VersaBank (VBNK) Q1 2023 Earnings Call Transcript

VersaBank (NASDAQ:VBNK) Q1 2023 Results Conference Call March 8, 2023 9:00 AM ET

Company Participants

David Taylor - President, CEO

Shawn Clarke - CFO

Conference Call Participants

David Feaster - Raymond James

Mike Rizvanovic - KBW Research

Stephanie Woo - LodeRock Research

Trevor Reynolds - Acumen Capital

Brad Ness - Choral Capital

Operator

Good morning, ladies and gentlemen. Welcome to VersaBank's First Quarter Fiscal 2023 Financial Results Conference Call. This morning, VersaBank issued a news release reporting its financial results for the first quarter ended January 31, 2023. That news release, along with the Bank's financial statements, and supplemental financial information are available on the Bank's website in the 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 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 provided 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 1 hour following 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 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 Mr. David Taylor, President and Chief Executive Officer of VersaBank. Please go ahead, Mr. Taylor.

David Taylor

Good morning, everybody, and thank you for joining us for today’s call. With me today 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 and our reporting currency of Canadian dollars. Those interested, we provide U.S. translations for most of our financial numbers in our standard investor presentation, which will be updated and available on our website shortly.

Now to the results. The first quarter was not only another record quarter for VersaBank, but more importantly, one that was demonstrative of the true efficiency and return on equity generating capability of our branchless business to business digital banking model. And once again, this was complemented by the continued profitable contribution of our cybersecurity services business. Our digital banking operations contingency very strong year-over-year growth in our loan portfolio at 46%. Which drove our portfolio, to an all-time high of just under $3.25 billion.

Growth was again driven primarily by Canadian point of sale loan and lease portfolio, which was up 68% from Q1 last year. The combination of loan growth and stable net interest margin drove record revenue and record interest income. On the cost side, as we anticipated the transitory costs related to growth in investments and our move to NASDAQ that temporarily elevated our noninterest expense and dampened our profitability in 2022 substantially normalized in the first quarter. Putting our efficiency ratio back on track towards its full potential.

We continue to expect further normalization as our noninterest expense and importantly, we haven't only barely begun to realize the growth contributions of those investments we made last year. All this drove by far our best quarter ever in terms of net income and EPS. They for one outside quarter for net income in 2017 due to an accounting recognition when VersaBank amalgamated with PwC capital.

Net income grew 69% year-over-year to $9.4 million, besting our previous record of 6.4 million by a full $3 million. And EPS grew 79% or $0.15 year over year to $0.34.

Looking more closely at our performance, as I noted a moment ago, the first quarter financial

results were marked once again by our best ever revenue, net interest income and net income and earnings per share. Outside of these record results, there are three metrics that I'd like to highlight.

The first is our net interest margin. It's important to note that we have generated loan growth while maintaining our overall net interest margin and without taking on additional risk. This is something relatively unique compared to our peers. The second is our efficiency ratio. Now that we are through the bulk of our transitory costs for our strategic growth initiatives, that's the truth, scalability and efficiency of our model is emerging.

The third earnings per share growth, which outpaced net income growth as a result of our active share repurchase program. As we look ahead, in addition to the continued growth, we expect in our Canadian loan portfolio, we expect to generate significant long-term growth from our launch of the United States receivable purchase program. This is our high value add financing offering for consumers and small business lenders. Based on our proprietary technology that provides them with a regular, reliable, inexpensive funding alternative to help them succeed in their businesses.

As I discussed in our last quarterly call, this acquisition is transformational. The next step and 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 bank markets. We have launched this program on a limited basis in United States have the broad national rollout plan upon completion of the acquisition of the Minnesota based Stearns Bank Holdingford a fully operational OCC, Chartered National U.S. Bank.

Specifically, this acquisition will enable us to broadly rollout our receivable purchase program to the underserved U.S. market, which has been so successful in Canada, where we call it our point-of-sale financing business. In December, we submitted the requisite filings to the OCC and the reserves seeking approval of the acquisition and baseline continuing dialogue. We remain optimistic with respect to near term approval. In terms of an update on timing, which is ultimately the discretion of our regulators on both sides of the border.

We anticipate receiving a decision the respect for its approval of the proposed application from the U.S. regulators during the second quarter of the calendar 2023. And as favorable, we will proceed to complete the acquisition as soon as possible subject to Canadian regulatory approval. In the interim, we continue to actively prepare for this significant opportunity to bring our differentiated and attractive financing solutions to U.S. partners.

Topic of U.S. Receivable Purchase Program, or RPP. Our U.S. portfolio continues to expand with loans now nearly 44 million. As I discussed in our last call, we have limited aborning of loans head of the fulsome rollout upon completing the U.S. acquisition. And in fact, command to date has continued to outstrip our self-imposed short term capacity restrictions. Very comfortable with our progress and with a revised expectations for completion, we have made the decision to ramp up our U.S. RPP zones ahead of closing the acquisition -- in this moment.

I'd now like to turn the call over to Shawn to review our financial results.

Shawn Clarke

Thanks, David. Before I begin, just a quick reminder that our full financial statements and MD&A for the first quarter are available on our website or the investor section, as well as on SEDAR and EDGAR. And 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 first quarter of fiscal 2023 were just over 3.5 billion, up 46% from 2.4 billion at the end of Q1 last year, and up 8% from 3.3 billion at the end of fiscal 2022. Cash and securities at the end of Q1 were 251 million or 7% of total assets compared with 155 million or 6% of total assets at the end of Q1 last year at 203 million or 7% of total assets at the end of fiscal 2022. Our total loan portfolio at the end of the first quarter expand to another record balance at 3.24 billion, an increase of 46% year-over-year, and 8% sequentially. I'll break this out into its component parts in a moment.

Book value per share increased 8% year-over-year and 3% sequentially to another record at $12.77. These increases reported function of higher retained earnings resulting from net income growth, partially offset by dividends paid and also benefited from the lower number of outstanding shares as a result of our active share buyback program. Our CET1 ratio was 11.2% down from 14.8% at the end of Q1 last year, and down from 12% at the end of fiscal 2022 or leverage ratio at the end of Q1 of this year was 9.21% down from 12.7% at the same point last year and 9.8% at the end of fiscal 2022. Both of our CET1 and leverage ratios remain well above our internal targets.

Turning to our income statement. Total consolidated revenue increased 42% year-over-year and 7% sequentially to a record 25.9 million with the increase driven primarily by higher net interest income derived from our digital banking operations resulting from the strong growth in our loan portfolio that I mentioned earlier, and the maintenance of our net interest margin.

Consolidated net income for Q1 increased 69% year-over-year and 46% sequentially to a new record 9.4 million, excluding Q1, 2017, which is attributed primarily to a one-time recognition of deferred income tax assets pursuant to the amalgamation of VersaBank with PwC capital as David mentioned earlier. In addition to the growth in net interest income as expected noninterest expense substantially reduced year-over-year and sequentially as a transitory costs related to our strategic investments in several strategic growth initiatives, including the U.S. Bank acquisition and the launch of the receivable purchase program in the U.S. rolls off.

Consolidated earnings per share increased 79% year-over-year and 48% sequentially to $0.34, with the increase benefiting from strong earnings and the lower number of outstanding shares due to our active share repurchase program. During the first quarter, we were purchasing cancelled just over 822,000 shares bringing the total number of shares purchased under the NCIB as of the end of Q1 to just over 1 million. Primary driver of growth in our loan portfolio was once again our point-of-sale financing business, which increased 68% year-over-year and surpassing the 2.4 billion mark just continue to be driven, this growth continued to be driven mainly by strong demand for home, home improvement, HVAC and our receivable financing.

As we noted on our last call, although we expect very healthy growth from our point-of-sale business in 2023, we won't see the same outsized growth as last year. Q1 of this year saw a sequential growth in the point of sale portfolio of 9% relative to Q4 of last year and we believe sequentially, quarterly growth in the same range throughout the remainder of the year is achievable is consumer spending in the sectors on which we focus remains active.

Our point-of-sale portfolio represents 75% of our total loan portfolio as of the end of Q1, which was unchanged from the end of fiscal 2022. Our commercial real estate portfolio was expanded 5% year-over-year and 6% sequentially to 807 million at the end of Q1. As discussed in our last several quarterly calls. We have taken a more cautionary stance with respect to our commercial lending portfolios to the expected volatility and valuations in this asset class in a rising interest rate environment as well as concerns led to higher construction costs resulting from supply chain disruptions in a very tight labor market.

That said, we are seeing healthy demand for our construction term financing products in the form of very high-quality deal flow. We expect this to continue throughout to 2023. We remain very comfortable the risk profile of our commercial real estate portfolios based on our criteria working only with well-established well capitalized development partners to demonstrate excellent track records and of course, 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 security and other assets decreased 20 basis points or 6% year-over-year, but was unchanged sequentially at 3.03%. Year-over-year decrease was due mainly to a shift in the bank's funding mix combined with rising interest rates or the respective periods offset partially by generally higher yields or normal lending portfolio. And this is margin overall which includes the impact of cash securities and other assets. Increased 6%, or two big, sorry, increased 6 basis points or 2% year-over-year, and 2 basis points are slightly less than 1% sequentially to 2.83% this is attributed to higher yields earned on lending and treasury assets offset partially by higher cost of funds.

Now interest expenses for Q1 are 12.3 million compared with 10.6 million for the same period of 2022. However, down meaningfully from the elevated levels of 13.8 million for Q4 2022. The year-over-year increases due mainly to higher salary and benefits costs resulting from an increase in staffing levels to support expanded revenue generating business activity across the entire bank. Higher costs related to employee retention to very tight labor market and higher cost way to investments in the bank's business development initiatives. Offset partially by lower insurance premiums attributed adverse events listed on the NASDAQ September 2021, as well as lower capital tax expense.

The sequential decrease is due to the expected significant reduction in transitory costs related to strategic growth investments, and our listing on NASDAQ that David and I both mentioned earlier, as well as lower capital tax expense. Cost of funds for Q1 was 2.95% of 166 basis points year-over-year and up 50 basis points sequentially, but both increases due mainly to the larger proportion of Wealth Management Deposits relative to our lower cost and solvency professional deposits versus the comparative periods, as well as the general increase in marketing interest rates.

Increasing our cost of funds remain significantly less than the Bank of Canada's increasing the benchmark rate of 425 basis points to the beginning of fiscal 2021. Insolvency professional deposits once again can track it slightly in Q1 on both the year-over-year and sequential basis to historically low bankruptcy activity Canada's experienced primarily as a result of government support for both individuals and small businesses extended during the pandemic. Wealth management or what we refer to as personal deposits expanded 87% year-over-year 14% sequentially. They will talk a little bit more about our expectations around funding mix in just a moment.

Our provision for credit losses or PCLs in Q1 once again evidence that prudent risk mitigation strategies inherent in our lending models and outstanding credit quality of our loan portfolio, especially evident given the product expansion and PCL ratio there appears are reporting. Provision for credit losses for Q1 was 385,000, compared with a provision for credit loss of 2,000 in Q1 of last year, and a provision for credit losses of 205,000 for the fourth quarter of 2022.

Sequential and year-over-year changes were a function primarily of changes in the forward-looking information used by the bank and its credit risk models, as well as higher lending asset balances. PCL is as a percentage of average loans for Q4 was 5 basis points and our average for the past 12 quarters was zero. Our PCL ratio who continues to remain one of the lowest in the Canadian banking industry.

Turning now to DRTC. I would like to remind you that DBG's gross profit amounts are included in DRTCs consolidated revenue, which in turn is reflected in non-interest income in VersaBank's consolidated statements of income and comprehensive income. DBG's revenue for Q1 decreased 3% year-over-year and 19% sequentially 2.3 million as a function of lower service work volume in the current quarter.

Historically, Q1 is softer for DBG attributed the impact of the slower holiday period which typically results in lower revenue generating activity. Gross profit, however, increased 70% year-over-year and decreased 6% sequentially to 1.6 million, with a year-over-year increase driven primarily by higher pricing on engagements, and improved operational efficiency. DBG remain profit on a standalone basis this quarter.

DRTC consolidated revenue for the quarter that is including revenue generated through the provision of various technologies support and consultation services provide VersaBank digital banking operations increased 3% sequentially 29% year-over-year to 1.8 million. DRTC recorded a net loss of just over $0.5 million compared to net income of 150,000 in Q1 last year, and net loss of just under $0.5 million in Q4 last year. The year-over-year trend was a function primarily higher interest expense is attributed to higher salary and benefits expense due to higher staffing levels to support expanded business activity and higher costs associated with employee retention invested current challenging labor market.

And now let's turn the call back to David for some closing remarks. David?

David Taylor

Thanks Shawn. As many of you know, I'm an avid pilot and we aviators have a term that describes the absolute best conditions for flying at being capital K, which means ceiling and visibility, okay. As I look out to the foreseeable future for VersaBank, we have capital K. Sidenote, I'm sitting here at London Airport looking out my window and today it is indeed capital K.

Our comps for Canadian digital banking operations will benefit throughout 2023 from the outsized loan portfolio growth of 2022. And we continue to see sequential quarterly growth in the neighborhood of 8%. We expect net interest margin on loans to remain robust. We expect meaningful add for our loan portfolio through our U.S. receivable purchase program. With each passing month, with more discussions with our existing and potential customers for our RPP offering in United States.

We are more confident in the uniqueness and attractiveness of our offering. Case in point last week, we attended KBW, Fintech conference in New York City, providing us with an opportunity to discuss our solution with a number of potential partners, and the response was overwhelmingly positive. Although the approval process for our U.S. Bank opposition is taking longer than expected, it has not in any way changed our belief on the size of the opportunity. In the interim, we made the decision to expand our limited pre acquisition rollout to better capitalize on the near-term demand I described earlier. And as we await the opportunity for broad rollout, notably, we expect to generate a larger spread compared to Canada when we rolled it out broadly.

Last quarter, I discussed how I specifically designed VersaBank to perform well in good times, and even better in more challenging times. A core component of this model in addition to risk mitigation, being at the core of everything we do. It's our high value insolvency professional deposit business. As a reminder, we have almost singularly addressed the unserved market opportunity to provide integrated technology to easily enable Bankruptcy Trustees to park deposits with us.

We have the vast majority of the market for personal and small business bankruptcies in Canada. Insolvencies plummeted during the pandemic due to government financial support reduced consumer spending, and a halt to collection activity. Hitting a low of over 7,500 per month for the period April 2020 to February 2022. This compares to an average over the two years preceding the pandemic of over 11,300 per month.

As expected, we are now seeing those numbers begin to climb. Now up to 9,000 for January 2023, an obvious leading indicator with respect to our insolvency deposit growth. And we are now very recently seeing this flow through in terms of account openings and quite dramatically. At the same time, we are continuing to add new trustees and partners, further expanding our already impressive market share. This obviously bodes well for the low cost deposits moving forward.

To conclude, as discussed at the outset of this call, we view our results for the first quarter. As clearly evidence of the operating leverage inherent in our branchless business to business digital bank you model the resulting return on equity generating capability. We continue to grow our loan portfolio in Canada and add the significant additional long-term growth we extract in United States. We expect to continue to see the torque in our operating leverage.

Notably, our U.S. receivable purchase program will be serviced by the same technology centers in London, Ontario and Saskatoon, Saskatchewan service, our Canadian point of sale portfolio, and essentially the same number of personnel that's operating leverage.

With that, I'd like to open the call to questions. Michelle.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from David Feaster at Raymond James.

David Feaster

I'm just wanted to start on appreciate all the color on the loan growth front. I just was hoping to get maybe some more detail on the U.S. expansion. Glad to hear you're kind of going to be accelerating that. I'm just curious how, you've had good reception thus far. But how is demand in the states, the pipeline of new partnerships and just kind of the roadmap for the U.S. expansion? And maybe where do you think that portfolio gets to by the end of the year? I don't know if you had any targets for that?

David Taylor

Well, David, that sort of thing in the comments, we had purposefully limited our lending activity in the United States pending receipt of the approval to acquire the Stearns Holding for bank. We just wanted to test the market and get the legal documentation in place and our internal systems in place. And that we did. And we were expecting that we would be able to operate the bank around now. So we just sort of slowed it down. But it looks like it'll be a little longer before we're able to operate the U.S. Bank.

So we've made the decision to lend directly from our Canadian bank for the time being, so as not to lose the momentum that we've been gathering by talking to various potential partners. So to answer your question, there's a huge number of points of well don't call them point of sale financing states, but let's call them receivable purchase program partners and United States that are really keenly interested in itching up to our program. And, in fact, the saying of the last visit we had in New York City encouraged him KBW, I met many potential new partners who were very keenly interested in signing up.

That's why I made the decision to fund it from Canada for the time being, I didn't want to disappoint them. And I like to keep the momentum going. We don't have any year end targets. By quarter by quarter, you'll start seeing it grow. And I expect, we'll have the approvals. And then we'll be able to really ramp up with the U.S. Bank.

David Feaster

And maybe touching on the CRE book, you talked about some of the cautiousness that you might have had past few quarters. I'm just curious, maybe what changed? Is it availability of credit, in the market, where are you seeing demand that provides good risk adjusted returns for you? And I mean, have you tightened underwriting standards in that segment at all?

David Taylor

Well, we operate with sort of a mantra, and it goes like this. Bad loans are made in good times. So quarter-over-quarter, you see me saying we're being quite cautious, because we believed in quite rightly so that there was somewhat of a real estate bubbling cannon, probably all of North America, prices were way too high. And so we were very cautious in our lending during that period of time.

Now we've seen the prices reset, and getting down to what we might call a recent reasonable pricing switch gives us a bit of comfort. And secondly, as usual, as soon as they are our tactic our competitors are usually licking their wounds around about this time from finding themselves over lent on various properties. So that's the reason why the resurgence now in our optimism and the CRI portfolio, like a competition and pricing coming to reasonable levels. And of course, we have the who's who in the industry as clients. So it's a typical for us, I've done this every coming out every recession in my 45 years being a banker.

David Feaster

And then maybe last one for me. I mean, you've been extremely active repurchasing stock we're still trading well below tangible, you've got plenty of capital. I'm just curious your appetite for repurchasing stock here and how you think about capital when you've got such strong organic growth at the same time. Just curious, your thoughts on capital return capital priorities and yes, supporting the organic growth?

David Taylor

Well, we just love buying backer stock at these precious. I mean, it's about, it's the best invest and Warren Buffett said, his very best investment at zero risk, we buy it back, we get the return. I kind of doubt we're going to have that opportunity much longer. I think the market probably wondered if we had something to do with the crypto industry and I got sort of treated the same way as others have. There's no reason why our stock should drop below book. They're kind of earnings.

So this quarter, we sort of, I think, shaken that misconception off obviously our model is very powerful. It works extremely well and the earnings we've just produced her leave most of the industry in the dust. So I'd love to buy back keep buying back the stock, but I can't see the stock stand on this level for much longer with these kind of numbers coming out.

David Feaster

Well, congrats on a great quarter. I appreciate all the questions.

David Taylor

Thanks David. Look forward to seeing you sometime in Florida. I'm still in the frozen north here but I hope to turn the airplane sell 180 degrees and head back.

David Feaster

It's sunny and beautiful. So come on down.

David Taylor

My wife tells me that too.

Operator

Your next question will come from Mike Rizvanovic at KBW Research.

Mike Rizvanovic

I wanted to just ask a couple of quick questions on the numbers here. So first on the POS hold back, I think you're down about 5.5%, you were, I think, well north of 10, or a little bit north of 10 in the depths of the pandemic. Do you have a blindness sight as to how low that number might go? And or any maybe ranges? Is it range bound? Can you get much lower from here? How do you sort of look at that number going forward?

David Taylor

Well, the number depends on the quality of the receivables that we're purchasing. So it's 100% dependent on the quality. So we don't have any particular overall target it just by chance sort of settled in 10% for a while. The portfolio has or migrated over to lower risk assets. That might be something to do with the impending perhaps recession. We're seeing less riskier assets than we did in the past, i.e., now, it's moving towards home improvement type loans, which generally are a lot less riskier than, say, hot tubs and motorcycles and RVs, and that sort of thing.

So we're seeing a migration towards the lower risk asset classes, as consumers, maybe spend less in the what you call luxury items, items, they don't really need to they really need a new motorcycle when a recession might be coming, maybe not. But maybe we really need to look at our house and make sure it's insulated property. And we've got a really energy efficient furnace. Now, that price furnace now that price energy costs are higher. So that's the reason it's just simply a lower risk portfolio than it was when times are buoyant.

Mike Rizvanovic

Okay. Is it fair to assume that you've incorporated the same level of diligence to reflect a potential downturn like the 5.5% is low because it makes but it doesn't mean that you're necessarily not including a bit of a buffer because of the macroeconomic environment? Maybe not looking so robust anymore? Is that fair?

Shawn Clarke

Absolutely, we generally run around at least three times the amount of losses that our clients would show so and that's what we had. The depths of despair and the pandemic are the intrinsic losses that our models pointed to for our portfolio that have been around just round numbers 30 million, and we were holding about 100 million in cash fullbacks. And that's generally where we run. But these are ballpark figures. It's done a lot more scientifically than that each individual portfolio is looked at and reviewed on continuous basis. And we're always adjusting the cash hold backs, depending on our view of what's in store for our partner on the overall economy.

David Taylor

And Mike one other piece of colors you might want to keep in mind is that, as David mentioned, no change in our risk assessment process or the management process there. But in some cases, some of our seller partners post LCS as opposed to cash. So the risk fee, the volume there is still there, the protection is still there, but just the structure of the whole back is modified slightly with some of our partners.

Mike Rizvanovic

And then just a quick one on your insolvency deposit down in the quarter. And we have seen the number take up both on business and consumer, it is gradually normalizing. I think I was a little bit surprised that the number wasn't up sequentially, just given that trend. Or is it maybe just the nature of the assortment, maybe the size of an average insolvencies smaller today than it was. What's driving the number coming in lower? And then as a quick follow-up to that, how important is this as a funding mix shift on your margins going forward?

David Taylor

Well, the good news for us the bad news for Canada is we're opening more new accounts to receive the deposits and liquidation of the unfortunate businesses and consumers are going bankrupt. So we're opening more accounts. So these are sort of empty buckets that take about two years to fill up and then they're used to their burst to the creditors. So really, it's just you're just seeing the lag effect. We're seeing more insolvencies now those even in the figures earlier, and we're opening up a lot more accounts. Now we have most of the trustees in Canada dealing with us. So kind of the leading indicator is, what's the new volume of account opening. And there's a lot more been open since the close of our fiscal year.

So it's just simply the lag effect, I expect the solvency deposits will reach a record high for us, because we have a larger piece of the market share now than we had a few years ago, quite a larger piece. And already, we're seeing the new accounts be opened at an increasing pace. So it's just simply the lag.

Now, how important are these two are our net interest margin? While they're pretty important, we pay on average, about prime minus 2.8, on the solvency deposit, something like that. And that's a good, stable low-cost funding source. But frankly, I don't see that impacting our margin, our margins, always, of course been industry leading margin and category of 1% higher than most banks, I think marginal stay the same.

What could impact the margin? A little, which is really positive, because it has a tremendous boost to return on equity is our instant mortgage app is getting ready to roll out. And that gives us access to lower margin conventional mortgages and CMHC mortgages, their lower margin, but the risk weighting, of course, CMHC is zero, 35% on conventionals. So it might, you might see that, possibly as quarters to come depress margin a little but it certainly won't be too repressed from return equity, return on equity will continue to grow at a rapid pace. He's seen it growing up.

Operator

[Operator Instructions] Your next question will come from Stephanie Woo at LodeRock Research.

Stephanie Woo

I'm Stephanie on for Greg. So this quarter, I see surprising sequential growth and point of sale loans, given the economy backdrop, and I think you guys also alluded to in the comments that going forward probably won't see the same type of growth going forward. Maybe just a little bit more color on the Canadian side of point of loan growth? That's my first question.

And second, is it correct for me to assume that the U.S. expansion is going to be helpful for the NIM to go back to 3% going forward?

David Taylor

I appreciate that people are likely surprised that our loan growth is continuing at 8% per quarter, or the other banks in Canada, some are underwater, some are up here. And that's probably because the market that we're targeting, our partners are targeting is in the home improvement area. And as I was saying earlier, with energy costs going up, folks are quite rightly looking at getting new siding, new installation, new furnace more efficiency. And that's been a sort of a bonanza for our partners to provide that type of financing.

Discretionary purchases, I was saying earlier boats, cars, motorcycles as well, that's really dialed down. But thankfully, we're nicely diversified across the entire country and across all the industries. And we're seeing substantial significant growth in the point of sale on the home improvement in particular. So that's Canada, and in Canada for loan growth too, keep in mind that we've been working for quite a while on this innovative new program we call Instant-Mortgage. That's an app that enables a developer who's selling homes to that is potential purchasers punch the numbers in and come back with a very quick approval for their conventional mortgage or their CMHC mortgage inside. So we expect to see some growth in that area. And we're comforted somewhat in the market price of housing in certain communities seems to drop back to relatively reasonable prices. So unlike other lenders that unfortunately, were lending in the bubble, and maybe their loan to value ratios are, have gotten a lot higher than they were open for.

Now we're getting in sort of at the right time, but carefully. So that'll boost Canadian loan growth to. In the U.S., the cost funds United States is good bit less than visa vie Canada, relative to the risk free rate. So we see 4% net interest margins as being quite possible. And that will, as time progresses, that will boost our overall NIM. Just keep in mind our NIM on loans overall NIM on loans with north of 3%. And on our treasury assets, it's about 1%. So as if rates continue to go up or rates went up, we get a little bit more in our treasury assets. So the overall NIM improves. But then again, it says saying it depending on how much and CMHCs and conventionals are in summary, [indiscernible] delivers, that will tend to depress NIM, but it'll increase ROE because these are really, really high ROE type assets. They absorbed. And CMHCs use case no capital in conventional mortgages case 35% risk weighting.

So even NIM might slide back a bit betting all these factors might hold won't change much, but our release should be increasing pretty dramatically.

Stephanie Woo

Okay. Thank you so much. Best of luck on the U.S. expansion.

David Taylor

U.S. expansion. Basically, Stephanie, the approval to get the U.S. Bank is a little slower than we'd expected. We're working well with our U.S. regulators and the Canadian regulators. And, we expected halfway through this calendar year. But in the meantime, there was so much interest for our product amongst U.S. point of sale companies that we thought well, we should just roll it out anyways. Directly from Canada and satisfy the demand. Just get it going. We hate to see really ideal partners wanting to deal with us and us not doing it not we made a strategic decision to slow it down. But no, we said you know what, we'll hit our program up to some of our U.S. partners and let it get going.

Operator

Your next question will come from Trevor Reynolds at Acumen Capital.

Trevor Reynolds

Just a couple quick ones. I think most of them been touched on but in terms of the asset classes that you're seeing demand for in the U.S., would they be similar to what you're seeing in Canada or just maybe a little bit of insight on that?

David Taylor

No real theme to it. U.S. coasts a huge market. And we are interested in all asset classes. It's just what we see in Canada too. We've got a trucking firm. Now on board. We've got another one coming up as medical equipment. We're looking at recreational products. For us, we're sort of agnostic to asset classes. We look very carefully at the skill of our partners with respect to lending.

So basically, if they're good lenders, they asked they'll have to somebody or irrelevant. If they're ever they're not good lenders, it doesn't matter what asset class and we don't have to do with them. There's no saving them, if they haven't got their credit adjudication sorted out.

Trevor Reynolds

And then just on the instant mortgage app like is it you mentioned that it's close to being ready, what's the timelines on that being rolled out? And what sort of growth are you expecting on that?

David Taylor

The app itself is developed many, many months ago, and the systems are on place, people are ready to go. But there's been a few regulatory issues that we've been working through with the regulators, and we hope to have those resolved in about a month. And we have partnered lined up to the mortgage administration for is a wonderful, wonderful partner that's worked with us in other areas. So everybody's all set to go. And there's a fair amount of demand. It's in the order of hundreds and millions of dollars. So, consumer just starting up, I mean, I'd look for as long as we can get it going in about a month, I'd look for at least a couple of 100 million in the year.

Trevor Reynolds

And just remind me who would be the primary people looking at this, the instant mortgage?

David Taylor

Usually new homebuyers. This is the apps designed to be resident in the sales office of the developer selling the units. So it's designed as a sales tool. It's an adjunct to our point of sale program, we just thought real estate home purchases, was the largest point of sale market, in Canada, in the States. So we would develop this app to aid in that not programmed to aid in the sales process.

So when somebody wants to buy a house, and they haven't negotiated a mortgage with one of their traditional banks, we say not to worry, punch the numbers in here. And before you know it, you'll be approved for one of those types of mortgages. So it's designed to help our customers that we already deal with, for the most part by doing their financing for the construction of the residential units, is designed to help them in their sales process by taking that hurdle to closing a deal, i.e., I haven't got financing yet. And we say okay, here we are. Here's your thing.

There was nothing like that in North America when we came up with it. It's still nothing like Canada, but there's something like a United States that works really well. And just disappointing to me that it took so long to get all the regulator's on side to let Canadians enjoy this sort of convenience and again, the mortgage committed a bit earlier at the point of sale.

Trevor Reynolds

Great. And then just last one, just on the digital currency, maybe just some insight on where that sits, whether it's on the back shelf for now or what the plan is with that moving forward?

David Taylor

It's on the back shelf, the digital deposit receipt that we developed in as is fully developed. We think eventually, banks will use blockchain as a new channel for deposits. I think it's inevitable. But given the regulatory environment, north and south of the border, and given all the busy, good work we have on our point-of-sale business, it really, really pays. We decided leave this one on the shelf, and we don't have any particular time to take it off the shelf. It'd be sometime maybe in the future, when regulators say, hey, maybe that was pretty good idea. You guys want to bring out to market. I always regulators asked me to do it. Rather than because, obviously, we love diversifying our deposit base, and we embrace technology. But we've got a lot to do with our core business, our spread business that's grown by leaps and bounds. We're actually using artificial intelligence where to enhance the efficiency in our bank. For me, that is the layup. There's serious in our bank that artificial intelligence seems ideally suited. So we're working with our artificial intelligence people to improve our banks overall efficiency so we can scale even faster and at torque I was talking about. I think we'll be putting numbers out maybe in a year that banks thought were impossible.

Operator

Your next question comes from Brad Ness at Choral Capital.

Brad Ness

Hey guys, how you doing?

David Taylor

Very good Brad. Although I'm in the frozen north right now but I got my really socks off.

Brad Ness

Sounds good. Well, I'm going to jump into things. You had quarterly expenses, noninterest expenses at 12.3 million in the quarter. Is there any one time kind of transitory expenses in there?

David Taylor

There's a little bit left from the previous year but not a whole lot anymore. That to 12.3 probably run rate for us now. It's like I said a little bit of hangover from the past, but there's pluses and minus going forward.

Brad Ness

And what type of growth should we see in that number kind of excluding a U.S. acquisition?

David Taylor

Well, we're not looking for any growth in the upcoming year.

Brad Ness

Do you think hold flat in the whole year?

David Taylor

Yeah. We've already absorbed the additional salary increases that came about by hiring some new employees and Kia is of course, also just the general wage increases that I guess post-pandemic gave us gave us all inflationary increases. So that's already in the numbers. And yes, I mean, there's potential for a little bit of a decline in that 12.3. But I wouldn't think about it that way. Because there's kind of a lot of moving parts involved.

Brad Ness

And in light of continued upward pressure on interest rates. Do you think you can continue to maintain that interest margin on loans about 3%?

David Taylor

So saying this, there's a few factors, generally speaking, yes. You note that our cost of funds is about 1.5% less than the same term government, Canada. We have a really nice efficient gathering networking. And we've got, sooner or later, we know that those buckets I was talking about those insolvency accounts that we've opened are going to fill up with cheap deposits. So that helps. The thing that could depress NIM a little, which is kind of good, really good, actually, is the answer mortgage CMHC isn't conventionals. Because they have left, NIM, they're approximately 2%, all in after administration costs.

So that that would depress NIM on a weighted average basis, but because very little capital they have, so it really boosts ROE. So henceforth, you're going to start seeing me talk more and more about ROE. I mean, obviously, we all know, that know about banks, that are we is highly correlated to this two percentage, a book value, market value presented percent of book and highly coordinated last analysis we did was 0.8, 0.6 was they are. So my mission is to move ROE up as fast as it can.

So that stock starts trading where it should. In fact, I like to she is an outlier on the positive side, like because of the trajectory. So NIM covering around three could go up a little bit, down a little bit. But are we should really, really start moving.

Brad Ness

And when I do think about ROE, at the end of this year, it sounds like you're excited about artificial intelligence, when it can use due to your efficiency in the back room. You're excited about capital efficiency and Instant-Mortgage. And with continued strong loan growth and limited expense growth. I mean, is 17%, ROE something that we should be looking forward by the fourth quarter?

David Taylor

Well, I let me say this to your Brad. I brought a team down to lovely Fort Lauderdale for a strategic planning session. And there was one metric I had probably every slide, and it was ROE and the target I gave the staff was 18%. Some of them choke [indiscernible] and such. But the building of the bank days are over, we're got the bank built now. And that's a realistic number, whether we get that by the end of this year, the last month, October, whether we can week, the month shows 18 or not, I don't know. But it's going to be moving up every month now because it has to take costs the same and revenue is growing by 8% a quarter right. As our loans have grown by that as a little plus and minus their two saying what central bankers do and how high the put rates. It could just dampen demand. But as I was saying earlier, Canadians, and I think their U.S. counterparts are quite rightly looking at energy costs and saying to themselves, hey, how do we save a few bucks on heating their house? And that's a wonderful market for point-of-sale business.

So all in Brad, yeah, realistically, I said, '18 and '18 looks definitely when our model will turn. So 2024, we shouldn't be clicking our glasses together and saying, the team did it for me.

Brad Ness

Last question here. On your cyber initiative or I'll just call it the cybersecurity initiative. I'm always waiting for like a breakout quarter where revenues just jumped exponentially and kind of continues on a really strong path. And it's just, I continue to wait for that. What's going on with cybersecurity, and what type of growth expectations should we assume?

David Taylor

Well, the breakout quarter, I'm waiting for two. And here's what you can expect. Next quarter and a quarter and quarter after it'll be it'll be good growth in DRTC based on the new products and the customers and sort of how we're onboarding new customers. But to get a breakout, frankly, I think we've got to have a reseller signed up. Somebody who's got a huge customer base and wants to resell these products for us, when we don't have a sales force that can produce 10 times revenue growth. Somebody else could.

The type of products we have our state-of-the-art, they work for our bank, they're fantastic. I mean, some of the customers we've on boarded or the who's who in North America, of course, you know, some of them. So you've got a first class product, oh, it's tough. In-house developed suite of wonderful products. I think other rap fights throughout North America would do would be really happy with her sweet. But, we've only grown a few people. And right now our focus is mainly on the bank growing the banks NIM business.

Brad Ness

Thank you.

David Taylor

Well, Brad, it's really good to hear from you. Are you still in the D.C. area?

Brad Ness

I am. Let me know you're here.

David Taylor

These days all show up in person sales. We had that way pretty soon.

Operator

There are no further questions from the phone lines. At this time, I'll turn the conference back to David Taylor for any closing remarks.

End of Q&A

David Taylor

Well, I just like to thank everybody for dialing in and listening to us. It's an exciting quarter for us, and I very much look forward to talking to you next quarter. Stay tuned. VersaBank is centered on airport I'll say a passenger safety belt. So we're cleared to take off. Thank you. Bye.

Operator

Ladies and gentlemen, this does conclude the conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.