Mr. David Taylor reports

VERSABANK REPORTS RECORD FOURTH QUARTER AND FISCAL 2023 FINANCIAL RESULTS AS IT CONTINUES TO BENEFIT FROM INCREASING OPERATING LEVERAGE IN ITS UNIQUE DIGITAL BANKING MODEL

VersaBank has released its results for the fourth quarter and year ended Oct. 31, 2023. All figures are in Canadian dollars unless otherwise stated.

Highlights for the fourth quarter of fiscal 2023

Consolidated:

• Total assets increased 29 per cent year-over-year and 6 per cent sequentially to a record $4.2-billion.
• Consolidated total revenue increased 20 per cent year-over-year and 9 per cent sequentially to a record $29.2-million, driven by higher net interest income due primarily to continued strong loan growth, as well as a larger contribution from DRT Cyber Inc. (DRTC).
• Consolidated net income increased 94 per cent year-over-year and 25 per cent sequentially to $12.5-million, driven primarily by the significant and increasing operating leverage in VersaBank's branchless, business-to-business (partner-based) digital banking model as well as a recovery of credit losses.
• Consolidated earnings per share increased 104 per cent year-over-year and 24 per cent sequentially to 47 cents due to higher net income, as well as the positive impact of the purchase and cancellation of VersaBank's common shares through its normal course issuer bid (NCIB).
• Return on common equity increased to 13.58 per cent from 7.32 per cent.
• The bank continues to advance the process seeking approval of its proposed acquisition of Office of the Comptroller of the Currency-chartered U.S. bank, Stearns Bank Holdingford NA, and expects a decision from U.S. regulators during the first calendar quarter of 2024. If favourable, the bank will proceed toward completion of the acquisition as soon as possible, subject to Canadian regulatory (Office of the Superintendent of Financial Institutions) approval.

Digital banking operations:

• Loans increased 29 per cent year-over-year and 5 per cent sequentially to a record $3.85-billion, driven primarily by growth in the bank's point-of-sale (POS) financing portfolio, which increased 30 per cent year-over-year and 4 per cent sequentially.
• Total revenue increased 18 per cent year-over-year and 6 per cent sequentially to a record $26.6-million, driven primarily by higher net interest income attributable substantially to loan growth and higher non-interest income attributable to higher gross profit generated by DRTC.
• Net interest margin on loans decreased 34 basis points (bps), or 11 per cent, year-over-year and was unchanged sequentially at 2.69 per cent. The year-over-year and sequential trends were a function primarily of higher cost of funds due to elevated rates on term deposits experienced periodically over the course of the year, including during the fourth quarter, offset partially by higher yields earned on the bank's loans.
• Net interest margin decreased 27 bps year-over-year, or 10 per cent, and decreased three bps, or 1 per cent, sequentially to 2.54 per cent.
• Provision for credit losses as a percentage of average loans remained negligible at minus 0.02 per cent, compared with a 12-quarter average of 0.00 per cent, which remains among the lowest of the publicly traded Canadian Schedule I (federally licensed) banks.
• Efficiency ratio (excluding DRTC) improved year-over-year to 45 per cent (down from 51 per cent), driven by the significant and increasing operating leverage in VersaBank's branchless, business-to-business (partner) digital banking model. On a sequential basis, efficiency ratio increased modestly to 45 per cent from 43 per cent due primarily to transitory non-interest expenses related to intercompany technology and cybersecurity services provided in the current quarter.

DRTC's cybersecurity services operations (Digital Boundary Group):

• Revenue for the cybersecurity services component of DRTC (Digital Boundary Group, or DBG) increased 21 per cent year-over-year to $3.4-million driven by higher service engagements, while gross profit increased 50 per cent to $2.6-million due to improved operational efficiency. Sequentially, revenue and gross profit for Digital Boundary Group increased 46 per cent and 45 per cent, respectively, due primarily to higher service engagements. DBG's gross profit amounts are included in DRTC's consolidated revenue which is reflected in non-interest income in VersaBank's consolidated statements of income and comprehensive income. DBG remained profitable on a stand-alone basis within DRTC.

Highlights for the full fiscal 2023 year

Consolidated:

• Total assets increased 29 per cent year-over-year and 6 per cent sequentially to a record $4.2-billion.
• Consolidated total revenue increased 32 per cent to a record $108.6-million, driven by higher net interest income resulting primarily from continued strong loan growth and higher revenue contributions from DRTC.
• Consolidated net income increased 86 per cent to $42.2-million due primarily to strong revenue growth significantly outpacing the small increase in non-interest expenses (mainly due to the significant and increasing operating leverage in VersaBank's branchless, business-to-business (partner-based) digital banking model), which was partially offset by higher provision for credit losses.
• Consolidated earnings per share increased 99 per cent year-over-year to $1.57 due to higher net income, as well as the positive impact of the purchase and cancellation of VersaBank's common shares through its NCIB.
• Return on common equity increased to 11.75 per cent from 6.61 per cent.
• The Bank purchased and cancelled 1,321,358 common shares under its NCIB in the current year, bringing the total number of common shares purchased through the NCIB as at Oct. 31, 2023, to 1,516,658.

Digital banking operations:

• Loans increased 29 per cent to a record $3.85-billion, driven primarily by growth in the bank's POS financing portfolio, which increased 30 per cent year-over-year, as well as strong growth in its commercial lending portfolio, which increased 24 per cent.
• Total revenue increased 31 per cent year-over-year to a record $100.6-million, driven primarily by higher net interest income attributable substantially to loan growth.
• Net interest margin on loans decreased 23 bps, or 7 per cent, year-over-year to 2.85 per cent due to elevated rates on term deposits experienced periodically over the course of the year, offset partially by higher yields earned on the bank's loans.
• Net interest margin decreased two bps year-over-year, or 1 per cent to 2.68 per cent.
• Provision for credit losses (PCL) was $609,000 compared with $451,000 last year due primarily to higher loan balances, as well as changes in the forward-looking information used by VersaBank in its credit risk models offset partially by changes in the bank's loan mix.
• Provision for credit losses as a percentage of average loans remained negligible at 0.02 per cent, compared with a 12-quarter average of 0.00 per cent, which remains among the lowest of the publicly traded Canadian Schedule I (federally licensed) banks.
• Efficiency ratio for digital banking operations (excluding DRTC) improved to 43 per cent from 55 per cent last year as a function of 31-per-cent growth in revenue and only a 1-per-cent increase in non-interest expenses due to the significant and increasing operating leverage in VersaBank's branchless, business-to-business (partner-based) digital banking model.

DRTC's cybersecurity services operations (Digital Boundary Group):

• Revenue for the cybersecurity services component of DRTC (Digital Boundary Group, or DBG) increased 9 per cent year-over-year to $10.6-million due to higher service engagements, while gross profit increased 38 per cent to $7.8-million due to improved operating efficiency. DBG's gross profit amounts are included in DRTC's consolidated revenue which is reflected in non-interest income in VersaBank's consolidated statements of income and comprehensive income. DBG remained profitable on a stand-alone basis within DRTC.

Management commentary

"Another record quarter capped off another record year as continued strong growth in our loan portfolio increasingly enabled us to capitalize on the significant operating leverage in our unique, branchless, business-to-business, partner-based digital banking model," said David Taylor, president and chief executive officer, VersaBank. "Twenty-nine-per-cent growth in total assets for the year, which pushed us well past our $4-billion milestone, drove an 86-per-cent increase in annual net income, improving our banking efficiency ratio for the year to 43 per cent from 55 per cent and return on common equity at the end of the year to just under 12 per cent for the year and just under 14 per cent for the fourth quarter from 7.3 per cent last year.

"Looking ahead to fiscal 2024, we expect continued solid growth in our loan portfolio, led by our Canadian point-of-sale receivable purchase program, with an expectation to surpass our next total asset milestone of $5-billion during the year. As we continue to grow, we will increasingly benefit from the operating leverage in our model, driving further outsized increases in profitability and return on common equity. The massive U.S. market opportunity for our receivable purchase program, should we receive regulatory approval for our proposed acquisition of a U.S. national bank, provides the potential for additional growth to drive total assets well in excess of our $5-billion milestone."

Financial review

Consolidated

Net income -- net income for the fourth quarter of fiscal 2023 was $12.5-million, or 47 cents per common share (basic and diluted), compared with $10-million, or 38 cents per common share (basic and diluted) for the third quarter of fiscal 2023 and $6.4-million, or 23 cents per common share (basic and diluted), for the same period of fiscal 2022. The sequential and year-over-year increases were due primarily to higher revenue, which was driven by strong loan growth, increased contribution from DRTC, a recovery of credit losses as well as lower non-interest expense.

Capital -- at Oct. 31, 2023, VersaBank's total regulatory capital was $476-million compared with $460-million at the end of the third quarter of fiscal 2023 and $449-million a year ago. The bank's total capital ratio at Oct. 31, 2023, was 15.38 per cent, compared with 15.10 per cent at the end of the third quarter of fiscal 2023 and 16.52 per cent a year ago.

Digital banking operations

Net interest margin -- net interest margin (or spread) for the quarter was 2.54 per cent compared with 2.57 per cent for the third quarter of fiscal 2023 and 2.81 per cent for the same period of fiscal 2022. The year-over-year and sequential decreases were a function primarily of higher cost of funds due to elevated rates on term deposits experienced periodically over the course of the year, offset partially by higher yields earned on the bank's loans.

Net interest margin on loans -- net interest margin on loans for the quarter was 2.69 per cent compared with 2.69 per cent for the third quarter of fiscal 2023 and 3.03 per cent for the same period of fiscal 2022. The year-over-year and sequential trends are attributable to the same variables discussed in the net interest margin section above.

Net interest income -- net interest income for the quarter increased to a record $26.2-million from $24.9-million for the third quarter of fiscal 2023 and $22.5-million for the same period of fiscal 2022. The year-over-year and sequential trends were a function primarily of higher interest income attributable to continued, strong loan growth, higher yields earned on floating rate loans attributable to rising interest rates and the redeployment of available cash into higher-yielding, low-risk securities, offset partially by higher interest expense in the current period.

Non-interest expenses -- non-interest expenses for the quarter were $11.4-million compared with $10.8-million for the third quarter of fiscal 2023 and $11.5-million for the same period of fiscal 2022. The sequential increase was a function primarily of higher fees incurred in the current quarter related to intercompany technology and cybersecurity services.

Provision for/recovery of credit losses -- recovery of credit losses for the quarter was $184,000 compared with a provision for credit losses of $171,000 for the third quarter of fiscal 2023 and a provision for credit losses of $205,000 for the same period of fiscal 2022. The year-over-year and sequential trends were a function primarily of management recalibrating the POS financing portfolio's static, legacy loss rate floor to align more closely with empirical loss rate data and changes in the bank's lending mix offset partially by higher loan balances and changes in the forward-looking information used in the bank's credit risk models. Provision for credit losses as a percentage of average loans was minus 0.02 per cent, compared with a 12-quarter average of 0.00 per cent.

Credit quality -- the bank's allowance for expected credit losses (ECL) at Oct. 31, 2023, was $2.5-million compared with $2.7-million for the third quarter of fiscal 2023 and $1.9-million a year ago. The sequential and year-over-year increases were due primarily to higher loan balances and changes in the forward-looking information used by VersaBank in its credit risk models offset partially by the impact of management recalibrating the POS financing portfolio's static, legacy loss rate floor to align more closely with empirical loss rate data and changes in the bank's loan portfolio mix. VersaBank's allowance for credit losses ratio continues to be one of the lowest in the Canadian banking industry, reflecting the very-low-risk profile of the bank's loan portfolio, enabling it to generate superior net interest margins by offering innovative, high-value deposit and lending solutions that address unmet needs in the banking industry through a highly efficient partner model. VersaBank has very limited exposure to the commercial real estate market as the vast majority of its commercial real estate portfolio is composed of loans and mortgages for residential use properties, it has very limited exposure to the commercial real estate market.

Lending operations: POS financing -- POS financing portfolio balances for the quarter increased 4 per cent sequentially and 30 per cent year-over-year to $2.9-billion due primarily to continued strong demand for home improvement/HVAC (heating, ventilation, air conditioning) receivable financing. Consumer spending and business investment in Canada are expected to slow modestly over the course of fiscal 2024 due primarily to the impact of higher interest rates, inflationary pressures and a softening labour market. This modest economic slowdown is not expected to devolve into a recession and is anticipated to be reasonably short lived, with only modest layoffs and a moderate increase in unemployment. It is management's view that any impact of a slower Canadian economy on the POS financing portfolio in fiscal 2024 will be substantially mitigated by the positive impact of continued onboarding of new origination partners and the continued expansion of business with existing partners over the course of the year. As a result, management expects solid growth in the Canadian POS portfolio over the course of fiscal 2024.

U.S. receivable purchase program (RPP): Despite higher interest rates and continuing inflationary pressures in the United States, the U.S. labour market remains resilient, which, combined with the broad expectation that the Federal Reserve's tightening cycle has come to an end, will continue to support consumer spending. Management views the current trajectory of the U.S. economy to be favourable in the context of continued, stable demand for durable goods as a function of enduring consumption. Management believes that the anticipated U.S. macroeconomic and industry trends described above will continue to support healthy growth in the bank's RPP portfolio over the course of fiscal 2024, which would be expected to include meaningful contribution from the bank's U.S. subsidiary should VersaBank receive regulatory approval for, and complete, the proposed acquisition of a U.S. bank.

Lending operations: commercial lending -- the commercial lending portfolio for the quarter increased 10 per cent sequentially and 24 per cent year-over-year to $898-million due primarily to increased loan origination in select markets that were in line with the bank's conservative loan origination strategy in light of the evolving, challenging macroeconomic environment. Notwithstanding the effective risk mitigation strategies that are employed in managing the bank's commercial real estate (CRE) portfolios, including working with well-established, well-capitalized partners and maintaining modest loan-to-value ratios on individual transactions, management continues to take a cautionary stance with respect to its broader CRE portfolios due to volatility in CRE asset valuations and the potential impact of higher-for-longer interest rates on borrowers' ability to service debt. While management will continue to focus on the multifamily residential sector in fiscal 2024 it is anticipated that bank's CRE portfolio asset mix will meaningfully pivot into lower-risk-weighted insured assets that will drive moderate portfolio growth in the coming year.

Deposit financing -- cost of funds for the fourth quarter was 3.86 per cent, an increase of 24 bps sequentially and 141 bps year-over-year due primarily to higher rates paid on term deposits during the quarter. Management expects that commercial deposits raised via VersaBank's trustee integrated banking (TIB) program will continue to grow throughout fiscal 2024 as a function of higher volumes of consumer and commercial bankruptcy and proposal restructuring proceedings, attributable primarily to the impact of a higher-interest-rate environment. In addition, VersaBank continues to pursue a number of initiatives to grow and expand its well-established, diverse deposit broker network through which it sources personal deposits, consisting primarily of guaranteed investment certificates. The bank's current deposit channels remain an efficient, reliable and diversified source of financing, providing access to ample reasonably priced deposits in volumes that comfortably support the bank's liquidity requirements. Substantially all of the bank's deposit volumes raised through these channels are eligible for Canada Deposit Insurance Corp. insurance.

DRTC (cybersecurity services and banking and financial technology development)

DRTC revenue (including that from services provided to the digital banking operations) increased 83 per cent sequentially and increased 108 per cent year-over-year to $3.7-million, due primarily to the timing of service engagements and higher fees earned related to intercompany technology and cybersecurity services provided to digital banking. DRTC recorded net income of $1.2-million compared with net loss of $99,000 for the third quarter of fiscal 2023 and a net loss of $486,000 a year ago. The sequential and year-over-year improvement was due primarily to higher revenue which was partially offset by higher non-interest expenses attributable to higher salary and benefits expense due to higher staffing levels necessary to support expanded business activity.

DBG revenue increased 46 per cent sequentially and 21 per cent year-over-year to $3.4-million while gross profit increased 45 per cent sequentially and 50 per cent year-over-year to $2.6-million. The sequential and year-over-year trends were due primarily to higher service engagements in the current quarter. DBG's gross profit amounts are included in DRTC's consolidated revenue which is reflected in non-interest income in VersaBank's consolidated statements of income and comprehensive income.

Strategic realignment of certain senior management roles

VersaBank also announced that it has realigned certain senior management roles as it prepares for broad launch of its RPP in the U.S. should it receive the relevant regulatory approvals (as discussed above). Shawn Clarke, previously the bank's chief financial officer, has been appointed to the newly created role of chief operating officer (COO). John Asma, previously treasurer, has been appointed chief financial officer (CFO). Chintan Shah, previously assistant treasurer, will assume the role of treasurer, reporting directly to Mr. Asma.

"I am very pleased to announce these appointments, which, together, enable the bank to efficiently and effectively deploy our deep internal expertise to fully capitalize on the significant opportunities in front of us," said Mr. Taylor. "During his nearly 15-year tenure with VersaBank, Shawn has made tremendous contributions to our growth and success in a variety of capacities, especially in last several years, as, in addition to his normal course CFO duties, he has been integral to our U.S. IPO and Nasdaq listing, as well as the U.S. regulatory approval process for our proposed acquisition. His extensive involvement in the development of the business plan and implementation strategy for the RPP in the U.S. will be invaluable to the success of our broad rollout.

"John brings a long track record of success in banking and finance, as well as a deep knowledge and understanding of the unique VersaBank model, to the CFO role. In his recent tenure as treasurer, he has been instrumental in enhancing our return on treasury balances, while further mitigating risk and enhancing liquidity, as well as expanding our base of business development. As CFO, John's financial acumen and discipline will serve the bank well as we increasingly realize the operating leverage in our business, with a particular focus on optimizing net interest margin and managing non-interest expense to fully capitalize on this critical part of our business model, as well as optimizing its efficiency and return on common equity in the context of focusing on risk mitigation throughout the Bank and our regulatory obligations.

"Chintan has spent most of his career in the treasury function within the banking sector and over the past 2.5 years has proven to be a valuable member of our own treasury team, working closely with John toward that group's many accomplishments. I have the utmost confidence in his ability to take on the bank's treasurer role and continue to drive the success of this critical aspect of our business."

About VersaBank

VersaBank is a Canadian Schedule I chartered (federally licensed) bank with a difference. VersaBank became the world's first fully digital financial institution when it adopted its highly efficient business-to-business model in 1993 using its proprietary state-of-the-art financial technology to profitably address underserved segments of the Canadian banking market in the pursuit of superior net interest margins while mitigating risk. VersaBank obtains all of its deposits and provides the majority of its loans and leases electronically, with innovative deposit and lending solutions for financial intermediaries that allow them to excel in their core businesses. In addition, leveraging its internally developed information technology security software and capabilities, VersaBank established wholly owned, Washington, D.C.-based subsidiary, DRTC, to pursue significant large-market opportunities in cybersecurity and develop innovative solutions to address the rapidly growing volume of cyber threats challenging financial institutions, corporations of all sizes and government entities on a daily basis.

Conference call

VersaBank will be hosting a conference call and webcast today, Wednesday, Dec. 13, 2023, at 9 a.m. ET to discuss its fourth quarter results, featuring a presentation by Mr. Taylor, president and CEO, and other VersaBank executives, followed by a question-and-answer period.

Dial-in details

Toll-free dial-in number: 1-888-664-6392 (Canada/U.S.)

Local dial-in number: 416-764-8659

Please call between 8:45 a.m. and 8:55 a.m. ET.

To join the conference call by telephone without operator assistance, you may register and enter your phone number in advanceto receive an instant automated call back.

Webcast access: For those preferring to listen to the conference call via the Internet, a webcast of Mr. Taylor's presentation will be available via the Internet from the bank's website.

Instant replay

Toll-free dial-in number: 1-888-390-0541 (Canada/U.S.)

Local dial-in number: 416-764-8677

Passcode: 219304 followed by pound key

Expiry date: Jan. 13, 2024, at 11:59 p.m. ET

The archived webcast presentation will also be available via the Internet for 90 days following the live event on the bank's website.

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