, joined up as Chief Operating Officer. Avery, of course, is moving over to DRT Cyber. But I should mention that Avery, of course, will still be providing his high, high, high degree of expertise and counsel to the Board of the bank. And we're blessed with the Honorable Tom Ridge becoming the Chairman, and Barbara Chaffee, who worked with Tom for many, many years, joining the Board also. Slide 29 is just a quick snapshot of how we made out in Q1. Virtually everything was increasing over the same quarter last year. What happens in Q2 might be slightly different with the impact of the pandemic. I'll be happy to answer questions when we go into our question session on that. So talking about what the pandemic has presented to our bank, I could dub this threats and/or challenges and opportunities. So on the challenges side, obviously, having to work remotely has presented significant challenges for most businesses. Thankfully, our business is ideally designed to accommodate that, and we were fortunate enough to work with Avery and his colleagues in the creation of a super-secure software-driven virtual private network, which all our employees have, and they're able to work seamlessly from home. The -- I talked about it before, but having introduced custom software from the insolvency professionals and signing up a good portion of the insolvency practices in Canada. That's given us quite an opportunity for low-cost stable deposits to ensure that our net interest margin still stays at the top of the heap in our banking industry. Looking at another opportunity, of course, I mentioned it earlier, is the opportunity to once again get -- finance the public sector projects that I believe our country most certainly desperately needs, particularly in the health care area. And I expect governments -- all levels of government throughout Canada will be getting back into infrastructure in a big way. We specialize, I was saying earlier, in the smaller projects and more remotely located communities, but I can see a big market for that. So concluding on Slide 31. Perhaps, VersaBank was created a little bit before its time. But to date, it's certainly the ideal model for the challenges that this market has presented. I see, of course, I was saying on the previous slide, a lot of opportunities for our bank to do even better during this period of time with the influx of lower-cost deposits and the reintroduction of the public sector finance group and possibility of some acquisitions in our market. So that concludes the slide presentation. And now, what we're planning to do is switch over to the calling. I've got the numbers up on the screen. I'd like to thank you all for dialing in and look forward to your questions on the telephone. Thank you.