U.S. Markets closed

Edited Transcript of VB.TO earnings conference call or presentation 27-Nov-19 2:00pm GMT

Q3 2019 VersaBank Earnings Call

LONDON Jan 10, 2020 (Thomson StreetEvents) -- Edited Transcript of VersaBank earnings conference call or presentation Wednesday, November 27, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Roy Taylor

VersaBank - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Stephen Boland

INFOR Financial Group - Principal

* Brian Smith

- Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to the VersaBank Fourth Quarter Results Conference Call.

I would now like to turn the meeting over to David Taylor. Please go ahead, Mr. Taylor.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [2]

--------------------------------------------------------------------------------

Thank you, Melanie, and good morning, ladies and gentlemen. Welcome to VersaBank's 2019 Fourth Quarter and Annual Financial Results. Also with me today, I have Shawn Clarke, who's our Chief Financial Officer.

Before we begin, please note that the conference call slides, quarterly results, news releases and supplemental financial information are all available on our website, which is versabank.com.

I'd like to remind our listeners that statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by management. Actual results should -- could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank's business. Please refer to our forward-looking statements.

I'm turning to Slide 3. Our strategy of using new technologies to access otherwise unattainable banking niches is working very well. Over the past 5 years, EPS has grown by a phenomenal annual compounded growth rate of 24%. This year's EPS increased to $0.85, and core cash earnings increased to $1.30 per share. This net income growth allowed us to increase our regulatory capital, which fuels our growth and also increase our dividend.

Turning to Slide 4. During 2019, we accomplished a number of key tasks. We were approved by MasterCard as an issuing member. We entered into new partnership with a second insolvency administrator, Vision Blue. We launched VersaVault and DRT Cyber Inc. We created 3 new e-commerce origination channels, and we grew e-commerce Purchased Receivable Program and total assets to over $1 billion. We achieved of course record EPS and core cash earnings of $0.85 and $1.32, respectively.

Turning to Slide 5. Here's what we plan to do in 2020. We plan to launch a MasterCard co-branded credit card program. We plan to launch a new project with code name Direct-Connect. We continue -- we're going to continue to expand our e-commerce product offering to support additional incremental portfolio growth. We're going to maintain our commercial banking portfolio around its present size. We're going to expand our commercial deposit base, and we're going to expand DRT Cyber Inc.'s capabilities and product scope. This all, of course, should result in increased EPS and core cash EPS.

Turning to Slide 6. Lower noninterest expenses, lower provisions for losses and higher NIM, that'd be net interest margin, that's increased to 304 basis points from 300, contribute to net income increase over last quarter. VB's provision for credit losses ratio for the quarter remained negligible, and VB's efficiency ratio improved to 45.26% for the quarter.

Turning to Slide 7. Revenue declined slightly, but as I said earlier, it was made up by a significant reduction in noninterest expenses and a decrease in provision for losses, giving rise to a record quarterly net income for the quarter.

Turning to Slide 8, it shows how our regulatory capital increased. And in terms of capacity, roughly, we have approximately $2 billion worth of capacity for CMHC mortgages or about $1 billion worth of capacity for conventional mortgages, and approximately $500 million in capacity for our receivable purchases. And notice I'm saying or. What we expect is the combination of these various programs to grow.

Turning to Slide 9. This slide shows our net interest income figure declining slightly over the previous quarter, but this reduction, as I mentioned earlier, was offset by a reduction in noninterest expenses.

Slide 10 shows that in 2019, we benefited from an increase in revenue year-over-year and a recovery of a provision for credit losses, while noninterest expenses only increased marginally.

Let's -- turning to Slide 12, it shows our provision for credit losses, as usual being one of the lowest in the industry, declining to only 13 basis points.

On Slide 12, our bank's model involves taking, of course, minimal credit risk, and that's been illustrated over the decades by having one of the lowest loan loss provisions in our industry. And also targeting niche markets where we were able to earn extraordinary wide net interest margins. I suppose that follow banks will know that generally, you don't get your cake and eat it too. They appear to have wide interest margins, the size of what VersaBank is able to produce. Normally, you give a good portion of that back in provisions for losses. But over the decades, it's our model by targeting niche markets using technology has given rise to having our cake and eat it too.

Going to Slide 13. Fourth quarter, we only had 2 nonperforming loans. And one of them was normalized dropping off our gross impaired loans. And so that the ratio dropped from 1.58% down to 39 basis points. We expect that we'll able -- be able to normalize this one remaining impaired loan in the present quarter.

Turning to Slide 14. This slide illustrates that more than half of our loans are in Ontario. Of course, the 2 factors that explain that are that Ontario has largest population in the country. And historically, Ontario is the -- where the roots are of VersaBank. It's where VersaBank was formed.

Turning to Slide 15. This illustrates that the balance of our loan portfolio has remained relatively static over the past year. This has resulted from our strategy of reducing the size of our real estate loan portfolio and increasing the size of the purchased loan and lease portfolio. Well, there's been a reconfiguration over the course of 2019, where we let certain noncore real estate loan assets repay, and we replaced them with growth in our Receivable Purchase program.

Slide 16 talks about VersaVault. This is a technology that we created that we believe is leading-edge technology to safely store digital assets. We're very excited about the potential that VersaVault brings to the bank.

Looking at Slide 17. This is an interesting correlation graph that shows that VersaBank's common shares remain a significant outlier, I guess that's what you'd call it, on the buy side. Hopefully, with more education of our market, that can be rectified.

With that, I'll close my formal remarks and turn it over to the operator, Melanie, to open the floor for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from Stephen Boland.

--------------------------------------------------------------------------------

Stephen Boland, INFOR Financial Group - Principal [2]

--------------------------------------------------------------------------------

Maybe first question, David, if you could just talk about the 2 business segments. Commercial loans, it continues to trend down a little bit further compared to Q3. I mean where do you see the bottom in terms of the loan book in that segment kind of bottoming out?

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [3]

--------------------------------------------------------------------------------

We bottom out this order, Steve. The commercial banking portfolio is basically composed of construction loans and term loans and such we call legacy loans from the past, some are public sector loans with thin spreads. So what we've -- what we're allowed to do is the noncore business, that being the thin spread term loans and public sector loans to repay, and we also had a fair amount of construction loans mature that we're now replacing. So going forward, you'll see the book remain about the same, maybe a little bit of growth in the construction area and that we've authorized quite a number of new construction loans, but not much growth in that area, 2% or 3% or something like that in the upcoming year.

--------------------------------------------------------------------------------

Stephen Boland, INFOR Financial Group - Principal [4]

--------------------------------------------------------------------------------

Okay. That's good. Second question is on the e-commerce loans. There is some speculation that there is some portfolio that are up for sale that may be changing. I'm not sure if you've heard that, and is there a possible impact to your business over the next several quarters?

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes, we have heard that. And it's -- I guess, you'd expect it's a relatively new market, and there's a bit consolidation going on. The impact on us might be positive in that some of these portfolios that might be changing hands are accessible by us, what we called -- through our Direct-Connect software we're developing. So I -- we don't see really any overall impact on the growth of that portfolio. There's a few other originators that we've been working with in some very large markets that, I think will more than make up for the perhaps reduction in the ones that might be bought by others. So we're looking for, again, significant growth in our Receivable Purchase program. And then, of course, in the commercial banking sector, hardly any growth but maintaining where it presently is at.

--------------------------------------------------------------------------------

Stephen Boland, INFOR Financial Group - Principal [6]

--------------------------------------------------------------------------------

Would those large originators that you just mentioned, are those possible? Are they coming on stream in this fiscal year? Possible?

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [7]

--------------------------------------------------------------------------------

This quarter.

--------------------------------------------------------------------------------

Stephen Boland, INFOR Financial Group - Principal [8]

--------------------------------------------------------------------------------

This quarter. Okay.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [9]

--------------------------------------------------------------------------------

Yes. This quarter. We've been working on it throughout 2019. And I suppose in a sort of a reaction to what you are alluding to, there has been a shake-up in the industry and the consolidation. So we set our sights on some new markets that we thought were relatively untapped, and developed the software and the capability of receiving receivables from these markets. So in this quarter, you should start to see those going on the books and expect it to gather momentum throughout the year.

--------------------------------------------------------------------------------

Stephen Boland, INFOR Financial Group - Principal [10]

--------------------------------------------------------------------------------

Okay. And last question for me, David, just on the NIM. It's floated around that 3% mark, came down 8 basis points sequentially. I mean is 3% still a decent number? Or do you expect to float up and down a little bit in that range?

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [11]

--------------------------------------------------------------------------------

I'd expect it to hover around 3%, up and down a little bit. The reason why it dipped a bit in one of the past quarters and then recovered is the gross impaired loan that we had as we were accounting for some of the interest. It wasn't going into the income and then it was recaptured when the interest was paid. So it gives a little fluctuation in the NIM. But generally speaking, we look for a 3% NIM. We target that, and that's one of the reasons why you saw us let the thinner-priced legacy loans repay. And in fact, what we did is to replace those loans with the higher-priced receivables that we were purchasing to hold on to the 3% NIM.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions) And the following question is from [Brian Smith].

--------------------------------------------------------------------------------

Brian Smith, - Analyst [13]

--------------------------------------------------------------------------------

Yes. First, I want to congratulate you on your excellent results. I'm also surprised that the market hasn't recognized the value of your stock. And I've asked this to your public -- Investor Relations person a while back, but I have one question, and I have another one after. The first one is, given the fact that your stock is undervalued, instead of a dividend increase had you considered a normal course issuer bid that could, in fact, take advantage of the undervaluation for existing shareholders that are interested in selling?

And then the second question is, if we were to take a look at your business, there seems to be this very efficient banking machine that's there. And then you have this option with these new businesses in Cyber technologies, MasterCard and so forth. Could you -- in order to get a better understanding of the potential of your business, could you identify how much of your cost structure is associated with the new businesses versus the legacy? I know your efficiency ratio is 45%. But if you didn't have all the energies that are dedicated to building these new businesses, what would your efficiency ratio be? Maybe you can answer the second one first and then go to the normal course issuer bid.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [14]

--------------------------------------------------------------------------------

Well, I haven't got the numbers off the top of my head, but we do devote a fair amount of energy, money and time into developing new businesses. Our mission statement is to provide innovative financial solutions to our clients in selected niche markets. So keeping in line with our mission statement, we're always having a look at what new and better solutions we can provide. So it does soak up quite a bit of time. If we were steady state, I just speculate that that efficiency ratio would drop significantly lower. And the earnings would probably stabilize at one of the best in the industry, I suppose. But the risk is with today's changing technology environment that -- which is being illustrated with -- by Steve Boland's questions, you can find yourself become redundant. You could -- some of the products could maybe not be as attractive as they have been in the past. So we feel it's important that we keep looking forward about what new ideas we can bring to the market.

What I was alluding to with Steve's question is, yes, in the Receivable Purchase program, that's a relatively new business. We started it about 7 years ago. And for a little while, we were one of the first movers in it and had quite an advantage. But lots and lots of other FYs to come into it. So we have come up with some new technology to apply to that industry, and that we were hoping to roll out this quarter. So we think it's worthwhile spending the time on that in this particular new, we call it, code name Direct-Connect. We think it's something that will give the bank an advantage for many years to come.

With respect to the normal course issuer bid, yes, indeed, we did have a look at that. It just takes a month or so to get it in place. And we -- so we're putting it in place, but it may very well be that some of these new initiatives that I was referring to will start soaking up the capital rather rapidly. And I'd be surprised if our stock stays at the level it is. It's just such a outrageous outlier, but I think -- if we could have waved our magic wand and started buying the stock back when it was as low as it was around $6.50, $6.80, maybe we would have done it, of course. But by the time normal course issuer bid gets in place, I think with these earnings releases and the really sort of regathering our momentum in the Receivable Purchase over these new products that we'll start to utilize the capital rapidly, and those stock will probably reflect it.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions registered at this time -- actually, I'm sorry, we do have a question from Brian -- hold on one moment, Brian Smith.

--------------------------------------------------------------------------------

Brian Smith, - Analyst [16]

--------------------------------------------------------------------------------

Yes. First of all, I'm, again, fascinated by your initiatives here. Could you tell us more about the MasterCard credit program that's been a very profitable niche for the activities for the major banks to have. How do you see yourself playing this out?

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [17]

--------------------------------------------------------------------------------

Well, I think at the onset, some of our existing customers are interested in partnering with us on a MasterCard. So last year, we applied a MasterCard to have a conditional approval to issue the card. There's a number of areas that are complementary to our type of business. I like, in particular, the MasterCard global elite card that allows MasterCard holders to utilize their cash on deposit with the bank throughout the world with a secured card. It works well for us, and that it sort of fast forwards us away from the archaic ways of doing i.e. travelers checks and other types of checks, where if you're a world traveler you'll find it very difficult to use your money. I like that one. And then there's prepaid cards in riskier markets that we're having to look at, again, in partnership with some of our existing customers.

--------------------------------------------------------------------------------

Brian Smith, - Analyst [18]

--------------------------------------------------------------------------------

Excellent. Excellent.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [19]

--------------------------------------------------------------------------------

Well, thanks for the good questions.

--------------------------------------------------------------------------------

Brian Smith, - Analyst [20]

--------------------------------------------------------------------------------

Yes, I know I wanted to make earlier calls, but this is the first opportunity I had to join your conference call. I -- it's just surprising me that there is not more people around here. Again...

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [21]

--------------------------------------------------------------------------------

Well, hopefully, we're going to change that. We've got -- this year, I want to stop that -- the embarrassment of having a stock that's trading a good bit less than the TSX average as -- with respect to multiples. So it is turning out to be a bit of an embarrassment of having a stock trading that low. Mind you, for myself, personally, I think the insider reports show that I've been capitalizing on it but yes, we're going to -- we're hopefully going to raise the flag up the pole a little bit more and talk about what we're up to.

--------------------------------------------------------------------------------

Brian Smith, - Analyst [22]

--------------------------------------------------------------------------------

Yes. No, it's interesting. I see a lot of fintech. So it's -- companies trying to start out. So you're doing it. So I'm very impressed.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [23]

--------------------------------------------------------------------------------

Well, thank you.

--------------------------------------------------------------------------------

Brian Smith, - Analyst [24]

--------------------------------------------------------------------------------

Well. Okay. I also want to comment that you're the first CEO that has actually started new initiatives and hasn't increased the NIM costs. So congratulations.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [25]

--------------------------------------------------------------------------------

Well, thank you. Yes, that's the trick. We talk to our staff, we're not saying every day, but maybe every second day about finding economical ways to do things, faster, cheaper ways of doing things. We take a hard look at our cost structure. And you can also use the new technology internally to do things a little more economically. And that's what we try to do because, obviously, these types of costs can get away in a hurry if you don't watch them.

--------------------------------------------------------------------------------

Brian Smith, - Analyst [26]

--------------------------------------------------------------------------------

Yes, yes. I know the whole premise behind your bank is actually why you're going to be more successful. The other banks have to set up innovation centers outside their main core because they're not thinking like you are. They have the bureaucracy to worry about and the politics. You've got that at the core of your business. I'm so impressed.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [27]

--------------------------------------------------------------------------------

Well, thank you. Hopefully, everyone else will be all happy about it.

--------------------------------------------------------------------------------

Brian Smith, - Analyst [28]

--------------------------------------------------------------------------------

Yes. Well, sometimes, you know what, if you're not going to the market looking for capital, then you're not followed that much. So that appears to be the way it is. So I wouldn't take a lack of coverage as anything other than that.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [29]

--------------------------------------------------------------------------------

Yes, I agree with you.

--------------------------------------------------------------------------------

Brian Smith, - Analyst [30]

--------------------------------------------------------------------------------

Yes, that's the way the markets work. They're all excited about Canada's 1-day cryptocurrencies, pureplays the next day. So -- and this is coming from somebody who's been in -- teaching finance for years. So yes, retail investors, yes, they get what they pay for.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [31]

--------------------------------------------------------------------------------

Yes. Unfortunately, and since the last year, they've really learned some hard lessons.

--------------------------------------------------------------------------------

Brian Smith, - Analyst [32]

--------------------------------------------------------------------------------

Yes, yes. So institutions, then you'll probably get some foreign institutions hopefully covering you more. So -- or at least making investments so.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [33]

--------------------------------------------------------------------------------

Yes, we're hoping so this year. With 5 years' history with this sort of growth, hopefully.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions registered at this time. I'll turn the meeting back over to you, Mr. Taylor.

--------------------------------------------------------------------------------

David Roy Taylor, VersaBank - President, CEO & Director [35]

--------------------------------------------------------------------------------

Well, thank you, everybody, for dialing in. I appreciate having the opportunity to talk about VersaBank. Look forward to catching up at the end of the next quarter. Have a nice day here in London town. We're being greeted with the torrential rains. I noticed the corn is still in the field as I was driving in from the country. Poor farmers haven't been able to harvest their crops. And I also noticed a neighbor of mine was outside building what looked to be like an ark. So I'm sure you're dialed in from all over the country. So -- but have a little sympathy for us here in London, Ontario. And thank you, again, for dialing in.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.