VersaBank Q3 FY2024 earnings call

• Closing of U.S. acquisition: A transformational event, allowing expansion of RPP to the U.S. market.
• Financial results: Total assets at record high, net income up 15% YTD, EPS up 17% YTD.
• RPP model: Explained the cash holdback mechanism, where defaulted loans return to partners and are made whole by cash holdbacks, resulting in 0% provision for credit losses.
• Real estate portfolio: Transitioning to CMHC insured loans (0% risk weighted) with current commitments of $570 million, $125 million outstanding.
• DRT Cyber: DBG revenues and gross profit grew YOY, DRTC's net loss improved from Q2.

Bank Segment: Total assets at the end of Q3 FY2024 were $4.5 billion, up 13% YOY and 3% sequentially. Loan portfolio reached a record $4.05 billion, with the receivable purchase program (RPP) accounting for 80% of total loans, at $3.2 billion (+16% YOY, +4% sequentially). Real estate portfolio was $745 million, contracting 9% YOY and 10% sequentially. Net interest margin on loans (excluding cash and securities) was 2.41%, overall net interest margin including cash and securities was 2.23%. Provision for credit losses was 0% in Q3. DRT Cyber Segment: Digital Boundary Group (DBG) revenues in Q3 were $2.5 million (+8% YOY), gross profit $1.9 million (+5% YOY). DRTC had a net loss of $106,000 in Q3, comparable to the prior year and an improvement from Q2's net loss of $162,000.

• U.S. expansion: Expecting strong growth in the U.S. with RPP, benefiting from better economics and lower cost of funds.
• Canada growth: Continued steady growth in Canadian RPP, aiming to pass $5 billion milestone.
• Net interest margin: Anticipates short-term pressure from Canadian interest rate decreases but benefits from expansion of low-cost insolvency professional deposits.
• Real estate: Near-term expansion of real estate portfolio with transition to CMHC insured loans to enhance ROCE.

• Interest rate changes: Temporary pressure on net interest margin due to lagging deposit rate adjustments in Canada.
• Deposit rate lags: Canadian deposit rates lag bank of Canada rate changes, impacting cost of funds.
• Execution risks: Potential differences between expected and actual results due to various material risks associated with business operations.

Q: How are conversations going with new partners in the U.S. and growth trajectory?

A: Tremendous reception in the U.S., one partner nearly operational, others to sign up in next year. Economics in U.S. better than Canada with ~1% lower cost of funds.

Q: Timeline for funding growth in the U.S.?

A: Can immediately start raising deposits, already working with Raymond James and another brokerage for deposit access.

Q: Quantify one-time costs in Q3 and expected next quarter?

A: ~$700,000 in Q3 for U.S. acquisition (consulting fees, payroll additions, etc.). One-time charges in Q4 related to acquisition formal closing, with normalized costs in Q1.