VersaBank (VBNK) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to VersaBank's First Quarter Fiscal 2023 Financial Results Conference Call. This morning, VersaBank issued a news release reporting its financial results for the first quarter ended January 31, 2023. 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 morning's conference call. The webcast is listen-only. If you are listening on 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 provided 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 1 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 businesses. 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, everybody, and thank you for joining us for today's call. With me is Shawn Clarke, our Chief Financial Officer. Before I begin, I'd like to remind you that our financial results are reported and will be discussed on this call, and our reporting currency, Canadian dollars. Those interested, we will provide U.S. translations for most of our financial numbers in our standard investor presentation, which will be updated and available on our website shortly. Now to the results. The first quarter was not only another record quarter for VersaBank but more importantly, one that was demonstrative of the true efficiency and return on equity generating capability of our branchless business-to-business digital banking model. And once again, this was complemented by the continued profitable contribution of our cybersecurity services business. Our digital banking operations continue to see very strong year-over-year growth and our loan portfolio at 46%, which drove our portfolio to an all-time high of just under $3.2 billion. Growth was again driven primarily by Canadian point-of-sale loan and lease portfolio, which was up 68% from Q1 last year. The combination of loan growth and stable net interest margin drove record revenue and record interest income. On the cost side, as we anticipated, the transitory costs related to growth investments and our move to NASDAQ that temporarily elevated our noninterest expense and dampened our profitability in 2022, substantially normalized in the first quarter, putting our efficiency ratio back on track towards its full potential. We continue to expect further normalization as our noninterest expense and importantly, we haven't only barely begun to realize the growth contributions of those investments we made last year. All this drove by far, our best quarter ever in terms of net income and EPS. Say for one outside quarter for net income in 2017 due to an accounting recognition when VersaBank amalgamated with PWC capital. Net income grew 69% year-over-year to $9.4 million, besting our previous record of $6.4 million by a full $3 million, and EPS grew 79% or $0.15 year-over-year to $0.34. Looking more closely at our performance, as I noted a moment ago, the first quarter financial results were marked once again by our best-ever revenue, net interest income, and net income and earnings per share. Outside of these record results, there are 3 metrics that I'd like to highlight. The first is our net interest margin. It is important to note that we have generated loan growth while maintaining our overall net interest margin and without taking on additional risk. This is something relatively unique compared to our peers. The second is our efficiency ratio. Now that we are through the bulk of our transitory costs for our strategic growth initiatives, the true scalability and efficiency of our model is emerging. The third, earnings per share growth, which outpaced net income growth as a result of our active share repurchase program. As we look ahead, in addition to the continued growth we expect in our Canadian loan portfolio, we expect to generate significant long-term growth from our launch of the United States receivable purchase program. This is our high-value-add financing offering for consumers and small business lenders. Based on our proprietary technology that provides them with a regular, reliable inexpensive funding alternative to help them succeed in their businesses. As I discussed in our last quarterly call, this acquisition is transformational. The next step in VersaBank's long-term growth strategy that will enable us to bring our track record of innovative digital banking solutions to address unmet needs to one of the world's largest banking markets. We have launched this program on a limited basis in the United States of the broad national rollout planned upon completion of the acquisition of the Minnesota-based Stearns Bank Holdingford, a fully operational OCC chartered national U.S. Bank. Specifically, this acquisition will enable us to broadly roll out our receivable purchase program to the underserved U.S. market, which has been so successful in Canada, where we call it our point-of-sale financing business. In December, we submitted the requisite filings to the OCC and the reserve seeking approval of the acquisition. And based on continuing dialogue, we remain optimistic with respect to near-term approval. In terms of an update on timing, which is ultimately the discretion of our regulators on both sides of the border, we anticipate receiving a decision to respect with its approval of the proposed application from the U.S. regulators during the second quarter of the calendar 2023. And as favorable, we will proceed to complete the acquisition as soon as possible, subject to Canadian regulatory approval. In interim, we continue to actively prepare for the significant opportunity to bring our differentiated and attractive financing solution to U.S partners. Topic of U.S. Receivable Purchase Program, or RPP, our U.S. portfolio continues to expand with loans now nearly $44 million. As I discussed on our last call, we have limited aborning of loans head of the fulsome rollout upon completing the U.S. acquisition. And in fact, command to date has continued to outstrip our self-imposed short-term capacity restrictions. Very comfortable with our progress and with the revised expectations for completion, we have made the decision to ramp up our U.S. RPP loans ahead of closing the acquisition or in this moment. I would now like to turn the call over to Shawn to review our financial results.

Thanks, David. Before I begin, just a quick reminder that our full financial statements and MD&A for the first quarter are available on our website under the Investors section as well as on SEDAR and 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 our balance sheet. Total assets at the end of the first quarter of fiscal 2023 were just over $3.5 billion, up 46% from $2.4 billion at the end of Q1 last year and up 8% from $3.3 billion at the end of fiscal 2022. Cash and securities at the end of Q1 were $251 million or 7% of total assets compared with $155 million or 6% of total assets at the end of Q1 last year and $230 million or 7% of total assets at the end of fiscal 2022. Our total loan portfolio at the end of the first quarter expanded to another record balance of $3.24 billion, an increase of 46% year-over-year and 8% sequentially. I'll break this out into its component parts in a moment. Book value per share increased 8% year-over-year and 3% sequentially to another record of $12.77. These increases were both a function of higher retained earnings resulting from net income growth, partially offset by dividends paid, and also benefited from the lower number of outstanding shares as a result of our active share buyback program. Our CET1 ratio was 11.2%, down from 14.8% at the end of Q1 last year and down from 12% at the end of fiscal 2022, while our leverage ratio at the end of Q1 of this year was 9.21%, down from 12.7% at the same point last year and 9.8% at the end of fiscal 2022. Both of our CET1 and leverage ratios remain well above our internal targets. Turning to our income statement. Total consolidated revenue increased 42% year-over-year and 7% sequentially to a record $25.9 million, with the increase driven primarily by higher net interest income derived from our digital banking operations resulting from the strong growth in our loan portfolio that I mentioned earlier and the maintenance of our net interest margin. Consolidated net income for Q1 increased 69% year-over-year and 46% sequentially to a new record of $9.4 million, excluding Q1 2017, which is attributable primarily to a one-time recognition of deferred income tax assets pursuant to the amalgamation of VersaBank with PWC capital, as David mentioned earlier. In addition to the growth of net interest income, as expected, noninterest expense substantially reduced year-over-year and sequentially as the transitory costs related to our strategic investments in several strategic growth initiatives, including the U.S. Bank acquisition and the launch of the receivables purchase program in the U.S. rolled off. Consolidated earnings per share increased 79% year-over-year and 48% sequentially to $0.34, with the increase benefiting from strong earnings and the lower number of outstanding shares due to our active share repurchase program. During the first quarter, we repurchased and canceled just over 822,000 shares, bringing the total number of shares purchased under the NCIB as of the end of Q1 to just over $1 million. Primary driver of growth in our loan portfolio was once again our point-of-sale financing business, which increased 68% year-over-year and surpassing the $2.4 billion mark. This continue to be driven -- this growth continues to be driven mainly by strong demand for home, home improvement, HVAC, and on-receivable financing. As we noted on our last call, although we expect very healthy growth from our point-of-sale business in 2023, we won't see the same outsized growth as last year. Q1 of this year saw sequential growth in the point-of-sale portfolio of 9% relative to Q4 of last year, and we believe sequentially, quarterly growth in the same range through the remainder of the year is achievable as consumer spending in the sectors on which we focus remains active. Our point-of-sale portfolio represents 75% of our total loan portfolio as of the end of Q1, which was unchanged from the end of fiscal 2022. Our commercial real estate portfolio has expanded 5% year-over-year and 6% sequentially to $807 million at the end of Q1. As discussed in our last several quarterly calls, we have taken a more cautionary stance in respect to our commercial lending portfolios due to the expected volatility in valuations within this asset class in a rising interest rate environment as well as concerns related to higher construction costs resulting from supply chain disruptions in a very tight labor market. That said, we are seeing healthy demand for our construction and term financing products in the form of very high-quality deal flow. We expect this to continue throughout 2023. We remain very comfortable with the risk profile of our commercial real estate portfolios based on our criteria of working only with well-established, well-capitalized development partners to demonstrate excellent track records and of course, restricting transaction to modest loan-to-value ratios. Turning to the income statement for our digital banking operations. Net interest margin on loans, that is, excluding cash, securities, and other assets decreased 20 basis points or 6% year-over-year but was unchanged sequentially at 3.03%. The year-over-year decrease was due mainly to a shift in the bank's funding mix combined with rising interest rates over the respective periods, offset partially by generally higher yields earned on our lending portfolio. Net margin overall, which includes the impact of cash, securities, and other assets increased 6% or sorry, increased 6 basis points or 2% year-over-year and 2 basis points or slightly less than 1% sequentially to 2.83% and is attributable to higher yields earned on lending and treasury assets offset partially by higher cost of funds. Noninterest expenses for Q1 were $12.3 million compared with $10.6 million for the same period of 2022, however, down meaningfully from the elevated levels of $13.8 million for Q4 2022. The year-over-year increase is due mainly to higher salary and benefits costs resulting from an increase in staffing levels to support expanded revenue-generating business activity across the entire bank, higher costs related to employee retention in a very tight labor market, and higher costs related to investments in the bank's business development initiatives, offset partially by lower insurance premiums attributed to VersaBank's listing on the NASDAQ September 2021 as well as lower capital tax expense. The sequential decrease is due to the expected significant reduction in transitory costs related to strategic growth investments and our listing on NASDAQ that David and I have both mentioned earlier as well as lower capital tax expense. Cost of funds for Q1 was 2.95%, up 166 basis points year-over-year and up 50 basis points sequentially, with both increases due mainly to the larger proportion of wealth management deposits relative to our lower cost and solvency professional deposits versus the comparative periods as well as a general increase in market interest rates. The increase in our cost of funds remained significantly less than the Bank of Canada's increasing the benchmark rate of 425 basis points to the beginning of fiscal 2021. Insolvency Professional deposits once again contracted slightly in Q1 on both a year-over-year and sequential basis due to historically low bankruptcy activity candidates experienced primarily as a result of government support for both individuals and small businesses extended during the pandemic. Wealth Management or what we refer to as personal deposits expanded 87% year-over-year and 14% sequentially. Dave will talk a little bit more about our expectations around funding mix in just a moment. Our provision for credit losses or PCLs in Q1, once again, evidence that prudent risk mitigation strategies inherent in our lending models and outstanding credit quality of our loan portfolio, especially evident given the broader expansion and PCL ratios that our peers are reporting. Provision for credit losses for Q1 was $385,000 compared with a provision for credit loss of $2,000 in Q1 of last year and a provision for credit losses of $205,000 for the fourth quarter of 2022. The sequential and year-over-year changes were a function primarily of changes in the forward-looking information used by the bank in its credit risk models as well as higher lending asset balances. PCL as a percentage of average loans for Q4 was 5 basis points, and our average over the past 12 quarters was 0. Our PCL ratio will continue to remain one of the lowest in the Canadian banking industry. Turning now to DRTC, I would like to remind you that DBG's gross profit amounts are included in DRTC's consolidated revenue, which in turn is reflected in noninterest income in VersaBank's consolidated statements of income and comprehensive income. DBG's revenue for Q1 decreased 3% year-over-year and 19% sequentially $2.3 million as a function of lower service work volume in the current quarter. Historically, Q1 is softer for DBG attributed to the impact of the slower holiday period, which typically results in lower revenue-generating activity. Gross profit, however, increased 17% year-over-year and decreased 6% sequentially to $1.6 million with a year-over-year increase driven primarily by higher pricing on engagements and improved operational efficiency. DBG remained profitable on a stand-alone basis this quarter. DRTC consolidated revenue for the quarter, that is including revenue generated through the provision of various technology support and consultation services provide to VersaBank's digital banking operations increased 3% sequentially and 29% year-over-year to $1.8 million. DRTC recorded a net loss of just over $0.5 million compared to net income of $150,000 in Q1 last year and net loss of just under $0.5 million in Q4 of last year. The year-over-year trend was a function primarily of higher noninterest expenses attributable to higher salary and benefits expense due to higher staffing levels to support expanded business activity and higher costs associated with later retention amidst the current challenging labor market. I'd now like to turn the call back to David for some closing remarks. David?

Well, thanks, Shawn. As many of you know, I'm an avid pilot, and we aviators have a term that describes the absolute best conditions for flying, that being CAVOK. Which means Ceiling and Visibility, okay. As I look out to the foreseeable future for VersaBank, we have CAVOK. As a side note, I'm sitting here at London Airport looking out my window and today, it is indeed CAVOK. Our comps for Canadian digital banking operations will benefit throughout 2023 from the outsized loan portfolio growth of 2022, and we continue to see sequential quarterly growth in the neighborhood of 8%. We expect net interest margin on loans to remain robust. We expect meaningful add to our loan portfolio through our U.S. Receivable Purchase Program. With each passing month, with more discussions with our existing and potential customers for our RPP offering in the United States. We are more confident in the uniqueness and attractiveness of our offering. Case in point, last week, we attended KBW Fintech Conference in New York City, providing us with an opportunity to discuss our solution with a number of potential partners, and the response was overwhelmingly positive. Although the approval process for our U.S. Bank acquisition is taking longer than expected, it has not, in any way, changed our belief on the size of the opportunity. In the interim, we made the decision to expand our limited pre-acquisition rollout to better capitalize on the near-term demand I described earlier. And as we await the opportunity for broad rollout, notably, we expect to generate a larger spread compared to Canada when we roll it out broadly. Last quarter, I discussed how I specifically designed VersaBank to perform well in good times and even better in more challenging times. A core component of this model in addition to risk mitigation being at the core of everything we do is our high-value insolvency professional deposit business. As a reminder, we have almost singularly addressed the unserved market opportunity to provide integrated technology to easily enable bankruptcy trustees to park deposits with us. We have the vast majority of the market for personal and small business bankruptcies in Canada. And the solvent fees plummeted during the pandemic due to government financial support, reduced consumer spending, and a halt to collection activity, hitting a low of over 7,500 per month for the period April 2020 to February 2022. This compares to an average over the 2 years preceding the pandemic of over 11,300 per month. As expected, we are now seeing those numbers begin to climb. Now up to 9,000 for January 2023, an obvious leading indicator with respect to our insolvency deposit growth. And we are now very recently seeing this flow through in terms of account openings and quite dramatically. At the same time, we are continuing to add new trustees and partners, further expanding our already impressive market share. This obviously bodes well for the low-cost deposits moving forward. To conclude, as discussed at the outset of this call, we view our results for the first quarter as clearly evidence of the operating leverage inherent in our branchless business-to-business digital banking model and the resulting return on equity-generating capability. We continue to grow our loan portfolio in Canada and add a significant additional long-term growth we expect in United States. We expect to continue to see the torque in our operating leverage. Notably, our U.S. Receivable Purchase Program will be serviced by the same technology centers in London, Ontario, and Saskatoon Saskatchewan to service our Canadian point-of-sale portfolio and essentially the same number of personnel. That's operating leverage. With that, I would like to open the call to questions. Michelle?

[Operator Instructions] Your first question will come from David Feaster at Raymond James.

I just wanted to start on -- I appreciate all the color on the loan growth front. I was just hoping to get maybe some more detail on the U.S. expansion. Glad to hear you're kind of going to be accelerating that. I'm just curious how -- you've had good reception thus far. But how is demand in the states, the pipeline of new partnerships, and just kind of the road map for the U.S. expansion? And maybe where do you think that portfolio gets to by the end of the year? What we like -- I don't know if you have any targets for that.

Well, David, that's what I'm saying in the comments. We had purposely limited our lending activity in the United States pending receipt of the approval to acquire the Stearns Holdingford Bank. We just wanted to test the market and get the legal documentation in place and our internal systems in place. And that we did, and we were expecting that we would be able to operate the bank around now. So it just sort of slowed it down. But it looks like it will be a little longer before we're able to operate the U.S. bank. So we've made the decision to lend directly from our Canadian bank for the time being, so as not to lose the momentum that we've been gathering by talking to various potential partners. So to answer your question, there's a huge number of points of -- well, they don't call them point-of-sale in the United States, but let's call them Receivable Purchase Program partners in the United States that are really keenly interested in itching up to our program. And the fact that as I was saying the last visit we had in New York City, encouraged him KBW, I met many potential new partners who are very keenly interested in signing up. And that's why I made the decision to fund it from Canada for the time being. I didn't want to disappoint them, and I'd like to keep the momentum going. We don't have any year-end targets. But quarter-by-quarter, you'll start seeing it grow. And I expect we'll have the approvals, and then we'll be able to really ramp up with the U.S. bank.

That makes sense. And maybe just touching on the CRE book. You talked about some of the cautiousness that you might have had in the past few quarters. I'm just curious maybe what changed? Is it availability of credit in the market? Where are you seeing demand that provides good risk-adjusted returns for you? And I mean, have you tightened underwriting standards in that segment at all?

Well, we operate with sort of a mantra and it goes like this. Bad loans are made in good times. So quarter-over-quarter, you'd see me saying we're being quite cautious because we believe in quite rightly so that there was somewhat of a real estate bubble in Canada and probably all of North America prices were way too high. And so we are very cautious in our lending during that period of time. Now we've seen the prices reset. And getting down to we may call it reassembled pricing, which gives us a bit of comfort. And secondly, as usual, a use or tactic. Our competitors are usually licking their wounds around about this time from finding themselves over lent on various properties. So that's the reason why the resurgence now in our optimism in the CRE portfolio, lack of competition, and pricing coming to reasonable levels. And of course, we have the who's who in the industry as clients. So this is typical for us. I've done this every -- coming out of every recession in my 45 years of being a banker.

Okay. That makes sense. And then maybe last one for me. I mean you've been extremely active repurchasing stock. We're still trading well below tangible. You've got plenty of capital. I'm just curious your appetite for repurchasing stock here and how you think about capital when you've got such strong organic growth at the same time? Just curious your thoughts on capital return, capital priorities, and yes, supporting the organic growth?

Well, we just love buying back our stock at these prices. I mean it's about -- it's the best -- as Warren Buffet would say, it's very best investment. It's 0 risk, yes, we buy it back, we get the return, Yahoo. I kind of doubt we're going to have that opportunity much longer. I think the market probably wondered if we had something to do with the crypto industry and we got sort of treated the same way as others have. There's no reason why our stock should drop below book the kind of earnings. So this quarter, we sort of, I think, shaken that misconception off. Obviously, our model is very powerful. It works extremely well. And the earnings we just produced are -- leave most of the industry in the dust. So I'd love to buy back -- keep buying back the stock. But I can't see the stock stand down this level for much longer with these kind of numbers coming up.

Yes. That makes sense. Well, congrats on a great quarter. I appreciate all the questions.

Thanks, David. Look forward to seeing you sometime in Florida. I'm still in the frozen north here but I hope to turn the airplane sell 180 degrees and head back.

Your next question will come from Mike Rizvanovic at KBW Research.

I wanted to just ask a couple of quick questions on the numbers here. So first on the POS holdback, I think you're down about 5.5%. You were, I think, well north of 10% or a little bit north of 10% in the depths of the pandemic. Do you have a line of sight as to how low that number might go? Or any maybe range, is it range bound? Can you get much lower from here? How do you sort of look at that number going forward?

Well, the number depends on the quality of the receivables that we're purchasing. So it's 100% dependent on the quality. So we don't have any particular overall target. It just by chance sort of settled in at 10% for a while. The portfolio has or migrated over to lower-risk assets. It might be something to do with the impending perhaps recession. We're seeing less riskier assets than we did in the past, i.e., now it's moving towards home improvement type loans, which generally are a lot less riskier than, say, hot tubs and motorcycles and RVs and that sort of thing. So we're seeing a migration towards the lower risk asset classes as consumers maybe spend less in the, what you call, luxury items, items they don't really need. Do they really need a new motorcycle when a recession might be coming? Maybe not. But maybe we really need to look at our house to make sure it's insulated property and our -- we've got a really energy-efficient furnace now that price and energy costs are higher. So that's the reason. It's just simply lower-risk portfolio than it was when times are buoyant.

Okay. Is it fair to assume that you've incorporated the same level of diligence to reflect a potential downturn? The 5.5 is low because of mix, but it doesn't mean that you're necessarily not including a bit of a buffer because of the macroeconomic environment, maybe not looking so robust anymore. Is that fair?

Well, yes, absolutely. We generally run around at least 3x the amount of losses that our clients would show. So -- and that's what we had the depths of this third and the pandemic are the intrinsic losses that our models pointed to for our portfolio have been around just round numbers, $30 million, and we were holding about $100 million in cash pullbacks. That's generally where we run, but these are ballpark figures. It's done a lot more scientifically than that. Each individual portfolio is looked at and reviewed on a continuous basis, and we're always adjusting the cash holdbacks dependent on our view of what's in store for our partner on the overall economy.

And Mike, one other piece of color you might want to keep in mind is that, as David mentioned, no change in our risk assessment process or the management process there. But in some cases, some of our seller partners post LCs as opposed to cash. So the risk -- the volume there is still there, the protection is still there, but just the structure of the holdback is modified slightly with some of our partners.

Okay. That's super helpful. And then just a quick one on your insolvency deposits down in the quarter. And we have seen the number tick up both on business and consumer. It is gradually normalizing. I think I was a little bit surprised that the number wasn't up sequentially just given that trend. Or is it maybe just the nature of the -- maybe the size of an average insolvency is smaller today than it was? What's driving the number coming in lower? And then as a quick follow-up to that, how important is this as a funding mix shift on your margins going forward?

Well, the good news for us, the bad news for Canada is that we are opening more new accounts to receive the deposit fund liquidation of our -- of the unfortunate businesses and consumers that are going bankrupt. So we're opening more accounts, but these are sort of empty buckets that take about 2 years to fill up and then they're used to -- they're diverse to the creditors. So really, you're just seeing the lag effect. We're seeing more insolvencies now even in the figures earlier, and we're opening up a lot more accounts -- now we have most of the trustees in Canada dealing with us. So kind of the leading indicator is what's the new volume of account opening and a lot more have been open since the close of our fiscal year. So it's just simply the lag effect. I expect the insolvency deposits will reach a record high for us because we have a larger piece of the market share now than we had a few years ago, quite a larger piece. And already, we're seeing the new accounts be opened at an increasing pace. So it's still simply the lag. Now how important are these to our net interest margin? Well, they're pretty important. We pay on average about prime minus 2.8% on the insolvency deposits, something like that. And that's a good, stable, low-cost funding source. But frankly, I don't see that impacting our margin. Our margins always, of course, been the industry-leading margin in Canada a 1% higher than most banks. I think the margin will stay the same. What could impact the margin a little which is really positive because it has a tremendous boost to return on equity is our instant mortgage app is getting ready to roll out, and that gives us access to lower-margin conventional mortgages and CMHC mortgages, they're lower margin, but the risk weighting of course, CMHC 35% on conventionals. So might -- you might see that possibly as quarters to come depressed margin a little, but it certainly won't be depressed return on equity. Return on equity will continue to grow at the rapid pace you see it growing at.?

[Operator Instructions] Your next question will come from [ Stephanie Woo ] at LodeRock Research.

[ Stephanie ] on for Greg. Congrats on the quarter. So this quarter, I see surprising sequential growth and the point-of-sale loans, given the economy backdrop. And I think you guys also alluded to in the comments that going forward probably won't see the same type of growth going forward. Maybe just a little bit more color on the Canadian side of point of loan growth? That's my first question. And second, is it correct for me to assume that the U.S. expansion is going to be helpful for the NIM to go back to 3% going forward?

Yes. And I appreciate that people have likely surprised that our loan growth is continuing at 8% per quarter or the other banks in Canada. Some are underwater, some are up here. And that's probably because the market that we're targeting -- that our partners are targeting is in the home improvement area. And as I was saying earlier, with energy costs going up, folks are quite rightly looking at getting new siting, new insulation, [indiscernible] more efficiency. And that's been a sort of a financial for our partners to provide that type of financing. So discretionary purchase as saying earlier boats, cars, motorcycles, well, that's really dialed down. But thankfully, we're nicely diversified across the country and across all the industries, and we're seeing substantial significant growth in the point-of-sale on the home improvement, in particular. So that's Canada. And in Canada for loan growth, too, keep in mind that we've been working for quite a while on this innovative new program we call Instant Mortgage. That's an app that enables a developer who's selling homes to that is potential purchasers punch some numbers in and come back with a very quick approval for their conventional mortgage or the CMHC mortgage insights. So we expect to see some growth in that area. And we're comforted somewhat in that the market price of housing in certain communities seems to drop back to relatively reasonable prices. So unlike other lenders at first, we're lending in the bubble and maybe their loan-to-value ratios are -- have gone a lot higher than they were open for. Now we're getting in sort of at the right time, but carefully, so that will boost Canadian loan growth, too. In the U.S., the cost funds in the United States is a good bit less than vis-a-vis Canada relative to risk-free rate. So we see 4% net interest margins as being quite possible. And that will, as time progresses, that will boost our overall NIM. Just keep in mind, our NIM on loans -- overall NIM on loans is north of 3%. And on our treasury assets, it's about 1%. So if rates continue to go up, rates went up, we get a little bit more in our treasury assets. So the overall NIM improves. But then again, as I was saying, depending on how much and CMHCs and conventionals our Instant Mortgage app delivers that will tend to depress NIM, but it will increase ROE because these are really, really high ROE type assets. They absorbed in CMHCs case no capital and in convention mortgage case, 35% risk weighting. So NIM might slide back a bit betting on all these factors might hold, won't change much, but ROE should be increasing pretty dramatically.

Okay. Best of luck on the U.S. expansion.

U.S. expansion? Basically, [ Stephanie ], the approval to get the U.S. Bank is a little slower than we had expected. We're working well with our U.S. regulators and the Canadian regulators, and we expect it halfway through this calendar year. But in the meantime, there was so much interest for our product amongst U.S. point-of-sale companies that we thought, well, we should just roll it out anyways directly from Canada and satisfy the demand, just get it going. We hate to see really ideal partners wanting to deal with us and not doing it, not -- we made a strategic decision to slow it down. But now we said, you know what, we'll hitch our program up to some of our U.S. partners and that'll get it going.?

Your next question will come from Trevor Reynolds at Acumen Capital.

Just a couple of quick ones. I think most of them have been touched on. But in terms of the asset classes that you're seeing demand for in the U.S., would they be similar to what you're seeing in Canada, or just maybe a little bit of insight on that?

No real theme to it. U.S. coast is a huge market, and we are interested in all asset classes. It's just what we see in Canada, too. We've got a trucking firm now on board. We've got another one coming up, a medical equipment. We're looking at recreational products. For us, we're sort of agnostic to asset classes. We look very carefully at the skill of our partners with respect to lending. So basically, if they're good lenders, they asked they'll have to somebody or irrelevant. If they're not good lenders, it doesn't matter what the assets classes and we don't have to deal them. There's no saving them if they haven't got their credit adjudication sorted out.

Okay. And then just on the Instant Mortgage app, like is it -- you mentioned it's close to being ready. What's the timelines on that being rolled out? And what sort of growth are you expecting on that?

The app itself is developed many, many months ago, and the systems are in place, people know where to go. But there's been a few regulatory issues that we've been working through with the regulators, and we hope to have those resolved in about a month. And we have a partner lined up to the mortgage administration for as a wonderful partner that's worked for some other areas. So everybody is all set to go. And there's a fair amount of demand. It's in the order of hundreds of millions of dollars. So a consumer just starting up. I mean I'd look for as long as we can get it going to bottom, I look for at least a couple of 100 million in the year.

Got it. And just remind me who would be the primary people looking at this -- the Instant Mortgage...

Usually new homebuyers. This is the apps designed to be resident in the sales office of the developer selling the units. So it's designed as a sales tool. It's an adjunct to our point of sale program, we just thought real estate home purchases, was the largest point of sale market, in Canada, in the States. So we would develop this app to aid in that not programmed to aid in the sales process. So when somebody wants to buy a house, and they haven't negotiated a mortgage with one of their traditional banks, we say not to worry, punch the numbers in here. And before you know it, you'll be approved for one of those types of mortgages. So it's designed to help our customers that we already deal with, for the most part by doing their financing for the construction of the residential units, is designed to help them in their sales process by taking that hurdle to closing a deal, i.e., I haven't got financing yet. And we say okay, here we are. Here's your thing. There was nothing like that in North America when we came up with it. It's still nothing like Canada, but there's something like a United States that works really well. And just disappointing to me that it took so long to get all the regulator's on side to let Canadians enjoy this sort of convenience and again, the mortgage committed a bit earlier at the point of sale.

Great. And then just last one, just on the digital currency. Maybe just some insight on where that sits, whether it's on the back shelf for now or what the plan is with that moving forward?

It's on the back shelf. The digital deposit receipt that we developed is fully developed. We think eventually, banks will use Blockchain as a new channel for deposits. So I think it's inevitable. But given the regulatory environment north and south of the border and given all the busy good work we have on our point-of-sale business at really, really pace. We decided to leave this one on the shelf, and we don't have any particular time to take it off the shelf, it would be sometime maybe in the future when regulators say, "Hey, maybe that was a pretty good idea. You guys want to bring out to market." I always to regulators ask me to do it. Rather than -- because obviously, we love diversifying our deposit base. We embrace technology, but we've still got a lot to do with our core business, our spread business, it's growing the leaps and bounds. We're actually using artificial intelligence to enhance the efficiency in our banker where that's -- for me, that is the layup. The series in our bank that artificial intelligence seems ideally suited. So we're working with artificial intelligence people to improve our bank's overall efficiency so we can scale even faster. And a talk I was talking about, I think we'll be putting numbers out maybe in a year that banks thought were possible.

Your next question comes from Brad Ness at Choral Capital.

Well, I'm going to jump into things. You had quarterly expenses, noninterest expenses at 12.3 million in the quarter. Is there any one time kind of transitory expenses in there?

There's a little bit left from the previous year but not a whole lot anymore. That to 12.3 probably run rate for us now. It's like I said a little bit of hangover from the past, but there's pluses and minus going forward.

And what type of growth should we see in that number kind of excluding a U.S. acquisition?

Yes. We've already absorbed the additional salary increases that came about by hiring some new employees in key areas is of course, also just the general wage increases that I guess post-pandemic gave us gave us all inflationary increases. So that's already in the numbers. And yes, I mean, there's potential for a little bit of a decline in that 12.3. But I wouldn't think about it that way. Because there's kind of a lot of moving parts involved.

And in light of continued upward pressure on interest rates. Do you think you can continue to maintain that interest margin on loans about 3%?

So saying this, there's a few factors, generally speaking, yes. You note that our cost of funds is about 1.5% less than the same term government, Canada. We have a really nice efficient gathering networking. And we've got, sooner or later, we know that those buckets I was talking about those insolvency accounts that we've opened are going to fill up with cheap deposits. So that helps. The thing that could depress NIM a little, which is kind of good, really good, actually, is the answer mortgage CMHC isn't conventionals. Because they have left, NIM, they're approximately 2%, all in after administration costs. So that that would depress NIM on a weighted average basis, but because very little capital they have, so it really boosts ROE. So henceforth, you're going to start seeing me talk more and more about ROE. I mean, obviously, we all know, that know about banks, that are we is highly correlated to this 2 percentage, a book value, market value presented percent of book and highly coordinated last analysis we did was 0.8, 0.6 was they are. So my mission is to move ROE up as fast as it can. So that stock starts trading where it should. In fact, I like to she is an outlier on the positive side, like because of the trajectory. So NIM covering around 3 could go up a little bit, down a little bit. But are we should really, really start moving.

And when I do think about ROE, at the end of this year, it sounds like you're excited about artificial intelligence, when it can use due to your efficiency in the back room. You're excited about capital efficiency and Instant-Mortgage. And with continued strong loan growth and limited expense growth. I mean, is 17%, ROE something that we should be looking forward by the fourth quarter?

Well, I let me say this to your Brad. I brought a team down to lovely Fort Lauderdale for a strategic planning session. And there was one metric I had probably every slide, and it was ROE and the target I gave the staff was 18%. Some of them choke, some fall off their chairs and such. But the building of the bank days are over, we're got the bank built now. And that's a realistic number, whether we get that by the end of this year, the last month, October, whether we can week, the month shows 18 or not, I don't know. But it's going to be moving up every month now because it has to take costs the same and revenue is growing by 8% a quarter right. As our loans have grown by that as a little plus and minus their 2 saying what central bankers do and how high the put rates. It could just dampen demand. But as I was saying earlier, Canadians, and I think their U.S. counterparts are quite rightly looking at energy costs and saying to themselves, hey, how do we save a few bucks on heating their house? And that's a wonderful market for point-of-sale business. So all in Brad, yes, realistically, I said, '18 and '18 looks definitely when our model will turn. So 2024, we shouldn't be clicking our glasses together and saying, the team did it for me.

Last question here. On your cyber initiative or I'll just call it the cybersecurity initiative. I'm always waiting for like a breakout quarter where revenues just jumped exponentially and kind of continues on a really strong path. And it's just, I continue to wait for that. What's going on with cybersecurity, and what type of growth expectations should we assume?

Well, the breakout quarter, I'm waiting for 2. And here's what you can expect. Next quarter and a quarter and quarter after it'll be it'll be good growth in DRTC based on the new products and the customers and sort of how we're onboarding new customers. But to get a breakout, frankly, I think we've got to have a reseller signed up. Somebody who's got a huge customer base and wants to resell these products for us, when we don't have a sales force that can produce 10 times revenue growth. Somebody else could. The type of products we have our state-of-the-art, they work for our bank, they're fantastic. I mean, some of the customers we've on boarded or the who's who in North America, of course, some of them. So you've got a first class product, oh, it's tough. In-house developed suite of wonderful products. I think other rap fights throughout North America would do would be really happy with her sweet. But we've only grown a few people. And right now our focus is mainly on the bank growing the banks NIM business.

There are no further questions from the phone lines. At this time, I'll turn the conference back to David Taylor for any closing remarks.

Well, I just like to thank everybody for dialing in and listening to us. It's an exciting quarter for us, and I very much look forward to talking to you next quarter. Stay tuned. VersaBank is centered on airport I'll say a passenger safety belt. So we're cleared to take off. Thank you. Bye.

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