VersaBank

Good morning, ladies and gentlemen. Welcome to VersaBank's second quarter fiscal 2025 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the second quarter ended April 30, 2025. That news release, along with the bank's financial statements, MD&A, and supplemental financial information are available on the bank's website in the investor relations section, as well on Cedar Plus and Edgore. Please note that in addition to the telephone dial-in, VersaBank is webcasting this morning's conference call. The webcast is listen-only. If you're listening to the webcast but wish to ask a question in the Q&A session following Mr. Taylor's presentation, please dial in to the conference line, the details of which are included in this morning's news release and on the bank's website. For those participating in today's call by telephone, the accompanying slide presentation is available on the bank's website. Also, today's call will be archived for replay both by telephone and by the internet beginning approximately one hour following completion of the call. Details on how to access the replays are available in this morning's news release. I would like to remind our listeners that the statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by Bursa Bank Management. Actual results could differ materially from our expectations. due to various material risks and uncertainties associated with Bursa Bank's businesses. Please refer to Bursa Bank's forward-looking statement advisory in today's presentation. I would now like to turn the call over to David Taylor, President and Chief Executive Officer of Bursa Bank. Please go ahead, Mr. Taylor.

Good morning, everyone, and thank you for joining us for today's call. With me is our Chief Financial Officer, John Asman. The second quarter of of fiscal 2025 unfolded as planned, with a number of positive highlights that will continue to drive momentum in our business. We saw the first drawdowns of our US RPP portfolio, which by the end of the quarter had surpassed US$70 million. We saw growth in our Canadian residential construction loan portfolio. We saw meaningful expansion of our net interest margin due to several factors that are trending positively. John will go into these in more detail, and we do expect these trends to continue to support NIM around these levels for the remainder of the year. This drove record assets, record credit assets, record revenue alongside sequential improvements in banking efficiency and return on common equity based on our core earnings. Subsequent to quarter end, we initiated a structural realignment of our business to that of the standard U.S. bank framework, which if approved by regulatory authorities and shareholders, we expect will realize additional shareholder value, reduce costs, and further mitigate risk. Looking at the financial highlights in more detail, as I noted, record credit assets and very healthy expansion of our net interest margin drove record revenue. Credit assets on both sides of the border are expanding more or less in line with expectations this year. Net interest margin also expanded as we saw several favorable trends continue, driving 23 basis point increase in NIM on credit assets sequentially. I will note here there were two items that did slightly dampen our income. The first is some preliminary costs associated with our proposed structural realignment. The second is the impact of foreign exchange translation of U.S. subsidiary assets, which was a typically large, unrealized non-cash loss due to precipitous drop of the U.S. versus Canadian dollar in Q2. Including these items, earnings per share is 28 cents, or excuse me, excluding these items. I will take the opportunity to remind you that this is early point in our US Receivable Purchase Program. Although profitable, the results of our US operations continue to reflect the cost structure that will support our ramp to vastly larger revenues. As I noted last quarter, we tend to look at our Canadian banking operations as a proxy for where we think the efficiency and return on common equity of our US banking operations can go. And we are pleased to see both improve sequentially, excluding the two aforementioned items, to 44% and 12.53% respectively. And I will remind you that our Canadian banking operations bear the vast majority of our corporate overhead costs, including our public company costs. So as an indicator of true potential efficiency and return on equity of our U.S. business is actually significant. significantly understated. And finally, as I did last quarter, I'll remind you that our EPS for the quarter reflects a significant higher number of shares outstanding in Q2 as a result of our December capital raise, most of which we are still putting to work. We deploy this capital at around 12 times or more and around 2.5% spread, so it is very accretive. Now I'd like to turn the call over to John to review the financial results in detail. John?

Thanks, David. Before I begin, I will remind you that our financial statements and MD&A for the second quarter are available on our website under the Investors section, as well as on CDAR and EDGAR. All of the following numbers are reported in Canadian dollars as per our financial statements, unless otherwise noted. Starting with the balance sheet, total assets at the end of the second quarter of fiscal 2025 grew 15% year-over-year and 2% sequentially to a new high of over $5 billion. Cash and securities were $445 million, or 9% of total assets, down from 11% at the end of Q1 as we steadily deployed the capital we raised in December of last year. Book value per share increased to a record $16.25. Our CET1 ratio increased to 14.28%, and our leverage ratio was 9.61%, both remaining above our internal targets.

Total consolidated revenue was a record $30.1 million,

up 6% year-over-year and 8% sequentially. The increase was driven primarily by our continued growth in credit assets, with the sequential growth being additionally driven by solid expansion of our net interest margin. Consolidated net interest expense was $17.5 million compared to $12.2 million in Q2 of last year and $15.7 million for Q1 of this year. As David discussed, Q2 NIEs included $900,000 related to the preliminary costs associated with the bank's proposed structural realignment, as well as an atypically high unrealized foreign exchange translation loss. Excluding these costs, NIEs were in line with our expectations. Otherwise, the year-over-year increase in net interest expenses was primarily due to the addition of VersaBank USA. As a reminder, DRT cyber expenses were included in our consolidated net interest expenses and totaled $2.7 million for the quarter. Reported net income was $8.5 million and consolidated earnings were $0.26 per share. Excluding the preliminary costs associated with the proposed structural realignment and the impact of the foreign exchange translations, consolidated net income was 9.2 million and consolidated earnings per share was 28 cents. Looking at the income statement on a segmented basis, the vast majority of revenue continues to be driven by our Canadian digital banking operations. And within that, Canadian banking operations, as well as our US RPP program, ramped up with continued incremental growth. Revenue for the Canadian banking operations was 25.6 million, up 8% sequentially from Q1. As the corporate expenses flow through the Canadian digital banking segment, Net income and net earnings per share were negatively impacted by costs associated with the structural realignment and the impact of foreign exchange translation. Excluding these impacts, net income for the Canadian banking operation was $9.9 million, which comes to $0.30 per share. Revenue from the U.S. banking operations was $2.5 million, a 22% sequential increase. And net income for U.S. banking operations was $133,000, a 29% increase sequentially. Within DRTC, the cybersecurity component generated revenue of $1.8 million, down from $2.3 million in Q2 of last year. Net loss was... $652,000 impacted by higher operating expenses. Within DRTC, digital media revenue was $569,000 with net loss of $152,000. Our credit assets grew to a record $4.52 billion at the end of Q2, driven once again by our receivable purchase program. which increased 14% year over year and 4% sequentially to $3.5 billion. Our RPP portfolio represented 79% of our total asset portfolio at the end of Q2, consistent with the end of Q1. Our multifamily residential loans and other portfolio grew 8% year over year and 3% sequentially to $958 million. as we steadily drew down on CMHC insured loan commitments. As a reminder, our multifamily residential loans and other portfolio is primarily business to business mortgages and construction loans for residential properties.

We have very little exposure to commercial use properties.

Turning to the income statement of digital banking operations. net interest margin on credit assets, that is excluding cash and securities, was 2.59%. That was seven basis points or 3% higher on a year-over-year basis and 16 basis points or 10% higher sequentially. As David discussed, our net interest margin on credit assets is benefiting from several positive trends. The yield curve is no longer inverted further replacement of maturing higher interest rate term deposits with lower interest rate term deposits, continued expansion of our low-cost insolvency professional deposits, and higher margin generated by our US RPP. Net interest margin overall, including the impact of cash, securities, and other assets, was 2.29%, an increase of 21 basis points sequentially. which still remained among the highest of the publicly traded financial licensed banks in Canada. Our provision for credit losses, or PCL, in Q2 increased slightly this quarter to 0.08% of average credit assets compared to 0% last year and is higher than our 12-quarter average of 0.02%. The increase this quarter was due to changes in forward-looking information used in our credit risk models, mainly due to increased uncertainty and more challenging outlook for the economy.

I'd now like to turn the call back to David for some closing remarks. David?

Thanks, John. Looking ahead to the second half of the year, we expect positive trends of Q2 to continue into the third and fourth quarters. which we expect will drive steady sequential growth in core earnings, meaning excluding the investment in the structural realignment. Credit assets should continue to steadily grow, driven by momentum in our U.S. Receivable Purchase Program, which we continue to expect to reach at least 290 million U.S. dollars by the end of the year. The U.S. has vastly underserved market for big-ticket point-of-sale financing and we have a unique solution that offers a number of clear advantages over existing alternatives. We see some potential for incremental growth in Canada amidst what remains a challenging environment for consumer spending, and we expect to see an increasing contribution from our growing CMHC-insured multifamily residential loan business in this opportunistic part of our Canadian business and remain on target to achieve $1 billion in commitments by the end of the year. We will increasingly benefit from the operating leverage in our business model as those assets scale, especially as we deploy the capital from our equity offering last December, contributing to further improvements in efficiency and return on common equity on core earnings. We expect to see the continuation of this favorable trend in support of our net interest margins that are in line with our expanding Q2 levels, further replacement of maturing higher cost term deposit receipts for those at the current rates, the normalized yield curve, which benefits from our RPP spreads, the higher spread we generate on RPP assets in the US, and the higher deposits in our low cost insolvency deposit business. Q2 insolvency balances were up another 5% sequentially and 22% year over year. And we continue to expect those deposits to grow to about a billion. Finally, as discussed in our last call, we are aggressively pursuing the renewed opportunity for our proprietary digital deposit receipts. As we expected with the US administration's significantly more favorable view towards digital assets, including digital currencies and stablecoins, we are starting to see the industry itself ramping up their plans. Most notably, Wall Street Journal reported JPMorgan Chase, Citi, Wells Fargo, and Bank of America and others are all exploring the use of this technology to modernize payments. Our digital deposit receipts are a market-ready solution created by a bank or bank. that seamlessly integrate with existing bank software systems while addressing the major concerns of regulators. They take the concept of stablecoin to an entirely new level. In fact, next week, I'll be speaking at the Florida Bankers Association annual meeting, the title of my presentation, Introducing the Ultimate Stablecoin, the Only USD Digital Deposit Receipt. I will discuss why we believe our first-of-a-kind stablecoin, minted by a national bank, SOC 2 approved, based on the highest military-grade security, can and we believe will play a role in changing the banking industry. Before we open the call to questions, a few words on the proposed structural realignment we announced last week. The details are a little convoluted and well laid out in our news release, so I won't get into those here. The purpose of this initiative is to realign our corporate structure to that of the most international banks under which there is a corporate parent entity that holds the various operating subsidiaries. This is the structure with which U.S. and international investors are most familiar. Under the proposed plan, the new parent would be domiciled in the United States and fall under the purview of the US regulators, as would our US operations. Our Canadian operations would remain domiciled in Canada and remain under the purview of the Canadian regulators. The benefits of this proposed realignment are clear. We would simplify our regulatory oversight. We would further mitigate risks, something we continuously seek to do. We would generate meaningful cost savings. should become eligible for certain indices, including the Russell 2000. And looking longer term, it would provide a structure that would be favorable to further international expansion. We would expect all this to generate additional shareholder value over and above the value we expect to drive through growth of the business itself. The realignment is subject to a number of approvals. The OCC, the Fed, in the US, the Minister of Finance in Canada, the NASDAQ, and the Toronto Stock Exchange, of course, and our shareholders. There is significant cost to this undertaking, which is very much we view as an investment with a substantial expected return. We estimate that to be around $8 million Canadian to be roughly divided between third and fourth quarters this year with a small amount incurred in Q2, as noted earlier. That expected $8 million investment equates to about 1.5% of our current market cap. We are confident that the combined benefits will drive incremental shareholder value far in excess of this investment. With that, I'd like to open up the call to questions.

Operator?

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the star followed by the number two. With that, our first question comes from the line of Joey Antunes with Raymond James.

Please go ahead.

Good morning. Good morning, Joe.

So in your prepared remarks, I believe you said that you expect insolvency deposits will reach $1 billion. What's the timing for that target? And in conjunction with this tailwind and the several others that you listed, do you have a sense for the magnitude of NIM expansion in the out-quarters?

Can you repeat the second half? I broke up a little bit.

Yeah, it was the timing for the billion and then, you know, kind of an outlook, a near-term outlook for the NIM expansion.

Well, with the billion, I'm thinking by the end of the calendar year, we should get there. As you can see, we're growing at 22% year-over-year, and unfortunately for Canada, we're almost a record low for consumer sentiment and insolvency. So while it's a tough time for most Canadians, it's a good time for the insolvency business, and it should splice us with some economically-priced deposits. I think the balances continue to go at the present rate. By the end of the calendar year, it hit about a billion. Now, with respect to NIM expansion, I'm very pleased to see the 29 basis points sequentially in the credit assets. There's a little bit of a dampening effect right now happening in Canada, even though we have about 700 million in GICs maturing in the next few months at about 1% less than them. And the replacement GIC is about 1% less. So that's all very favorable for us. But the yield curve is still pretty flat and might have a little tiny inversion in the short end. That puts a bit of damper on it. So it hasn't quite swung back up as it normally is. And the margin over government cantabones that our GICs have over the last while are high too. It's about 80-odd basis points, usually around 50. So right now I'm thinking NIM will stay where it is and probably start edging up again when some of this noise gets out of the system.

Got it. I appreciate that. And then kind of moving over to expenses.

So excluding the realignment costs, How should we think about, you know, non-interest expenses kind of trending from here? And then what are the expected annual savings from redomiciling in the U.S.?

Well, excluding those one-time expenditures with respect to reorganizing, there's probably a little bit more in NIE. In the States, maybe one more hire to do. And as with that, it should stabilize. So maybe a slight increase in the U.S. bank's expenses going forward is unstable. And with respect to the savings, you could probably pencil in around $2 million, $3 million a year once we've got the reorganization done.

Um, Jackson, I appreciate that.

Then just last one for me with respect to capital and perhaps I missed this in the materials, but didn't look like you utilize your recent share repurchase authorization. Uh, how should we think about your appetite for repurchases in the headquarters?

Well, um, we're, we're keen to buyers talk back less than book value and it looks like it's less than book value. Uh, uh, maybe today and has been the last. Uh, so, um, We are keen to buy back at that price. I personally don't expect it to stay down there that long, but if it is, you know, we've got loads of capital and that's probably the best place to deploy our capital is buying back our stock less than book.

Excellent. Thank you for taking my questions. Thank you, Joe. Look forward to seeing you in Florida.

And your next question comes from the line of Tim Switzer with KBW. Please go ahead.

Hey, good morning. Thank you for taking my question. Good morning, Tim. Good morning. Can you update us on the expectations you have on the cell DRTC cyber and the timeline there?

Well, we're in sort of the final stages of engaging a firm to look after that sale. And I would expect by the end of this fiscal year, we'll have a deal done. It's, I think, a very popular business, unfortunately, but a terrible comment on humanity that cybersecurity attacks just seem to be relentless, and DRT Cyber is seen to be a world leader, particularly in the air penetration testing. So we're actively in the sale process now, and as I said, we expect fairly soon to engage a firm to look after that for us.

Okay, great. That's good to hear. Um, and can you provide an update on how like conversations with new partners in the U S are going, um, maybe how many new programs you expect to be fully launched, you know, by the end of the year?

Well, the conversation's going, uh, quite well. And of course it's a, it's a very attractive product, but the onboarding process is a little longer than I would like. Uh, we've got three signed up now. And by the end of the year, um, say we have another three signed up, um, I'm hoping for a lot more than that, but it is taking a while to onboard. The legal work is different in the States versus what we have in Canada. Not that much different, but there are nuances to it. So three now, maybe another three. And if the guys pleasantly surprised me, maybe another three on top of that.

Okay, that sounds good. And the last question I have is, can you just provide some commentary on the credit trends you're seeing in the CRE book where we've seen some reserve release over the last few quarters, but have also had some charge-offs. Just would love to hear what you guys are seeing there.

Well, the charge-offs actually are sort of an academic charge-off in that they're part of the U.S. portfolio that we purchased. when we purchased that U.S. bank. So they're not in the Canadian real estate area. We have no charge-offs, no real charge-offs at all in our book. But we purchased a portfolio to buy the bank, and along with it, we purchased their expected loss provision that's being charged against it. The Canadian real estate market is in a bit of a turmoil. So it's really a heads up game lending in that area. We've been at it for, I guess in my case, 48 years. So this is one of those periods of time where you have to be really careful. Hence our focus on the government insured CMHC mortgages. And we intend to keep that focus. And we tend to lend to our clients that we've lent to for decades around the London, Ontario area. So, yeah, even our real estate developer clients are, for the most part, sitting on a lot of cash, sort of waiting until things smooth out a bit in the economy.

Great. Appreciate you answering all the questions, David. No problem, Tim. Maybe I'll see you in New York. I'm heading in there next week sometime. Okay. Yeah, we'll be in touch.

Thank you.

And once again, if you would like to ask a question, simply press the star 1 on your telephone keypad. Your next question comes from the line of Andrew Scott with Broad Capital Partners. Please go ahead.

Hey, good morning, and thank you for taking my questions. So my first one here is a little bit of a two-parter. You guys had nice growth in the RPP portfolio. Um, so kind of breaking it out by geography, um, with the softness, uh, in the Canadian economy, can you just kind of talk about what verticals you did see strengthened and then maybe within the active U S portfolio, is there anything you've kind of learned that surprised you, um, thus far?

Well, um, it actually, Andrew, it surprised me that Canadian, uh, portfolio grew and that, um, All the stats in Canada are pretty negative. Consumer sentiment at an all-time low, insolvencies at an all-time high. So I was surprised to see any growth in Canada. I think last quarter I said that. But the vertical really is home improvement. And I suppose that may be it. Maybe that's to be expected. Canadians are buying new furnaces and energy-efficient furnaces and hot water heaters and that sort of thing. They're saving them ultimately in monthly expenses. So that's where we see the growth in Canada still, strangely enough. And it's probably going to continue right through the end of the year. So you may very well see about a 10% increase year-over-year in the RPP in Canada. And of course, on the other side of that, we're seeing 22% growth year over year in the insolvency deposits, which are helping drive the expansion of our margin. In the United States, I suppose the lesson is that the alternate source of financing is securitization, and the credit spreads in that area have been pretty narrow. So even though, first, everybody we talk to in the States wants to sign up for our program as sort of a continuous, steady, reliable source of capital to fund their loans, the market is giving money pretty cheap right now. So it means that we're maybe not the top priority with that would be otherwise if credit spreads were really wide. So that's an American point of sale customers tend to be a lot larger than the Canadian ones. But the Canadian ones don't have, because of their size, don't have really access to the securitization programs. But the American ones do because they're so much larger. And so their appetite for our program is huge.

sort of modified by the credit spreads.

Really appreciate the detail there. And second one for me, if I may, you guys added an additional deposit broker in the quarter, noted this could potentially be a tailwind to NIM. So can you kind of talk us through how that could be a benefit, guys, and if you're interested to further expand your network?

Well, absolutely right. We were fortunate that Bank of Montreal put us on their board. In my early career, I started off with Bank of Montreal, so it was justice that they should have us on their board. Bank of Montreal is a huge channel for distributing our deposits, so that is a tailwind on it. That would be contributing to our net interest margin expansion and the diversity of our deposit bases. So we're thankful that Bank Montreal added us. There may be one large bank left in Canada to put us on their board. And again, that helps with the diversity and the NIMA expansion. And just to spell it out, the more channels we have that distribute our deposits, the less we have to pay for our deposits and that we don't overwhelm one one particular channel because it were so well distributed all across the entire country of Canada. So that's helpful. And like I said, there may be one more bank that in the very early days of, I was just conceiving this model with actually a supplier and then the market changed a bit, the industry changed. So we should really sign them up too and then we have the entire country.

Great. We really appreciate the call, and thanks for taking my questions. Well, thank you, Andrew. See you in New York soon. Yeah, that'd be great.

And your next question comes from the line of Jack Wogman with Raymond James. Please go ahead.

Hey, good morning, David and John. Good morning.

It's been a while. Are you in St. Petersburg? Are you in the baking hot St. Petersburg right now?

No, no. I'm in, actually, getting warmer Toronto.

Oh, no kidding. Sorry. Sorry. I thought you were down in the headquarters.

No. I hope to be in London sometime through the summer. But anyway, just a general question, given the political climate. and the expansion and wisely, I think, the concentration of business to the United States. Are you experiencing or hearing of any possible pushback given the political environment regarding foreigners in the U.S.?

No, not yet, but we've heard sort of statements earlier on about cane bags in general, and it hasn't affected us negatively. In fact, on the balance, the current U.S. administration's propensity for digital commerce has helped us a lot. As you know, we have the world's first digital deposit receipt. We pioneered it in Canada under the cane regulatory environment. And now it seems that it's absolutely perfect for what the U.S. administration is talking about. So other than that, a little bit of rhetoric about Canadian banks. The overwhelming positive thing is the endorsement of digital commerce. And our digital deposit receipt, of course, is at least two years ahead of the game. We not only pioneered it in the regulatory environment, but we also... obtained a SOC type 2 audit, which you can only get by having it actually be functional. So everybody else that's dreaming of doing this, they've got a few years to go. And we've got the thing ready to roll in the United States. So if anything, on the balance, it's positive to be in the United States.

All right, so I'll propose they're talking about tax increases on foreigners investing in the States and the increase in withholding taxes on dividends and that sort of thing. But I don't know about business operations yet. I haven't heard anything about that.

Yeah, a good portion of our shareholders are U.S. Other than our major holding company, it's 80% U.S. shareholders.

But it won't impact your business as an operational thing, will it?

No. Or could it? I don't see it.

Part of this restructuring will give us insights into how we can efficiently structure ourselves to minimize our tax burdens. exchange translations that we saw us get hit with this quarter. So that's all underway. Also, obviously, with us adopting the same holding company structure that the other international U.S. banks have, that minimizes the risk that there might be some sort of aversion to Canadian banks in the United States. We'll have a holding company structure identical to that at, say, J.P. Morgan.

So that minimizes all that stuff.

Okay. I'll give you a shout, and hopefully when you guys are in London, I'll make a plan to come down and see you.

Yeah, well, I'm in London right now. I'm right at the VersaBank Innovations center of excellence here. But alas, I'm without an airplane, so I can't fly on the island to visit with you.

I'm in Toronto. It's Jeff. Yeah, I know.

Well, Island Airport, of course.

Oh, the Island Airport. I forgot about that.

Yeah, that's a 35-minute flight for me out of London Airport here where we're located. But I've got a new set of Garmin instruments going in and it seems to take forever. Like a lot of things in life nowadays, everything seems to take a lot longer than you hope for.

Well, I'm tied up this month. We've got our kids in from overseas. So it'll be July or August, hopefully July. It'll be sometime in July. But I'll message you and John. Yeah, absolutely. Yeah.

I'm in L.A. regularly once I got my wings back.

Yeah, I'm sure.

All right. Well, thanks again. Thanks very much. Okay. Thank you. Bye.

And we have no further questions at this time. I would like to turn it back to David Taylor for closing remarks.

Well, I'd like to thank everyone for joining us today, and I look forward to speaking to you at the time of our third quarter results. So long.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.