Good morning, ladies and gentlemen. Welcome to VersaBank's fourth quarter and year-end fiscal 2022 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the fourth quarter and fiscal year ended October 31. That news release, along with the bank's financial statement and supplemental financial information, are available on the bank's website in their investor relations section, as well as on SEDAR and EDGAR. Please note that in addition to the telephone dial-in, VersaBank is webcasting this morning's conference call. The webcast, sorry, is listen-only. If you are listening on the webcast but wish to ask a question in the Q&A session following Mr. Taylor's presentation, please dial into the conference line, the details of which are included in this morning's news release and on the bank's website.
For those participating in today's call by telephone, the accompanying slide presentation is available on the bank's website. Also, today's call will be archived for replay both by telephone and via the Internet beginning approximately one hour following the completion of the call. Details on how to access the replays are available in this morning's news release. I would like to remind our listeners that the statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by VersaBank's management. Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank's businesses. Please refer to VersaBank's forward-looking statement advisory in today's presentation. I would now like to turn the call over to David Taylor, President and Chief Executive Officer of VersaBank. Please go ahead, Mr. Taylor.
Good morning, everyone. Thank you for joining us for today's call. With me is Shawn Clarke , our Chief Financial Officer. Before I begin, I'd like to remind you that our financial results are reported and will be discussed on this call in our reporting currency of Canadian dollars. For those interested, we provide U.S. dollar translations for most of our financial numbers in our standard investor presentation, which will be updated and available on our website shortly. On to our results. A record fourth quarter across each of our key performance metrics capped off a record year for VersaBank. In our digital banking operations, continued strong year-over-year growth in our point-of-sale loan and lease portfolio drove our loan portfolio to an all-time high of just under CAD 3 billion.
That was up 42% as we maintained our overall net interest margin without trading or taking any additional credit risk. This drove record revenue, record net interest income, record net income, save for one outsized quarter in 2017 due to a large tax recovery. Additionally, the cybersecurity services component of DRTC had a strong fourth quarter and remains profitable. Importantly, we achieved net income despite the significant transitory expenses incurred during the year on our account of strategic growth initiatives, the returns of which we expect to begin to realize in fiscal 2023. All of this positions VersaBank for continued growth in 2023, comfortable in the knowledge that our bank has a track record of performing even a little better during economic slowdowns. I'll discuss this more in a few minutes.
Looking more closely at our performance, the fourth quarter was highlighted by the highest ever levels of revenue, net interest income, and net income, even with the dampening effect on our bottom line of the transitory investments in multiple strategic growth initiatives we made throughout the year. Combined, these investments totaled CAD 1.8 million, the vast majority of which will run off during the current quarter. As Shawn will discuss, we will also experience the temporary elevated provision for taxes in Q4 which further dampened our net income by CAD 1.1 million, and which we expect to reduce early in fiscal 2023. Fourth quarter performance was driven mainly by continued outsized growth in the Canadian point-of-sale Financing business, which increased 11% sequentially to the end of the year and 74% higher than fiscal 2021.
Again, I will note that we achieved this growth with essentially no impact on net interest margin and without relaxing our stringent credit policy. Similarly, for the full fiscal year, the outside growth in our Canadian point-of-sale drove record revenue, net interest income, and net income. Like the fourth quarter record net income was dampened by expenses related to the transitory strategic investment, which for the year totaled CAD 5.2 million, as well the CAD 1.1 million elevated tax in Q4. Again, these investments will substantially dissipate throughout Q1 of fiscal 2023, and our tax provision will reduce early in 2023. I'd like to provide a quick update on our planned acquisition of Minnesota-based Stearns Bank Holdingford, a fully operational OCC chartered national U.S. bank. As I discussed on our last quarterly call, this acquisition is transformational.
Next step in VersaBank's long-term growth strategy that will enable us to bring our track record of innovative digital banking solutions to address unmet needs to one of the world's largest banking markets. Specifically, this acquisition will enable us to broadly roll out our Receivable Purchase Program in the underserved U.S. market, which has been so successful in Canada, where we call it our Point-of-Sale Financing business. The process has taken a little longer than initially thought, I'm pleased to report that earlier this morning, we submitted the requisite filing to the OCC and the Federal Reserve seeking approval of this acquisition. With these filings complete, we can now move ahead with our application to our Canadian regulators.
I'm also pleased to announce that Tom Ridge, former governor of Pennsylvania and inaugural secretary of the Department of Homeland Security, has agreed to become chair of our new U.S. subsidiary, VersaBank USA. We are targeting to close this acquisition early in calendar 2023. On the topic of U.S. Receivable Purchase Program, our first partner, a large North American commercial transportation financing business focused on independent owner-operators, has continued to expand their business with us. With loans now nearly $50 million. That number would have been even higher. However, we are somewhat constrained in this limited early rollout ahead of completing the U.S. Bank acquisition. Recently, we added a second partner, the retail finance division of a $40+ billion U.S.-based financial services company, and expect to begin taking on loans shortly.
We continue to be very encouraged by our discussions we're having with other potential partners in the United States. They are repeatedly confirming our belief that we are a valuable alternative for point-of-sale Financing in this $1.8 billion and growing U.S. market. Finally, before I turn over the call to Shawn, an update on our revolutionary Digital Deposit Receipts. As I discussed last quarter, there have been tremendous amount of turmoil in the sector and heightened regulatory awareness and scrutiny, which has been further exacerbated by FTX debacle. The downside of this, of course, is that it has a negative repercussions and very broadly in our industry.
The upside, at least for us, is that all of these events further underscore the importance of regulation and our belief that we share with some of our regulatory pundits that licensed banks are the right entities to be issuing digital currencies. With the rapid evolution of the market and the regulatory environment, we made a decision to substantially change our model such that our DDR accounts, our Digital Deposit Receipt accounts, which are essentially eWallets, are hosted by VersaBank as opposed to being hosted by external third party. We are now able to do this through the addition of our Viewer software, a tool developed exclusively for our bank. To prove out the new model in November, we initiated an initial pilot program for the new offering, which we are calling CADV. The pilot is restricted to VersaBank's directors, executives, all of whom reside in Canada.
With this progression to a new model, we'll further extend our time to launch. Our DDR program is, as it always has been, a long-term opportunity to grow low-cost deposits. We still have access to abundant low-cost deposits to fuel our growth in Canada. In fact, I will discuss in a moment, we expect to return to robust growth in our bankruptcy deposit channel, resulting from the challenging and potentially more challenging economic environment. Finally, I will note that we continue to see some digital currency offerings trickle out here and there. Each and every time we do, we're even more confident with respect to the significant competitive advantages that our offering brings. I'd now like to turn the call over to Shawn to review our financial results in detail. Shawn.
Thank you, David, and good morning, everyone. Before I begin, just a quick reminder that our full financial statements and MD&A for the fourth quarter and full fiscal 2022 year are available on our website under the investor relations section, as well as on SEDAR and on EDGAR. As David mentioned, all the following numbers are reported in Canadian dollars as per our financial statements, unless otherwise noted. Starting with our balance sheet, total assets at the end of the fourth quarter crossed the CAD 3.3 billion mark, up 35% from CAD 2.4 billion at the end of Q4 of last year and up 6% from CAD 3.1 billion at the end of the third quarter of this year.
Cash and securities at the end of Q4 were at CAD 230 million or 7% of total assets, down from CAD 272 million or 11% of total assets at the end of Q4 of last year, up from CAD 218 million or 7% of total assets at the end of Q3 of this year. The year-over-year decrease was a result of the bank deploying cash into higher year than lending assets and lower securities over the course of the quarter. Our total loan portfolio at the end of the fourth quarter expanded to another record balance of CAD 2.99 billion, an increase of 42% year-over-year and 6% sequentially. I'll break this out into its component parts in a moment.
Book value per share increased 7% year-over-year and 2% sequentially to another record at CAD 12.37. These increases were both a function of higher retained earnings resulting from net income growth, partially offset by dividends paid, while the year-over-year increase was also impacted by our common share offering in the U.S. last September. Our CET1 ratio was 12%, down from 15.2% at the end of Q4 of last year and down from 12.51% at the end of Q3 of this year, while our leverage ratio at the end of Q4 was 9.8%, down from 12.6% at the same point last year and 10.38% at the end of Q3 of this year. Both our CET1 and leverage ratios remain comfortably above our internal regulatory ratio targets.
Turning to the income statement, total consolidated revenue increased 33% year-over-year at 14% sequentially to a record CAD 24.3 million, with the increase being driven primarily by higher net interest income derived from our digital banking operations, resulting from the strong growth in our loan portfolio that was discussed earlier. Consolidated net income for Q4 increased 9% year-over-year and 12% sequentially to a record CAD 6.4 million, with the exception of Q1 2017, during which we recorded a one-time tax recovery resulting from the amalgamation of a bank and PWC Capital that same period.
Net income for Q4 was reduced by transitory costs totaling CAD 1.8 million, as David mentioned earlier, incurred in the period related to our investments in several strategic growth initiatives, including the U.S. Bank acquisition, the launch of the U.S. version of our point-of-sale offering, our Receivable Purchase Program, in preparation for the launch of our Digital Deposit Receipts. We expect these investments to begin to contribute to profitability over the course of fiscal 2023. Net income was also reduced by CAD 1.1 million in incremental tax provisions, which we also expect will reduce in fiscal 2023. Consolidated earnings per share decreased 4% year-over-year to CAD 0.23, with the decrease due primarily to the impact of the issuance of 6.3 million common shares concurrent with the bank's listing on the NASDAQ in September of last year.
On a sequential basis, however, consolidated EPS was up 15%. The impact, for context, the impact of the transitory strategic investments and higher income tax on our 2022 EPS metric was CAD 0.06 per share and CAD 0.04 per share respectively. The primary driver of growth in our loan portfolio was once again our point-of-sale financing business, which increased 74% year-over-year and 11% sequentially, surpassing the CAD 2.2 billion mark. This growth continued to be driven primarily by strong demand for home finance, home improvement, HVAC, and auto receivable financing. Our point-of-sale portfolio continues to expand as a proportion of the overall portfolio as per our strategy, representing now 75% of our total loan portfolio as at the end of the fourth quarter, up from 71% at the end of the third quarter.
Our commercial real estate portfolio decreased 7% year-over-year and 6% sequentially to CAD 759 million at the end of the fourth quarter. As we now have noted for several quarters, management has taken a more cautionary stance with respect to the commercial real estate portfolio due to expected volatility in the valuations within this asset class in a rising interest rate environment, as well as concerns related to higher construction costs resulting from supply chain disruptions and a very tight labor market. That said, we remain very comfortable with the risk profile of our commercial real estate portfolio based on our criteria of working only with well-established, well-capitalized development partners with excellent track records and restricting transaction to modest loan-to-value ratios.
Turning to the income statement for our digital banking operations, net interest margin on loans, that is excluding cash and securities and other assets, decreased 28 basis points or 8% year-over-year and four basis points or 1% sequentially to 3.03% due primarily to a shift in the bank's funding mix and rising interest rates over the respective periods, as well as the successful execution of our strategy to grow our POS financing portfolio. These factors were partially offset by generally higher yields earned on our lending portfolio during the period also as a function of rising interest rates. As a margin for the quarter, which includes the impact of cash, securities, and other assets, increased eight basis points or 3% year-over-year and five basis points or 2% sequentially to 2.81%.
Non-interest expenses for the quarter were CAD 13.8 million compared to CAD 10.4 million for the same period last year and CAD 13.2 million for Q3 of this year. The year-over-year and quarter-over-quarter increases were substantially due to transitory costs related to the strategic growth investments I described earlier. Investments associated with the acquisition and integration of the operations of the U.S. Bank are anticipated to be realized substantially by the end of the first quarter of 2023. The year-over-year and quarter-over-quarter increases were also impacted by higher salary and benefits costs attributed to increased staffing levels to support expanded revenue-generating business activity across the bank, as well as higher costs associated with employee retention in this very tight labor market.
Cost of funds for the fourth quarter was 2.45%, up 114 basis points year-over-year and up 51 basis points sequentially due primarily to our funding mix being comprised of a larger proportion of wealth management deposits relative to our lower cost insolvency professional deposits and the impact, of course, of rising interest rates. Insolvency professional deposit balances contracted slightly in Q4 compared to a year ago, despite adding more partners and as we continue to experience historically low bankruptcy activity, which remains well below pre-pandemic levels. During the same period, our wealth management deposits grew 65%. Looking ahead to 2023, we do expect insolvency deposits to grow moderately throughout the year as a function of an increase in the volume of consumer bankruptcy and proposal restructuring proceedings amidst the challenging current and forecasted economic environment.
Our provision for credit losses or PCLs in Q4 was again demonstrative of the prudent risk mitigation strategies inherent in our lending and credit risk management processes, as well as the outstanding credit quality of our current loan portfolio. PCLs in the current quarter were CAD 205,000, compared with a recovery of credit losses in the amount of CAD 79,000 for the same period last year, and a PCL of CAD 166,000 for Q3 of this year. The recovery recorded last year was attributable primarily to changes in the bank's lending asset portfolio mix and changes in the forward-looking information used in the bank's credit risk models, offset partially by higher lending balances.
Sequential change this year was a function primarily of higher lending asset balances and changes in the forward-looking information that we use in our credit risk models, offset partially by changes in the bank's lending asset mix. Our PCL ratio remains one of the lowest in the Canadian banking industry at an average of 0% over the past 12 quarters. As David will discuss in a moment, the superior risk profile is expected to serve us well should an economic downturn materialize over the course of 2023. Gross impaired loan balances October 31st, 2022 were CAD 0.3 million, all of which were repaid on November 1, 2022, compared to CAD 1.4 million last quarter and nil a year ago.
Turning now to DRTC sales, which are generated almost exclusively through our cybersecurity services business Digital Boundary Group, increased 33% sequentially, decreased 8% year-over-year to CAD 2.8 million, due primarily to timing of service engagements in those respective periods. Gross profit however increased 48% sequentially and decreased 19% year-over-year to CAD 1.7 million. The sequential increases were driven primarily by higher pricing charged on services, as well as meaningful improvements in DBG's operational efficiency.
DRT generated a net loss of CAD 0.5 million in the current quarter compared with a net income of CAD 0.5 million Q4 of last year and a net loss of CAD 0.7 million in Q3 of this year, which was the higher gross profits from DBG being partially offset by higher salary and benefits expense associated with employee retention in a highly competitive labor market. I will note here that the net loss for DRTC includes costs associated with strategic technology development investments for our digital banking operations. The operations of DBG on a standalone basis continue to be profitable.
Finally, before I turn the call back to David, in August, we received approval from the TSX to undertake a normal course issuer bid for up to 1.7 million common shares, or just over 9.5% of our public float at the time of application. Further, in September, we received approval from the NASDAQ to proceed with an NCIB on that exchange as well. As of October 31st of this year, we have repurchased in aggregate 195,300 shares under the NCIB program. I'd now like to turn the call back to David for some closing remarks. David.
Thank you, Shawn. Well, we enter 2023 with considerable momentum and confidence in our ability to continue to generate strong growth in our loan portfolio that is in line with pre-2022 levels. We begin the year with nearly CAD 3 billion in loans in our Canadian digital banking operations, an annual revenue run rate of nearly CAD 100 million. At the same time, both Shawn and I discussed we expect our non-interest expenses to decline meaningfully as the expenses associated with the acquisition of the U.S. Bank and the setup of our Receivable Purchase Program in the United States come to an end. We expect that that will contribute to profitability margins on revenue that are in line with those prior to making these investments. To be clear, this is just the starting point for fiscal 2023.
Despite forecasts for moderation in consumer spending, we expect to generate continued strong growth in our Canadian point-of-sale business. While we expect it will be tough to repeat the 74% year-over-year growth that we saw in 2022, we do expect business with existing partners to expand along the additional and to add additional partners, which should contribute to growth of this portfolio in line with the very healthy pre-2022 levels. We also expect the investments we made in 2022 will provide meaningful additional upside to growth. We continue to be very encouraged by the limited launch of Receivable Purchase Program in the U.S., confirming both the value proposition of the offering and the market opportunity as we continue to plan for a broad launch upon completion of our U.S. Bank acquisition.
We expect to see strong profitable growth in revenue and gross profits in our cybersecurity business as both DBG continues to expand its business activities with existing clients while adding new clients. As it grows, we expect our cybersecurity business to be increasingly accretive to the bank's overall earnings. On the deposit side, we expect our low-cost insolvency deposits to return to growth, expanding throughout fiscal 2023 as a function of an increase in the volume of consumer bankruptcies over the same time frame, attributable primarily to the more challenging economic environment. We also expect to continue to expand our diverse broker network, which we source through personal wealth management deposits, mainly GICs, and expand our business with existing partners. Recent data from one of our major banking partners is bearing this out.
Finally, very importantly, as I noted earlier, VersaBank was designed specifically to perform well in any economic environment. As I noted earlier, the bank has a track record of performing even a little better in economic downturns. As our banking peers are hunkering down for difficult times. Our low risk model enables us to capitalize on opportunities that might not have otherwise been available to us. With that, I'd like to open the call to questions. Operator?
Thank you.
Joe, are you there?
Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please leave the handset before pressing any keys. One moment please for your first question. Your first question comes from, sorry, Greg MacDonald from LodeRock Research. Please go ahead.
Thanks. Good morning, Shawn. Good morning, David. How are you guys?
Very good, Greg. We're here in foggy London, Ontario today.
Yeah. listen, I wanted to ask, there's been a lot of discussion on net interest margins this quarter with earnings season. You make reference a little bit to it, David. I know that the mix of this bank's a little different than what most banks in Canada have. Can you talk about a couple of things? One is you make reference to the deposit mix, specifically bankruptcy deposits, and we haven't really seen a whole lot of traction on that. Maybe that's been surprising to some. Can you give us a sense of what you see in 2023 from that perspective? I have a second question on loan growth. The loan growth expectation on point of sale, I think it's not a surprise to anyone.
Is there anything that you're seeing in the mix within point of sale that you can comment on? or is that mix still relatively similar to what the growth in 2022 was? Thanks.
Sure. Good questions, Greg. With respect to our deposit mix, yes, the deposits we receive from the insolvency industry are even a little lower than the previous year. I think that is the result. Well, I know that's a result of the various support payments that our government made to help Canadians suffer with the pandemic. We're coming off a 35-year low of insolvencies, and there's a bit of a lag effect from that turning into deposits when the insolvencies increase. I expect that now, of course, the support payments have ended and interest rates are going up, and it's becoming more challenging an environment for, particularly for consumers and small businesses, that unfortunately we'll see a lot more insolvencies in Canada.
It'll get back to sort of normal levels, maybe even exceed that. That does bode well for us. It means that our insolvency deposits will start growing again and could very well get to a CAD 1 billion mark. They're only CAD 600 million right now, I mean, coming off of 35-year lows. The mix should throughout 2023 increase in percentage to insolvency deposits. Now with respect to loan growth, we're not really seeing much of a reduction in our point-of-sale growth presently. Although I do expect the higher interest rates will dampen loan growth into 2023. The mix is primarily, well, not primary. About two-thirds has been in home improvement and home-type financing.
We love that business, and it represents a low-risk segment of the market. Look, in 2023, slightly a little more emphasis on the home improvement side than there has been, but it is already a big business for us. Of course, as we welcome it and that it is, it's a lower risk segment of the point-of-sale market.
With respect to the U.S. market, this is an opportunity to grow in point of sale as well. I suspect the mix is a little bit different in the U.S., but any general comments on what you're seeing in trends in the U.S. market so far, with respect to growth opportunities in that segment?
There seems to be a tremendous growth opportunity. It's a huge market. I think one trigger we have is $1.8 trillion, as opposed to Canada, maybe, not even a tenth of that, 5% of that maybe. A huge growth from size. Any one of the industries that we finance in Canada, we'd be happy to do in the States. It's just by chance, the first one, the customer we got was a large tractor-trailer financing company. Coincidentally, that was the very first customer we got in Canada, too. Not the same company, but the same industry. It was a tractor-trailer financing. I don't really have a good sort of visibility on what segments we'll grow most rapidly in.
It's just the market is so big, and our product seems to be so attractive, to these point-of-sale finance companies that, once we've got our U.S. bank, we expect really big growth in the States.
Okay. Thanks for that. Just final one for me, and then I'll pass it on. With respect to timing on bankruptcy deposit growth, thank you for the reference point of CAD 1 billion.
Are you getting any indications from the trustees that you deal with in that side of things on timing? Is this something that you expect happening in the first half of the year or as I suspect more so in the second half of the year?
Well, you know, we're all seeing the cracks in the economy right now. The trustees are seeing increased volume already. Other banks are reporting, you know, larger provisions for losses. Their arrears rates are going up. It's just what you'd expect. We're seeing the leading indicators. I would say second half of 2023, it'll be growing. Unfortunately for Canadians, it'll be growing like gangbusters. These deposits start pouring in the door as states are being wound up. Towards the end of middle, say, 2023, we probably start seeing the type of growth we used to experience in this area.
Okay. Thanks very much for answering the questions. I'll pass it on. Thanks.
Thank you, Greg.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question comes from Stephen Ranzini from University Bank . Please go ahead.
Good morning, David. Thank you for a great quarter. I've got several questions, but I'm just gonna ask two and then go back in the queue. Last time we talked, you were thinking that you would have approval for your Digital Deposit Receipt project by the end of October. Obviously, that deadline's come and gone. What are your current thoughts on that? Secondly, have you ever given any thought to off-balance sheet structures to hold some of your loans to be more capital efficient and drive higher ROE for the bank?
Well, Stephen, thanks for logging in. I wonder if you have just seen the fog and rainy weather that's just gone through, London here. I imagine you saw it just a bit earlier than we did where you're located.
Yeah, it's pretty gray here in Ann Arbor. Sorry.
What happened with the additional Digital Deposit Receipt is the model that we had worked on, we called DCAD, that used a third party to hold the wallets, didn't seem to sit well with the various regulators that we were discussing it with. We pivoted over to a different model, but using all the same technology where we would host, and we are hosting right now, the wallets ourselves. Hence the name changed to CADV. We think this is the model that will have legs. And frankly, I wouldn't be surprised every other bank will want too, in that it has a lot of advantages over the original one.
For one thing, the data for the deposits are maintained both on the Stellar blockchain and also in our tried and true, what we called, deposit management system, DMS. To alleviate our regulatory fears, say something should happen to a blockchain, which I really doubt that would ever happen. If it were, the data is maintained simultaneously on our existing deposit system. Sort of in reaction to feedback we got from various regulators and what we noticed happening in the world, we pivoted over to this, what we think is the best of the best that's out there, where a bank itself is the host of the wallet. The Digital Deposit Receipt isn't really a token.
It represents a real deposit with a real bank that goes through all the normal AML procedures and all that. But it did take time. It is fully functional now amongst our directors and our employees. But we'll tactically wait to lift the curtain up and to make it available to our other depositors. With respect to utilizing off-balance sheet techniques to fund our loans, presently, we have a lot of capital. We're just using our own capital to fund the loans and leases as we're generating them. As time progresses, though, we are contemplating portfolioing these assets so that they would be readily available for sale for two reasons.
One increases the bank's liquidity, and the other one, as you say, it, improves the bank's return on common equity.
Okay, great. I've got two more questions, but I'll go back in the queue, and we'll see if we get back to me. Thanks.
Okay, Stephen.
Thank you. Your next question comes from Brad Ness from Choral Capital. Please go ahead.
Hello, gentlemen. How are you doing?
Very good, Brad.
Good. Hey, on the effective tax rate, that CAD 1.1 million in additional taxes for the quarter, what was that specifically related to? Are we gonna go back to that 27% effective tax rate, you know, say, going forward?
You know, I think that's a good question for our CFO, who's been on the line, waiting for a good question to answer. Shawn, I'll leave that one to you.
Thanks, David. I hope I'm off mute here, folks. Morning, Brad. That, the little high tax rate there we're seeing in the year is a function of kind of three core variables, Brad, that we're pointing to. We do expect this to diminish over the course of 2023. We don't think we'll get back to our statutory rate at 27%, but we do think we'll be south of 30% as these the various elements are rationalized over the course of the year. They're comprised primarily of non-deductible expenses associated with our stock options, Brad, as well as some non-deductible losses. We think this is gonna be one that we'll be able to utilize early in the coming year.
As well as the, you're probably familiar with the FAPI tax here in Canada, which we'll pay. It's a function of the foreign exchange gains, realized over the last, particularly over the last quarter on our current U.S. lending operations through Versa Finance. Those three elements, those miscellaneous items are new stuff, but those three items contribute to about 90% of the increase that we noted in our public disclosure.
Okay, great. I got several more here if you guys have time. Nowadays, what type of rates are you getting on your point-of-sale financing, and what's the incremental cost to fund those?
Well, the rates are running in Canada about 2.5% over the same term government Canada bond. Say the government Canada bond is, say, 4%, we're up at least 6.5%-7% is the yield on the Point of Sale in Canada. In the United States, it's about a 1% to that on the net interest margin. With respect to incremental costs, there may be a little bit of hiring necessary to take on the U.S. market, but not very much in relation to the scale of the operation. It's very, very scalable and for the most part, all the operations will be handled at the tech center, which I'm sitting in today in London.
There's no need to duplicate what we have here in London to take on the U.S. market. You know, marginal increases, tiny increases, maybe in a few staff members to take on the U.S. market. Other than that, the systems are capable of many times the volume that we're presently dealing with.
Okay, great. If I heard that correct, in the Canadian market, you're getting 250 basis points over Treasuries, and in the U.S. market you're getting 350 basis points over Treasuries.
Yeah.
for this point-of-sale product.
Be about right. Yeah. It's about 1% better than we get in Canada, roughly speaking, those numbers.
Okay, great. Can you update me on kind of the timing of the CADV rollout as you kind of see things play out next year?
Well, the I think, I think here, sort of early in 2023, we'll be we'll be in a position to take CADV to the open market. That all depends on the regulators' perception. Right now, thanks to, thanks to a certain fellow in the Bahamas, created a whole lot of nervousness in this area, even though, of course, our Digital Deposit Receipt is entirely different animal than what was, what was being promoted out of the Bahamas. I mean, technically, we'd be ready to go first part of 2023. We are, we are cognizant of the of the caution and concern that various regulators have about this use of a blockchain. That's about the only similarity.
We're simply using Stellar to account for our actual deposits with our bank. You know, not a whole lot of similarity to all the things that have gone wrong or even what the so-called stable coins where they've placed deposits with another financial institution as collateral for their coin. Ours is, you know, represents a real deposit with a real bank. In fact, the data is duplicated, as I think earlier, on our own DMS deposit system and on Stellar. That in effect, our depositor has the ability to use Versa "View", our View software, our View app and look at their deposit just like they would with any other bank using an internet app. You can look at it on Stellar.
The bonus is, of course, is that should you choose to move your Digital Deposit Receipt from your wallet to somebody else's wallet, say to effect a payment, you can do it. What we've in effect done is turned an old school bank account into the most modern type of checking account where our CADVs become checks, certified checks, in fact, as they're drawn on our bank, and move to somebody else's e-wallet, say Amazon's e-wallet, to effect a payment. You know, when I say that, some folks say, "There are already rails that do that, David. There's already ways to do payments." Nowhere near as efficiently, nowhere near as cost-effective.
Transactions on Stellar is in the order of fractions of cents and takes place instantaneously anywhere in the world versus, if you try to move money from even from Canada to United States, you might be waiting three days and be charged a hefty fee for that. We think it's fantastic revolutionary adaption of blockchain technology. We're hoping that our regulators, and this is all throughout the world, will understand what we're doing and endorse it. It's about as low risk as you can imagine. You know, as a bank, we pay attention to all the things that others don't seem to have paid attention to, like, say, anti-money laundering and terrorist financing to not be the least.
Anyway, Brad, we're keenly excited about putting it out in Canada and hopefully our regulators in the new year after we've had some good solid interaction with them, will endorse it too.
Great. Thanks. A couple more here. On Digital Boundary Group, you had a strong revenue increase in the quarter of CAD 1.8 million. Is that sustainable or is that an anomaly or a seasonal boost in revenue, or do you think that's more recurring?
I think that's more reoccurring in that we received a large contract with one of the largest corporations in Canada to do app testing, and that's very profitable. It's a specialized type work that DBG is doing for this large corporate. The only constraint really is finding enough app testers. We're actively trying to hire as many as we can to bolster that business. Yeah, we're excited. DBG, I think it round numbers was CAD 10 million in revenue, CAD 5.8 million, CAD 6 million in gross profit. That should just keep going up at the same trajectory. App testing, like I say, is wonderful business for us and all the other products that we have in DBG, such as, sophisticated, penetration testing.
There's always an increasing demand for it.
Absolutely. You said CAD 10 million in revenue. I'm showing CAD 5.7 million for the year.
Yeah. What we show.
What is that CAD 10 million? Is that expectation?
We show gross profit on our statements and total revenue. Shawn's on the line. I think it was CAD 9.8 for the year, Shawn, total revenue.
That's right, David. Yeah. Brad, you're right. You're looking at gross profit of CAD 5.7 as published, and David's talking about revenue, top line revenue or sales, sir.
It's in the income statement. When I see non-interest income of CAD 1.8 million, that's not revenue. You said that's net?
On the, on the quarter, Brad, you're right, CAD 1.8 million. That is, that's gross profit at DBG. The challenge there is integrating that with the bank statement. It's the most intuitive way we can merge the, the two income streams, to have it somewhat, sort of align with the, how the bank's statements are structured. You're right. What you're looking at is gross profit.
Okay.
Sean.
What was revenue for the quarter?
about CAD 2 million.
Probably around three.
Yeah.
We published the total revenue, I think.
Okay. You're saying core revenue of Digital Boundary Group was CAD 3 million, and the CAD 1.8 million you report in the income statement is the lower gross profit part of that.
That's right. about CAD 2.8 million on the quarter, Brad, for sales.
Got it.
CAD 1.8 million, as you meant, for gross margin or gross profit, my apologies.
Okay. If that's something you could present going forward, that would definitely be helpful, so I can differentiate that. Let's see. Lastly here, when I add back that CAD 1.8 million and CAD 1.1 million, roughly CAD 0.10 a share, it comes up to, you know, 1.1% ROA, 11% ROE, kind of on a core basis. I imagine that's a good starting place as I think about profitability, next year, early next year. How much leverage should I think you have in this model? You know, if you continue to grow 20%+, do you get to 15% ROE? I know you do eventually, but, you know, what's the timing of something like that?
Well, we do get to 15%. That's the number we use in our, in our planning. The good question is on the timing. Presently, the point-of-sale business in Canada is still growing rapidly, which is quite surprising to me in that it's driven by the actual cost per month of the item that the person's purchasing, and interest rates of course, have a huge bearing on that. You would think it would dampen down, but presently it's still growing rapidly in Canada. Like I was saying earlier, not to the extent that we the year we just completed 70% odd growth.
In the States, the model looks really attractive from the real-life customers we've been dealing with and pitching to. The major constraint to get into that 15% ROE is how long it takes us to be granted the acquisition of the Holdingford Bank. That's what's holding us back in the United States. We created a sort of interim company we call Versa Finance to hold these assets, and it's quite cumbersome. We've actually been backing off until we've got that U.S. license. That's the gating item on rapid growth and a huge improvement in ROE.
After saying that, as you noted, we end the year, at a run rate of about CAD 100 million in revenue and, fixed costs are, Shawn will know better than I, but, without any extraneous items, they're probably around CAD 55 million. Is that number you would have, Shawn?
Yes, sir.
Yeah. We're already starting the year with a CAD 45 million pre-tax. If we did nothing else, I mean, if we didn't grow a bit, and we are growing rapidly still in the Canadian market. You know, we really are heading into this 2023 with a full head of steam. Then, you know, if it turns out that the bankruptcies increase as they are, as they seem to be already, well, that helps our margin too, because the what we pay on the on what are really operating accounts is a lot less than we pay on GICs. You know, I hate to be so optimistic when all my colleagues are looking at their boats and and weeping at times.
As I was saying earlier, our little bank is designed for this type of economy, and it, you know, it's looking really good. You didn't hear us complaining about loan losses or cracks in the portfolio or any of those things. In fact, the only loan we had in arrears paid off the next day. That's just a crazy anomaly in accounting that you show a loan impaired for one day, the next day it pays off. You know, we're going into the market with a really solid portfolio, a full head of steam of existing loans and customers growing. If the recession kicks in as everybody thinks it does, probably that just means an abundance of economical priced deposits for us.
Got it. Thank you, gentlemen, and happy holidays.
Thank you, Brad. Hope to come and see you again sometime in the winter months. I might be spending a little time in my place in Florida, so it won't be too short a ride to go up to where you are.
Sounds good. Just let me know.
Absolutely.
Thank you. Your next question comes from Stephen Ranzini from University Bank . Please go ahead.
Yeah. Hey, guys. thanks for having the chance to ask my last two questions. I noticed in your financials that your average price per share on the buybacks that you did was CAD 9.88, right? Which is actually.
Yeah.
higher than the current price. I noticed that during the year you granted, just under 1 million shares of options at CAD 15.90. I guess my question to you is, you know, with the stock currently trading at CAD 0.77 on the dollar book value, you know, why not get a little more aggressive than just buying 195,300 shares to at least offset the stock option dilution?
Well, good question, Stephen. The answer is, it took quite a while to take the normal course issuer bid into United States. It wasn't anything other than just paperwork and regulatory approvals required. It now is in place. Raymond James is operating it for us. They've, of course, been blacked out, like we all are. But after the blackout, you'll see RJ in there. We've got about 1.5 million shares left that we can buy. As you say, fantastic price we might be able to buy them at at 77% a book. We'll be looking to pick up as much as we can.
Awesome. Then, my last question is on, net interest margin and changes in interest rates, right?
Yep.
You know, in the short run, the impact for a bank, you know, like VersaBank, is not, you know, fully reflective of what the longer term impacts are of a shift in interest rates, as you know. You know, I noticed that, you know, sequentially, you know, you had, I think it was 5 basis point rise in your net interest margin, right?
Yes.
I would assume that over a year since the Bank of Canada rate rose 3.5% so far, that there's a bigger impact as assets continue to reprice. Can you quantify in dollars, you know, for every 1% rise in rates, you know, what's the immediate impact is and then what the, you know, say one-term, sorry, one-year impact is on net interest margin, please?
Well, short answer is that there's hardly any impact on us on a rising interest rate environment in that we're so precisely matched. We only run about 1.4 years asset duration, about the same in liabilities. We move very precisely with the interest rate environment by design. However, we do make out much better on the cash that we're holding for liquidity purposes. That's why you would see the margin on our loans stay pretty well the same, maybe decline even a tiny bit, the margin on the loans. The actual overall net interest margin of the bank improved to 2.81%, which in Canada, that would be the, by far the highest net interest margin of any bank. All of them are posting declines.
There will be a great continual time, and as I expect there will a little bit more in Canada. There's a positive impact on our profit and loss on net interest margin, in that we earn more on our liquid securities.
Okay. Thanks. Thanks so much. Again, great work on a good quarter. Thank you.
Well, thank you. We look forward to getting together in person one of these days. You're not that far away.
I can actually come to Canada now.
Yes, and we can go there. We can cross the border too, it seems. I crossed at the Blue Water Bridge not long ago, and got a nice welcome. I don't think there's that many customers coming in right now, so I was well received.
No, the tourism business is way down.
Yeah. We'll get back. It'll get back. Look forward to seeing you, Stephen. We'll have to have a nice lunch.
Yeah. Thank you. Look forward to it.
Yeah.
Thank you. Mr. Taylor, there are no further questions. You can go ahead.
Well, I'd like to thank everyone for joining us today, and I look forward to speaking with you at the time of our first quarter fiscal release. Obviously we're a very excited team of bankers here at VersaBank, as opposed to maybe our colleagues in our industry. In that, we designed our bank, as we sort of talked about in a little more detail on this call, we designed our bank to take advantage of what for other bankers are challenges, for us it tends to be a opportunity. And that was demonstrated, I think, quite readily in how fast we recovered to have a record year in 2022, particularly with the growth in our point-of-sale business that came off the pandemic's huge decline in the, in volume.
That's, that's sort of what you can expect with this, how this bank is set up to run. That, when recessions come, our competition tends to be, let's say a little more myopic having to look at their own portfolios. Our source of deposits from the insolvency industry, which is now we've probably grown our client base of insolvency professionals to most of the industry. Most of the large insolvency practices in Canada now bank with us. We're in good shape to take advantage of what might be a tougher time for others. Again, thank you. Thank you for dialing in, and we'll look forward to talking to you next quarter.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. As you please, disconnect your lines.