VersaBank Q2 FY2025 earnings call

• Second quarter of fiscal 2025 had positive highlights including first drawdowns of U.S. RPP portfolio surpassing USD 70 million, growth in Canadian residential construction loan portfolio, and meaningful expansion of net interest margin. • Record assets, credit assets, and revenue with sequential improvements in banking efficiency and return on common equity. • Initiated structural realignment of business to standard U.S. bank framework, expecting to realize additional shareholder value, reduce costs, and mitigate risk. • Net interest margin expanded with favorable trends, but preliminary costs of structural realignment and foreign exchange translation impacted income. • Canadian banking operations act as a proxy for U.S. operations' efficiency and return on equity. • U.S. operations' results reflect cost structure supporting ramp to larger revenues.

The vast majority of revenue is driven by Canadian digital banking operations. Canadian banking operations had revenue of $25.6 million, up 8% sequentially. U.S. banking operations had revenue of $2.5 million, a 22% sequential increase. DRTC Cyber had revenue of $1.8 million, down from $2.3 million in Q2 of last year, with a net loss of $652,000. Digital Meteor had revenue of $569,000 with a net loss of $152,000. Credit assets grew to a record $4.52 billion at the end of Q2, with the U.S. Receivable Purchase Program increasing 14% year-over-year and 4% sequentially to $3.5 billion, representing 79% of total asset portfolio.

• Expect insolvency deposits to reach $1 billion by end of calendar year. • NIM trends to continue with factors like replacement of maturing term deposits and expansion of low-cost insolvency professional deposits supporting NIM. • Structural realignment costs estimated at CAD 8 million, roughly divided between third and fourth quarters. • Expect DRTC Cyber sale to be done by end of fiscal year. • U.S. RPP expected to reach at least USD 290 million by end of year.

• Structural realignment subject to regulatory approvals (OCC, Fed, etc.) and shareholder approval. • Potential impact of political climate on U.S. operations, though current U.S. administration's view on digital commerce is favorable. • Canadian real estate market turmoil requiring careful lending in that area.

Q: Any pushback on U.S. operations due to political climate?

A: Not yet, current U.S. administration's view on digital commerce has helped, and adopting U.S. holding company structure minimizes risks related to Canadian banks in U.S.