Good day, everyone. Welcome to the iAccess Alpha Buy-Side Best Ideas Spring Conference 2024. The next presenting company is VersaBank. If you would like to ask a question during the webcast, you may do so at any point during the presentation by clicking on the Ask Question button on the left of your screen. Type your question into the box and hit the Send button to submit your questions. I'd now like to turn the floor over to your host, David Taylor, CEO of VersaBank. David, over to you.
Well, thank you very much, Jenny. I'm pleased to be here for the first time to tell you all about our technology-based, fully digital, branchless business-to-business bank that I conceived in the early 1990s and, in fact, created.
I wasn't supposed to have earbuds. They got way in here.
All righty. Sorry, we just did a little interruption there. The emphasis should be on B2B. So not only did I create a digital bank, but I employed a partnership model to eliminate the need for branches. It's unfolded as it was designed to be, probably one of the most efficient banks in North America. Also, it comes through, I think, one of the lowest risk profiles in that purposefully, I designed it to not take on the normal risk that other traditional banks do. Looking at slide 2 is the normal disclaimer. Then moving on to slide 3, literally, I took a whiteboard and had a fair amount of banking experience before I came up with this idea. As the whiteboard denotes, I tried to eliminate all those pesky issues that the traditional banks faced.
As I was saying a bit earlier, with respect to risk, lending risk, I managed to get rid of most of it out of our bank so that in the last three decades, we've hardly any loan losses to speak of at all. With respect to the pesky humans, I would call them, or the pesky bio unit, I developed the software to eliminate the need for a lot of people. We're about 100 people, a little bit more than 100 people, and presently CAD 4.3 billion in assets. Hugely scalable and without the need for adding too many more people. Deposit risk is a risk that's plagued a lot of banks quite recently, of course. With the advent of the internet, it's actually got worse.
Well, someone said to me once, "What happens if you have a run on your bank, David?" And I said, "Well, geez, where are they going to run to? They have no branches." Well, they said, "Well, what about your website? Maybe someone will post something derogatory about you and there'll be an afternoon run on your bank." I said, "Well, we don't have one of those fancy websites where people can pull their money out." So pretty well, I wouldn't say eliminated deposit risk, but really got it to a very, very low level. Economic exposure, I can talk about that. Another slide, how we built a countercyclical business to offset economic downturns, interest rate risk. We don't take any of that wherever possible. We try to match as perfectly as possible.
The inefficiencies that come with having a branch network, of course, to be eliminated by not having such. Looking at our bank today, tremendous operating leverage, as I was saying, highly risk-mitigated model. Now you're starting to see the real power of a digital branchless bank. We've gone through what we call our inflection point where the economies of scale are showing up quite dramatically with dramatic increases to earnings. For those who have been following us, will know that we've agreed to buy a U.S. federal bank so that VersaBank would be able to operate throughout North America, i.e., erase the Canadian border, and provide our unique banking products to the U.S. market and hopefully do what we can to help that economy too, as we are doing in Canada.
And this is a little bit odd for a bank, but somewhere in my past, I was a maximum security prison guard, and I thought, "When I create a digital bank, I certainly don't want to fall prey to bank robbers." So we also created DRT Cyber, a cybersecurity firm, to keep our bank safe. And it's expanded throughout North America and is keeping about 400 of the high-value enterprises, that being energy companies and railway lines and retailers and other banks, safe from cybersecurity threats. That's called DRT Cyber. So moving along to the next slide, this just sort of graphically denotes what I've been referring to. As you can see in the middle, that circle, there's two VersaBank logos. One designates the tech center that we have located in the middle of Canada at the University of Saskatchewan's Innovation Place.
The other one is the other tech center that we have in London, Ontario, at the airport, which is our other tech center. We are a cloud-based bank, so quite literally, we can operate anywhere in the world wherever we have legal authority to do so. We do in Canada, being a federal bank, and hopefully soon in the United States, we'll have a federal bank license also. So on either side of the circle, you see we have partners, partners that give us access to deposits, and partners that give us access to loans. Well, I should note on that slide, we show that our Efficiency Ratio is 40%, which is one of the lowest in the industry. Hopefully, it'll get much better as we grow, which is about what it costs us in cents to earn a dollar of revenue, so CAD 0.40.
The next slide, ultra-low risk model. Well, as I was saying earlier, we didn't think it appropriate that a tiny little bank should take on a lot of risk. So everywhere possible, I tried to mitigate risk to the lowest levels. This one line graph shows you that in the last 30 years or so, we've had no real material loan losses. In fact, the provision we make for losses, as you'd expect, is averaging zero since 2017. It's just sort of an illustration of what I was talking about. Flipping over to the next slide, you can see on the deposit side, as I was alluding to earlier, we have a countercyclical deposit gathering system.
That is that we set up custom banking software for the insolvency industry in Canada so that the insolvency professionals would have a convenient, seamless banking platform to bank with us rather than what would be a little more cumbersome banking with the existing bank. It's just your classic, you build it and they will come. I think we're virtually no advertising. We pioneered this custom banking software with two of the largest insolvency professionals in Canada. Shortly afterwards, most of the industry in Canada adopted our banking platform. So at this point, in English-speaking Canada, we might have 85%-90% of the market. So that gives us a nice countercyclical supply of an economically priced deposit as the economy goes into a downturn. The other method is through the partner network of wealth management. In contrast, that's what we started with in 1993.
We created this digital deposit broker network. It's got about 120 or so partners that supply us with deposits each day. Moving along. So looking at our lending channels, I decided to create a lending channel that was somewhat analogous to the way we raise deposits. So while on the deposit side, we have partners that raise deposits for us and send the data to us electronically, we have lenders on the other side of the balance sheet that provide, for the most part, point-of-sale financing for people who are buying cars and motorcycles and hot tubs and home improvement. And these finance companies look after the loans, credit adjudication, acquiring the loans at the point of sale, very convenient for consumers and small businesses. And then they send the loan data to us electronically, again, very analogous to the way we raise deposits.
So on one side, we have all this nice CDIC-insured deposits coming to us economically priced. And on the other side, we have these nice loans coming to us through our partners. And let VersaBank be sort of, in essence, probably one of the purest banks there are, right, sort of an electronic warehouse where a deposit is pouring on one side and loans are pouring on the other side, and our software, it takes care of the business for us. Moving along. Yeah, this is a nice slide. It shows, as assets have been growing, and they grew quite rapidly after the COVID-19 crisis. You can see it sort of flattened during that time. There wasn't a whole lot of increase in point of sale financing, but when COVID dissipated in 2021, folks got out and started buying things, cars and motorcycles and such, doing home improvement.
You see assets growing at that point. And of course, right along with it is the revenue, and then net income is growing rapidly along with it too. Looking at the next slide, as I was talking about, as these tremendous economies of scale are being realized as we continue to grow through our break-even point or point of inflection, you can see that year-over-year, loans grew by 23% over the last quarter, just 3%, which was a little bit of a strategic reason for just three. The point of sale program was alluded to grew about 7%. Total revenue year-over-year was 11%, down a little tiny bit in the last quarter, again, winter months and folks not buying quite as much as they normally do. Net income up 35% year-over-year, sequentially 2%.
EPS up 41% year-over-year and 2% on a year that should be a quarterly basis. Digital banking, you saw the efficiency ratio of 40%. Return on equity is going up nicely too. So when you have a look at our bank, the growth opportunity, of course, is in the point of sale south of the border. Actually, I'm sitting south of the border right now. My daughter's in there getting her green card, and I've got to be here tomorrow to get my stuff done, getting ready for operating the bank in the United States. So tremendous opportunity for growth with our point of sale program. We pioneered it in Canada, and we've done a little bit of pioneer work here in the United States too to prove the model out. And it appears it's without peers here in the United States.
We are keenly waiting to bring this model as are our potential clients in the United States waiting for it. Minimizing the cost of funds is always something we're always looking at, finding lower-cost deposits. The U.S. market would be just great for that. In fact, over the risk-free rate, it's slightly better pricing. And then once in a while, you see us do accretive acquisitions. I haven't really got any in the hopper right now other than the U.S. bank acquisition to give us access to the market here. Just flipping on to the next slide. This slide just shows you what kind of a market to expect in the United States. It's probably the largest in the world in point of sale, maybe $1.8 trillion. And it's growing rapidly too. What's driving it is consumer and small business adoption of a convenient way to do their financing.
The old days of going down to your branch manager and negotiating a loan with your cap in your hand, "Dear sir, may I have a loan to buy this motorcycle?" None of that anymore. The modern consumer just prefer to be in the motorcycle shop, throw their leg over a nice new Harley, and ask what the monthly payments are. Those loans come to us. They sit on our balance sheet unless they go into arrears, and then we put them back to the finance company that sent them to us so we don't have to have a collection department or any dealings with those pesky humans, as I was alluding to earlier. Looking at slide number 13, this one just is talking about the acquisition of that very small U.S. federal bank. We feel we're in the final stages of closing that purchase.
We've been dealing with the U.S. regulators. I actually have quite a good relationship with them. We enjoy dealing with them. They're used to dealing with small banks in the United States, and of course, we're a small bank. So we're hopeful we'll be able to close that fairly soon and then bring this wonderful, proven point of sale model to the customers that are keenly waiting for it to come their way. We must have about 30 or so that are keenly interested in starting to deal with this in the States. The next chart illustrates that sort of inflection point I was referring to. You can see in 2022, the ROE figures start taking off as assets are steadily building, that being due to the point of sale program.
Of course, economies of scale, 40% efficiency ratio, declining from CAD 0.55 to earn CAD 1 of revenue down to CAD 0.43 and CAD 0.40. I've put a few milestones up. CAD 5 billion would be a nice number. Should be able to achieve that this year sometime. That drops the efficiency ratio to less than CAD 0.40, which would be one of the best, I think, in North America. I don't know one that's lower. But when you get into the 30s, CAD 0.30 to earn a dollar of revenue, you really are setting yourself apart from the pack. And ROE, of course, just through the math, increases to around 16.5 with about CAD 5 billion, depending on the net interest margin and other things. But the main driver of that is our fixed costs remain fixed, as you'd expect, and revenue grows in proportion to assets.
Having a look at slide 15, well, this is just a slide that talks about that David Roy Taylor or DRT Cyber firm that keeps our banks safe from cyber attacks. And also, as I was saying earlier, about 400 or so high-value clients in North America are safe. That includes police departments and transportation lines and the big energy companies and all those enterprises that really, really can't afford to be hacked and taken down. It's a wonderful business, and we call it free option. Am I okay for time? I just heard a sound there.
David, we should wrap up so we have time to get to some questions here.
All righty. So I'm on the last slide, I guess. Why should you be interested in VersaBank right now? Well, we're clear at the inflection point. We're poised to make that U.S. acquisition. It gives us sort of a quantum leap in growth. If you don't like risk in the financial services industry, we've got to be the least risky example out there. And the valuation is today, I think it's just a book value. So at a normal valuation, it should be running around 2 times book. So still lots of upside. And you get a free auction with the cybersecurity firm. Anyways, ladies and gentlemen, that's it for me. Open for questions.
All right, David. We're going to start with a question about point of sale. Although you're a branchless bank, you must have some geographic concentration on the point of sale lending side. Can you give us an overview of what's been going on in this footprint from an economic standpoint?
Well, for the most part, we're just operating in Canada on the point-of-sale market. We have a little bit of dabbling in the United States, sort of saying you're going to approve all the model. We don't really have any sort of geographic concentrations. Roughly, our loans and leases that we put on through the point-of-sale program roughly correlate to the population of Canada. Ontario would have the highest, Northwest Territories and Nunavut would have the lowest, of course. It goes roughly in line with the population.
David, when you expand into the U.S., hopefully, broadly, nationally, with the point of sale or the RPP program, would you expect that you'd have the same population-based distribution in the U.S.?
Yes, I would on the longer run. But I think on the short run, it'll depend on where the 30 or so U.S. finance companies are operating. We've got quite a lineup keenly interested in signing up with us. And so it would depend where they're operating at the beginning. But thereafter, I'd expect it'd follow the same sort of pattern as Canada, where it's such a welcome new product that you find it being used by wherever the higher-density populations where consumers are.
Okay. We've got a listener here who recently saw a large point of sale company in the U.S. that issued senior notes at 6.875%. Do you think you'll have a cost of funds advantage in the U.S.? And if yes, how do you participate or do you participate to a greater net interest margin in the U.S. versus Canada?
Yeah, we have a huge advantage over the non-banks. In Canada, our deposits are CDIC insured. And in the States, they will be FDIC insured. In the States, deposits in the time band that we normally participate about one-two years are running just a few basis points over the risk-free rate, so way, way less than what unrated bond yields are. So yeah, it gives us, as it should, because we're a highly regulated financial institution and our deposits are insured, a huge advantage. But then again, we don't take a lot of risks. So we pass a good portion of that advantage on to our partners so that there's enough left on the table for them to earn a good living.
David, your credit quality has been remarkably stable and low. Have you had any credit quality issues in the past? What makes you so consistent? Given the vast majority of the portfolio is point of sale, why don't you talk a little bit more about that cash collateral model and the lack of loan losses there?
Well, first and foremost, I started this bank with the idea that we wouldn't accept much credit risk. So it's a disciplined approach, and it's served us well over the years. So we haven't really had any issues. And we have a legacy business that came with me from Bank of Montreal to Barclays Bank. It's what's called interim construction. And normally, lenders do face losses in that area. But we thankfully have been able to avoid that too by having low loan evaluations and such and very disciplined. In the point of sale area, the trick is the putback. So we tell our partners that don't look at us as a bank that's buying the receivable or the loan or the lease and accepting the credit risk. We have no facility to accept credit risk, as I was saying.
No collection departments, no parking lots to put repossessed cars in. The Putback is the trick. Our partners need to come to terms with that they are fully responsible for the credit adjudication, putting on the loans, and the collecting of the loans. Just to ensure that we can feel good about their ability to accept the loans back, we also demand a fair amount of cash collateral be held with us so that our computer can just automatically debit their account should a loan go 19 days in arrears.
Excellent. We have time for a couple of more questions. David, can you clarify what's going on with the NCIB? I know you had one in place for most of last year's fiscal year ending in October. What's the status of a potential NCIB, or is your preference to defer that in terms of cash for growth?
Well, at this point in time, we put the new NCIB on hold pending the purchase of the U.S. bank. We prefer to keep our capital position somewhat static so that our regulatory applications don't need updating. No, the NCIB in the past served us very well. Our stock got as low as three-quarters of book value, and we were thankfully able to purchase quite a few shares back at low book. If the stock ever did get down there again, which I doubt with a U.S. bank license, but if it did, we'll have another NCIB in place to be able to pick it up cheaply. It definitely turbocharges our earnings per share. I think at the year-end, our earnings per share increased more than 100% year-over-year. Most of that was earnings growth, but also some component of that huge increase was the buyback of shares.
Great. Operator?
Yes. Is that the end of the questions?
Well, Jenny?
We've got, sorry, Jenny, instead of operator. Jenny. We've got a number of other questions. I was just going to say, I think we're butting up against time, so I'm going to save all these questions, and we'll get back to everyone in due course directly.
Wonderful. Thank you so much. David, do you have any final comments?
Yes, I do. Thank you very much, Jenny, for giving this opportunity to speak to people. I suppose the takeaway, even though we're called a bank, and we do have the federal license and such and all that, but there isn't much similarity to us or to what are thought of as traditional banks. We're mainly just an electronic warehouse that gathers deposits electronically and loans electronically, earns maybe in Canada the largest net interest margin in the country, and doesn't give anything back for loan losses. It's a wonderful money-making machine rather than maybe bank. Money-making machine is more like it. Happy to talk to you offline and answer questions that you might have. Thank you again.
Thank you so much. That is now the end of the presentation. You may now disconnect your lines. Please consult the conference agenda for the next presenting company. Thank you.
It's fine, Jenny. Bye.
Take care.