Welcome, everybody, to the Summer 2024 Investor Summit. We have here joining us today, David Taylor, Founder, President, and CEO of VersaBank, and we're thrilled to host them. We'll hold a Q&A session towards the end of the webcast. You can ask a question at any point during the presentation. Your mics are muted, so it is necessary to type your questions into the Ask Question box on the left side of your screen for the team to address. David Taylor, please take it away.
Thank you. I'm delighted to be addressing you today. It's a beautiful, sunny day in London, Ontario, and I'm going to tell you about a bank that I created with a vision to exceed most banks statistics using technology. The big news is that we've just recently been granted the authority to, metaphorically, I can say, lend in the United States. The bank started in Canada. Moving on to the next slide. That's the usual advisory. I had the wonderful opportunity to create this bank literally with a whiteboard, and what I tried to do was eliminate the risks that had plagued banks for eons.
As this whiteboard illustrates, I tried to mitigate the lending risk as low as I could get it. I'll show you in the next slide how I managed to accomplish that. That meant there was no need for collection departments, as we were able to duck out of having loan losses over the decades. I always thought that a bank should first and foremost look after its roots, I called it, that being its deposit-gathering capability. I wanted to ensure that our bank wasn't vulnerable to liquidity issues that other banks that raise demand deposits and then have fancy websites where folks can move their money in a very short time to somewhere else.
So that was one of the other things I wanted to make sure that our bank wasn't vulnerable to. And with respect to economic exposures, you know, banks over the years have, of course, suffered when markets turn down and economies go into recessions. So I wanted to create sort of a counterbalance for our bank so that we wouldn't suffer like the other banks do when recessionary times came along. Interest rate exposure, I didn't think it behooved a small bank to take any interest rate exposure. Physical infrastructure very costly, of course, and goes out of date somewhat quickly. So I tried to eliminate the requirement for physical infrastructure.
All that sort of added up to creating, I think, probably one of the most efficient banking models the world has ever seen. Moving along to the next slide. What we are today is a fully digital North American bank. We're hoping to close the U.S. acquisition as of August thirtieth, which will give us a full access to the U.S. market. It's a OCC bank, which enables us to bring our tried-and-true product that we developed in Canada, south of the border. We can call ourselves fully digital North American bank presently, 'cause we have been operating in the United States through a subsidiary company we call Versa Finance.
This branchless B2B model that we created has, as you'd expect, enabled the bank to be extremely efficient without all the usual inefficiencies that are associated with retail branches and lots and lots of bio units, I call them, or humans. Innovative? Because we are a software company, there's about 100 of us here that is dedicated to innovating in the financial services industry, we tend to have leading-edge products, leading-edge ideas of how to make our bank more even more efficient than it is today and exploit new opportunities as they appear.
At this juncture, of course, it's a huge, huge change for us in that we're now on the verge of having access through an OCC bank of the largest market, perhaps in the world for our product, which is point-of-sale financing. Moving on to the next slide. This just shows sort of geographically how our bank is organized. We have two tech centers. One's located in the University of Saskatchewan's innovation center on the campus, and the other one is where I'm speaking to you today from. That's the London Airport. I'm saying it's a beautiful day for flying. Actually, after this meeting, hopefully, I can take one of my airplanes for a little ride. It's just had both its engines overhauled. It needs to be broken in.
We have a cloud facility in Iowa. It's not shown on the map here, but I guess denoted by the on the right-hand side the software we have. So theoretically, our bank is able to operate anywhere in the world, functionally. And it could be headquartered in Iceland, for that matter of fact, but we have chosen to have the tech centers in Canada, and the cloud facility we're using is in Iowa, giving us full functionality throughout the entire United States and the world. But we, of course, are only able to operate when we're granted authority to operate as a bank. And presently, that is Canada and soon to be United States. Moving along. All righty.
So, as I was saying earlier, I tried to design this bank in order to avoid the pesky risks that have plagued other banks, in fact, still do plague them. But starting from scratch and having quite a few years of banking experience with a large Canadian bank, I was on a task force to convert that bank to what they call the mechanized mode, so a rudimentary computerized mode back in the 1970s, and then working for a large international British bank. I got a very good education of how banking works, and my takeaway was that certain aspects to the old school banking models that I didn't want to repeat when I had this opportunity to create a brand-new bank.
So this slide just shows how successful we have been in executing that model. Thirty years with no material loan losses, and that's reflected in our provisions for credit losses, which average about zero, as you'd expect, because we don't have any losses. With respect to the deposits, as I was saying earlier, I didn't want our bank to be vulnerable to those old school run on the banks when folks showed up at the door looking for their money back. There's no place to show up in our bank because we don't have any branches, of course.
But still the fancy websites that some banks or most banks now have adopted give rise to an even faster run on the bank when you can move your money with a click of a mouse to some other bank. So I didn't want our bank to be vulnerable to any of that. We raise deposits by way of term deposit rates or CDs, or in Canada, they call them GICs, with fixed terms, no demand deposits to the retail market at all. Then we have opened up another channel. We call it Insolvency Professionals. This is where we provide custom banking application for this in the insolvency industry, so they can easily do their banking with us and get all the information they need.
It provides us with a counterbalance to a recessionary time. So when other banks are whining about a recession drawing upon them, in our case, that means more relatively economical price deposits coming to us from those poor unfortunate businesses and people that have become insolvent. That last bullet there shows that 98% of our deposits are insured in Canada by CDIC, and in the States, it would be by FDIC, of course. Moving along to the next one. This slide denotes basically our reason for being, and certainly our reason for going to the United States. We developed about fourteen years ago. The rudimentary idea came to us about providing point-of-sale receivable financing.
So what this means is that we, consistent with our B2B model, we have partners that are involved in the point-of-sale business. So and the slide denotes hot water heaters. So our partners that are involved in the point-of-sale business finance virtually everything. That would be hot tubs and motorcycles and cosmetic surgery. If you get your teeth fixed or something, and you wanna pay by the month for it, a lot of people do that now, or a lot of home improvement with energy costs that's going up dramatically in the last while, that we find ourselves providing a lot of home improvement in financing directly through our partners.
This slide just illustrates that if you want a new energy-efficient hot water heater, your plumber might say, "Hey, would you like to pay by the month?" Most people say yes nowadays, and then that loan would be put on the books digitally and sent to us digitally, the data. We buy it off the point-of-sale company, and it would reside on our balance sheet so long as the payments stayed current. But if the payments went, say, ninety days in arrears, then we have the ability to put that delinquent loan back to the original vendor, and they look after the full customer experience. They put a loan on the books, managing the portfolio, and also providing the collection. Moving along. On this slide, the...
I guess the takeaway that I've been harping on a little bit throughout here is the significantly risk mitigated model. And I guess I should restate what I'd said earlier. I didn't think it was appropriate for a small bank to take on a lot of risk. Large banks have got tremendous amount of capital and momentum, and most of them have been designated as too big to fail, domestically important financial institutions or systemically important financial institutions. As a small bank, we don't have that luxury. So we have to look after ourselves, and that's why I designed it to be so extensively risk mitigating. Our software, of course, we developed it all ourselves, enables us to do this.
In fact, when I designed the software back in the early nineties, it was a primary design feature to enable us humans to manage the portfolio in the most efficient and knowledgeable way so as we can avoid the pitfalls that other banks seem to walk into from time to time. So, this portfolio that we've developed, the point-of-sale portfolio, the bullet show here, it started about fourteen years ago. It really started to take off about five years ago. We've done about CAD 9 billion. We've got about CAD 3.1 billion on the books presently, and it's been growing at over 26% over the past five years. Moving along.
A nice graph here basically shows the inflection point, and this is where our bank accumulated enough assets so the efficiency of the software that we've employed to look after banking operations really starts to kick in. As you can see, in 2022, the return on equity figures popped from seven up to 12, closing in on 14, 15% this year, with assets growing from CAD 3.27 billion to CAD 4.2 billion, and fixed costs remaining flat at about CAD 50 million. It should be sort of taken away that of that 50, about seven million of that associated with our newly developed cybersecurity firm. I'll talk about that in a few minutes.
So the bank, the bank itself is actually more efficient than it's even denoted on these slides. Moving along. Uh-huh. So this is the timeline. This is what we're all getting excited about. Now that the federal government has approved our acquisition of tiny bank in Holdingford, Minnesota, but nonetheless an OCC federal bank, we're getting ready to close it as of August thirtieth. So that's coming pretty soon. And at that point, metaphorically, our plane will be able to touch down in the United States. It's authorized to land or legally entitled to land in the United States. And as with respect to a point-of-sale market, I think the US market would be by far the largest point-of-sale market.
It's probably the size of about $2 trillion. So as soon as we've closed, we'll start signing up new point-of-sale partners. We're working on one right now. It's quite a due diligence process, but we're hoping towards the end of September, we'll have our first one signed up in the bank. We've got a few signed up in Versa Finance, sort of as a test market, but we're hoping our first one will be signed up in the bank in the month of September. Moving along. So this slide denotes the operating leverage that our bank has. First column there in total assets, just little over CAD 5 billion. Gives rise to efficiency ratios less than 40%. We're already there now.
I think we're at 38% or so in the last quarter, at about CAD 4.5 billion. You know, these numbers are, of course, very realistic. That gives rise to our return on common equity figures in the higher teens. As the bank grows, they just get better and better in that. We're highly scalable being a software bank, as I was talking about earlier. Moving along. Let's see what we got here. Okay, this is DRT Cyber. To keep our bank safe, we created our own cybersecurity firm. Wonderful company. It's got 400 clients across North America. They are everything from police departments to states, energy companies, transportation lines. We keep them safe, and it also keeps our bank safe.
As part of the approval to operate in the United States, we agreed to sell this bank within it, or this DRT Cyber firm within the next two years. So, what it's valued at is probably quite a lot, but I don't think we're receiving any value on our valuation, present valuation for this wonderful cybersecurity firm. So at this point in time, you know, why would you want to invest in VersaBank? Well, clearly, we're embarking on a transformational move in a few days when we close that purchase of that US bank. It's, and our profitability is all about growth.
More assets we have in the books, as the previous slide showed, the more profitable we become, the better statistics we're able to post. The risk mitigative model that we've developed has stood us well throughout the last three decades here in Canada. We don't expect any different. We have a view that we shouldn't take a lot of risk, and we've tried our best to mitigate it in structures so that very little risk lands on the books of VersaBank. And as kind of a bonus, the eventual divestiture of the cybersecurity firm will likely mean a substantial gain for the shareholders of VersaBank. So there we have it. I'm open for questions.
David, it's Lawrence, and I'll be passing along some questions that have come in through the chat board for the conference. So the first one is with respect to the Point-of-Sale Receivable Purchase Program, how does that differ from what somebody like a Klarna or an Affirm would offer? What's the difference there?
Those companies would be meeting with the customers and providing the full customer experience. They, that would represent our partners. We would be complementary to those types of companies, and that we can warehouse the loans and leases economically for them, so long as they remain current, and that's because we have no collection capability. You know, we would push it back to them, and then they would collect, so we provide an economical funding source, additional funding source for them so that they can go about their business and they do well.
David, you've talked about how much success the point-of-sale business has had in Canada, or the Point-of-Sale Receivable Purchase Program has had in Canada. Why would a Klarna or an Affirm or anybody else in the U.S. find your Point-of-Sale Receivable Purchase Program attractive? What's unique or different about it? What advantage does it give them in going about their everyday business?
That's probably what our US partners rationalize. It's wise to have alternate funding sources. The first reason is it's always wise for a finance company or a bank to have as many diversified funding sources as it can. This alternate funding source is an economical, reliable with a digital interface. It seems to be very attractive to point-of-sale companies, i.e., they have lots of other ways of raising capital, but why not add one more that may be a little more economical and reliable, as we have proven throughout the last fourteen years in Canada.
Another question about... We've got a couple of questions here about the outlook and pace of potential growth in the U.S. for the point-of-sale program, as well as growing assets. Maybe, David, you could start by speaking to, you know, what you expect over the next three to five years in terms of additional growth in Canada. And then, with respect to the U.S., someone states that, "I imagine the regulators will limit the rate at which you can roll out your point-of-sale product. Is demand gonna be greater than what you're able to achieve, and how are you thinking about that in the first one to two years?
It's a really good question. In Canada, we'd expect to grow about 15%-20% per year in that the market seems to be growing at that rate, and our product is still being adopted by our partners. So Canada, I'd say that sort of rate we can continue growing with. In the United States, there is a tremendous demand. It's about a $2 trillion market, and even at 10% of that, it would fit our books ideally. The $200 billion is a huge, monstrous market. And whoever asked the question is quite right.
The U.S. regulators, being the prudent regulators that they are, wouldn't want to see a new entrant to United States growing anywhere near that rapidly, even though our software and our infrastructure is capable of doing that, so what we'll likely be doing is managing the portfolio for other banks that wish to participate with us as a service, and our software that we developed many years ago is able to do that very nicely, so what we have in mind is serving the needs of the U.S. market, but maybe only a small portion of it will end up on the books of our bank. It...
within the three-to-five-year period of time, small, being in relative to the $200 billion market that's in front of us. But we'll likely be able to service a good portion of that, and that our software and our technique is capable of doing that. And it appears there's a fair number of smaller community banks who would like to participate in this program, i.e., get access to a relatively low asset that has a decent yield on it, managed by ourselves.
Great. Thank you, David. When you look at the US, are there other markets or products that you'd be looking at to bring there? Or is there enough opportunity with the Point-of-Sale Receivable Purchase Program that that's your predominant or even exclusive focus for the US?
From the lending side, it'd be our exclusive focus for the foreseeable future. It's such a huge market, and our products are so ideally suited, and the customer demand is tremendous. So no need to stray from this path. It is possible in distant future we bring some other product that we deem the market is looking for, like we've done in Canada from time to time. But this one is a real easy deal for us, and it's tried and true and tested in Canada and a huge demand in the United States. Our challenge is dealing with the demand and rather than bringing in any other products.
All right, David, we'll stop the questions there, just in the interests of time. And, you know, any closing remarks for you before you sign off for the day?
I'd just like to thank everybody for tuning in. It's an extremely exciting time for us. This is something I dreamt up in nineteen ninety-three, prior to internet, and I used telephone modems and IBM PCs to develop. Here it has evolved into this state-of-the-art cloud-based bank, providing this unique service to Canada, and soon to be United States in a very big way. We're very pleased, actually, to be able to bring this product to the States, and that it has that trickle-down effect to the users of the funds, i.e., the consumers and the small businesses.
It should theoretically allow them to do their financing at more economical rates than otherwise, and that this our funding is more economical than what so these point-of-sale financing companies are presently using, so it should have a nice effect on the U.S. economy, too, in that a cheaper, more efficient funding sources mean better things for those that are using loans to finance their acquisitions. Thank you, everybody.
Ladies and gentlemen, that does conclude the VersaBank presentation. You may now disconnect. The next session will begin shortly. Please consult the conference agenda for the next presenting company.