All right, good afternoon. Welcome to the ThinkEquity Conference once again. This is the last company of the day for this room. VersaBank trades under the NASDAQ symbol VBNK. And presenting is David Taylor. He's the President, CEO, and Director.
Excellent. Well, thank you very much. This is a dubious honor, of course, in that I'm standing in front of all of you at a happy hour. I know sort of the last of this, so I'll make sure I'm dead on time. I think it could be injurious if I'm not. That's the usual disclaimer stuff, so this is a story about a bank I conceived and created in the early 1990s, and frankly, it was too far in front of its time, in that it took the regulators in the country of Canada a long time to sort of buy into a digital branchless financial institution, but eventually, they did and blessed me with the first federal bank license in 18 years in Canada, so I'm in the history books.
Someone said, "Is that going to turn into money, Dave?" I said, "Well, I hope so." So bottom line is I had the opportunity to start this bank with the knowledge I gained working for a large bank, Bank of Montreal, and then a British bank, Barclays. And so when I conceived this bank, I wanted to do away with all the things that bugged me about working in those other banks: excessive lending risk, loan losses and collections. Those are all messy, nasty, nasty things. You know, Mrs. Jones doesn't want to pay you back because the cat died or something. You don't want any of that. I didn't want any of that stuff. I didn't like the idea of banks being exposed to liquidity problems. You've seen that fairly recently in the United States with SVB and others that have faced those types of issues. Economic exposures.
You know, bankers are whining when things go down and come up and credit issues and that sort of stuff. I wanted to make sure that our bank wasn't vulnerable to those things: interest rate risk and physical infrastructure, costly, and things go wrong and doesn't give rise to efficiencies. So I want to make sure our bank, the new model, was extremely efficient. So what you see today is a fully digital bank, North American-wise. Most recently, we were just granted access to the U.S. market as a federal bank, which I think is a pretty rare event in that I wasn't able to find ChatGPT, find another example of a foreign bank in decades that was granted access to the United States. So this is a pivotal moment for us. This is a bank that has worked wonderfully in Canada.
It's very profitable, maybe the widest margins of any bank in Canada. It also has no loan losses. So it stands unique with the widest margins. And usually, if you've got wide margins, you're taking on more risk and you have to give some back. So it's a very successful model been prototyped in Canada. And now we are entering the largest market in the world for our type of business. All righty. So I was saying it's a digital bank, cloud-based. We've got two tech facilities, one's at the University of Saskatchewan in the Innovation Place. The other one's sitting at London Airport, at the airport, another tech facility. The actual data is in Des Moines, Iowa, in the Azure facility there, as you'd expect. Theoretically, our bank is able to function anywhere in the world, of course. It's a cloud-based bank.
But I use the airplane metaphor there because I love airplanes. It can only land and do business when it's granted approval. And we've just been granted approval in this country. So this slide just illustrates what I was talking about with mitigating the credit risk down to almost zero. That little line graph is provisions for losses. And as you'd expect, if a bank, if I'm telling the truth, and our bank doesn't have credit losses, then you'd expect the provision for losses to be marginal. What is it? Two basis points up, two basis points down. Average is about zero in that we modeled out the normal credit risks. So this is the heart of our business here. And these are supposed to be hot water heaters. And they could be anything.
I used to have motorbikes up there because I like motorbikes too, along with airplanes, much to my wife's dismay. So the idea is that we act as an electronic warehouse for point-of-sale finance companies. So this is the companies that you'd be familiar with if you go to get a new energy-efficient furnace, a motorcycle, a hot tub, or cosmetic surgery we do, or premium on your insurance. These point-of-sale companies send to us the loans and leases that they originate, and they reside on our balance sheet so long as they stay current. Now, if they go into arrears, 90 days in arrears is the demarcation, then we have a put agreement with everybody to put the loan back to them at debit to their cash deposit with us. So hence, we are removed from that nasty experience of calling up Mr.
Jones, "How are you going to pay on that motorcycle?" and listening to all the whiny reasons. As soon as the loan has got nine days in arrears, bingo, it goes right back to whoever originated it. They get to look into all that, so that means we get to stay pure to our origination as software engineers that just run a tech facility processing data, and all that messy human experience is jobbed out to our partners. Do you guys have any questions on that? I'll leave questions at the end. Okay, so that's the heart of our bank. We don't do much else. In Canada, we do a little something else I could talk about later, but in the United States, that's all we'll be doing. That's, in fact, all we have been doing in the United States. Why do anything else?
Because this makes us tons of money, gives us huge margins, and we don't have those nasty loss experiences. I'm going to look at this. So the partner model is what I talked about. And that's both on the loan origination side and on the deposit side. So unlike community banks you might be familiar with, they don't have any branches. I guess we have a retail outlet now in Holdingford, Minnesota. That's how we managed to get the access to the U.S. market. We acquired a tiny bank that's sitting in the middle of Minnesota called Holdingford. But the rest of the business is without any retail interaction.
Our software also monitors the data as it's flowing in to catch anomalies or trends so that as we're buying the loans and leases from everybody, say they're starting to deteriorate or say there's a particular geographic region that's for some reason having worse loss experiences, then our software looks after all that so that we can stay on top of the risk in the portfolio. All our facilities are what's called as-offered facilities. So that means if it turns out that something is going not so well, then we have the right to be able to discontinue the purchasing. Let's see. 14 years did it in Canada. It's probably getting close to 15. Those are some of the stats. Wonderful stats. That shows our asset growth in the blue charts there. You can see during the COVID times, pretty flat.
That wouldn't be that we weren't booking any loans flowing in, but the putbacks would be a lot. We would be putting back a lot of loans. Say we grew by 5%, but we put back 6% to our partners, then the net growth would be negative. That's what happened there. Then, of course, when the economy started to improve, we started booking more assets. That gave rise to that inflection in ROE. The efficiency ratio is the CAD 0.43 . It's actually quite a bit better than that. We were, in the last few years, endeavoring to acquire that U.S. bank. We had to hire the individuals, the key people in the United States. We had to do a lot of work putting it all together. Those expenses are embedded in the consolidated group. October 31st is our year-end.
So if you're interested and have a look at our statements, you'll see them segmented now. You'll see the U.S. bank, Canadian bank. And you'll also see a cybersecurity firm that we created called DRT Cyber to keep those modern-day bank robbers at bay. Some of you might know that in my youth, I used to be a maximum security prison guard and had the opportunity to meet those real-life old-school bank robbers. And so when I created a bank, I thought, "We're not going to be vulnerable." So we have a DRT Cyber. It provides some cybersecurity services to a lot of your high-value enterprises here in the United States, including the New York Police Department and Warren Buffett's energy companies, your transportation lines, all those companies that can't afford to be hacked. So that's some stats, what we look like. Pretty good stuff. EPS growth, 17%.
I guess that's important. So this little timeline shows you where we are. Finally got to U.S. approval. U.S. bank acquisitions closed. So now we'll be booking new point-of-sale partners in the United States. There's quite a demand for this product. It's probably one of the reasons why the Federal Reserve and the OCC gave us license in the first place and that it's a service that is not presently being met in the States. We're bringing a brand new product to the United States that at least 30 or 40 point-of-sale companies are already wanting to sign up with us. It's very, very popular. In fact, the demand is so huge that we have created a method of syndicating, sharing these loans with other community banks.
So in other words, to meet the tremendous demand that we expect here in the United States, we'll have so much we can put on our balance sheet, and then we'll share the excess with the other community banks that want to participate. So being a software company, we modified our software to accommodate that. So with any luck, next month, you might see the first U.S. new point-of-sale company sign up. And you may see the first community bank joining up with the program. I expect there'll be a lot of community banks that would like to get an asset like that on their books. It might even have a pretty good bond rating. Our bank was A, and I think this portion of our bank should be better. So it's a nice rating.
Having a look at some milestones, it just shows you what to expect with assets being the driver: CAD 10 billion, CAD 6 billion. ROE figures keep getting better and better. The U.S. is, in fact, a little better market for us. Our cost of funds in the States is less vis-à-vis the risk-free rate than it is in Canada. And of course, your market is way, way, way bigger. So we're really excited about that. And this is DRT Cyber that I was alluding to. DRT Cyber is a wholly owned subsidiary of the Canadian bank. And it's headed up by the fellow who headed up BlackBerry's cybersecurity for about 14 years. And those like me are familiar with the BlackBerry. And as our chairman of this company, Tom Ridge, said, it was the only device that I would allow in Homeland. So we're pretty happy he heads this up.
We've created, we think, a wonderful business of looking after the cybersecurity needs of these high-value clients, as we were saying. However, the Federal Reserve Bank places a condition that somewhere along the line in two years, we'd have to divest of DRT Cyber. I'm not sure what it's worth, but I think it's worth a lot. Where are we here? Why would you want to invest in VersaBank at this juncture? Just to summarize this, we just got access to U.S. market with a beautiful new product we prototyped in Canada. Your market is, I shouldn't say your market anymore because he also gave me a green card too. The market is at least 100 times bigger. There's tremendous enthusiasm to sign up with us. Are we done? Five minutes already. Any questions before we get to happy hour? Must be something.
But. Materials and notes I looked at a couple of days before. You guys are supposed to be branchless, right? Right. So how exactly do you facilitate deposits?
Well, the large brokerage firms send us deposits. As soon as we got our license, Raymond James signed up with us, and Stifel will sign it right afterwards. So the model we have in Canada is relying on brokerage firms to send the deposits to us. And we plan to use the exact same model here in the United States. So RJ signed up, Stifel signed up. Might be more. But we're relatively small, and they're relatively huge. Ample supply.
Yes, sir. Yeah. So forgive me for my ignorance on this. But in the early slide, you mentioned lines for liquidity. How do you ensure what are the terms around that sort of wholesale funding?
They're all certificates of deposit with a fixed maturity date, and they're matched precisely to the maturity of our loans. Yeah. If we had, say, a fancy high-rate daily interest savings account and a fancy website where you could do your banking, move your money around and that, then I thought runs on banks are way easier nowadays than they used to be when you had to line up at a building, so that was one of the vulnerabilities I didn't want to build into our model.
And is that industry standard for the neobanks, the digital banks? Is that they borrow cash in the wholesale market?
Some of them do that. Yeah, some of them do that. Yeah. I think most of them dabble in that a little, but most of them have branch networks still. As far as I know, we're unique in a lot of ways.
That might be one of them too.
Thank you.
Yeah. You don't want a run on your bank, and you don't want it digital. I mean, in the old days, what's it called? It's a Wonderful Life movie. You guys are probably familiar with it. At least they're lined up at the door saying, "Where's my money?" This way, in an afternoon, you can move your money, and the bank is insolvent. That was the negative side of becoming a digital bank. If you provided that wonderful convenience, you also provided massive vulnerability. What's the duration of your equity process? It's about 1.5 years. Yeah. We've been matched dead on. You'd expect it to be longer than that because these point-of-sale loans, say, motorbikes, hot tubs, or whatever, usually are five years.
But typically, what happens is the consumer looks at the intrinsic interest rate and goes, "15%." And then there's an early repayment. So we model that in. We have a propensity to prepay factor that we build in. And so we take that into consideration. It's more like a convenience thing. People, I think, like the convenience of getting the new energy-efficient furnace and not have to reach in their pocket to pay for it. So they take the loan, whatever is offered to them. And then maybe a little later, they figure, "Oh, that's kind of a pretty high interest rate, so maybe we better pay that off." So we're facilitating something that's convenient for consumers and small business.
So you're probably a subprime customer?
No. No. We're somewhat credit risk agnostic in that the model works for subprime, but it works for superprime too.
And just the way it's flowed, most of ours are prime. And the reason being, most of the loans that we have in Canada are home improvement loans, which are folks getting more energy-efficient furnaces and such, better siding and better this and that. Two-thirds of our portfolio would be that. So these are homeowners that are borrowing legitimately to cut down on their energy costs. But if it was, say, it was subprime automobile loans, we'd expect default rates 5%-10%. And the cash collateral that we'd hold back would be increased accordingly. We normally shoot for about three times their worst loss year in cash. So that's why after 14-15 years, we haven't had a case where the cash has been exhausted. And we top it up too.
If it looks like they're trending down, this is why the data analysis is so important as it's flowing in, that if we start to see that their losses or delinquency is increasing, then we may just say, "Sorry, we don't want any more." Or we say, "Look, you got to top up the cash because the risk is higher than what we model." Yes, madam.
Thoughts about expanding to Latin America?
Not in the foreseeable future, and the reason being is it took a little while to get into this country, and this is a huge market. It's quite a task. Luckily, I was able to hire key people for the U.S. bank and get them all on board, and then we've got some partners helping us outsource the point-of-sale people. It's going to be a big job. In fact, I've never been to Latin America.
I hate to say. I probably should. We got some Latin American people working for us in the IT department. Yes. Are we up? Five minutes? I don't want to get caught in a stampede here. Anything else you can think of? Anyways, the takeaway is simply this. Prototyped in Canada, worked perfectly, wonderfully. Finally, we were blessed with licensure in the United States and now we're just rolling it out as we did in Canada. Same way, except for there's a fair amount of efficiencies in the States that we didn't get in Canada. On the deposit-raising side, those 120 other partners we have accumulated over the years and it's a little more labor-intensive than what you have here in the States, just dealing with a few large brokerage firms. We have 30 people employed doing that in Canada. Probably have one or two here in the States.
All righty. Well, thank you very much. Let's get at her.