Q1 2026 VersaBank Earnings Call

March 4, 2026

Speaker #2: That news release, along with the bank's financial statements, MDNA, and supplemental financial information, are available on the bank's website in the investor relations section, as well as on Cedar Plus and Edgar.

Operator: 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 are listening to the webcast but wish to ask a question in the Q&A session following Mr. Taylor's presentation, please dial into the conference line, the details of which are included in this morning's news release and on the bank's website.

Speaker #2: 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 are listening to the webcast but wish to ask a question in the Q&A session following Mr. Taylor's presentation, please dial into the conference line.

Speaker #2: 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.

Dani: For those participating in today's call by telephone, the accompanying slide presentation is available on the bank's website. Today's call will be archived for replay, both by telephone and via the Internet, beginning approximately one hour following the 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 VersaBank management. Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank's businesses. Please refer to VersaBank's forward-looking statement advisory in today's presentation. I would now like to turn the call over to David Taylor, President of VersaBank. Please go ahead, Mr. Taylor.

Operator: For those participating in today's call by telephone, the accompanying slide presentation is available on the bank's website. Today's call will be archived for replay, both by telephone and via the Internet, beginning approximately one hour following the 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 VersaBank management. Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank's businesses. Please refer to VersaBank's forward-looking statement advisory in today's presentation. I would now like to turn the call over to David Taylor, President of VersaBank. Please go ahead, Mr. Taylor.

Speaker #2: Also, today's call will be archived for replay both by telephone and via the internet beginning approximately one hour following the completion of the call.

Speaker #2: 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 VersaBank management.

Speaker #2: Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank's businesses. Please refer to VersaBank's forward-looking statement advisory in today's presentation.

Speaker #2: I would now like to turn the call over to David Taylor, president of VersaBank. Please go ahead, Mr. Taylor. Good morning, everyone, and thank you for joining us for today's call.

David Taylor: Good morning, everyone, thank you for joining us for today's call. With me for the first time is our recently appointed Global Chief Financial Officer, Nico Ospina. Nico joined us from Raymond James US Investment Banking Group, where he was a member of the team that has been so supportive of our US capital market activities. He knows our business and our industry well and is already having a meaningful impact on our organization. John Asma, who previously served as our CFO, will now head up our Canadian banking operations, where his many years of experience with the bank across multiple executive roles will support the continued expansion and enhanced efficiency of our Canadian banking operations. I'd like to thank John for his excellent contribution as CFO over the past couple of years.

Speaker #2: With me for the first time is our recently appointed global chief financial officer, Niko Ospina. Niko joined us from Raymond James U.S. Investment Banking Group, where he was a member of the team that has been so supportive of our U.S.

Speaker #2: capital market activities. He knows our business and our industry well, and is already having a meaningful impact on our organization. John Asma, who previously served as our CFO, will now head up our Canadian banking operations.

Speaker #2: His many years of experience with the bank across multiple executive roles will support the continued expansion and enhanced efficiency of our Canadian banking operations.

Speaker #2: I'd like to thank John for his excellent contribution as CFO over the past couple of years. Before I begin, I want to remind you, as I did last quarter, that our financial results for the first quarter reflect the continued, although significantly lower, costs associated with our plan to realign our corporate structure to that of a standard U.S.

David Taylor: Before I begin, I want to remind you, as I did last Q4, that our financial results for Q1 reflect the continued, although significantly lower costs associated with our plan to realign our corporate structure to that of a standard US bank framework. Those costs amount to $1.5 million before tax in Q1, which was down significantly from Q4. Also, a quick note about some updated terminology. As part of the broader reorganization, we have changed the name of our Receivable Purchase Program to Structured Receivable Program. This is a change in label only. The program itself has not changed in any way. Now on to the quarter. Q1 was a great start for fiscal 2026. Unfolding very much on plan and highlighted by new records for the credit assets and revenue, which were up 23% and 31% year-over-year, respectively.

Speaker #2: bank framework. Those costs amount to $1.5 million, before tax in Q1, which was down significantly from the fourth quarter. Also, a quick note about some updated terminology.

Speaker #2: As part of the broader reorganization, we have changed the name of our receivable purchase program to Structured Receivable Program. This is a change in label only.

Speaker #2: The program itself has not changed in any way. Now, onto the quarter. Q1 was a great start for fiscal 2026, unfolding very much on plan and highlighted by new records for the credit assets and revenue, which were up 23% and 31% year-over-year, respectively.

David Taylor: Notably, the credit assets revenue grew 5% and 4% sequentially, clear evidence of a momentum in our business. Most importantly, as per the fundamental tenet of our business model, we are seeing the benefit of operating leverage really kick in. Most of this was driven by the acceleration of our US Structured Receivable Program portfolio. Finally, I will note, as I have in the last several quarters, that we achieved these metrics with significantly higher than typical levels of liquidity at the early point of our expansion in the US. Looking a little closer at our Structured Receivable Program, after achieving and in fact surpassing our 2025 target for our program in the United States, we completed more than US dollars 200 million in additional fundings in Q1.

Speaker #2: And notably, the credit assets revenue grew 5% and 4% sequentially. Clear evidence of a momentum in our business. But most importantly, as per the fundamental tenet of our business model, we are seeing the benefit of operating leverage really kick in.

Speaker #2: Most of this was driven by the acceleration of our U.S. Structured Receivable Program portfolio. Finally, I will note, as I have in the last several quarters, that we achieved these metrics with significantly higher-than-typical levels of liquidity at the early point of our expansion in the U.S.

Speaker #2: Looking a little closer at our Structured Receivable Program, after achieving and, in fact, surpassing our 2025 target for our program in the United States, we completed more than U.S.

Speaker #2: dollars 200 million in additional fundings in Q1. Notably, the vast majority of the Q1 fundings were through our higher spread core SRP, with only a small contribution coming from our securitized offering.

David Taylor: Notably, the vast majority of the Q1 fundings were through our higher spread core SRP, with only a small contribution coming from our securitized offering. Importantly, for Q1, we saw the efficiency of our US operations surpass those of our Canadian banking operations. Our US operations have an advantage of both less expensive deposit funding and a smaller team need to manage and grow the business. With substantially all our cost structure in place, we will see meaningful increases in efficiency as the year progresses, moving into the low 20% range through the year end. We are well on track to achieve our target of adding at least $1 billion in fundings in fiscal 2026. That's more than three-fold increase from 2025.

Speaker #2: Importantly, for Q1, we saw the efficiency of our U.S. operations surpass those of our Canadian banking operations. Our U.S. operations have an advantage of both less expensive deposit funding and a smaller team needed to manage and grow the business.

Speaker #2: With substantially all our cost structure in place, we will see meaningful increases in efficiency as the year progresses, moving into the low 20% range through the year-end.

Speaker #2: We are well on track to achieve our target of adding at least U.S. dollars 1 billion in fundings in fiscal 2026. That's more than threefold increase from 2025.

David Taylor: While we can achieve this with our existing SRP partner relationships, we are continuing to cultivate new potential partnerships to drive additional potential upside this year. I'd now like to turn the call over to Nico to review our financial results in detail. Nico?

Speaker #2: While we can achieve this with our existing SRP partner relationships, we are continuing to cultivate new potential partnerships to drive additional potential upside this year.

Speaker #2: I'd now like to turn the call over to Niko to review our financial results in detail. Niko?

Nicolas Ospina: Thanks for the kind introduction, David. Glad to be here on my first call as a CFO, as a Global CFO of VersaBank. It is certainly a very exciting time as we enter a year defined by strong growth and meaningful improvements in operating leverage. Before I begin, I will remind you that our full financial statements and MD&A for Q1 are available in our website under the investor section, as well as on SEDAR 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 Q1 of fiscal 2026 grew 24% year-over-year and 6% sequentially to a new high of over CAD 6.1 billion.

Nico Ospina: Thanks for the kind introduction, David. Glad to be here on my first call as a CFO, as a Global CFO of VersaBank. It is certainly a very exciting time as we enter a year defined by strong growth and meaningful improvements in operating leverage. Before I begin, I will remind you that our full financial statements and MD&A for Q1 are available in our website under the investor section, as well as on SEDAR 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 Q1 of fiscal 2026 grew 24% year-over-year and 6% sequentially to a new high of over CAD 6.1 billion.

Speaker #3: Thanks for the kind introduction, David. Glad to be here. My first call as CFO, as global CFO of VersaBank. It is certainly a very exciting time as we enter a year defined by strong growth and meaningful improvements in operating leverage.

Speaker #3: Before I begin, I would remind you that our full financial statements and MD&A for the first quarter are available in our website under the Investors section, as well as on Cedar and Edgar.

Speaker #3: 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 first quarter of fiscal 2026 grew 24% year-over-year and 6% sequentially, to a new high of over $6.1 billion.

Nicolas Ospina: Cash and securities were at CAD 729 million or 12% of our total assets, up slightly compared to the end of Q4 2025. I would like to mention here David's early comment about this being higher than our historical levels of around 7% as a result of our entry into the United States. Book value per share increased to another record of CAD 16.93. In terms of our capital, our CET1 ratio was at 12.8%, and our leverage ratio was 8.2%. We both remaining above our internal targets. Our strong growth in assets drove total consolidated revenue to a record of CAD 36.5 million, up 31% year-over-year and 4% sequentially.

Nico Ospina: Cash and securities were at CAD 729 million or 12% of our total assets, up slightly compared to the end of Q4 2025. I would like to mention here David's early comment about this being higher than our historical levels of around 7% as a result of our entry into the United States. Book value per share increased to another record of CAD 16.93. In terms of our capital, our CET1 ratio was at 12.8%, and our leverage ratio was 8.2%. We both remaining above our internal targets. Our strong growth in assets drove total consolidated revenue to a record of CAD 36.5 million, up 31% year-over-year and 4% sequentially.

Speaker #3: Cash and securities were at $729 million, or 12% of our total assets, up slightly compared to the end of Q4 2025. I would like to mention here, David's early comment about this being higher than our historical levels of around 7% as a result of our entry into the United States.

Speaker #3: Book value per share increased to another record of $16.93. In terms of our capital, our CET1 ratio was 12.8%, and our leverage ratio was 8.2%, with both remaining above our internal targets.

Speaker #3: Our strong growth in assets drove total consolidated revenue to a record of $36.5 million, up 31% year-over-year and 4% sequentially. Consolidated non-interest expenses, including one-time costs associated with the reorganization, were $20.5 million, compared with $15.7 million in Q1 last year and $23.9 million in Q4 last year.

Nicolas Ospina: Consolidated non-interest expenses, including one-time costs associated with the reorganization, were CAD 20.5 million, compared with CAD 15.7 million in Q1 last year and CAD 23.9 million of Q4 last year. Excluding this cost, non-interest expenses for Q1 were CAD 19 million. As a reminder, DRT Cyber expenses are included in our consolidated non-interest expenses and total CAD 2.8 million for the quarter. Reported net income was CAD 11.1 million, and consolidated earnings per share was CAD 0.35. Excluding the after-tax expenses associated with the reorganization, consolidated adjusted net income was CAD 12.2 million or CAD 0.38 per share, with adjusted net income increasing 49% year-over-year and 15% sequentially. Looking at the income statement on a segment data basis, revenue for the Canadian banking operations was 27.6%, up 16% year-over-year and level sequentially.

Nico Ospina: Consolidated non-interest expenses, including one-time costs associated with the reorganization, were CAD 20.5 million, compared with CAD 15.7 million in Q1 last year and CAD 23.9 million of Q4 last year. Excluding this cost, non-interest expenses for Q1 were CAD 19 million. As a reminder, DRT Cyber expenses are included in our consolidated non-interest expenses and total CAD 2.8 million for the quarter. Reported net income was CAD 11.1 million, and consolidated earnings per share was CAD 0.35. Excluding the after-tax expenses associated with the reorganization, consolidated adjusted net income was CAD 12.2 million or CAD 0.38 per share, with adjusted net income increasing 49% year-over-year and 15% sequentially. Looking at the income statement on a segment data basis, revenue for the Canadian banking operations was 27.6%, up 16% year-over-year and level sequentially.

Speaker #3: Excluding these costs, non-interest expenses for Q1 were $19 million. As a reminder, DRT Cyber expenses are included in our consolidated non-interest expenses, and total $2.8 million for the quarter.

Speaker #3: Reported net income was $11.1 million, and consolidated earnings per share was $0.35. Excluding the after-tax expenses associated with the reorganization, consolidated adjusted net income was $12.2 million, or $0.38 per share, with adjusted net income increasing 49% year-over-year and 15% sequentially.

Speaker #3: Looking at the income statement on our segmented basis, revenue for the Canadian banking operations was $27.6 million, up 16% year-over-year and level sequentially. I would remind you that the bank’s corporate expense flowed through our Canadian digital banking segment, and as a result, reported net income included those reorganization costs.

Nicolas Ospina: I will remind you that the bank's corporate expense flow through our Canadian digital banking segment. As a result, reported net income include those reorganization costs. Net income was CAD 8.7 million. However, that number is dampened by the CAD 1.1 million after-tax impact of the reorganization I described earlier. Revenue for our US banking operations was $6.8 million, a 30% increase sequentially, primarily due to the ramp up of our USR SRP. That drove 40% increase in sequential net income to $2.8 million, as we see the US operating leverage take effect. Within DRTC, the cybersecurity component generated revenue of CAD 2 million, level with Q1 last year. A net loss of CAD 630,000 impacted by higher operating expenses related to the onboarding support costs for new cybersecurity offerings.

Nico Ospina: I will remind you that the bank's corporate expense flow through our Canadian digital banking segment. As a result, reported net income include those reorganization costs. Net income was CAD 8.7 million. However, that number is dampened by the CAD 1.1 million after-tax impact of the reorganization I described earlier. Revenue for our US banking operations was $6.8 million, a 30% increase sequentially, primarily due to the ramp up of our USR SRP. That drove 40% increase in sequential net income to $2.8 million, as we see the US operating leverage take effect. Within DRTC, the cybersecurity component generated revenue of CAD 2 million, level with Q1 last year. A net loss of CAD 630,000 impacted by higher operating expenses related to the onboarding support costs for new cybersecurity offerings.

Speaker #3: Net income was $8.7 million. However, that number is dampened by the $1.1 million after-tax impact of the reorganization I described earlier. Revenue for our U.S.

Speaker #3: banking operations was $6.8 million, a 30% increase sequentially, primarily due to the ramp-up of our U.S. RSRP. That dropped 40% increase in sequentially net income to $2.8 million, as we see the U.S.

Speaker #3: operating leverage take effect. Within DRTC, the cybersecurity component generated revenue of $2 million. Level with Q1 last year. A net loss of $630,000 impacted by higher operating expenses related to the onboarding support costs for new cybersecurity offerings.

Nicolas Ospina: Digital media revenue was $528,000, with net income of $179,000, driven by higher client engagement and lower operating expenses. Our credit asset portfolio grew to a new record of $5.33 billion at the end of Q1, driven once again by our Structured Receivable Program, which increased 29% year-over-year and 9% sequentially to $4.4 billion. Our SRP portfolio represented 83% of our total credit assets at the end of Q1, up from 80% at the end of Q4, 2025.

Nico Ospina: Digital media revenue was $528,000, with net income of $179,000, driven by higher client engagement and lower operating expenses. Our credit asset portfolio grew to a new record of $5.33 billion at the end of Q1, driven once again by our Structured Receivable Program, which increased 29% year-over-year and 9% sequentially to $4.4 billion. Our SRP portfolio represented 83% of our total credit assets at the end of Q1, up from 80% at the end of Q4, 2025.

Speaker #3: Digital Meteor revenue was $528,000, with net income of $179,000, driven by higher client engagement and lower operating expenses. Our credit asset portfolio grew to a new record of $5.33 billion, at the end of Q1, driven once again by our structured receivable program, which increased 29% year-over-year and 9% sequentially to $4.4 billion.

Speaker #3: Our SRP portfolio represented 83% of our total credit assets at the end of Q1, up from 80% at the end of Q4 2025. Our multifamily residential loans and other portfolio decreased 1% year-over-year and 8% sequentially to $0.9 billion, as we transitioned some of our higher risk-weighted to lower risk-weighted multifamily residential loans as part of our bank's strategy to capitalize on opportunity for low risk-weighted credit assets with higher return on capital, and to continue growth in our SRP portfolio.

Nicolas Ospina: Our multifamily residential loans and other portfolio decreased 1% year-over-year and 8% sequentially to CAD 0.9 billion as we transition some of our higher risk-weighted to lower risk-weighted multifamily residential loans as part of our bank's strategy to capitalize on opportunity for low risk-weighted credit assets with higher return on capital and to continue growth in our SRP portfolio. As a reminder, our multifamily residential loans and other portfolio's primary business-to-business mortgages and construction loans for residential properties. We have very little exposure to commercial use properties. Now, turning into our income statement for digital banking operations, net interest margin on credit assets, that is excluding cash and securities, was 2.64%. That is 28 basis points or 12% higher on a year-over-year basis and level sequentially.

Nico Ospina: Our multifamily residential loans and other portfolio decreased 1% year-over-year and 8% sequentially to CAD 0.9 billion as we transition some of our higher risk-weighted to lower risk-weighted multifamily residential loans as part of our bank's strategy to capitalize on opportunity for low risk-weighted credit assets with higher return on capital and to continue growth in our SRP portfolio. As a reminder, our multifamily residential loans and other portfolio's primary business-to-business mortgages and construction loans for residential properties. We have very little exposure to commercial use properties. Now, turning into our income statement for digital banking operations, net interest margin on credit assets, that is excluding cash and securities, was 2.64%. That is 28 basis points or 12% higher on a year-over-year basis and level sequentially.

Speaker #3: As a reminder, our multifamily residential loans and other portfolios primarily business-to-business mortgages and construction loans for residential properties, we have very little exposure to commercial-use properties.

Speaker #3: Now, turning to our income statement for digital banking operations, net interest margin on credit assets—that is, excluding cash and securities—was 2.64%. That is 28 basis points, or 12%, higher on a year-over-year basis, and levels sequentially.

Nicolas Ospina: Overall, net interest margin, including the impact of cash securities and other assets, was 2.25%, an increase of 17 basis points year-over-year and down slightly from Q4 2025. Again, it's dampened by our higher than typical cash balances. This is still remain among the highest of the publicly traded Canadian federally licensed banks. Our provision for credit losses in Q1 continued to be diminished as a percentage of average credit assets at 5 basis points. This was down from 11 basis points from Q4 2025, primarily due to changes in the forward-looking information used by the bank in its credit models. I now would like to turn the call back to David for some closing remarks. David?

Nico Ospina: Overall, net interest margin, including the impact of cash securities and other assets, was 2.25%, an increase of 17 basis points year-over-year and down slightly from Q4 2025. Again, it's dampened by our higher than typical cash balances. This is still remain among the highest of the publicly traded Canadian federally licensed banks. Our provision for credit losses in Q1 continued to be diminished as a percentage of average credit assets at 5 basis points. This was down from 11 basis points from Q4 2025, primarily due to changes in the forward-looking information used by the bank in its credit models. I now would like to turn the call back to David for some closing remarks. David?

Speaker #3: Overall, net interest margin, including the impact of cash securities and other assets, was 2.25%, an increase of 17 basis points year-over-year, and down slightly from four-quarter 2025.

Speaker #3: And again, it's dampened by our higher than typical cash balances. This is still remaining among the highest of the publicly traded Canadian federally licensed banks.

Speaker #3: Our provision for credit losses in Q1 continued to be diminished, as a percentage of average credit assets at 5 basis points. This was down from 11 basis points from Q4 2025, primarily due to changes in the forward-looking information used by the banks in its credit models.

Speaker #3: I now would like to turn the call back to David for some closing remarks. David?

David Taylor: Thanks, Nico. The Q1 of fiscal 2026 sets us up for a very good year. In fact, what should be by far the most profitable year in our history. At the risk of overusing the term, we have strong momentum in our core digital business, and in the US specifically, where we have significantly greater operating leverage. Importantly, all the elements that support the very positive trajectory, the strong growth that I had discussed in our last call, have not changed. We have multiple drivers of our credit asset growth. The US SRP growth is accelerating, and we're on track to hit our fiscal 2026 target of $1 billion in additional assets. We expect to continue to see decent growth in Canada and expect our growth in CMHC loan book in Canada also.

Speaker #2: Thanks, Nichol. The first quarter of fiscal 2026 sets us up for a very good year. In fact, what should be by far the most profitable year in our history.

Speaker #2: At the risk of overusing the term, we have strong momentum in our core digital business. And in the United States specifically, where we have significantly greater operating leverage.

Speaker #2: Importantly, all the elements that support the very positive trajectory the strong growth that I have discussed in our last call have not changed. We have multiple drivers of our credit asset growth.

Speaker #2: The U.S. SRP growth is accelerating, and we're on track to hit our fiscal 2026 target of $1 billion in additional assets. We expect to continue to see decent growth in Canada, and expect our growth in CMATC loan book in Canada also.

David Taylor: We have already seen the incremental contribution of new revenue stream generated by our CMHC allocation fees. We expect net interest margin to be relatively flat to the higher levels of last year with some upside potential. We expect non-interest expense to be relatively flat to last year with some opportunities for year-over-year cost savings. I'll remind you that about CAD 10 million of our annual costs last year were incurred by our cybersecurity business that we're in the process of divesting. 2026 is also a year in which we are on track to realize additional value from two other initiatives. First, we are making steady progress on our reorganization to a standard US bank framework that we started last year. Most of this work is happening behind the scenes, but we do expect to be able to share some noteworthy updates in the near future.

Speaker #2: And we have already seen the incremental contribution of new revenue stream generated by our CMATC allocation fees. We expect net interest margin to be relatively flat to the higher levels of last year, with some upside potential.

Speaker #2: We expect non-interest expense to be relatively flat to last year, with some opportunities for year-over-year cost savings. I'll remind you that about $10 million of our annual cost last year were incurred by our cybersecurity business that we're in the process of divesting.

Speaker #2: 2026 is also a year in which we are on track to realize additional value from two other initiatives. First, we are making steady progress on our reorganization to a standard U.S.

Speaker #2: bank framework that we started last year. Most of this work is happening behind the scenes, but we do expect to be able to share some noteworthy updates in the near future.

David Taylor: While we are very comfortable with where we are, there have been more work here than initially thought by our external legal counsel and auditors. While Q1 costs for the reorg were more or less in line with the additional costs we thought we would have this year, we expect to incur an additional costs of CAD 4 to 4.5 million in the Q2. We still expect the benefits in shareholder value creation to be meaningfully outweigh the aggregate costs of this project. Second, the divesture process of our cybersecurity business is also steadily moving forward. It's still our goal to have this completed by the end of the summer, hopefully earlier.

Speaker #2: While we are very comfortable with where we are, there have been more work here than initially thought by our external legal counsel and auditors.

Speaker #2: So while Q1 costs for the reorg were more or less in line with the additional costs, we thought we would have this year we expect to incur an additional cost of $4 to $4.5 million in the second quarter.

Speaker #2: We still expect the benefits in shareholder value creation to meaningfully outweigh the aggregate costs of this project. Second, the divestiture process of our cybersecurity business is also steadily moving forward.

Speaker #2: It's still our goal to have this completed by the end of the summer. Hopefully earlier. Completion of the sale will provide meaningful additional regulatory capital to support our growth and obviously well more than absorbs the additional costs associated with reorganization.

David Taylor: Completion of the sale will provide meaningful additional regulatory capital to support our growth and obviously well more than absorbs the additional costs associated with the reorganization. We continue to execute and deliver strong growth in our core digital banking operations. We are simultaneously moving steadily forward on our digital asset strategy. It was just a year ago that we re-engaged on this opportunity. In my more than four decades as a banker, I've never seen the banking sector as historically very conservative, move so quickly to adopt an emerging technology. We now have a separate investor presentation on our website specifically dedicated to our digital asset opportunities. This is also partly due to the importance and magnitude of this opportunity for us, also due to confusion that exists around how the opportunity in this space is evolving. As a reminder, we have two parallel commercial paths.

Speaker #2: We continue to execute and deliver strong growth in our core digital banking operations. We are simultaneously moving steadily forward on our digital asset strategy.

Speaker #2: It was just a year ago that we re-engaged on this opportunity. In my more than four decades as a banker, I've never seen the banking sector, which is historically very conservative, move so quickly to adopt an emerging technology.

Speaker #2: We now have a separate investor presentation on our website specifically dedicated to our digital asset opportunities. This is also partly due to the importance and magnitude of this opportunity for us, but also due to the confusion that exists around how the opportunity in this space is evolving.

Speaker #2: As a reminder, we have two parallel commercial paths. Both are based on our proprietary VersaBank technology, which we believe, due to our unique approach, is the most secure digital asset technology available today.

David Taylor: Both are based on our proprietary VersaVault technology, which we believe due to our unique approach, is the most secure digital asset technology available today, proven and validated by SOC 2 Type 1 certification, considered to be the gold standard in data security. The first and largest opportunity is our proprietary Real Bank Tokenized Deposits or RBTDs. Tokenized deposits are very rapidly gaining traction as the industry increasingly recognizes the many advantages of these being an actual bank deposit, just like any other bank deposit. In effect, we are simply replacing archaic check clearing system with state-of-the-art blockchain technology. For bank customers, this means they will receive interest, and we expect, subject to confirmation by regulators, that they will enjoy the comfort of conventional deposit insurance. Announced US stablecoin regulation prohibits both. For us banks, it means we can use these deposits for lending. Again, just like any other deposit.

Speaker #2: Proven, and validated by SOC 2 Type 1 certification, conserves to be the gold standard in data security. The first and largest opportunity is our proprietary real bank tokenized deposits, or RBTDs.

Speaker #2: Tokenized deposits are very rapidly gaining traction as the industry increasingly recognizes the many advantages of these being an actual bank deposit just like any other bank deposit.

Speaker #2: In effect, we are simply replacing the archaic check clearing system with state-of-the-art blockchain technology. For bank customers, this means they will receive interest, and we expect, subject to confirmation by regulators, that they will enjoy the comfort of conventional deposit insurance.

Speaker #2: Announced U.S. stablecoin regulation prohibits both. For U.S. banks, it means we can use these deposits for lending, again, just like any other deposit. Stablecoin funds must be parked with a third party and liquid assets like T-bills.

David Taylor: Stablecoin funds must be parked with a third party and liquid assets like T-bills. The integrated US and Canadian pilot programs for RBTDs that we initiated last fall is proceeding well on both sides of the border, although it's taking a little longer than I originally anticipated. The second is the extension of the deposit services we are already providing on both sides of the border as a national federally licensed bank to stablecoins. While we firmly believe that bank-issued tokenized deposits have a number of key advantage over stablecoins have a role to play in the financial ecosystem. Being opportunists that we are, we have a strategy here as well, providing custody services to stablecoin issuers. This is not new for us. It's simply an extension of the custodial services we have provided to others for years. Just a new market segment and using our VersaVault technology.

Speaker #2: The integrated U.S. and Canadian pilot programs for RBTDs that we initiated last fall is proceeding well on both sides of the border, although it's taking a little longer than I originally anticipated.

Speaker #2: The second is the extension of the deposit services we are already providing on both sides of the border as a national federally licensed bank to stablecoins.

Speaker #2: While we firmly believe that bank-issued tokenized deposits have a number of key advantages over stablecoins, stablecoins have a role to play in the financial ecosystem and being opportunist that we are.

Speaker #2: We have a strategy here as well, providing custody services to stablecoin issuers. This is not new for us; it's simply an extension of the custodial services we have provided to others for years.

Speaker #2: Just a new market segment and using our VersaBank technology. Just a couple of days after the end of the quarter, we announced our first stablecoin custody customer, StableCorp.

David Taylor: Just a couple of days after the end of the quarter, we announced our first stablecoin custody customer, Stablecorp, for QCAD, Canada's first regulatory compliant stablecoin. Stablecorp is a pioneering leader in the stablecoin space, backed by an investor group who is a who's who of the leading participants in this space, including Coinbase, Circle, DeFi Technologies, and FTP Ventures. We see their choice of VersaBank as custodian for QCAD as a massive endorsement of our technology and our experience, as well as confirmation of our belief that the best choice for stablecoin custody is a national, federally licensed, regulated bank. It's difficult to provide any guidance on the financial impact of our relationship.

Speaker #2: For QCAT, Canada's first regulatory compliant stablecoin. StableCorp is a pioneering leader in stablecoin space backed by an investor group who is a who's who of the leading participants in this space, including Coinbase, Circle, DeFi technologies, and FTP ventures.

Speaker #2: We see their choice of VersaBank as custodian for QCAT as a massive endorsement of our technology and our experience as well as confirmation of our belief that the best choice for stablecoin custody is a national federally licensed regulated bank.

Speaker #2: It's difficult to provide any guidance on the financial impact of our relationship. It will very much depend on the growth in the issuance of QCAT, but one need only look at the U.S.

David Taylor: It will very much depend on the growth in the issuance of QCAD, One need only look at the US market, where the leading stablecoins in aggregate are valued at hundreds of billions of dollars. With that, I'd like to open up calls to questions. Operator?

Speaker #2: market where the leading stablecoins in aggregate are valued at hundreds of billions of dollars. With that, I'd like to open up calls to questions.

Dani: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star key followed by 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star key followed by 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, while we assemble the queue. Your first question comes from Timothy Switzer of KBW. Please go ahead.

Operator: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star key followed by 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star key followed by 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, while we assemble the queue. Your first question comes from Timothy Switzer of KBW. Please go ahead.

Speaker #2: Operator?

Speaker #1: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the start key followed by the number 1 on your touchtone phone.

Speaker #1: You will hear a prompt at your hand has been raised. Should you wish to decline from the polling process, please press the start key followed by the number 2.

Speaker #1: If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, while we assemble the queue. Your first question comes from Tim Switzer of KBW.

Timothy Switzer: Hey, good morning, guys. Thank you for taking my questions.

Speaker #1: Please go ahead.

Speaker #3: Hey, good morning, guys. Thank you for taking my questions.

David Taylor: Good morning, Tim.

Rachel Smith: Good morning, Tim.

Nico Ospina: Good morning, Tim.

Speaker #4: Good morning, Tim.

Timothy Switzer: The first one I have is on the stablecoin custody opportunity you guys have talked about. Is there any update you can provide on, I guess, the progress Stablecorp has made on launching the coin? Do you have any kind of idea or expectations in terms of, you know, the volume the coin could reach and their aspirations there?

Speaker #5: Good morning, Tim.

Speaker #3: So first one I have is on the stablecoin custody opportunity you guys have talked about. Is there any update you can provide on, I guess, the progress StableCorp has made on launching the coin and do you have any kind of idea or expectations in terms of the volume the coin could reach and their aspirations there?

David Taylor: Well, Tim, I would just say it's imminent for the full-blown launch. We're in the thick of it every day with work with Stablecoin. It's hard to say on the quantum of the size. Their partners are the who's who in the industry. In the US, of course, Circle or USDC has got about $70 billion on deposit with BlackRock, I understand from public information. You know, Canada's 10% the size, so I don't know if it proportionately will get to something like that. It's kind of early days. They've got the right partners, they've got the right product, they seem to have in Canada a country keen to get on with it and endorse it.

Speaker #5: Well, Tim, I would just say it's imminent for the full-blown launch. We're in the thick of it every day with work from a stablecoin.

Speaker #5: It's hard to say on the quantum of the size. Their partners are the who’s who in the industry, and in the United States, of course, Circle—or USDC—has got about $70 billion on deposit with BlackRock, I understand, from public information.

Speaker #5: Canada's 10% the size, so I don't know if it proportionally it'll get to something like that, but it's kind of early days. They've got the right partners.

Speaker #5: They've got the right product, and they seem to have in Canada country keen to get on with it and endorse it. So I sort of I think we'll wait and see, but it won't be too much longer to see.

David Taylor: I think we'll wait and see, but it won't be too much longer to see.

Timothy Switzer: Okay. Could you maybe provide some details in terms of how you guys plan to monetize this? You know, like what are the various revenue streams, you expect to generate through the Stablecorp partnership?

Speaker #3: Okay. And could you maybe provide some details in terms of how you guys plan to monetize this and what are the various revenue streams you expect to generate through the StableCorp partnership?

David Taylor: Well, for quite a while, it'll just be the traditional net interest margin that we earn on the deposits. Because we have no experience with the stickiness of these types of deposits, we'll keep them in highly liquid securities. We might be earning around 50 basis points net interest margin on the deposits. You know, it's not super profitable, but is incrementally profitable to the bank.

Speaker #5: Well, for quite a while, it'll just be the traditional net interest margin that we earn on the deposits. And we'll be because we have no experience with the stickiness of these types of deposits, we'll keep them in highly liquid securities.

Speaker #5: So, we might be earning around 50 basis points net interest margin on the deposits. So, it's not super profitable, but it is incrementally profitable to the bank.

Timothy Switzer: Got it. Yeah, that makes sense. You know, it allows you to kind of prove out the technology you have. Has this spurred more conversations at all for your, you know, for VersaVault and custody in Canada or the US?

Speaker #3: Got it. Yeah, that makes sense. And has this since you signed a partner, has this it allows you to kind of prove out the technology you have.

Speaker #3: Has this spurred more conversations at all for your for VersaVault and custody in Canada or the U.S.?

David Taylor: Yeah, it's put us on the radar screen for sure. It's, I've had a lot of conversations with the players in this industry, probably prompted by that release. You know, there's one thing to talk about it, but when you're chosen to be the custodian by a company as well regarded as Stablecorp with the partners of the who's who in this entire industry, it is an endorsement that we, you know, clearly have state-of-the-art technology to be able to deal with it. Of course, being a national bank in the States of Schedule I bank in Canada, where better to put your deposits than with us, of course.

Speaker #5: Yeah, it's put us on the radar screen for sure. I've had a lot of conversations with the players in this industry, probably prompted by that relief.

Speaker #5: There's one thing to talk about it, but when you're chosen to be the custodian by a company as well regarded as StableCorp with its the partners of the who's who in this entire industry, it is an endorsement that we clearly have state-of-the-art technology to be able to deal with it.

Speaker #5: And of course, being a national bank in the states of Schedule I bank in Canada, we're better to put your deposits than with us, of course.

Timothy Switzer: Yeah. Yeah, I get you. Okay. Then on, you know, the other product you guys have, the Real Bank Tokenized Deposits, you know, any update on, I guess, like distribution strategy, potential partners? You know, like have there been any conversations with, you know, the big payment providers or payment rails, credit card networks, other banks, you know, like for either maybe white labeling it, you know? Can you provide an update there?

Speaker #3: Yeah, yeah, I get you. Okay. And then on the other product you guys have, the Real Bank Deposit Tokens, any update on I guess distribution strategy, potential partners, have there been any conversations with the big payment providers or payment rails, credit card networks, other banks for either maybe white labeling, can you provide an update there?

David Taylor: Well, I should just simply say all of the above. It's a very popular product with the other banks, particularly the community banks that, you know, are at risk of losing their deposits to the stablecoins. We have lots of conversations with, as I was saying, all the above. Primarily, our work has been though with the regulators on both sides of the border, producing sort of a white paper framework for them to have a hard look at so they'll understand just how it all fits together legally and mechanically. We're just about done that. We've got one for the Canadian regulators, one for the US regulators, really well laid out, spells it out, the legal side of it and mechanical side.

Speaker #5: Well, I should just simply say all of the above. It's a very popular product with the other banks, particularly the community banks that are at risk of losing their deposits to the stablecoins.

Speaker #5: So we have lots of conversations with I was saying all the above. Primarily, our work has been though with the regulators on both sides of the border, producing sort of white paper framework for them to have a hard look at.

Speaker #5: So they'll understand just how it all fits together legally and mechanically. We're just about done that. We've got one for the Canadian regulators and one for the U.S.

Speaker #5: regulators. Really well laid out. Spells it out the legal side of it and mechanical side. And so within a day or two, that should be enhanced with the regulators.

David Taylor: within a day or two, that should be in the hands of the regulators. You know, that's the gating item. You know, we need the regulators to sign off on what we have in mind. I think it's just like all our other products. You build it and they will come. I mean, we have all kinds of interested parties joining in with us. I have said to both sides of the border that I don't plan on holding on to this technology for our own exclusive use. I'm happy to share it with all the rest of the FIs. In fact, it's the safety in numbers. It's a wonderful technology. It's good for the entire banking industry.

Speaker #5: And that's the gating item. We need the regulators to sign off on what we have in mind. And then I think it's just like all our other products: you build it, and they will come. I mean, we have all kinds of interested parties joining in with us.

Speaker #5: And I have said to both sides of the border that I don't plan on holding onto this technology for our own exclusive use. I'm happy to share it with all the rest of the FIs.

Speaker #5: In fact, this safety in numbers, it's a wonderful technology. It's good for all the entire banking industry. We might want to clip a little royalty on it going through, but we are I think it's best for the industry that we share the technology with everybody.

David Taylor: You know, we might want to clip a little royalty on it going through. You know, I think it's best for the industry that we share the technology with everybody.

Timothy Switzer: Got it. That makes sense. One last follow-up. You mentioned the community banks showing some interest, and, you know, I assume that's in the US. You have a lot of other competition in the United States that, you know, are probably better known to those US banks rather than VersaBank. You know, I mean, you have JPMorgan, Citi, some of the non-bank stable coins, you know, SoFiUSD recently launched. You know, like what are the conversations? What's the value proposition you offer them on why they should maybe choose one of VersaBank's, you know, digital deposits rather than a competitor's?

Speaker #3: Got it. That makes sense. And one last follow-up. You mentioned the community banks showing some interest, and I assume that's in the U.S. You have a lot of other competition in the United States that are probably better known to those U.S.

Speaker #3: Banks rather than VersaBank. I mean, you have JPMorgan, Citi, some of the non-bank stablecoins. SoFiUSD recently launched. What are the conversations? What's the value proposition you offer them?

Speaker #3: On why they should maybe choose one of VersaBank's digital deposits rather than a competitor's?

David Taylor: Well, with respect to the very large banks that are doing a good job of getting their tokenized deposits out, Gosh, I don't want to speak for them, but historically, they haven't been that much inclined to help these small community banks become competitive with them. Of course not. I mean, they're looking after their own customers and doing a really good job of it. I think the community banks, which maybe number, say 4,400 or so, quite rightly see that they're not gonna get a lot of help from the big guys, but they are gonna get help from us because we're part of the pack.

Speaker #5: Well, with respect to the very large banks that are doing a good job of getting their tokenized deposits out, they I don't want to speak for them, but in the historically, they haven't been in that much inclined to help.

Speaker #5: They small community banks become competitive with them. Of course, not. So I mean, they're looking after their own customers and they're doing a really good job of it.

Speaker #5: I think the community banks, which may be number, say, 4,000, 400 or so, quite rightly see that they're not going to get a lot of help from the big guys.

Speaker #5: But they are going to get help from us because we're part of the pack. We're and with our discussions with the various regulatory bodies, it does appear we're ahead of the pack by quite a bit because the type of questions I'm getting would imply that they haven't heard about our techniques before.

David Taylor: With our discussions with the various regulatory bodies, it does appear we're ahead of the pack by quite a bit because the type of questions I'm getting would imply that they haven't heard about our techniques before. If the others are talking about what they plan on doing, they're not at the front, or else I wouldn't be receiving the questions that I am from various regulatory bodies on both sides of the border.

Speaker #5: So if the others are talking about what they plan on doing, they're not there. They're not at the front. Or else I wouldn't be receiving the questions that I am from the various regulatory bodies on both sides of the border.

Rachel Smith: Gotcha. Yeah. I mean, you know, probably helps that you're not necessarily competing directly, with a lot of these community banks' core businesses.

Timothy Switzer: Gotcha. Yeah. I mean, you know, probably helps that you're not necessarily competing directly, with a lot of these community banks' core businesses.

Speaker #3: Gotcha. Yeah. I mean, it probably helps that you're not necessarily competing directly with a lot of these community banks' core businesses. But also, thank you.

David Taylor: No, no, we don't. Yeah, we have no intention to do that at all. This is just simply we think we've got a great product for the banking industry. It does away with the archaic check clearing systems. It's good for everybody. We've got a little bit of a first mover on it, and I'm sure the rest will wanna catch up quickly. If, you know, we can clip a little transaction fee from our friends in the other community banks, all the better. The ones I'm talking to, they all expect they'll have to pay a little bit of a toll, but you know, we're not greedy. This is sounds I'm being altruistic, and that's kind of odd for a banker.

Speaker #5: Yeah, we have no intention to do that at all. And this is just simply—we think we've got a great product for the banking industry.

Speaker #5: It does away with the archaic check clearing systems. It's good for everybody. We've got a little bit of a first mover on it, and I'm sure the rest will want to catch up quickly.

Speaker #5: And if we can clip a little transaction fee from our friends in the other community banks, all the better. But once I'm talking to, they all expect they'll have to pay a little bit of a toll.

Speaker #5: But we're not greedy. This is it sounds like I'm being altruistic and that's kind of odd for a banker. But keep with you got to do something for the industry.

David Taylor: Gee whiz, you know, you gotta do something for the industry. This is a great technology. It's gonna work for everybody.

Speaker #5: This is a great technology. It's going to work for everybody.

Rachel Smith: Got it. Thanks for taking all my questions, David.

Timothy Switzer: Got it. Thanks for taking all my questions, David.

Speaker #3: Got it. Thanks for taking all my questions, David.

David Taylor: Thank you, Tim.

Speaker #5: Thank you, Tim.

Dani: Your next call comes from Liam Coohill of Raymond James. Please go ahead.

Operator: Your next call comes from Liam Coohill of Raymond James. Please go ahead.

Speaker #1: Our next call comes from Liam Cohill of Raymond James. Please go ahead.

Liam Coohill: Hey. Good morning, David. Good morning, everybody. This is Liam on for Joe.

David Taylor: Good morning.

Speaker #6: Hey, good morning, David. Good morning, everybody. This is Liam on for Joe.

Liam Coohill: So-

David Taylor: Hi, Liam.

Speaker #5: Good morning.

Liam Coohill: I was wondering, you know. Hey, good morning. I appreciate all the color on the crypto side, but I'd like to flip over to the US Structured Receivable Program quickly.

Speaker #6: So, I was wondering—hey, good morning. I appreciate all the color on the crypto side, but I'd like to flip over to the U.S.

David Taylor: Yeah.

Liam Coohill: Can you just assess the pipeline of partners there and your expectation for, you know, the mix between legacy portfolioing and what securitized the offering?

Speaker #6: Structured receivable program—quickly, could you just test the pipeline of partners there and your expectation for the mix between legacy portfolioing and securitized offering?

David Taylor: Well, we started out with sort of lofty expectations, and I think most people quite rightly were skeptical about what our success would be. Strangely enough, a lot of that skepticism came from Canada saying, Gee whiz, US is a huge market. Why do you think your product would be well received? It's actually exceeded our expectations which were lofty to start with. We've got tremendous interest in our on-balance sheet securitized receivable product. As you saw by the results, it's almost as fast as we can sign them up, so we'll be adding to it. With the mix, this quarter, it was about 85% of on-balance sheet securitized receivables.

Speaker #5: Well, we started out with sort of lofty expectations and I think most people quite rightly were skeptical about what our success would be. Strangely enough, a lot of that skepticism came from Canada, saying, gee, U.S.

Speaker #5: is a huge market. Why do you think it that your product would be well received? It's actually exceeded our expectations. Which were lofty to start with.

Speaker #5: We've got tremendous interest in our unbalance sheet securitized receivable product. You should saw by the results. It's almost as fast as we can sign them up.

Speaker #5: We'll be adding to it. So with the mix, this quarter, it was about 85% of unbalance sheet securitized receivables. And we had originally estimated it'd be more like 60/40 still in favor of the unbalance sheet.

David Taylor: We had originally estimated it to be more like 60/40, still in favor of the on-balance sheet. It may move to that number a little later on. The pipeline is very strong. It's an economical and reliable funding source and, you know, well-proven in Canada. The folks that have signed up with us here in the States seem to have all kinds of volume for us. You know, with numbers, we've said publicly, we expect to put 1 billion on by the end of the year. It could get well over that figure from just a few partners who've already signed.

Speaker #5: It may move to that number a little later on, but the pipeline is very strong. It's an economical, reliable funding source, and well-proven in Canada.

Speaker #5: And the folks that have signed up with us here in the States, seem to have all kinds of volume for us. So with numbers, we've said publicly we expect to put a billion on by the end of the year.

Speaker #5: It could get well over that figure from just a few partners we've already signed.

Liam Coohill: No, that's great color. Thank you so much. Quickly, I appreciate the update on the sale process of DRT Cyber. I am curious how you think about recent concerns surrounding AI potentially disrupting the cybersecurity space.

Speaker #6: No, that's great color. Thank you so much. And quickly, I appreciate the update on the sale process of DRT Cyber. But I am curious, how you think about recent concerns surrounding AI potentially disrupting the cybersecurity space?

David Taylor: Well, we have an AI module ourselves, and it is state-of-the-art. I mean, we did a few years back when AI started becoming more popular. You know, from what I use AI for, I mean, I went back to somebody yesterday. It's fantastic. I think it is the way of the world. It's the way it's gonna go, and I think the bad actor is gonna be using it just as much too. You know, it's one of those games where you can't rest. You just gotta keep getting better and better all the time. We think DRT Cyber is there. It's got a team of about 60, 70 experts in this area. Some we recruited from around the world that were legendary at the time.

Speaker #5: Well, we have an AI module ourselves. And it is state of the art. I mean, we did a few years back when AI started becoming more popular.

Speaker #5: From what I use AI for, I mean, I send mine back somewhere yesterday. It's fantastic. I think it is the way of the world.

Speaker #5: It's the way it's going to go. And I think the bad actors are going to be using it just as much too. So it's one of those games where you can't rest.

Speaker #5: You've just got to keep getting better and better all the time. And we think DRT Cyber is there. It's got a team of about 60 to 70 experts in this area.

Speaker #5: Some we recruited from around the world that were legendary at the time. So, it's a team of people and technology that anybody would be proud to have with them.

David Taylor: It's a team of people and technology that anybody would be proud to have with them. You know, let's just say, as we say, if you're not secured by DRT Cyber, you're not secured. We're not being arrogant there. It's just as you're implying, the world is changing so rapidly, and the bad guys have got the tools too. You gotta have a really good team on your side to make sure that your facility has got shields up all the time. It changes in a month or two. It's a sad comment on humanity that this has taken place.

Speaker #5: But let's just say, as we say, if you're not secured by DRT Cyber, you're not secured. We're not being arrogant there. It's just so you're implying the world has changed so rapidly and the bad guys have got the tools too.

Speaker #5: So you got to have a—you got to have a really good team on your side to make sure that your facility has got shields up all the time.

Speaker #5: It changed in a month. A month or two. It's a sad, sad comment on humanity that this has taken place. I think some of you folks know that in my youth, I used to be a maximum security prison guard.

David Taylor: I think some of you folks know that in my youth, I used to be a maximum security prison guard, I thought at that time, maybe 2%, 3% of the population was given to evil endeavors. Now with this, gee whiz, it's a lot, it's a lot higher percentage.

Speaker #5: And I thought at that time, maybe 2%, 3% of the population was given to evil endeavors. And now with this, gee, it's a lot higher percentage.

Liam Coohill: Yeah, no kidding. It's definitely.

Speaker #6: Yeah, no kidding. It's definitely something to watch. But I appreciate all that. And just one more for me. I noticed some of the Canadian insolvency deposits decline slightly quarter over quarter.

David Taylor: Yeah

Liam Coohill: something to watch. I appreciate all that. Just one more for me. I noticed some of the Canadian insolvency deposits declined slightly quarter-over-quarter. Could you discuss kind of bankruptcies in Canada and expectations for those moving forward?

Speaker #6: Could you discuss kind of bankruptcies in Canada and expectations for those moving forward?

David Taylor: Well, unfortunately, we're signed up maybe 1.5% more this quarter in new accounts that are there to receive the proceeds from a wind up of an insolvency. That would mean that Canada is still sliding down into a deeper recession. As a leading indicator is how many of our insolvency professionals sign up new accounts. Then the accounts fill up with deposits. You'll see deposits increase unfortunately. It slid back a little because of seasonality. I guess our insolvency professionals tend to distribute the proceeds maybe before Christmas and then in the quarters that come, it will build. I think round numbers we're around CAD 900 million, probably get to around CAD 1 billion by the end of the year.

Speaker #5: Well, unfortunately, we're signed up maybe one and a half percent more this quarter in new accounts that are there to receive the proceeds from the windup of an insolvency.

Speaker #5: So that would mean that Canada is still sliding down into a deeper recession. Leading indicator is how many of our insolvency professionals sign up new accounts.

Speaker #5: And then the accounts fill up with deposits. So you'll see deposits increase unfortunately. It slid back a little because of seasonality. I guess our insolvency professionals tend to distribute the proceeds maybe before Christmas and then in the quarters that come, it'll build.

Speaker #5: I think round numbers were around $900 million Canadian—probably get to around a billion by the end of the year. Canada is still suffering.

David Taylor: Canada's still suffering and there's very lot of reasons for that. You know, we keep our fingers crossed even though we make a bit of money on insolvencies, I'd much prefer to see, I'd be telling you a decline in insolvencies rather than an increase.

Speaker #5: And it's very, very a lot of reasons for that. We'll keep our fingers crossed even though we make a bit of money on insolvencies.

Speaker #5: I much prefer to see I'd be telling you a decline in insolvencies rather than an increase.

Liam Coohill: No, yeah. Thank you so much for the color, David. I'll step back.

Speaker #6: No, yeah. Thank you so much for the color, David. I'll step back.

David Taylor: All righty. Well, it's good talking to you, Liam. You're in, St. Pete?

Speaker #5: All righty. Well, good talking to you, Liam. You're in. St. Pete's? Are you in St. Pete's too? Good for you. We're enjoying some decent weather here in Florida.

Liam Coohill: Likewise.

David Taylor: Are you in St. Pete too?

Liam Coohill: Yep.

David Taylor: Good for you.

Liam Coohill: I am.

David Taylor: We're enjoying some decent weather here in Florida.

Liam Coohill: Oh, definitely. Yeah, it's warmed up really nicely since a couple cold weeks back in January.

Speaker #6: Oh, definitely. Yeah, it's warmed up really nicely since a couple of cold weeks back in January.

David Taylor: Indeed. I had to wear my jacket on my motorbike here the last few days. Looks like today I can go out. It's bike week here in Daytona. I can go out as a proper biker with my T-shirt on. Nice and warm. Fresh air and sunshine.

Speaker #5: Indeed. I had to wear my jacket on my motorbike the last few days. But it looks like today I can go out. It's bike week here in Daytona.

Speaker #5: So I can go out as a proper biker with my T-shirt on. So nice and warm. Fresh air and sunshine.

Liam Coohill: Great. That's always a fun time.

David Taylor: Indeed.

Speaker #6: Boy, that's always a fun time.

Speaker #5: Indeed.

Dani: Our next question comes from Andrew Scutt of ROTH Capital Partners. Please go ahead.

Operator: Our next question comes from Andrew Scutt of ROTH Capital Partners. Please go ahead.

Speaker #1: Our next question comes from Andrew Scutt of Roth Capital. Please go ahead.

David Taylor: Good morning, Andrew.

Andrew Scutt: Good morning. Thank you for taking the questions. The first one for me on the US program. You guys said you did the bulk of the originations in the quarter were through the core program. I was kind of curious how you see the mix working out as we go through the year and you kind of build towards that 1 billion target.

Speaker #4: Hey, good morning.

Speaker #5: Good morning. Thank you for taking the questions. So, the first one for me on the US program—you guys said the bulk of the originations in the quarter were through the core program.

Speaker #5: It was kind of curious how you see the mix working out as we go through the year and you kind of build towards that $1 billion target.

David Taylor: Well, I think, I think you'll see an increase in the purchase securitizations, in the, in the next few quarters. There's a fair amount of product out there that fits us and some has strategic value for us and that it's, it, the securitizations are issued by our target market. I think, the first quarter might have been a bit of anomaly with about only 15%. Then again, there is super strong demand for the traditional on-balance sheet securitization coming in too. Bottom line is, I said CAD 1 billion, it could be a lot more than CAD 1 billion in total. It's, you know, it's a good product. It provides, a value to our client site. It's cheaper funding, it's more reliable.

Speaker #4: Well, I think you'll see an increase in the purchase securitizations in the next few quarters. And there's a fair amount of product out there that fits us.

Speaker #4: And some have strategic value for us in that it's the securitizations are issued by our target market. So I think the first quarter might have been a bit of anomaly with about only 15%.

Speaker #4: But then again, there is super strong demand for the traditional on-balance sheet securitization coming in too. Bottom line is I set a billion it could be a lot more than a billion in total.

Speaker #4: It's a good product. It's provides value to our client side. It's cheaper funding. It's more reliable. And towards the end of the year, if we can enhance the product with the instant purchase program that we're working on, it should be even more popular.

David Taylor: You know, towards the end of the year, if we can enhance the product with the instant purchase program that we're working on, it should be even more popular.

Andrew Scutt: Great. Well, appreciate the detail. Kind of building off the strong demand you have for the program, at what point would you kind of say the program's kinda mature enough that you can kind of bleed off some of the excess liquidity that you have on the balance sheet now to fuel the growth?

Speaker #5: Great. Well, I appreciate the detail. And kind of building off the strong demand you have for the program, at what point would you kind of say the program's kind of mature enough that you can kind of bleed off some of the excess liquidity that you have on the balance sheet now to fuel the growth?

David Taylor: It'll be sometime this year. Our treasurer amassed a fair amount of liquidity. You know, we're earning a little bit of a spread on it. Towards the end of the year, that should dissipate. We'd also, we've said it earlier, we'd also start entertaining other community banks that might wanna participate with us. We'd manage the program for them and provide them with the on-balance sheet securitized product, which a lot of them have expressed interest in it. That was the kind of a longer-range plan to provide the service to the other small community banks that may have an abundance of deposits, may not a great place to put it, and this is, you know, a very low risk, pretty high yielding product.

Speaker #4: It'll be sometime this year. Our treasurer amassed a fair amount of liquidity. We're earning a little bit of a spread on it. But towards the end of the year, that should dissipate.

Speaker #4: What also we've said it earlier, what also started entertaining other community banks that might want to participate with us, we'd manage the program for them and provide them with the on-balance sheet securitized product, which we've a lot of them have expressed interest in it.

Speaker #4: So that was kind of a longer-range plan to provide the service to the other small community banks that may have an abundance of deposits that may not be a great place to put it.

Speaker #4: And this is a very low-risk, pretty high-yielding product.

Andrew Scutt: Great. Well, appreciate, you taking my questions and congrats on the progress.

Speaker #5: Great. Well, I appreciate you taking my questions and congrats on the progress.

David Taylor: Look forward to catching up with you in California, Andrew. You'll be down there, right?

Speaker #4: Look forward to catching up with you in California, Andrew. You'll be down there, right?

Andrew Scutt: Yep. Yeah. Looking forward to it.

David Taylor: Excellent. Excellent. Thanks for the invitation. We'll be, you know, we'll have our California outfit on. We'll be happy to bask in the sunshine with you.

Speaker #5: Yep. Yeah. Looking forward to it.

Speaker #4: Excellent, excellent. Thanks for the invitation. We'll have our California outfit on, and we'll be happy to bask in the sunshine with you.

Dani: As a reminder, if you wish to ask a question, please press star one. Your next caller comes from Eli Rodney of Bullpen Research. Please go ahead.

Operator: As a reminder, if you wish to ask a question, please press star one. Your next caller comes from Eli Rodney of Bullpen Research. Please go ahead.

Speaker #1: Also a reminder, if you wish to ask a question, please press star one. Your next caller comes from Eli Rodney of Bullpin Research. Please go ahead.

Eli Rodney: Morning, guys. Congrats on the quarter.

Speaker #6: Good morning, guys. Congrats on the quarter.

David Taylor: Oh, morning, Eli.

Eli Rodney: Yeah, all this sunshine talk is really getting to me while I sit in the dark here in cold Toronto.

Speaker #5: Good morning, Eli.

Speaker #6: Yeah, all this sunshine talk is really getting to me while I sit in the dark here in cold Toronto.

David Taylor: I'm rubbing it in Eli. I mean, obviously, I've spent most of my life in the dark days in the winter in Canada.

Speaker #5: I'm rubbing it in, Eli. I mean, obviously, I've spent most of my life in the dark days in the winter in Canada.

Eli Rodney: Just sticking on the US topic for now. $1 billion for 2026 in fundings, $200 million as of Q1. How should we think about the pace of growth here? Sort of steady quarterly build of $30 to 40 million or, more back-half weighted?

Speaker #6: And so, sticking on the US topic for now—a billion for 2026 in fundings, $200 million as of Q1. How should we think about the pace of growth here?

Speaker #6: Sort of steady, quarterly build of 30 to 40 million, or more backward?

David Taylor: Accelerated. No, it's gonna accelerate 'cause some of the partners who are just signing up have just signed up. They've got some really good product. I just love the stuff they're doing in the States with, you know, these, this type of lending. Low risk. You know, getting. It's kind of altruistic. They're getting economical priced funding directly through to consumers to help with the purchase of homes and vehicles and such. You know, it, I'd say it's gonna accelerate. Just it's catching on. People are saying, Gee whiz, that's pretty cool, man. How do I get a piece of that? How do you start funding me, Dave? Well, let's sign here.

Speaker #5: No, it's going to accelerate as some of the partners have just signing up have just signed up. So and they've got some really good product.

Speaker #5: I just love the stuff they're doing in the States with this type of lending. Low risk, getting there's kind of an altruistic to getting economical priced funding directly through to consumers to help with the purchase of homes and vehicles and such.

Speaker #5: So, I'd say it's going to accelerate—it's just catching on. People are saying, 'Gee whiz, that's pretty cool, man. How do I get—how do I get a piece of that?'

Speaker #5: How do you start funding me, Dave? Well, it's signed here.

Eli Rodney: Well, yeah, it sounds like it with your earlier comments on, you know, how strong the pipeline is and the potential for new partnerships being incremental to that, billion-dollar target. I'm curious how, you know, given that there is some constraints to growth naturally, like, how do you prioritize the pipeline? Like, what characteristics are you looking for in potential SRP partners?

Speaker #6: Yeah. And it sounds like it with your earlier comments on how strong the pipeline is and the potential for a new partnerships being incremental to that $1 1 billion target.

Speaker #6: I'm curious, given that there are some constraints to growth naturally, how do you prioritize the pipeline? What characteristics are you looking for in potential SRP partners?

David Taylor: Well, it seems that both sides of the border, it's primarily coming from homeowners in doing home improvement, usually in the energy savings areas. You know, energy-saving furnaces and air conditioners, that, and maybe some insulation, roofs and such. In the States, similarly, and also maybe sometime in the future you see a new kind of cool product on financing homeowners. It's that's primarily where it's coming from, retail, homeowners improving their existing properties and maybe looking at buying new economically priced housing units.

Speaker #5: Well, it seems that on both sides of the border, it's primarily coming from homeowners doing home improvement, usually in the energy savings areas—energy-saving furnaces and air conditioners, that and maybe some insulation, roofs, and such.

Speaker #5: And in the States, similarly, and also maybe sometime in the future, you see kind of a new kind of cool product on the financing homeowners.

Speaker #5: So that's primarily where it's coming from: retail, homeowners improving the existing properties, and maybe looking to buy new, economically priced housing units.

Eli Rodney: Great. Just flipping to costs, associated with the reorg, CAD 1.5 in Q1 and sort of guiding to CAD 4 to 4.5 in Q2. Just wanna frame up how we should be thinking about the back half of the year, and my baseline assumption is, we're heading into 2027 on a clean slate. Is that fair?

Speaker #6: Great. And just flipping to costs associated with the reorg, $1.5 million in Q1 and sort of guiding to $4 to $4.5 million in Q2, just want to frame up how we should be thinking about the back half of the year, and my baseline assumption is we're heading into 2027 on a clean slate.

David Taylor: Yeah, absolutely. I mean, the It's heart-stopping. I think I did that for a fact when I spoke to one of the senior partners in the accounting firms that have been charging us huge fees for all this stuff. Boy, I'm sure being happy to see the end of this. The lawyers aren't shy either with their fees. You know, we just gotta plow through it, get it closed, and then You'll see our efficiency ratio really improve. In the States, this quarter, I think we're around 40 odd%. With $1 billion, $1.3 billion, which that $1 billion new assets would do, we're getting down to around 25%.

Speaker #6: Is that fair?

Speaker #5: Yeah, absolutely. I mean, it's heart-stopping. I think I've I think I did that for a fact when I spoke to one of the senior partners in the accounting firms that have been charged in this huge fees for all this stuff.

Speaker #5: Boy, I sure am happy to see happy to see the end of this. And the lawyers aren't shy either with their fees. But we just got to plow through it, get it closed, and then you'll see our efficiency ratio really improve.

Speaker #5: In the States, this quarter, I think we're on 40-odd percent with $1.3 billion, which—that billion you asked us—would do. We're getting down to around 25%.

David Taylor: It just keeps getting better 'cause, you know, we're employing state-of-the-art technique for processing these receivables. So there isn't much more fixed cost needed to run the machine. So we'll be posting efficiency ratios that banks can only dream of, 20, 25%, lower and lower. You know, the idea, of course, is to pass those savings on to our partners, you know, so that they can make a bit more money too. It's self-fulfilling prophecy then. You know, if we can leave more on the table for our partners, they're all the more keen to sign up with us 'cause they're being more profitable too. It's a win-win.

Speaker #5: And it just keeps getting better because we're employing state-of-the-art technique for processing. These receivables. So there isn't much more fixed cost needed to run the machine.

Speaker #5: So we'll be posting efficiency ratios that banks can only dream up—20, 25 percent—lower and lower. And the idea, of course, is to pass those savings on to our partners so that they can make a bit more money too.

Speaker #5: And then it's a self-fulfilling prophecy that if we can leave more on the table for our partners, they're all the more keen to sign up with us because they're being more profitable too.

David Taylor: The more we book, the more efficient we are, the better pricing we can provide to the partners.

Speaker #5: So it's a win-win. The more we book, the more efficient we are, the better pricing we can provide to the partners.

Eli Rodney: Right. Even with some of the sort of, you know, near-term noise and one-time costs, you're already starting to see the operating leverage in the US model showing up. Maybe just to, you know, zoom out and reframe around the long-term picture, you've spent over a year in the US market now. You know, any changes to your original view on the long-term attractiveness of the market, you know, for better or for worse?

Speaker #6: Right. And even with some of the sort of near-term noise and one-time costs, you're already starting to see the operating leverage in the U.S. model showing up.

Speaker #6: So maybe just to zoom out and reframe around the long-term picture—it's, you’ve spent over a year in the US market now. Any changes to your original view on the long-term attractiveness of the market, for better or for worse?

David Taylor: Well, it'll get way bigger than Canada, and that's just the metrics. I mean, it's 10 times the population in the United States, and they may have 10 times the propensity to finance at point of sale than Canadians. It won't be long before we have more exposure in the United States than we have in Canada. It's just those water finds its own level sort of thing. In the States, the efficiency is greater. Lots of reasons. We're employing our state-of-the-art software. We call it AMS 3.0. Also, the deposit gathering network in the States is a lot more efficient and sophisticated.

Speaker #5: Well, it'll get way, way bigger than Canada. And that's just the metrics. I mean, it's 10 times the population. The United States and they may have 10 times the propensity to finance at point of sale than Canadians.

Speaker #5: So it won't be long before we have more exposure in the United States than we have in Canada. It's just this was water finds its own level sort of thing.

Speaker #5: So, and in the States, the efficiency is greater for lots of reasons, but we're employing our state-of-the-art software. We call it AMS 3.0. Also, the deposit-gathering network in the States is a lot more efficient and sophisticated.

David Taylor: We're only paying maybe 10, 15 basis points over US Treasuries. We only have 1 or 2 people in the deposit raising area in the States versus in Canada, we have an entire department. It's fragmented in Canada, smaller, and we pay maybe 50 basis points over the risk-free rate to come to Canada bond. It's just, you know, the States is bigger and more efficient, and we're ideally set up with a national license to exploit it.

Speaker #5: We're only paying maybe 10, 15 basis points over US Treasuries and we only have one or two people in the deposit raising area in the States versus in Canada.

Speaker #5: We have an entire department. It's fragmented in Canada, smaller. And we pay maybe 50 basis points over the risk-free rate, because it's Canada. So it's just the States is bigger.

Speaker #5: And more efficient. And we're ideally set up with a national license to exploit it.

Eli Rodney: Absolutely. As it scales past the size of the Canadian book, you know, total bank efficiency should really move along with that. I'll be following that closely. Last one for me, just on-

Speaker #6: Absolutely. And as you said, as it scales past the size of the Canadian book, total bank efficiency should really move along with that. So I'll be following that closely.

David Taylor: Yep.

Eli Rodney: Canada. Some of the multifamily book sequentially is down quarter-over-quarter.

Speaker #6: Last one for me, just on Canada. So some of the multifamily book sequentially is down quarter over quarter. I know that there were some comments earlier on that just being a transition from sort of uninsured to CMHC insured.

David Taylor: Yeah.

Eli Rodney: Some comments earlier on that just being a transition from, sort of uninsured to CMHC insured.

David Taylor: Yeah.

Eli Rodney: I'm assuming it's a timing thing, but I just am. Maybe I'm curious on the, you know, on the macro side, obviously, you know, inventories of multi-unit are building, construction slowing down. Was this a bit of a conscious effort to accelerate that transition and reduce exposure to the unsecured or uninsured?

David Taylor: Yeah.

Speaker #6: So, I'm assuming it's a timing thing, but maybe I'm just curious—on the macro side, obviously, inventories of multi-unit or building construction are slowing down.

Speaker #6: So was this a bit of a conscious effort to accelerate that transition and reduce exposure to the unsecured or uninsured?

David Taylor: Absolutely. In fact, about, if you looked in my quarterlies for the last few years, I'll say purposely that we're dialing down the conventional construction and that, you know, like most folks, we Canada looks pretty scary for the conventional construction of multifamily residents. We purposefully emphasize the CMHC construction and you'll see it. You know, I think we've talked about CAD 1 billion in commitments. It'll hit that number. There's some big well-heeled developers coming to see us. In fact, we just signed one recently in our backyard in London, Ontario. Those are the kind of deals we like. Buildings we can see, we can touch, and the developers putting a lot of equity in despite it being CMHC.

Speaker #5: Absolutely. In fact, if you looked in my quarterlies the last few years, I'll say purposely that we're dialing down the conventional construction, and that, like most folks, Canada looks pretty scary for the conventional construction of multifamily residences.

Speaker #5: So we purposely emphasized the CMHC construction. And you'll see it—I think we've talked about about a billion in commitments—it'll hit that number.

Speaker #5: There are some big, well-heeled developers coming to see us. In fact, we just signed one recently in our backyard in London, Ontario. So those are the kind of deals you like.

Speaker #5: Buildings we can see, we can touch, and the developers are putting a lot of equity in, despite it being CMHC. So we're doing what we've always done.

David Taylor: We're doing what we've always done. I've done this for maybe almost 50 years now. I've been through a lot of cycles. You know, you sort of look at the tea leaves and say, Oh, gee whiz, I think I better be backing off. We say something to the effect that bad loans are made in good times. You would have seen us backing off or maybe some of the others who are still pretty aggressive. At this point, the portfolio will start to look more and more like CMHC and our developer clients will be the who's who in the Canadian industry.

Speaker #5: I've done this for maybe almost 50 years now. I've been through a lot of cycles. You sort of look at the tea leaves and say, "Oh, gee whiz."

Speaker #5: I think I better be backing off." And we say something to the effect that bad loans are made in good times. So you would have seen us backing off or maybe some of the others were still pretty aggressive.

Speaker #5: So, at this point, the portfolio will start to look more and more like CMHC, and our developer clients will be the who's who in big Canadian industry.

Eli Rodney: Got it. Thanks for answering the questions, Dave, and, I'll leave you to enjoy the weather.

Speaker #6: Got it. Thanks for answering the questions, Dave. And I'll leave you to enjoy the weather.

David Taylor: Well, thank you. Yep. I got my Harley-Davidson Breakout fired up here. It's in the VersaBank colors, of course. I'm actually advertising for VersaBank in the next little while.

Speaker #5: Well, thank you. Yep. I got my hearty breakout fired up here. It's in the VersaBank colors, of course. So I'm actually advertising for VersaBank in the next little while.

Speaker #5: So

Dani: All right. There are no further questions at this time. I will now turn the call back over to David Taylor. Please continue.

Operator: All right. There are no further questions at this time. I will now turn the call back over to David Taylor. Please continue.

Speaker #4: Hi. There are no further questions at this time. I will now turn the call back over to David Taylor. Please continue.

David Taylor: Well, thank you, Dani. Thanks everybody for joining us today. I look forward to speaking to you at the time of our Q2 results. So long.

Speaker #5: Well, thank you, Danny. And thanks, everybody, for joining us today. I look forward to speaking to you at the time of our second quarter results.

Dani: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker #5: Thanks a lot.

Speaker #4: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

David Taylor: See you, Dani.

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