VersaBank (VBNK) Earnings Call Transcript & Summary

Well, good morning to all of you. My name is Tom Hockin, and I am Chair of VersaBank, and I've been a Director of the bank since 2014. And I'd like to welcome all of you. Almost every seat is taken. The Annual and Special Meeting of Shareholders of VersaBank will now come to order. In accordance with the bylaws of the bank, I will preside as Chair of the meeting. Brent Hodge, Senior Vice President, General Counsel and Corporate Secretary of VersaBank will act as secretary of the meeting. Today's meeting is held in person at the VersaBank Innovation Centre of Excellence in London, Ontario, and made available by live video webcast. My task first, I think, is to introduce the Board of Directors. We'll do so before commencing the formal business of the meeting. I'd like to introduce the other directors who are here with us today, and I'll ask them to stand as I introduce you. Gabrielle Bochynek. Gabrielle is from Toronto and currently resides in Stratford. She has been a director of the bank since 2019. Gabrielle, thank you. Robbert-Jan Brabander. Robbert-Jan is from Richmond Hill and has been a director of the bank since 2009. Robbert-Jan. David Bratton. David is from London, Ontario and has been a director of the bank since 1993. David. Peter Irwin. Peter is from Toronto, and has been a director of the bank since 2021. Rick Jankura. Rick is from London, and has been a director of the bank since May 2022. Art Linton. Art is from Kitchener and has been a director of the bank since 2020. Susan McGovern. Susan is from Aurora and has been a director of the bank since 2011. She's also vice chair of the bank. Paul Oliver. Paul is from Markham, and has been a director to the bank since 2005. David Taylor. David is from Ilderton and has been a director of the bank since 1993. David is also the President and Chief Executive Officer of VersaBank. We're also pleased to have some of the other officers and senior managers or the bank here today. The shareholders' auditor, Ernst and Young LLP, is represented today by [ Andrea Fidella ]. Andrea, there you go. Welcome. In order to make the best use of our time, certain individuals have been asked to move and second resolutions which are set out in the notice of meeting. I will call them in at the appropriate time. A word about scrutineers. Arlene Agnew and Lise-Anne Thomas of Odyssey Trust Company will act as scrutineer to report on the shareholders present in person and by proxy at this meeting. They will compute the votes cast by ballot, if any, and to report to me on these matters. Prior to the commencement of this meeting, the scrutineer reported that based on the registration of shareholders this morning and the proxies submitted, a quorum has been reached. In accordance with the bylaws of the bank, I declare the meeting then regularly called and properly constituted for the transaction of business. I direct that the scrutineer's report be annexed to the minutes of the meeting. I move now to the notice of the meeting. The notice calling this meeting and the accompanying material had been mailed to all shareholders of the bank who were shareholders of record on February 22, 2024. The secretary of the meeting has provided the proof of mailing of such material. Accordingly, the reading of the notice of meeting will be dispensed with and a copy of the notice with the proof of mailing will be kept with the secretary of the meeting. So I propose now to proceed with the business of the meeting. The financial statements of the bank for the year ended October 31, 2023, together with a 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 would be pleased to deal with any relevant questions concerning the statements during the general question period, which follows the formal business of the meeting. Copies of the report of the auditors on the financial statements are available for inspection at this meeting. Moving now to matters to be voted on. First is appointment of auditors. We're appointing the auditors for the current year and the authorization of the directors to fix the remuneration of the auditors. In respect of voting on the appointment of auditors, each holder of common shares of the bank is entitled to one vote for each share held by him or her. Please note that only those who are registered shareholders and appear on our registered shareholder list, as provided by our transfer agent, and those persons who are authorized proxy holders are eligible to vote in today's meeting. Now I propose to conduct the vote on the matter of the appointment of auditors by a show of hands. Please note that each registered shareholder or proxy holder present in person at this meeting has the right to demand that a ballot be conducted either before the show of hands or following that vote. And when a ballot is conducted on a resolution, I will vote by ballot all the proxies submitted to me as proxy holder as required. I will now ask John Asma to move the resolution appointing auditors for the current year and Andy Min to second the motion. John?

I move that we resolve that Ernst and Young LLP be appointed auditors of the bank to hold office until the close of the next annual meeting of shareholders or until the successors are duly appointed. And as the directors of the bank, we authorize to fix the remuneration of the auditors for the current year such amount as they made in their discussion.

May I have the motion seconded?

I second the motion.

Thank you. You've now heard the motion, and as there is no further discussion, I now put the resolution to the meeting. For this resolution to be passed, it must be approved by an affirmative vote of not less than a majority of the votes cast in respect thereof by the shareholders present at the meeting in person or represented by proxy. All those in favor of the resolution, please so signify by raising your hand. Thank you. Contrary, if any? I declare the resolution carried. We now move to the election of directors. In respect of voting for the election of directors, which is to proceed by way of cumulative voting, each holder of common shares of the bank has the right to cast the number of votes equal to the number of votes attached to the shares held by the shareholder, multiplied by the number of directors to be elected. And the shareholders may cast all such votes in favor of 1 candidate or distribute them among candidates in any manner. If a shareholder has voted for more than one candidate without specifying the distribution of the votes among candidates, the shareholder is deemed to have distributed the votes equally among the candidates for whom the shareholder voted. If the number of candidates nominated for director exceeds the number of positions to be filled, the candidates who receive the least number of votes will be eliminated until the number of candidates remaining equals the number of positions to be filled. Now to comply with the provisions of the Bank Act, the election of directors will be decided via vote by ballot. Where a ballot is conducted on a resolution, I will vote by ballot all the proxies submitted to me as proxy holder, as required by law. Now please note that only those who are registered shareholders that appear on our registered shareholder list, as provided by our transfer agent, and those persons who are authorized proxy holders are eligible to vote at today's meeting. So we'll now proceed with the election of directors. The number of directors of the bank is fixed at 10 and it's necessary for such number to be elected. I now declare the meeting open for nominations for the election of 10 directors to hold office for the ensuing year or until their successors are elected or appointed. Brent Hodge will now nominate each of the individuals listed in the management proxy circular for election as directors for the coming year, each of whom has agreed to serve as a director, if elected. I will ask Shawn Clarke to second the nominations.

I nominate each of the Honorable Thomas Hockin, David Taylor, Gabrielle Bochynek, Robbert-Jan Brabander, David Bratton, Peter Irwin, Richard Jankura, Art Linton, Susan McGovern, and Paul Oliver for election as a director of the bank for the ensuing year or until a successor is elected or appointed.

May I have each of the nominations seconded.

I second the motion.

Thank you. Are there any further nominations? Well, I declare nominations closed. Brent Hodge will now move the confirming resolution, and Shawn Clarke will second the motion.

I move that it be resolved that each of the Honorable Thomas Hockin, David Taylor, Gabrielle Bochynek, Robbert-Jan Brabander, David Bratton, Peter Irwin, Richard Jankura, Art Linton, Susan McGovern, Paul Oliver be elected as a director of the bank for the ensuing year or until a successor is duly elected or appointed.

May I have the motion in respect of the election of each director seconded?

I second the motion.

Thank you. The scrutineers have distributed a form of ballot to our registered shareholders and authorized proxy holders present. Each registered shareholder or proxy holder should record his or her vote in respect to the resolution which has been put to the meeting in the usual manner by indicating whether they are voting for all nominees, are withholding in respect of all nominees, are withholding in respect of one or several nominees. Each registered shareholder or proxy holder should then sign his or her name on the ballot. I would also ask each registered shareholder or proxy holder print his or her name on the ballot. The scrutineers will then collect the ballots. I would ask the scrutineer to deliver the report to the secretary of the meeting as promptly as possible. I understand that the report on the ballot from the scrutineer has been received. And the scrutineer reports that the resolution with respect to the election of directors has been duly carried by the majority of the votes cast both in advance and at this meeting. And accordingly, I declare the resolution carried. If any registered shareholder or proxy holder is interested in the exact number of votes cast in respect to the resolution, which has been voted upon by ballot, he or she may obtain particulars after the meeting on inquiry to the secretary of the meeting. The next item of business is the renewal of the bank's LTIP. Now this is the long-term incentive plan. A full copy of this plan is attached as Exhibit A to the management proxy circular mailed to the shareholders of the bank in connection with this meeting. On January 22, 2024, the bank's Board approved the renewal of the LTIP and now require a confirmation of the shareholders by ordinary resolution. The form of resolution is contained at Page 14 and 15 of the circular. Now in respect to voting on the renewal of the long-term incentive plan to the bank, each holder of common shares of the bank is entitled to 1 vote for each share held by him or her. Please note that only those who are registered shareholders and appear on our registered shareholder list, as provided by our transfer agent, and those persons who are authorized proxy holders are eligible to vote at today's meeting. I propose to conduct the vote on the matter of the LTIP by a show of hands. Please note that each registered shareholder or proxy holder present in person at this meeting has the right to demand that a ballot be conducted either before the show of hands or following that vote. Where a ballot is conducted on a resolution, I will vote by ballot all the proxies submitted to me as proxy holder as required. I will now ask Brent Hodge to move the resolution renewing the LTIP, and Shawn Clarke to second the motion.

I move that it be resolved that the renewal of the long-term incentive plan dated April 21, 2021, set out to schedule VIII, the management information circular of the bank is hereby approved, all unallocated options, rights or other entitlements under the long-term incentive plan B and are hereby approved. The bank shall have the ability to continue granting options, rights or other entitlements under the long-term incentive plan until April 17, 2027, which is the date that is 3 years from the date of the shareholder meeting at which shareholder approval is being sought and any officer or director of the bank be and hereby is authorized and empowered to make all such arrangements to do and perform also such acts and things and to execute and deliver all such documents in the name and on behalf of the bank or otherwise as such officer and director deems desirable or necessary in order to effectuate fully the purposes of each and all of the foregoing resolutions.

May I have the motion seconded?

I second the motion.

Thank you. This motion is now open for discussion. Well, you've now heard the motion, and as there is no further discussion, I now put the resolution to the meeting. For this resolution to be passed, it must be approved by the affirmative vote of not less than a majority of the votes cast in respect thereof by the shareholders present at the meeting in person or represented by proxy. All those in favor of the resolution, please so signify by raising your hand. Contrary if any? I declare the resolutions carried. Is there any further business? So if not, this concludes the formal business of this annual and special meeting of the shareholders. I would now ask Shawn Clarke to move the final resolution.

I move the formal resolution.

The motion has been accepted, and I declare the formal business of the meeting terminated. Now what everybody has been waiting for. I asked the President and CEO of the bank, David Taylor, to make his remarks concerning the bank. David?

Well, thank you, Tom, and it's a delight to see you all here today with the inclement weather that might have been more conducive for a duck. I'm surprised that we've got so many people show up. So for those that are joining us through the webcast, we're at the VersaBank's Innovation Center of Excellence in London, Ontario, at the London Airport. It's one of two tech centers that we have. One is at the University of Saskatchewan's Innovation Place. And the one here in London literally has our driveway leading to North America or perhaps the entire world, because we're at the London Airport, and we're actually holding this meeting in the hanger that keeps our planes out of the rain. Now before I get going, I'll just put up the normal advisory about forward-looking statements, and that's up. And now on to this really good looking slide here. Last year, of course, was a record year for us. We've had a few record years over last while. But this one in particular showed some fantastic figures, 29% year-over-year growth in assets, 29% in loan portfolio, 30% in point-of-sale business, and 86% in net income. And it was even more in earnings per share, 99%. Too bad I didn't have one more cent, I could say double. And that's because we took advantage of the lower share price over the year and repurchased shares below book and were able to even show a higher EPS. So this business, of course, has been driven by Mike Dixon, who is standing in the back there, Point-of-Sale program, almost all in Canada. And as I think most of you know, we have our eyes set on bringing this new product to the United States soon. Next slide. And here we are having -- let me see, my eyes are a little out of focus here. So on the key metric side, your assets are at $4.2 billion now. On another slide, I'll show you that one of our milestones is this year to hit $5 billion. And at $5 billion, the bank statistics start to look even better. Total revenue of $32 million, net income and all that. Return on equity is a key figure that I keep an eye on. I'm sure shareholders all do, too. Last year, it averaged 11.75%, which is all right. The final quarter though, we were closing it on 14%, which is getting better. And if we can keep the growth growing, then the math just works out to about 16.5% with about a $5 billion average size of assets. So the return on equity is coming into focus. And it's just purely a result of how the math works in our banking model. Next slide. And this slide shows what I was talking about, with the operating leverage kicking in this year in that as we get bigger and bigger, without adding fixed costs, you can see the fixed costs have stayed pretty well steady, $49 million, $50 million. And this year, the first quarter run rate was around $50 million. I am expecting, though, that, that fixed cost could increase somewhat in that we have some inflationary pressure. But right now, it's sort of hanging in there at the $50 million mark. So what that means is that as our assets grow, that increases our net interest income, so we're directly proportionate. And after the $50 million is paid, that just drops to the bottom line in pretax earnings. So it gives a very dramatic improvement in EPS and net earnings, because primarily the fixed costs remain fixed. Moving along. Some other key metrics. This is the first quarter. Total revenue up 11%. EPS year-over-year up pretty dramatically from the previous year. Again, just simply driven by our Point-of-Sale business growing in Canada. Moving along. So I think everybody is on the edge of their chair, as we are, hoping that we see a green light from the U.S. regulator to complete the purchase of Stearns Holdingford. We've been working with our U.S. regulatory friends on both locations, Washington and Minneapolis. And I think it's moving along as it should. I'm hoping that we'll see a positive result fairly soon. We think all the various questions have been answered, but we stand ready to answer more questions that the regulators have them for us. Unlike other businesses, a bank business is somewhat unique in that we have the privilege of receiving deposits from risk-averse people, who quite rightly expect to get their money back. So we find ourselves, of course, operating in a highly regulated environment, and we have to convince and comfort the regulators that we're running a bank that's safe and sound, and that those depositors' monies are safe with us. I think most of you know, in the United States, they had historic bank failures fairly recently. And that, of course, caused the U.S. regulators to be a little more diligent and questioning for this new foreign bank coming to their country, which we expected and they're doing exactly what they should do. In fact, one of them said, "What if you have a run on your bank, David?" And I said, where are they going to run to? We don't have any branches. So then they said something to the effect of, "What about your website?" Because in the States, they had depositors pull the money out courtesy of the website and move it to some other bank in an afternoon, leaving the bank insolvent. I said, but we don't have one of those fancy websites where you can access your deposits. So pretty tough to have a run on our bank. When you make a deposit at VersaBank, that's usually in the form of, in Canada, they call them GICs or term deposit receipts or term. So you receive your money back when it matures. We don't offer what you call high rate daily and savings accounts that people can pull their money out if they see fit. If they read something ridiculous about me flying an airplane too lower or something like that and want to pull their money out. We don't offer those for the reason we don't like, and you probably, those who have followed us, we don't like risk. So we try to mitigate it wherever we possibly can. And liquidity risk, of course, is what hurt those poor U.S. banks that failed recently. Anyways, we're hopeful that it's going to be fairly soon to make that announcement. It's almost 2 years it's been in the -- and it was originally taking a year. But with those failures, it had dragged on a little bit longer. Moving along. And so this slide just gives a view of what we think the U.S. market holds for us in the Point-of-Sale program. It might be $1.8 trillion vis-a-vis Canada is $180 million. So a huge difference in size. And from our last few years working with potential U.S. clients, it looks like there's a tremendous appetite for our product. It's what you call a greenfield from our perspective. And I often get asked, hasn't somebody in the United States done this? In fact that's what they asked me, the regulators, in 1993. Hasn't somebody in the United States done a digital bank? And I said no, and they said, "Oh, gee, what make you think you can? You're a Canadian, right?" Well, the OCC, that's the Office of the Comptroller of the Currency has confirmed to us that this model that we have, this Point-of-Sale financing model doesn't have a duplicate in the United States. So we are bringing a brand new product that we think is very attractive, and it's been very successful here in Canada. Moving on. And this slide shows sort of the power of the operating leverage. As you can see the return on common equity figure heading up north where it should be as the assets of the bank grow. And then those milestones we posted a few times. Just to give you an idea how the math works. At $5 billion in average assets, the math shows 40% or maybe a little less in efficiency. That's probably one of the best in North America. If you can get into the 30s in efficiency. And ours gets there with a little bit growth in assets. And it produces a decent return on common equity. But of course, as we move a little bit bigger, the numbers just keep getting better and better. Next slide. So this is the wrap up. And I'm sure you're all investors of VersaBank anyway, so you don't need convincing, but this is what I usually say, "Why would you want to invest at this point in time?" Well, one thing. The whole stock market tanked and our stock went down too, so it's a pretty good buy. But other than that, we're clearly at an inflection point where the offering leverage is being seen demonstrated and we think that acquisition in the United States is imminent, and that opens up this tremendous market for our proven Canadian product. And we're happy to serve the point-of-sale companies in the United States. We think we have a product that will percolate through to the consumers and provide them with more choice and more economical financing. So it's good. It's our classic win-win all the way around. The model that we created here at VersaBank, as I was alluding to earlier with respect to liquidity risk, is highly mitigated, i.e., I had the opportunity to design this bank literally with a whiteboard. So all the normal risks that banks face, I try to get away with. I try to eliminate them, not have credit risk, liquidity risk, operational risk, all those risks that traditional banks face and sometimes hurts them. I designed the bank to be somewhat impervious to them. And over the 30 years, it's shown that. It's one thing to say it, but it's actually demonstrated that. And the valuation, well, son of a gun, it still is running below book, which, I guess, is a symptom of the U.S. market. I think power to my screen, today and yesterday it was pure red on every stock I follow. But sure that will turn around as equity markets too. And the cybersecurity business that we created, first and foremost, to keep our bank safe is growing quite rapidly in the United States. We have about 400 of the who's who as clients, and that would be the transportation lines, the energy companies, states, police departments, and such. We do cybersecurity work for them. And tremendous demand for that work strengths you enough. Our fellow humans disappointingly seem to have nefarious tendencies. I want to hack in and try to steal people's data or hold them for ransom, but what it means for our cybersecurity firm is a lot of business. And unfortunately, sad comment on humanity, I don't see any end to that. I kind of think that's the way of the world. So we call it a free option, and that's because it's not part of the bank's valuation. Obviously, the bank is trading less than the book. The cybersecurity firm has a fair amount of value. Some people put it at $100 million, but it's not reflected in the figures. So you get the free option.

I think that's it. Open for questions. So I'm open for questions with the crowd here in front of me, which isn't really a big crowd. But also from the website I think questions are going to be received and then recited to me by Lawrence. Jeff Wagner, where are you? Jeff, are you here today? Jeff always has a question for me.

Exactly. We've seen the numbers and how good everything looks. And of course, it's a little frustrating because it doesn't translate into the stock price. The problem, and it's something we can address, but for the bank it's not necessary. You don't need it. It's not going to help you out any, but it's the liquidity on the common shares. And you're reducing it with the stock buyback, because frankly you don't need it. So you're sort of sitting on a fence here, and what can we do to improve the liquidity and the trading on the shares in the market, which would go a long way to upping that share price?

Really good question. So what we're hoping, and we're hoping we receive the U.S. bank approval soon. And at that point, we're hoping the stock comes back to life. I guess we have to also hope the market doesn't stay so pessimistic. And if the stock does come back to life and starts trading at where a normal U.S. bank trades, which is somewhere higher than 1.5x book, that's about CAD 23 a share, that it's possible we'd do an offering to create some liquidity and shore up our capital for the rapid growth that we expect in the United States. So that's on the drawing board, but it rests on where the share price is. If it's down below book, we're buying it. We have a normal course issuer bid on the shelf right now. We would activate it and buyback is too good a deal to pass up. And as you say, Jeff, it does hurt liquidity. But I don't expect that to stay that way for long. And that normally, a U.S. bank our size on the NASDAQ trades north of 1.5x. And I have no reason to believe we should be less than that. And P/E ratio, we're at 8 or something, it should be closer to 12 for a normal U.S. bank. Rapidly growing U.S. banks are in the 20s. Any questions from -- there's Doug Holliday.

Sorry, a question from the back here. My name is David Brennan. I just had a question regarding your U.S. expansion strategy. If the regulator does decline the acquisition, what's the backup plan?

Well, we're doing very well in Canada, obviously, doubling our earnings in this country. We have a backup plan sort of in the works to operate through our finance company we set out, Versa Finance, and in partnership with other U.S. banks that we're actually dealing with presently. That backup plan may actually spill over into the actual plan, because it may be that the growth in the United States is so much so that we may partner with U.S. banks anyways. So that's the backup plan. But if we're to be a Canadian point-of-sale company, and we're obviously growing very well and very profitably, and there isn't that much more expansion, then you'd start looking like Canadian banks normally do, cranking dividends, because Canadians tend to like a dividend. And presently, our dividend strategy has been to pay a minimal dividend and keep the capital to provide for growth. But in that extremely unlikely event that U.S. regulators don't give us the green light, Canada and Versa Finance would be the way we go. Good question. We always have backup plans. A pilot always -- even if you've got 2 engines, you're always looking for a field anyways.

David, can you comment on the future of DRT if and when the U.S. acquisition happens?

Well, it's quite likely that we divest the DRT sometime after we've got the approval to purchase that U.S. Bank. DRT Cyber was somewhat compatible with the Canadian rules for what a bank can hold, but it doesn't seem to work for the U.S. regulators. So probably sometime in the future afterwards, we'd look at divesting of DRT. Little boost for our shareholders, because I do think it's worth fair. Some of the numbers I got in California were outrageous for a tech company like DRT that has that client list. Certainly, there's some questions from the podcast?

No. Unfortunately, there was one question from the webcast, but it's already been asked in-house. So...

Well, if that's it, again, it was very, very nice to see you all arrive here at London. This is maybe unusual for a bank in the world, I suppose, having an annual shareholder meeting in the hangar. But that sort of indicates what kind of bank we are. We operate literally in the cloud. This is one of the tech facilities. The other one is in the University of Saskatchewan. Our data center is in the United States, and we have a backup here in Canada. Functionally, we can operate anywhere in the world, but using an airplane metaphor, I said, but we're not wheels touch down. We have to have authority. We have to have the banking authority to land. But I do have grandiose perhaps ideas about where VersaBank's model can go, and literally, functionally, it could be anywhere in the world. Our sight is, of course, for United States, the largest market in the world. Again, thank you for coming, and I'll be available for questions afterwards.

Well, ladies and gentlemen, this concludes the presentation. And I wish to thank all of you for taking the time to attend this annual and special meeting of the shareholders today. Thank you very much.