VersaBank Q1 FY2025 earnings call

• Signed first U.S. partner (Watercress Financial) post-U.S. bank acquisition, provided initial funding, and expect U.S. growth to contribute meaningfully.
• Successfully completed an $86 million capital raise.
• Aligned the structure of DRT Cyber.
• Achieved a new record for total assets.
• Canadian banking operations demonstrate operating leverage.
• NIM on credit assets saw small sequential increase in Q1.
• EPS affected by higher shares outstanding from December capital raise.

The vast majority of revenue was driven by digital banking operations. Canadian banking operations had revenue of $23.8 million, with net income of $8.8 million or $0.30 per share. U.S. banking operations had revenue of $2 million and income of $103,000. Within DRTC, the cybersecurity component generated revenue of $2 million (up from $1.9 million in Q1 last year) with a net loss of $757,000, and digital media revenue was $342,000 with net income of $33,000. The credit asset portfolio grew to a new record $4.35 billion at the end of Q1, with the RPP portfolio at $3.4 billion (79% of total credit assets), and the multifamily residential loans and other portfolio grew 5% year-over-year to $928 million.

• Expect solid growth in credit assets, with minimum low double-digit growth in Canadian assets.
• Anticipate meaningful contribution from CMHC-insured multifamily residential loan business, targeting $1 billion in commitments by end of fiscal 2025.
• Yield curve returning to normal slope to benefit NIM, and low-cost insolvency trustee deposits to continue.
• U.S. RPP business to grow with robust pipeline.
• DDRs pilot planned in the U.S. soon.

• Tariffs could impact the ramp-up of U.S. RPP business.
• Exchange rate effects increasing U.S. expenses in Canadian dollars.
• Credit market disruptions leading to higher provisions for credit losses.

Q: About the near-term plans for digital deposit receipts (DDRs) and quantification of deposits by year end.

A: Plan to pilot DDRs in the U.S. soon with regulators, and expect to start raising deposits mid to end of the year.

Q: Should we think of non-interest expenses as the current run rate moving forward?

A: Yes, maybe even a bit more, with exchange rate effects making U.S. expenses more expensive in Canadian dollars.

Q: How quickly can the U.S. RPP volume be ramped up?

A: Watercress Financial is gathering momentum, with the next partner in process and legal work expected to be quicker, expecting to ramp up with the robust pipeline.

Q: Update on newer partners in the U.S. point-of-sale business and launch timeline?

A: Paperwork with master purchase and sale agreements is involved, but partners are keen, and the next partner is in the hopper.

Q: U.S. RPP balance sheet capacity, syndication, and management fees?

A: Syndicating loans with community banks and investment firms, software developed, targeting ~1% management fees, and bond rating to improve risk weighting.

Q: Impact of yield curve flattening, deposit roll-off, and bankruptcies?

A: Higher-priced GICs maturing, increasing bankruptcies providing low-cost deposits, and margins expected to widen.

Q: Details on the provision increase due to accounting change?

A: Provisions based on forward-looking models, higher in unstable credit environment, still small compared to industry averages.