VBNK

• Asset Growth & Liquidity: Total assets grew 26% YoY to nearly $6.9 billion, surpassing $7 billion subsequently. Book value per share hit a record $17.45. Liquidity remains elevated at ~9% of assets due to U.S. expansion but is expected to normalize.
• U.S. SRP Expansion: The U.S. Structured Receivable Program gained significant momentum, adding $220 million in new fundings in Q3 and $127 million post-quarter. A new partner (ECN Capital) is expected to contribute at least $300 million annually.
• Real-Time SRP Launch: VersaBank launched an AI-enabled real-time version of its SRP, eliminating interest rate risk for partners during warehousing. Major partners FinanceIT (Canada) and ECN Capital (U.S.) have implemented the solution, receiving overwhelmingly positive feedback.
• Cost Structure & Efficiency: Non-interest expenses were $25.2 million, including $3.1 million in non-core costs (reorganization/software write-offs) and $2.3 million in transitory costs (share-based compensation/transient items). Adjusted non-interest expenses run rate is approximately $19.8 million annually.
• Operational Leverage & AI: Management highlights significant operating leverage as growth accelerates. Extensive use of proprietary core banking software and AI initiatives (e.g., Microsoft Aquarium) is driving efficiency, reducing credit application processing time from weeks to days, and strengthening risk profiling.
• Reorganization: A special shareholder meeting will be held to approve a corporate reorganization to align with U.S. bank frameworks, targeting completion by end-of-October 2026. This aims to improve access to capital and potentially enable stock index inclusion.

• Fiscal 2027 U.S. Growth Target: Management raised expectations for U.S. SRP funding, targeting $3 billion in additional fundings in Fiscal 2027 (approx. 60% growth in credit assets).
• Net Interest Margin (NIM): Expects NIM to trend back to the 2.3% range in Q4 and through the remainder of the year as liquidity normalizes and deposit mix improves.
• Core Expenses: Forecasts fiscal 2027 core non-interest expenses to remain in line with the current run rate of approximately $19.8 million annually (excluding divestiture-related costs), assuming no further major one-time items.
• Capital Requirements: Indicates that if homegrown asset-backed securities can achieve a 20% risk-weight under Basel III rules, the bank may become self-funding and require no additional equity capital.

Total consolidated revenue reached a record $38.8 million, up 23% year-over-year. The Canadian digital banking segment generated $27.6 million in revenue (up 4% YoY) with net income of $6.6 million (dampened by $1.8 million after-tax reorganization costs). U.S. banking operations generated $9.3 million in revenue (up 199% YoY) and $3.9 million in net income (up 803% YoY), driven by the ramp-up of the Structured Receivable Program (SRP). Digital Meteor contributed $114,000 in net income. The RTC cybersecurity component reported $1.9 million in revenue but incurred a net loss of $578,000.

• Regulatory Divestiture: The Federal Reserve requires the divestiture of the DRTC cybersecurity business. While granted an extension until August 30, 2027, the process remains pending and represents a distraction from core optimization projects.
• Liquidity Costs: Currently, high liquidity levels required for U.S. entry are costing the bank basis points due to the spread between deposit rates and government bond yields in Canada; this is expected to reverse as liquidity normalizes.
• Adoption Lag: Acknowledges that the industry's transition from traditional Asset-Backed Securities (ABS) to the real-time SRP model may face adoption lag due to entrenched relationships with investment bankers and accountants, though demand is strong.
• Concentration Risk: The credit asset portfolio is heavily weighted toward the SRP (85% of total credit assets), which relies on specific point-of-sale finance partners.

Q: Joe Yanchunas asked how NIM will return to the 2.3% range and what drives the recovery. / A: David Taylor explained that NIM compression was caused by high liquidity costs in Canada (deposit rates 70bps over bonds) and lower yields on newer assets. As U.S. operations stabilize, liquidity will drop to 5-5.5%, eliminating the drag. He expects NIM to reach ~2.3% in Q4, supported by higher-yielding homegrown SRPs ($250bps spread vs. $80-90bps for purchased securitizations). He emphasized their market-leading position with near-zero credit loss provisions.

Q: Joe Yanchunas followed up on the $3 billion U.S. growth target, asking how much is tied to existing vs. new partners. / A: Taylor estimated half the volume comes from existing partners (like FinanceIT/ECN) accelerating through the real-time program, and half from prospects. He noted doubling the U.S. SRP team and highlighted that the real-time model eliminates interest rate risk for partners, driving rapid adoption. He projected the $3 billion U.S. addition could add ~$1.75/share to earnings.

Q: Tim Switzer asked about the timeline and process for achieving a lower risk weighting on homegrown SRP loans. / A: Taylor stated the 'Holy Grail' of getting homegrown ABS risk-weighted at 20% (same as purchased) is targeted for mid-2027 via OCC presentation. However, interim steps using insurance mechanisms in Canada or other regulatory approvals could yield benefits sooner. He expressed confidence in the technical team securing this favorable treatment under Basel III rules.

Q: Andrew Scutt asked about the deposit funding source for U.S. growth and the split between balance sheet retention vs. securitization. / A: Nicolas Ospina and David Taylor confirmed all new U.S. growth will be kept on the balance sheet rather than securitized, as the homegrown model is more profitable. Deposits are raised exclusively via broker deposits, leveraging VersaBank’s historic expertise in this channel. They noted that while competition exists with stablecoins, tokenized deposits offer a superior, FDIC-insured alternative long-term.

Q: Lawrence Chamberlain asked about the ramp-up speed of the new ECN Capital partner and the size of pipeline deals. / A: Taylor indicated ECN is ramping quickly, already contributing to the recent asset jump to $7.2 billion. He described the U.S. pipeline as consisting of very large deals (each comparable to FinanceIT’s volume), requiring only 3-5 major signings to hit the $3 billion target. He contrasted this with Canada’s smaller, fragmented market, emphasizing the U.S. opportunity targets the heart of the traditional ABS market.