Q2 2026 VersaBank Earnings Call

June 3, 2026

Operator: Good morning, ladies and gentlemen. Welcome to the VersaBank Q2 Fiscal 2026 Financial Results Conference Call. This morning, VersaBank issued a news release reporting its financial results for the Q2 ended 30 April 2026. 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 as SEDAR+ and EDGAR. 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. For those participating in today's call by telephone, the accompanying slide presentation is available on the bank's website.

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.

Speaker #2: As well as Cedar Plus and EDGAR. Please note that, in addition to the telephone dial-in, VersaBank is webcasting this morning's conference call. The webcast is listen-only.

Speaker #2: 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.

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.

Operator: 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 the 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's 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: Details on how to access the replays are available in the 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's 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 end 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, and thank you for joining us for today's call. With me again is our Global Chief Financial Officer, Nicholas Ospina. Before I begin, I want to remind you again this quarter that our financial results for Q2 reflect incremental non-core costs associated with our plan to realign our corporate structure to that of a standard US bank framework, or what we refer to as the reorganization for short. As expected, those costs amounted to CAD 4.5 million before tax for Q2. That said, I am very pleased to report that, as announced in a separate news release this morning, we have publicly filed our S-4 registration statement for the reorg with the SEC. This has been a long process, much longer than originally anticipated, but the filing, which is a major milestone, marks passage into the final stages. More on this later.

Speaker #2: With me again is our global chief financial officer, Nicholas Ospina. Before I begin, I want to remind you again this quarter that our financial results for Q2 reflect incremental non-core costs associated with our plan to realign our corporate structure to that of a standard US bank framework.

Speaker #2: Or, what we refer to as the reorganization, for short. As expected, those costs amounted to $4.5 million before tax for Q2. That said, I'm very pleased to report that, as announced in a separate news release this morning, we have publicly filed our S-4 registration statement for the reorg with the SEC.

Speaker #2: This has been a long process, much longer than originally anticipated, but the filing—which is a major milestone—marks passage into the final stages.

Speaker #2: More on this later. During the quarter, we also incurred a non-core cash expense of $2.2 million for the write-down of intangible assets resulting from the sale of our sole physical bank branch.

David Taylor: During the quarter, we also incurred a non-core cash expense of CAD 2.2 million for the write-down of intangible assets resulting from the sale of our sole physical bank branch. Finally, I will also note that we spent CAD 0.6 million in Q2 on legal costs specifically related to the commercialization of our RealBank tokenized deposits, which was not deemed to be non-core, but is worth mentioning as an incremental cost. This was the bank's first discernible incremental spend associated with digital assets. One of the most attractive aspects of our range of digital asset opportunities is that any costs associated with bringing any of these to commercialization are expected to be de minimis. A small investment for what we expect will be meaningful near-term return in profitability. Now on to the quarter.

Speaker #2: And finally, I will also note that we spent $0.6 million in Q2 on legal costs specifically related to the commercialization of our real bank tokenized deposits.

Speaker #2: This was not deemed to be non-core, but it's worth mentioning as an incremental cost. This was the bank's first discernible incremental spend associated with digital assets.

Speaker #2: One of the most attractive aspects of our range of digital asset opportunities is that any costs associated with bringing any of these to commercialization are expected to be de minimis.

Speaker #2: A small investment for what we expect will be meaningful near-term return in profitability. Now onto the quarter. Q2 was very much a continuation of the strong performance and growth we saw in Q1.

David Taylor: Q2 was very much a continuation of the strong performance and growth we saw in Q1 as we increasingly benefit from the operating leverage inherent in our business model. We again achieved new records for credit assets and revenue, which were up 25% and 27% year over year respectively, and we once again saw strong sequential growth with increases of 6% and 5%. Q2 net interest margin on credit assets remained solid at 2.71%, up 12 basis points from Q2 last year. I will remind you that NIM is typically a little stronger in Q2 due to favorable seasonality. The benefit of our operating leverage is clear in our numbers. Adjusted or core net income meaningfully outpaced growth in both credit assets and revenue at 45%.

Speaker #2: As we increasingly benefit from the operating leverage inherent in our business model, we again achieved new records for credit assets and revenue, which were up 25% and 27% year over year, respectively.

Speaker #2: And we once again saw strong sequential growth with increases of 6% and 5%. Q2 net interest margin on credit assets remained solid at 2.71%, up 12 basis points from Q2 last year.

Speaker #2: I'll remind you that NIM is typically a little stronger in Q2 due to favorable seasonality. The benefit of our operating leverage is clear in our numbers.

Speaker #2: Adjusted, or core, net income meaningfully outpaced growth in both credit assets and revenue at 45%. I will add that we once again achieved these metrics with significantly higher-than-typical levels of liquidity at this early point in our expansion in the U.S.

David Taylor: I will add that we once again achieved these metrics with significantly higher than typical levels of liquidity at this early point in our expansion in the US. Growth in credit assets was again driven by continued momentum in our US SRP program, which saw another $150 million in new fundings alongside steady incremental growth in Canada. A reminder here is that the Q2 typically sees lower fundings than the other quarters due to some seasonality in the business, and $150 was in line with our budget. Again, this quarter, the vast majority of our additional fundings in the US were through our homegrown higher spread SRP as demand continues to exceed our expectations.

Speaker #2: Growth in credit assets was again driven by continued momentum in our US SRP program, which saw another $150 million in new fundings, alongside steady incremental growth in Canada.

Speaker #2: A reminder here is that the second quarter typically sees lower fundings than the other quarters due to some seasonality in the business. And the $150 was in line with our budget.

Speaker #2: Again, this quarter the vast majority of our additional fundings in the US were through our homegrown higher spread SRP as demand continues to exceed our expectations.

Speaker #2: With the continued ramp we expect throughout the remainder of the year, we can potentially choose not to augment the $150 million of higher-margin core SRP with securitized SRP, in order to maximize the margin for the year.

David Taylor: With the continued ramp we expect throughout the remainder of the year, we intentionally chose not to augment the CAD 150 million of higher margin core SRP with securitized SRP to maximize the margin for the year. As per our model, the efficiency of our US operations again improved sequentially, improving from 41% in Q1 to 37% in Q2, and keeping us on target for our goal by year-end to be in the low 20s, meaning CAD 0.80 of every dollar of revenue is dropping to the bottom line. Feedback from our partners continues to confirm what we knew when we entered the US market, that our SRP is a uniquely attractive funding solution for point-of-sale finance companies. Reliable, efficient, and economical.

Speaker #2: As per our model, the efficiency of our US operations again improved sequentially, improving from 41% in Q1 to 37% in Q2 and keeping us on target for our goal by year-end to be in the low 20s.

Speaker #2: Meaning 80 cents of every dollar of revenue is dropping to the bottom line. Feedback from our partners continues to confirm what we knew when we entered the US market, that our SRP is a uniquely attractive funding solution for point-of-sale finance companies—reliable, efficient, and economical.

Speaker #2: That said, we are in the precipice of taking our SRP to an entirely new level through an AI-enabled tech advancement that will enable our partners to more efficiently and cost-effectively finance their loans.

David Taylor: That said, we are on the precipice of taking our SRP to an entirely new level through an AI-enabled tech advancement that will enable our partners to more efficiently and cost-effectively finance their loans. Instead of our partners having to accumulate, warehouse, and batch their loans over a period of time, typically as much as 30 days or more, these loans can now be funded individually as they are made. This effectively eliminates the need for our partners to warehouse multiple receivables over a period of time. That is, they can finance individual loans within just a few hours, reducing the overall financing costs and the need for warehouse financing.

Speaker #2: Instead of our partners having to accumulate warehouse and batch their loans over a period of time, typically as much as 30 days or more, these loans can now be funded individually as they are made.

Speaker #2: This effectively eliminates the need for our partners to warehouse multiple receivables over a period of time. That is, they can finance individual loans within just a few hours, reducing the overall financing costs and the need for warehouse financing.

Speaker #2: I will note that as with all our technical advances, our real-time SRP capability further strengthens our risk mitigation through evaluation of partner loans underlying the SRP receivables on an individual basis and, of course, as the name says, in real-time.

David Taylor: I will note that as with all our tech advances, our real-time SRP capability further strengthens our risk mitigation through evaluation of partner loans underlying the SRP receivables on an individual basis, and of course, as the name says, in real time. We are currently engaged in a pilot for our real-time SRP solutions with one of our major SRP partners, Financeit, whose CEO, Casper Wong, someone we have worked with in the point-of-sale industry for years, calls it a game changer. We are targeting broad rollout in the coming months, and I can tell you that our other partners are chomping at the bit to get on board. I'd now like to turn the call over to Nico to review the financial results in detail. Nico?

Speaker #2: We are currently engaged in a pilot for our real-time SRP solutions with one of our major SRP partners. Finance it. Whose CEO, Casper Wang, someone we have worked with in the point-of-sale industry for years, called it a game changer.

Speaker #2: We are targeting a broad rollout in the coming months, and I can tell you that our other partners are chomping at the bit to get on board.

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

Speaker #3: Thanks, David. I am very excited to report another successful quarter for our bank. Before I begin, I will remind you that our full financial statements and our MDNA for the second quarter are available on our website under investor section as well as on Cedar and Edgar.

Nicolás Ospina: Thanks, David. I am very excited to report another successful quarter for our bank. Before I begin, I will remind you that our full financial statements and our MD&A for Q2 are available on our website under Investors 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. Okay, starting with our balance sheet. Total assets at the end of Q2 of fiscal 2026 grew 28% year-over-year and 5% sequentially to a new high of over CAD 6.4 billion. Cash and securities were CAD 674 million, or 10% of our total assets. That's down slightly compared to the end of Q1 2026. I will reiterate here David's earlier comment about this being higher than our historical levels of around 7% as a result of our entry into the United States.

Speaker #3: All of the following numbers are reported in Canadian dollars as per our financial statements, unless otherwise noted. Okay, starting with our balance sheet. Total assets at the end of the second quarter of fiscal 2026 grew 28% year-over-year and 5% sequentially to a new high of over $6.4 billion.

Speaker #3: Cash and securities were $674 million, or 10% of our total assets. That's down slightly compared to the end of Q1 2026. I will reiterate here David's earlier comment about this being higher than our historical levels of around 7%.

Speaker #3: As a result of our entry into the United States, book value per share increased to another record of $17.15. Our CET1 ratio was 12.3%, and our leverage ratio was 7.9%.

Nicolás Ospina: Book value per share increased to another record of CAD 17.15. Our CET1 ratio was 12.3%, and our leverage ratio was 7.9%, both meaningful down year-over-year and remaining comfortably above our internal targets. That year-over-year change is mainly due to putting capital to work for growth in the US SRP portfolio following our capital raise in December 2024. Now, our strong growth in assets, along with continued healthy net interest margin, drove total consolidated revenue to a record of CAD 38.3 million. That's up 27% year-over-year and 5% sequentially. Consolidated non-interest expenses, excluding the one-time costs associated with the reorganization and the non-cash expense resulting from the sale of our sole physical bank branch, were CAD 20.8 million, compared to CAD 16.6 million in Q2 last year and CAD 19 million for Q1. Including this cost, non-interest expenses for Q2 were CAD 27.5 million.

Speaker #3: Both meaningful down year-over-year and reminding comfortably above our internal targets. That year-over-year change is mainly due to the putting capital to work for growth in the US SRP portfolio, following our capital raise in December 2024.

Speaker #3: Now, our strong growth in assets along with continued healthy net interest margin dropped total consolidated revenue to a record of $38.3 million. That's up 27% year-over-year and 5% sequentially.

Speaker #3: Consolidated non-interest expenses excluding the one-time cost associated with the reorganization and the non-cash expense resulting from the sale of our sole physical bank branch were $20.8 million, compared to $16.6 million in Q2 last year and $19 million for Q1.

Speaker #3: Including these costs, non-interest expenses for Q2 were $27.5 million. As David noted, non-interest expenses for Q2 also included $600,000 in legal costs related to the commercialization of real bank tokenized deposits.

Nicolás Ospina: As David noted, non-interest expenses for Q2 also including CAD 600,000 in legal costs related to the commercialization of RealBank Deposit Tokens. As a reminder, DRT Cyber expenses are included in the consolidated non-interest expenses and totaled CAD 2.5 million for the quarter, more or less in line with last year. Reported net income was CAD 7.5 million, and consolidated earnings per share was CAD 0.23. Excluding the one-time cost mentioned previously, consolidated adjusted net income was CAD 12.4 million, or CAD 0.39 per share, with adjusted net income increasing 35% year over year and 2% sequentially. Again, this included approximately CAD 600,000 in tokenized deposit commercialization costs. Looking at the income statement on a segmented basis, revenue for the Canadian banking operations was CAD 28.1 million, up 10% year over year and 2% sequentially.

Speaker #3: As a reminder, DRT Cyber expenses are included in the consolidated non-interest expenses. And total $2.5 million for the quarter. More or less, in line with last year.

Speaker #3: Reported net income was $7.5 million and consolidated earnings per share was $23 cents. Excluding the one-time costs mentioned in previously, consolidated adjusted net income was $12.4 million, or $39 cents per share.

Speaker #3: With adjusted net income increasing 35% year-over-year and 2% sequentially. Again, this included approximately $600,000 in tokenized deposit commercialization costs. Now, looking at the income statement on a segmented basis, revenue for the Canadian banking operations was $28.1 million, up 10% year-over-year and 2% sequentially.

Speaker #3: I will remind you that the bank's corporate expenses flowed through the Canadian banking digital segment. And as a result, reported net income includes those reorganization costs and the intangible asset write-off.

Nicolás Ospina: I will remind you that the bank's corporate expenses flow through the Canadian banking digital segment, and as a result, reported net income includes those reorganization costs and the intangible asset write-off. Net income was CAD 4.1 million. However, that number is dampened by the CAD 4.9 million after-tax impact of the one-time cost associated with the reorganization and the non-cash expense resulting from the sale of the branch I described earlier. Revenue for the US banking operations was CAD 7.9 million, a 17% increase sequentially, primarily due to the ramp-up in the US SRP. That drove a 28% increase in net income sequentially to CAD 3.6 million, as we see the US operating leverage take effect. Digital media revenue was CAD 749,000, with net income of CAD 351,000, driven by higher client engagements and lower operating expenses. Within DRTC, the cybersecurity service component generated revenue of CAD 1.9 million, level with Q2 of last year.

Speaker #3: Net income was $4.1 million. However, that number is dampened by the $4.9 million after-tax impact of the one-time costs associated with the reorganization and the non-cash expense resulting from the sale of the branch I described earlier.

Speaker #3: Revenue for the US banking operations was $7.9 million. A 17% increase sequentially, primarily due to the ramp-up in the US SRP. That drove a 28% increase in net income sequentially to $3.6 million, as we see the US operating leverage take effect.

Nicolás Ospina: Revenue for the US banking operations was CAD 7.9 million, a 17% increase sequentially, primarily due to the ramp-up in the US SRP. That drove a 28% increase in net income sequentially to CAD 3.6 million, as we see the US operating leverage take effect. Digital media revenue was CAD 749,000, with net income of CAD 351,000, driven by higher client engagements and lower operating expenses. Within DRTC, the cybersecurity service component generated revenue of CAD 1.9 million, level with Q2 of last year.

Speaker #3: Digital meteor revenue was $749,000, with net income of $351,000, driven by higher client engagements and lower operating expenses. Within DRTC, the cybersecurity service component generated revenue of $1.9 million, level with Q2 of last year.

Speaker #3: Net loss was $508,000 compared to net loss of $652,000 last year. Our credit asset portfolio grew to a new record of just shy of $5.7 billion at the end of Q2.

Nicolás Ospina: Net loss was CAD 508,000 compared to net loss of CAD 652,000 last year. Our credit asset portfolio grew to a new record of just shy of CAD 5.7 billion at the end of Q2, driven again by our structured receivable program, which increased 32% year-over-year and 7% sequentially to CAD 4.7 billion. Our SRP portfolio represented 83% of our total credit asset at the end of Q2. That's level with Q1. Our multifamily residential loan and other portfolio increased 2% year-over-year and 6% sequentially to CAD 1 billion. As we continue to transition some of our higher risk-weighted to lower risk-weighted multifamily residential loans as part of the bank's strategy to capitalize on opportunities for lower risk-weighted credit assets with high return on capital and continued growth in the SRP portfolio.

Speaker #3: Driven again by our structured receivable program, which increased 32% year-over-year and 7% sequentially to $4.7 billion. Our SRP portfolio represented 83% of our total credit assets at the end of Q2.

Speaker #3: That's level with Q1. Our multifamily residential loan and other portfolio increased 2% year-over-year and 6% sequentially to $1 billion. As we continue to transition some of our higher risk-weighted to lower risk-weighted multifamily residential loans, as part of the bank's strategy to capitalize on opportunities for lower risk-weighted credit assets with higher return on capital and continue growth in the SRP portfolio.

Speaker #3: As a reminder, our multifamily residential loans and other portfolios' primary business-to-business mortgages and construction loans for residential properties. We have very little exposure to commercial-use properties, and our conservative underwriting and diversified lending strategy provides insulation from the particular challenging real estate markets in Greater Toronto area and other major centers in Canada.

Nicolás Ospina: 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, and our conservative underwriting and diversified lending strategy provides insulation from the particularly challenging real estate markets in Greater Toronto area and other major centers in Canada. Now, turning to the income statement for our digital banking operations, net interest margin on credit assets, that is excluding cash and securities, was 2.71%. That was 12 basis points or 5% higher on a year-over-year basis. As David noted, our Q2 net interest margin are seasonally stronger due to fewer days in the quarter. Overall net interest margin, including the impact of cash and securities and other assets, was 2.33%, an increase of 4 basis points year over year.

Speaker #3: Now, turning to the income statement for our digital banking operations, net interest margin on credit assets—that is, excluding cash and securities—was 2.71%. That was 12 basis points, or 5% higher on a year-over-year basis.

Speaker #3: As David noted, our Q2 net interest margin on seasonally stronger due to fewer days in the quarter. Overall net interest margin, including the impact of cash and securities and other assets, was 2.33%, an increase of 4 basis points year-over-year.

Speaker #3: Overall, net interest margin was again somewhat dampened by our higher-than-typical cash balances. This still remained among the highest of the publicly traded Canadian federally licensed banks.

Nicolás Ospina: Overall net interest margin was again somewhat dampened by our higher than typical cash balances. This still remains among the highest of the publicly traded Canadian federally licensed banks. Our provision for credit losses in Q2 continued to be de minimis as a percentage of average credit assets at 3 basis points. This was down from 5 basis points in Q1, primarily due to changes in the forward-looking information used by the bank in its credit risk models. I will now turn the call back to David for some closing remarks. David?

Speaker #3: Finally, our provision for credit losses in Q2 continued to be the minimum, as a percentage of average credit assets, at 3 basis points. This was down from 5 basis points in Q1.

Speaker #3: Primarily due to changes in the forward-looking information used by the bank in its credit risk models. I will now turn the call back to David for some closing remarks.

Speaker #3: David?

Speaker #2: Thanks, Nico. The first half of fiscal 2026 has unfolded very much as planned for our core digital banking operations, with additional strong progress on several of the initiatives that we expect will drive meaningful incremental shareholder value.

David Taylor: Thanks, Nico. The H1 of fiscal 2026 has unfolded very much on plan for our core digital banking operations, with additional strong progress on several other initiatives that we expect will drive meaningful incremental shareholder value. Accordingly, our very positive outlook for the remainder of 2026 remains firmly intact. In fact, we now see potential additional earnings upside this year. We have a strong momentum in credit asset growth. We remain on track to achieve our target of at least $1 billion in US SRP additions. Our US banking operations are already generating more than 20% of our total revenue. A quick note on Canada. Our SRP continues to be resilient in the face of sluggish Canadian economy. In fact, just last week, it was reported that Canada had slipped into a technical recession.

Speaker #2: Accordingly, our very positive outlook for the remainder of 2026 remains firmly intact. In fact, we now see potential additional earnings upside this year. We have strong momentum in credit asset growth.

Speaker #2: We remain on track to achieve our target of at least $1 billion in US SRP additions. Our US banking operations are already generating more than 20% of our total revenue.

Speaker #2: A quick note on Canada. Our SRP continues to be resilient in the face of sluggish Canadian economy. In fact, just last week, it was reported that Canada had slipped into a technical recession.

Speaker #2: This resiliency is very much the result of our focus on the home HVAC and renovation space, as well as our intentional strategy to partner with only the best point-of-sale lenders in the country.

David Taylor: This resiliency is very much the result of our focus on home, HVAC, and renovation space, as well as our intentional strategy to partner with only the best point-of-sale lenders in the country. I am pleased to report that just last week, we added a new partner who is very well-known name in the consumer auto sales space. The planned rollout of our real-time funding capability in the coming months is expected to drive significant additional growth with both existing and new clients. While we had initially expected growth in our Canadian SRP of low to mid-single digits in 2026, we are now potentially looking at something meaningfully higher. Moreover, in both Canada and United States, we believe that our real-time funding capabilities could capture significant share from securitization markets.

Speaker #2: And I am pleased to report that just last week, we added a new partner who is very well-known name in the consumer auto sales space.

Speaker #2: The planned rollout of our real-time funding capability in the coming months is expected to drive significant additional growth with both existing and new clients.

Speaker #2: So while we had initially expected growth in our Canadian SRP of low to mid-single digits in 2026, we are now potentially looking at something meaningfully higher.

Speaker #2: Moreover, in both Canada and the United States, we believe that our real-time funding capabilities could capture significant share from securitization markets. Certainly, earlier discussions we have had with partners and prospective partners in the market have been very encouraging in this regard.

David Taylor: Certainly, earlier discussions we have had with partners and prospective partners in the market have been very encouraging in this regard. The H2 outlook for net interest margins also remains favorable. We expect NIM to be relatively consistent with the start of this year with some potential upside. We continue to expect core 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 are incurred by our cybersecurity business that we are in the process of divesting. As noted earlier, we have sold our sole physical bank branch that we acquired as part of our entry into United States in 2024. While the financial impact of the sale is de minimis, I will note that it will result in cost savings of approximately $900,000 or CAD 1.2 million.

Speaker #2: The second-half outlook for net interest margins also remains favorable. We expect NIM to be relatively consistent with the start of this year, with some potential upside.

Speaker #2: We continue to expect core 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 costs are incurred by our cybersecurity business, which we are in the process of divesting.

Speaker #2: As noted earlier, we have sold our sole physical bank branch that we acquired as part of our entry into the United States in 2024.

Speaker #2: While the financial impact of the sale is de minimis, I will note that it will result in cost savings of approximately US dollars 900,000 or Canadian 1.2 million.

Speaker #2: Now, onto the initiatives that we expect to drive additional value beyond the expected strong growth in our digital banking operations. As I mentioned at the outset, we have publicly filed our S4 for the reorganization.

David Taylor: Now, on to the initiatives that we expect to drive additional value beyond the expected strong growth in our digital banking operations. As I mentioned at the outset, we have publicly filed our S-4 for the reorganization. It details our plan to realign our corporate structure to that of the standard US bank framework with the creation of a US domiciled holding company, Versa Bancorp, which becomes the parent of each of our Canadian and US operations. The S-4 has been confidentially reviewed and remains subject to additional review by SEC prior to being declared effective by the SEC. We intend to move forward with the shareholders' matters expeditiously in tandem with the other regulatory processes. As this initiative has protracted, so have the costs, and I will note here that expect to incur an additional CAD 2.5 million in costs in Q3.

Speaker #2: It details our plan to realign our corporate structure to that of the standard U.S. bank framework, with the creation of a U.S.-domiciled holding company.

Speaker #2: VersaBank Corp. Which becomes the parent of each of our Canadian and US operations. The S4 has been confidentially reviewed and remains subject to additional review by SEC prior to being declared effective by the SEC.

Speaker #2: We intend to move forward with the shareholders' matters expeditiously in tandem with the other regulatory processes. As this initiative has protracted, so have the costs, and I will note here that expect to incur an additional 2.5 million in costs in Q3.

Speaker #2: We remain confident that the benefits in terms of shareholder value created by this initiative will far outweigh the investment we have made over the past year or so.

David Taylor: We remain confident that the benefits in terms of shareholder value created by this initiative will far outweigh the investment we have made over the past year or so. At the end of the day, the cost of reorganization is an investment in the future shareholder value. Our multiple paths to commercialization of our digital asset technology are increasingly coming into focus, and they are expanding with new opportunities emerging as both the unique advantages of our VersaVault technology, combined with our status as a nationally federally licensed bank in both Canada and the United States becoming more widely recognized. We are now generating incremental revenue from both stablecoin custody services for QCAD, Canada's first regulatory compliant stablecoin.

Speaker #2: At the end of the day, the cost of reorganization is an investment in the future shareholder value. Our multiple paths to commercialization of our digital asset technology are increasingly becoming into focus.

Speaker #2: And they are expanding, with new opportunities emerging as both the unique advantages of our versatile technology, combined with our status as a nationally, federally licensed bank in both Canada and the United States, are becoming more widely recognized.

Speaker #2: We are now generating incremental revenue from both stablecoin custody services for QCAT, Canada's first regulatory compliant stablecoin, our customer stable corp when investors include Circle and Kraken, is highly respected in the industry and are rapidly moving their business plan forward with a listing on Kraken and announcement of the first on-chain Canadian US dollar settlement with QCAT on Circle's stable FX.

David Taylor: Our customer, Stablecorp, who investors include Circle and Kraken, is highly respected in the industry and are rapidly moving their business plan forward with a listing on Kraken and announcement of the first on-chain Canadian US dollar settlement with QCAD on Circle's StableFX. We are proud that our proprietary VersaVault technology is playing a critical role here. This is really just the proverbial tip of the iceberg for our technology. The industry is moving very quickly. We are leaders in the space, and the market is increasingly recognizing the undeniable advantage of working with a nationally licensed bank. Increasingly, we are seeing new opportunities emerge on the stablecoin side of things. These are distinct from, but complementary to the multiple opportunities we have around tokenized deposits.

Speaker #2: We are proud that our proprietary versatile technology is playing a critical role here. But this is really just the proverbial tip of the iceberg.

Speaker #2: For our technology, the industry is moving very quickly. We are leaders in the space, and the market is increasingly organizing the undeniable advantage of working with a nationally licensed bank.

Speaker #2: Increasingly, we are seeing new opportunities emerge on the stablecoin side of things. These are distinct from, but complementary to, the multiple opportunities we have around tokenized deposits.

Speaker #2: We have developed our technology and formulated commercial strategies in the context of the evolving regulatory environment and as a national federally licensed bank in both the United States and Canada with market-ready technology, we are uniquely positioned to capitalize.

David Taylor: We have developed our technology and formulated commercial strategies in the context of the evolving regulatory environment, and as a national federally licensed bank in both the United States and Canada with market-ready technology, we are uniquely positioned to capitalize. With that, I'd like to open up the call to questions. Operator?

Speaker #2: With that, I'd like to open up the call to questions. Operator?

Speaker #1: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touch-tone phone.

Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the 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 star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Joe Yanchunis with Raymond James. Your line is now open.

Speaker #1: You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two.

Speaker #1: If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Joyan Tunis with Raymond James.

Speaker #1: Your line is now open.

Speaker #3: Good morning.

Joseph Yanchunis: Good morning.

Joe Yanchunis: Good morning.

Speaker #4: Good morning, Joy.

David Taylor: Good morning, Joe.

Speaker #3: So you've now been receiving the QCAD deposits under the stable corp relationship. Can you provide any color on the current level of deposits? How bounces have trended since launch?

Joseph Yanchunis: You've now been receiving the QCAD deposits under the Stablecorp relationship. Can you provide any color on the current level of deposits, how balances have trended since launch, and what milestone should we watch for to gain adoption or to gauge adoption over the coming, call it six to 12 months?

Joe Yanchunis: You've now been receiving the QCAD deposits under the Stablecorp relationship. Can you provide any color on the current level of deposits, how balances have trended since launch, and what milestone should we watch for to gain adoption or to gauge adoption over the coming, call it six to 12 months?

Speaker #3: And what milestone should we watch for to gain adoption, or to gauge adoption, over the coming, call it, six to twelve months?

Speaker #4: Well, it's in a today, I think the balance is only in the 7, 800,000 range. Canadian. And I think the impetus for that those balances to increase substantially into the millions is a use case for the QCAD and I think the most we press release this before we think the most apparent use case is facilitating a seamless foreign exchange with a stablecoin in the United States.

David Taylor: Well, today I think the balances are only in the CAD 700,000, CAD 800,000 range Canadian. I think the impetus for those balances to increase substantially into the millions is a use case for the QCAD. I think most, and we pressed release this before, we think the most apparent use case is facilitating a seamless foreign exchange with a stablecoin in the United States, a US stablecoin versus a Canadian stablecoin. I know that's in the works. I know that's what folks are looking at because that's a natural application for these stablecoins. Of course, we're operating as a federal bank on both sides of the border, so we're keenly interested in that happening.

Speaker #4: A US stablecoin versus a Canadian stablecoin. And I know that's in the works. I know that's what folks are looking at because that's a natural application for these stablecoins.

Speaker #4: And of course, we’re operating as a federal bank on both sides of the border, so we’re keenly interested in that happening.

Speaker #3: Okay. And then kind of sticking with the digital asset, there's been a lot of regulatory talk about the clarity act in the US now that that's left committee.

Joseph Yanchunis: Okay. Kind of sticking with the digital asset theme, there's been a lot of regulatory talk about the CLARITY Act in the US. Now that that's left committee, how has your view changed regarding the timing of commercialization for your RealBank tokenized deposits? Can you remind us what are some of the key remaining milestones from a regulatory perspective?

Joe Yanchunis: Okay. Kind of sticking with the digital asset theme, there's been a lot of regulatory talk about the CLARITY Act in the US. Now that that's left committee, how has your view changed regarding the timing of commercialization for your RealBank tokenized deposits? Can you remind us what are some of the key remaining milestones from a regulatory perspective?

Speaker #3: How is your view changed regarding the timing of commercialization for your real bank tokenized deposits? And can you remind us what are some of the key remaining milestones?

Speaker #3: From a regulatory perspective?

Speaker #4: Well, first of all, the junior cycle and clarity act won't at this point apply to us in that they're not in place yet. And we're operating as a national bank in the United States.

David Taylor: Well, first of all, the GENIUS Act and CLARITY Act don't, at this point, apply to us in that they're not in place yet, and we're operating as a national bank in the United States. That is not an impediment for us. However, it may turn out. Eventually, if it does come into play, our bank will comply. Presently, we're operating it as we were always able to as a national bank. That's not an impediment at all to us launching. One of the things we were looking for was the FDIC to confirm the digital representations that deposits would indeed be insured, and they have. Right now, Joe, we're actually working with partners on the rollout.

Speaker #4: So that is not an impediment for us. However, it may turn out. Eventually, if it does come into play, our bank will comply. But presently, we're operating as we are always able to as a national bank.

Speaker #4: So that's not an impediment at all to us launching one of the things we were looking for was the FDIC to confirm that digital representations of deposits would indeed be insured.

Speaker #4: And they have. So that was a big deal. So right now, Joy, we're actually working with partners on the rollout. Technology is built, we're just working with some partners to be able to start pushing money through on a pilot project.

David Taylor: Technology's built, we're just working with some partners to be able to start pushing money through on a pilot project. I expect, as it did in Canada, it will work wonderfully, and then we'll roll it out. No legal impediments, no impediments with respect to FDIC insurance, and the technology is all built and tested in Canada. We're just working with some partners that I'm sure everybody will recognize their names when we roll it out.

Speaker #4: And I expect, as it did in Canada, it will work wonderfully. And then we'll roll it out. So, no legal impediments, no impediments with respect to FDIC insurance.

Speaker #4: And technology is all built and tested in Canada. And we're just working with some partners that I'm sure everybody will recognize their names when we roll it out.

Speaker #3: So I believe you were waiting on a non-objection letter from US regulators? Has that come through? Is that what I'm to understand from that answer?

Joseph Yanchunis: I believe you were waiting on a non-objection letter from US regulators. Has that come through? Is that what I'm to understand from that answer?

Joe Yanchunis: I believe you were waiting on a non-objection letter from US regulators. Has that come through? Is that what I'm to understand from that answer?

Speaker #4: No, no. We wouldn't ask for the non-objection when we're until we're ready to commercialize and have partners lined up on the other side. So that's a step, of course.

David Taylor: No. We wouldn't ask for the non-objection until we're ready to commercialize and have partners lined up on the other side. That's a step, of course. Yes, we will ask for a non-objection when we're ready to roll it out with one of the, or a few large partners.

Speaker #4: And yes, we'll ask for non-objection when we're ready to roll it out with one of the or a few large partners.

Speaker #3: Okay. So in that process, the remaining steps are to get the system in pilot in place with the partners, then you ask and hopefully receive the non-objection from regulators, and then you proceed with commercialization.

Joseph Yanchunis: Okay. In that process, the remaining steps are to get the system and pilot in place with the partners, then you ask and hopefully receive non-objection from regulators, and then you proceed with commercialization. Is that the right steps or am I missing something?

Joe Yanchunis: Okay. In that process, the remaining steps are to get the system and pilot in place with the partners, then you ask and hopefully receive non-objection from regulators, and then you proceed with commercialization. Is that the right steps or am I missing something?

Speaker #3: Are those the right steps, or am I missing something?

David Taylor: Yeah. If you thought of it that way, the gating item is finding suitable partners, and I think we have a few lined up that are keen to do this with us. Once we have the suitable partners, then we'll push token amounts of money through the system and demonstrate to the regulators on the south side of the border that it all works fine, just as it did on the north side of the border when we first pushed out deposit tokens. Yeah.

Speaker #4: Yeah. Yeah. If you thought of it that way, to gaining item is finding suitable partners. And I think we have a few lined up to look keen to do this with us.

Speaker #4: So once we have the suitable partners, then we'll push token amounts of money through the system and demonstrate to the regulators on the south side of the border that it all works fine, just as it did on the north side of the border when we first pushed out deposit tokens.

Speaker #4: Yeah. So.

Joseph Yanchunis: Would that be different than the pilot program to test the plumbing that you announced last year? I think it was last September.

Joe Yanchunis: Would that be different than the pilot program to test the plumbing that you announced last year? I think it was last September.

Speaker #3: Would that be different than the pilot program to test the plumbing that you announced last year? I think it was, like, last September.

Speaker #4: We haven't got established a US partner so we've had to sort of simulate that for the pilot project. And we actually did that in Canada, too, simulated partners.

David Taylor: We haven't established a US partner. We've had to sort of simulate that for the pilot project, and we actually did that in Canada too, with simulated partners. We need real live investment banking firms or others that are in that business to hitch up with us so that that's when the commercialization starts. We need a distribution channel. Our modus operandi is not to go direct to the public. We always go through somebody else that already has the relationship.

Speaker #4: But we need real live investment banking firms or others that are in that business to sort of hitch up with us so that that's when the commercialization starts.

Speaker #4: We needed a distribution channel. Our bonus apprendi is not to go direct to the public. We always go through somebody else that always already has the relationship.

Speaker #3: And do you have a sense for how long that pilot program would need to take?

Joseph Yanchunis: Do you have a sense for how long that pilot program would need to take?

Joe Yanchunis: Do you have a sense for how long that pilot program would need to take?

Speaker #4: Oh, considering we did it once before in Canada, we've done it with simulations here in the States, I wouldn't think more than a month.

David Taylor: Oh, considering we did it once before in Canada, we've done it with simulations here in the States, I wouldn't think more than a month.

Speaker #3: Okay, perfect. And then one more from me here, kind of shifting gears. So, given the expected continued growth of the U.S. SRP portfolio, and the recently renewed share repurchase program, how are you thinking about capital deployment from here?

Joseph Yanchunis: Okay, perfect. Then one more from me here, kind of shifting gears. Given the expected continued growth of the US SRP portfolio, in the recently renewed share repurchase program, how are you thinking about capital deployment from here? More specifically, do you believe your current capital levels are sufficient to fund your organic growth plans while maintaining flexibility for share repurchases? Should investors expect additional capital optimization initiatives over time? I mean, if you could just provide some color and thoughts on your capital levels, that'd be helpful.

Joe Yanchunis: Okay, perfect. Then one more from me here, kind of shifting gears. Given the expected continued growth of the US SRP portfolio, in the recently renewed share repurchase program, how are you thinking about capital deployment from here? More specifically, do you believe your current capital levels are sufficient to fund your organic growth plans while maintaining flexibility for share repurchases? Should investors expect additional capital optimization initiatives over time? I mean, if you could just provide some color and thoughts on your capital levels, that'd be helpful.

Speaker #3: And more specifically, do you believe your current capital levels are sufficient to fund your organic growth plans while maintaining flexibility for share repurchases? Or should investors expect additional capital optimization initiatives over time?

Speaker #3: I mean, if you could just provide some thoughts on your capital levels, that would be helpful.

Speaker #4: Yeah. The capital levels that we presently have are we can achieve our budget. And I think we publicly stated that we're looking for about a billion dollars in additional SRP in the United States.

David Taylor: At the capital levels that we presently have, we can achieve our budget, and I think we publicly stated that we are looking for about CAD 1 billion in additional SRP in the United States. We have sufficient capital to do that and more. Just a little bit of a warning, it is kind of a good thing, is when we announce the real-time purchase of receivables, there's a huge amount of enthusiasm for that product. There's an avalanche of deals likely to come our way. That could soak up our capital pretty rapidly. We are talking billions and billions could easily flow in. The idea of being able to purchase the loans and leases, or at least what we call it, invest in the cash flow derived from the loans and leases virtually real-time is a tremendous breakthrough.

Speaker #4: So we have sufficient capital to do that. And more. But just a little bit of a warning. It's kind of a good thing is when we announced the real-time purchase of receivables, this huge amount of enthusiasm for that product.

Speaker #4: There's an avalanche of deals likely to come our way, and that could soak up our capital pretty rapidly. We're talking billions and billions—could easily flow in.

Speaker #4: The idea of being able to purchase the loans and leases or at least what we call it invest in the cash flow derived from the loans and leases virtually real-time is a tremendous breakthrough.

David Taylor: Those that have been content to securitization, batching, taking some time to get their money are eagerly awaiting getting their money right away. That very well could soak up our capital pretty rapidly. I hope it does, because that means that we're making a lot more money.

Speaker #4: Those that are, have been content to securitization batching, taking some time to get their money, are sort of eagerly awaiting getting their money right away.

Speaker #4: So that very well could soak up our capital pretty rapidly. I hope it does. That means that we're making a lot more money.

Speaker #3: Okay, great. I appreciate it. I'll hop back in with you.

Joseph Yanchunis: Okay, great. I appreciate it. I will hop back in with you.

Joe Yanchunis: Okay, great. I appreciate it. I will hop back in with you.

Speaker #4: Thank you, Joe. How's it doing in St. Peter and St. Pete, right?

David Taylor: Thank you, Joe. How's it doing in St. Pete, right?

Joseph Yanchunis: The mosquito eggs have hatched.

Joe Yanchunis: The mosquito eggs have hatched.

Speaker #3: Mosquito eggs have hatched.

Speaker #4: Okay.

David Taylor: Okay.

Speaker #1: Your next question comes from Timothy Switzer with KBW. Your line is now open.

Operator: Your next question comes from Timothy Switzer with KBW. Your line is now open.

Speaker #4: Hi, Tim.

David Taylor: Hi, Tim.

Speaker #3: Hey. Good morning. Taking my question.

Tim Switzer: Hey, good morning. Thank you, my question.

Speaker #4: Do you hear Tim?

David Taylor: Go ahead, Tim.

Speaker #3: Yeah, the first one I have is on the real-time funding capabilities you guys have added and are piloting right now in the SRP program.

Tim Switzer: Yeah, the first one I have is on the real-time funding capabilities you guys have added and are piloting right now in the SRP program. You've mentioned how it can help you acquire new partners who have more specialized financing needs, which I assume refers to replacing their warehouse lines. Have you guys run an analysis that shows how much money this saves them in financing costs over time, or anything like that can help us kind of get an understanding of the value proposition you guys are offering?

Speaker #3: Are you you've mentioned how it can help you acquire new partners. You have more specialized financing needs, which I assume refers to replacing their warehouse lines.

Speaker #3: Have you guys run an analysis that shows how much money this stays them in financing costs over time or anything like that that can help us kind of get an understanding of the value proposition you guys are offering?

Speaker #4: Yes. We have done the analysis. I can't give it to you off the top of my head, but offline, I can give you more precise figures.

David Taylor: Yes, we have run the analysis. I can't give it to you off the top of my head, but offline I can give you more precise figures. Generally speaking, it means that the equity that these point-of-sale companies have is probably cut into about half. The amount of equity they require to run their business and support lines of credit and warehouse facilities is probably about half. The liquidity that they need is down to some tiny fraction because they're getting their cash immediately. The reduction in liquidity and say, on average, cutting their equity in half would mean double the return on equity, and then some on top of that because they don't have all the expenses associated with warehouse receivables and commissions and accounting bills and lawyers' bills and all those things that eat into their profits.

Speaker #4: But generally speaking, it means that the equity that these point-of-sale companies have is probably cut into about half, so the amount of equity they require to run their business and support lines of credit and warehouse facilities is probably about half.

Speaker #4: And the liquidity that they need is down to some tiny fraction, because they're getting their cash immediately. So the reduction in liquidity and, say, on average, cutting their equity in half would mean a doubling of return on equity, and then some on top of that—because they don't have all the expenses associated with warehousing receivables and commissions and accounting bills and lawyers' bills, and all those things that eat into their profit.

Speaker #4: So we help them on both sides. Reduce the amount of equity that they need. Substantially. And we trim back all these miscellaneous expenses they have with having to maintain a certain amount of liquidity to afford the batching.

David Taylor: We help them on both sides reduce the amount of equity that they need substantially, and we trim back all these miscellaneous expenses they have with having to maintain a certain amount of liquidity to afford the batching. It's a hell of a deal. The bottom line is I don't need to be on the phone for more than, let's say two minutes on a point-of-sale partner deal.

Speaker #4: It's a hell of a deal. I mean, I don't need to but bottom line is I don't need to be on the phone for more than let's say two minutes.

Speaker #4: And point-of-sale partner gets it.

Speaker #3: That's great. Good to hear. And then are you guys able to provide a little bit more quantitative guidance in terms of the non-interest expense outlook?

Tim Switzer: That's great. Good to hear. Are you guys able to provide a little bit more quantitative guidance in terms of the non-interest expense outlook how that should trend over the rest of this year on a core basis if we strip out some of the reorganization costs and other things? Are we looking at sticking around the CAD 21 million level, or is it going to go up a little bit from here?

Speaker #3: How should that trend over the rest of this year on a core basis, if we strip out some of the reorganization costs and other things?

Speaker #3: Are we looking at sticking around the 21 million level, or is it going to go up a little bit from here?

Speaker #4: Well, Nico's online. I think, Nico, you're looking around 21 or a little less. Is it a little less you're thinking?

David Taylor: Well, Nico's online. I think, Nico, you're looking around 21 or a little less. Is it a little less you're thinking?

Speaker #5: I'm thinking a little less. Thank you. Thank you, David. We are going on a core basis of around 20. And we can give you a little bit more precise numbers offline.

Nicolás Ospina: I'm thinking a little less. Thank you, David. We are going on a core basis of around 20, and we can give you a little bit more precise numbers offline, but less than 21.

Speaker #5: But less than 21.

Speaker #3: Okay, so it should move lower from Q2. What are the levers you're pulling there?

Tim Switzer: Okay. It should move lower from Q2. What are the levers you're pulling there?

Speaker #5: Well, we have the branch savings. We have coming up some initiatives that we have on optimization of general cost and administrative initiatives that will optimize our expenses at the end of the day.

Nicolás Ospina: Well, we have the branch savings. We have coming up some initiatives that we have on optimization of general cost and administrative initiatives that will optimize our expenses at the end of the day. They're being put in place for the last two quarters, and we expect to see some results in Q3 and Q4.

Speaker #5: They've been put in place for the last two quarters, and we expect to see some results in Q3 and Q4.

Speaker #4: Okay. Even though we allocate a certain amount, we call it sort of non-core expenses, there's still a lot of miscellaneous expenses associated with rolling out United States and this reorganization, travel expenses, hotels.

Tim Switzer: Okay, got it.

David Taylor: Even though we allocate a certain amount, we call it sort of non-core expenses, there is still a lot of miscellaneous expenses associated with rolling out United States and this reorganization. Travel expenses, hotels, all that stuff that is extra associated with the rollouts and the reorganization that don't get precisely allocated to non-core. We also, as Nico's alluding to, we also sold a holding for a branch back to Stearns, and there is a fair amount of savings there, strangely enough, even though it is only one branch. It was at least $900,000 a year on that one branch. Repositioning it back to the previous owner.

Speaker #4: All that stuff that's extra associated with the rollouts and the reorganization. That don't get precisely allocated to non-core. We also, as Nico's alluding to, we also sold a holding-free branch to back to Sterns.

Speaker #4: And there's a fair amount of savings there, strangely enough. Even though it's only one branch, it was at least $900,000 US a year on that one branch repositioning it back to the owner.

Speaker #4: The previous owner.

Speaker #3: Okay. Nice. Yeah. That's some good savings. And then the last one for me, the provision expenses step down a little bit the last two quarters.

Tim Switzer: Nice. Yeah, that's some good savings. The last one for me, the provision expense has stepped down a little bit the last two quarters, especially compared to 2025, and I think a lot of it was kind of driven by growth or provision for the acquired loan book. Where should we expect that to move going forward? Can it stay closer to the current level now?

Speaker #3: Especially compared to '25 and I think a lot of it was kind of driven by growth or provision for the acquired loan book. Where should we expect that to move going forward?

Speaker #3: Can it stay closer to the current level now?

Speaker #4: Yeah. Nico can fill in too. But yeah, that's why I think normally our provisions are very low, minuscule. In that the cash holdbacks that we take to support our SRP program are usually enough to cover off the expected loss provisions.

David Taylor: Yeah. Nico can fill in too, but yeah, that's what I think. Normally, our provisions are very low, minuscule, in that the cash holdbacks that we take to support our SRP program are usually enough to cover off the expected loss provisions. We have somebody else's cash standing in front of losses. That's normally where we run, at just a few basis points. In Canada, we have a residual portfolio of commercial mortgages. That this is usually an interim construction on residential properties. As you know, the Canadian economy is not doing all that well. We have been providing extra ECL on those, although now the portfolio is getting down to quite a small level. That's probably why you're seeing it decline a bit, in that even that residual portfolio seems to be well provided for and doing fairly well despite Canada's technical recession that we're encountering.

Speaker #4: We have somebody else's cash standing in front of losses. So that's normally where we run. It's just a few basis points. In Canada, we have a residual portfolio of commercial mortgages that it's usually an interim construction or residential properties.

Speaker #4: And as you know, the Canadian economy is not doing all that well. So we have been providing extra ECL on those although now the portfolio is getting down to quite a small level.

Speaker #4: So that's probably why you're seeing it decline a bit in that even that residual portfolio seems to be well provided for and doing fairly well despite Canada's technical recession that we're encountering.

Speaker #3: Okay, great. That's all from me. Thank you, David and Nico.

Tim Switzer: Okay, great. That's all for me. Thank you, David and Nico.

Speaker #4: You're very welcome.

David Taylor: You're very welcome.

Speaker #1: Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Ellie Rodney with Bullpen Research.

Operator: Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Eli Rodney with Bullpen Research. Your line is now open.

Speaker #1: Your line is now open.

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

Eli Rodney: Morning, guys, and congrats on the quarter.

Speaker #4: Good morning.

David Taylor: Good morning.

Speaker #6: On the real-time SRP pilot, obviously, it sounds like a fantastic deal for your partners. And you're targeting rollout in the coming months. I just want to put maybe some goalposts around what exactly that means.

Eli Rodney: On the real-time SRP pilot, obviously it sounds like a fantastic deal for your partners, and you're targeting rollout in the coming months. I just want to put maybe some goalposts around what exactly that means. Are you thinking this is a Q3 or Q4 commercialization, or is it more of a fiscal 2027 story?

Speaker #6: Are you thinking this is a Q3 or Q4 commercialization? Or is it more of a fiscal '27 story?

Speaker #4: Well, we're targeting I'll go and be bold here. We're targeting July 1st for the rollout of the commercialization. And our partners are keenly awaiting that, of course, because it's a huge savings for them.

David Taylor: Well, we're targeting, I'm going to be bold here, we're targeting July 1st for the rollout of the commercialization. Our partners are keenly awaiting that, of course, because it's huge savings for them. That's the pin we've got right now, July 1st. The first phase of this program is purchasing or investing in the receivables twice a day, which to our partners is good enough. It could stay like that forever. Twice a day is better than once every month. A huge breakthrough. Going forward, you'll probably see us get down to nanoseconds. I'd like to see it that we are buying them instantaneously and really helping our partners out so that they can do what they do best, i.e. credit adjudication, interfacing with their borrowers, and with wonderful iPad apps and all that stuff. We can be their funder as a real-time.

Speaker #4: So that's the pen we've got right now, July 1st. And the first phase of this program is purchasing or investing in the receivables twice a day.

Speaker #4: Which, to our partners, is good enough. It could stay like that forever. Twice a day is better than once every month. So a huge, huge breakthrough.

Speaker #4: But going forward, you'll probably see us get down to nanoseconds. So I'd like to see it that we are buying them instantaneously. And really helping our partners out so that they can do what they do best, i.e., credit adjudication, interface them with their borrowers, and with wonderful iPad apps and all that stuff.

Speaker #4: And we can be their funder of real-time. Also, it lends itself to the point of sale partners that operate lines of credit. So yeah, July 1st is the date.

David Taylor: It lends itself to the point-of-sale partners that operate lines of credit. Yeah, 1 July is the date. You can hold me to that. I'm holding the rest of my team to that date, too.

Speaker #4: You can hold me to that. I'm holding the rest of my team to that date too.

Speaker #3: Okay, great. And then you highlighted, obviously, that it removes the need for warehouse financing, and there are sort of billions in opportunity there. What's the magnitude, or I guess the pacing of that?

Eli Rodney: Okay, great. You highlighted, obviously it removes the need for warehouse financing, and there's sort of billions in opportunity there. What's the magnitude or, I guess, the pacing of that, assuming you come out in July with this and roll it out broadly, do you expect a wave of sort of new partner announcements to follow in pretty short order?

Speaker #3: Assuming you come out in July with this and roll it out broadly, do you expect a wave of sort of new partner announcements to follow in pretty short order?

Speaker #4: Well, actually, you'll see some new partners come on board because they're kind of waiting for this. But also just the existing partners let's just say we got 50% of their flow right now.

David Taylor: Well, actually, you'll see some new partners come on board, so they're kind of waiting for this. Also, just the existing partners. Let's just say we got 50% of their flow right now. I'd say there's no good reason why we wouldn't get 100%. Some of them are only at a third of their flow. I'd say we get the lion's share. There'd be a lot of growth just due to us taking more market share than signing up new partners. Although we've already just signed a new one in Canada. We've got a bunch going on in the United States too. The real fast growth will come out of just getting more of a bite out of their business, because obviously our product offering is way more attractive than batching them up in receivables and spreadsheets and mailing them in.

Speaker #4: I'd say there's no good reason why we wouldn't get 100%. Some of them were only at a third of their flow. I'd say we get the lion's share.

Speaker #4: So there'll be a lot of growth just due to us taking more market share. Then signing up new partners. Although we've already just signed new one in Canada.

Speaker #4: We've got a bunch going on in the United States too. But the real fast growth will come out just getting more of a bite out of their business because obviously our products are offering is way, way more attractive than batching them up and receivables and spreadsheets and mailing them in.

Speaker #4: I'm exaggerating a little bit. But this is what people dream of. They want to do what they want to do. They want to make the loans.

David Taylor: I'm exaggerating a little bit, but this is what people dream of. They want to do what they want to, they want to make the loans, they want to provide good customer service, they want to provide economical interest rates, and it's our bailiwick says to deliver that to our partners. I'm expecting a big chunk of market share growth, particularly in Canada.

Speaker #4: They want to provide good customer service. They want to provide economical interest rates. And it's our boohoo says to deliver. That's why our partners.

Speaker #4: So I'm expecting a big chunk of market share growth, particularly in Canada.

Speaker #3: Right. That makes sense. With the growth coming initially from growing share with your existing customers, with that said then, with the $1 billion additional US SRP funding target for the year, is the rollout of this real-time program sort of a crucial element of hitting that billion-dollar target?

Eli Rodney: Right. That makes sense, with the growth coming initially from growing share with your existing customers. With that said, with the $1 billion additional US SRP funding target for the year, is the rollout of this real-time program sort of a crucial element of hitting that billion-dollar target, or do you feel confident in hitting that regardless?

Speaker #3: Or do you feel confident in hitting that regardless?

Speaker #4: Regardless. Yeah. We set that target prior to this becoming a reality. So this is all on top of that. And it begs the question, if indeed there is the avalanche that looks like we're seeing, thankfully, we designed our software to be able to share these SRPs with other banks, other community banks, other funds and manage it for them.

David Taylor: Regardless. Yeah. We set that target prior to this becoming a reality, so this is all on top of that, and it begs the question, if indeed there is the avalanche that looks like we're seeing. Thankfully, we designed our software to be able to share these SRPs with other banks, other community banks, other funds, and manage it for them. We designed that originally, and we actually did speak to the regulator about that some time ago, so that if we're overwhelmed with new SRP assets, we can start divvying them up to others that are sitting, waiting with their catching mitts. Others that maybe have an abundance of funding and community banks throughout United States that would like a nice, clean, administered asset for them with almost no loan loss. Well, no loan loss in our histories. Very low risk. Nice yield.

Speaker #4: So we designed that originally. And we actually did speak to the regulator about that some time ago. So that if we do for overwhelm with new SRP assets, we can start divvying them up to others that are sitting waiting with their catching bits.

Speaker #4: Others that maybe have an abundance of funding and community banks throughout the United States that would like a nice clean administered asset for them with almost no loan losses.

Speaker #4: Well, no loan loss in our history. Very low risk. Nice yield. So we're designed to do that. And we probably end up having to do that because they responses have been overwhelmingly enthusiastic.

David Taylor: We're designed to do that, and we'd probably end up having to do that because the response has been overwhelmingly enthusiastic.

Speaker #3: That's interesting. I assume if you're sending that off to if you're at capacity within your own book and then helping other banks or lenders get exposure, I'm assuming you'd take an origination fee on that.

Eli Rodney: That's interesting. I assume if you're at capacity within your own book and then helping other banks or lenders get exposure, I'm assuming you'd take an origination fee on that and maybe some ongoing administration fee. Is that sort of?

Speaker #3: And maybe some ongoing administration fee. Is that sort of?

Speaker #4: Oh, absolutely. Yeah. We manage the cash. We manage the cash holdbacks. We manage the whole thing. This is your classic syndication. And our software was designed to be able to accommodate that.

David Taylor: Absolutely. Yeah. We manage the cash holdbacks. We manage the whole thing. This is your classic syndication, and our software was designed to be able to accommodate that. Now, I think it's nice for diversity for a bank to diversify its funding sources, i.e., with others. It's nice to help the other guys out. A lot of these community banks throughout the States have an established deposit gathering system, and some of them may be struggling to find high-quality assets to invest in, and we're standing ready to help them. It's always been our plan. In fact, in Canada, we've done that from time to time with large exposures too. I designed the software at the very beginning, in 1993, immediately to be able to support syndicating sharing.

Speaker #4: Now, I think that's nice for diversity for a bank to diversify. It's funding sources, i.e., with others. It's nice to help the other guys out.

Speaker #4: A lot of these community banks throughout the states have an established deposit gathering system. And they may some of them may be struggling to find high-quality assets to invest in.

Speaker #4: And we're standing ready to help them. It's always been our plan. In fact, in Canada, we've done that from time to time with large exposures too.

Speaker #4: I designed the software at the very beginning in 1993. Immediately to be able to support syndicating sharing.

Speaker #3: Awesome. And then I guess flipping to that US target. So that leaves roughly $650 million to hit the bill in H2. Obviously, the mix shift has been predominantly SRP versus securitization.

Eli Rodney: Awesome. I guess flipping to that US target, that leaves roughly CAD 650 million to hit the bill in H2. Obviously, the mix shift has been predominantly SRP versus securitization. You made a comment on the beginning of the call that.

Speaker #3: You made a comment on the beginning of the call that you can kind of flex that securitization as needed and given that you're seeing a lot of demand in pipeline for the SRP it's just not needed at this time and obviously the SRP has higher margins.

David Taylor: Yes

David Taylor: Yes.

Eli Rodney: you can kind of flex that securitization as needed, and given that you're seeing a lot of demand and pipeline for the SRP, it's just not needed at this time. Obviously, the SRP has higher margins. Through the back half of the year, is it fair to say that the sort of predominantly SRP growth in the US, it will continue, or will securitization be an important piece as well?

Speaker #3: year, is it fair to say that the sort of predominantly SRP growth in the US will continue or will securitization be an important piece as well?

Speaker #4: Well, I'd say we call it homegrown SRPs, homegrown securitization. I would say right now, that would be predominantly what it is. The purchase securitizations are same sort of credit quality.

David Taylor: Well, we call it homegrown SRP, homegrown securitization. I would say, right now, that would be predominantly what it is. The purchase securitizations are same sort of credit quality, and they come with a lower risk weighting, 20% usually, depending on the bond rating. They're good except for it looks like it'll have work out for us accommodating the demand that the real-time purchase program is bringing in. It may very well be that our original prediction of having, say, CAD 650 of the CAD billion in the homegrown SRP might go higher just because of that demand.

Speaker #4: And the company with a lower risk weighting 20% usually depending on the bond rating. So they're good. Except for it looks like we'll have a work out for us accommodating the demand that the real-time purchase program is bringing in.

Speaker #4: So it may very well be that our original prediction of having, say, $650 million of the $1 billion in the homegrown SRP might go higher, just because of the demand.

Speaker #3: Well, that's exciting. Looking forward to tracking that closely. Last one for me is just kind of a higher-level frame on Canada. Obviously, you mentioned some of the challenges here at home for us and I guess that plays on two fronts for you.

Eli Rodney: Well, that's exciting. Looking forward to tracking that closely. Last one from me is just kind of a higher-level frame on Canada. Obviously, you mentioned some of the challenges here at home for us.

David Taylor: Yeah.

Eli Rodney: I guess that plays on two fronts for you. One being the lending environment. Any additional color you could give there with SRP growth and your ongoing transition to multifamily, CMHC-insured multifamily. Also on the LIT deposit side, that moved quite nicely, higher sequentially.

Speaker #3: One, being the lending environment. So, any additional color you could give there with SRP growth and your ongoing transition to multifamily, CMHC-insured multifamily.

Speaker #3: And then also on the lit deposit side, that moved quite nicely, higher sequentially. And there was recent data with insolvencies kind of around post-2008 highs.

David Taylor: Yeah.

Eli Rodney: There was recent data with insolvencies kind of around post-2008 highs. What are you seeing as far as trajectory on the LIT deposit side as well?

Speaker #3: So, what are you seeing as far as trajectory on the deposit side as well?

Speaker #4: Well, I don't want to boast about it because what it means when our insolvency deposits grows rapidly as they are, it means bad things for Canada and for particularly Canadian consumers having a really rough go.

David Taylor: Well, I don't want to boast about it because what it means when our insolvency deposits grow as rapidly as they are, it means bad things for Canada, for particularly Canadian consumers having a really rough go. For us, that's why we built that program, to be a counterbalance to a recessionary time, and it's doing well. It'll be record high, of course. We're sort of the leading indicator in that the more accounts we open, the empty buckets fill up, and we're opening a lot of accounts now. Yeah, not good for Canada. Years ago, about three or four years ago, if you have a look at my quarterlies, I thought that the GVA Vancouver housing market, Toronto housing market, was too risky a place for us to participate.

Speaker #4: But for us, that was why we that's why we built that program to be a counterbalance to a recessionary time. And it's doing well.

Speaker #4: It'll be record high, of course. It's what the we're sort of a leading indicator in that the more accounts we open, the empty buckets fill up.

Speaker #4: And we're hoping a lot of accounts now. So yeah, not good for Canada. Years ago, I mean, about three or four years ago, you kind of look at my quarterlies.

Speaker #4: I thought that the VTA Vancouver housing market, Toronto housing market, was too risky a place for us to participate. So we, of course, moved out of those two markets.

David Taylor: We, of course, moved out of those two markets, and now there's a collapse of some people say 40% in value. Holy Toledo. That leaves consumers in a really tough spot in that they're looking at double the mortgage payment as the interest rates have gone up, and their house dropped by 40%. Rock and a hard place. Thankfully, a few years back, we pulled out of that. With respect to our SRP program, which is mainly home improvement, HVAC, and insulation, trying to reduce their utility bills by more efficient furnaces and the like. That business is still clicking along. Considering Canada's in a tough spot, I would even expect that to slow right down. The new business, but market share should increase quite dramatically just because the real-time purchase program is so attractive. It's just outstandingly attractive.

Speaker #4: And now there's a collapse of some people say 40% in value. So hold it till later. That leaves consumers in a really tough spot in that they're looking at double the mortgage payment as the interest rates have gone up.

Speaker #4: And their house dropped by 40%. Rock and a hard place. Thankfully, a few years back, we pulled out of that. With respect to our SRP program—which is mainly home improvement, HVAC, and insulation, trying to reduce their utility bills by more efficient furnaces and the like—not businesses—still clicking along.

Speaker #4: But concerning Canada's tough spot, I would even expect that to slow right down. The new business. But market share should increase quite dramatically just because the real-time purchase program is so attractive.

Speaker #4: It's just outstandingly attractive. I've had industry leaders say, "This is a revolution, David." Well, it is. It is indeed a revolution. It's what Boring Cell Companies have dreamed about.

David Taylor: I've had industry leaders say, "This is a revolution, David." Well, it is. It is indeed a revolution. It's what point-of-sale companies have dreamed about. It's made possible by using AI. Folks, I'm sure that you here have heard a lot about AI and what it can do for banking industry. This is a real-time application of AI. You couldn't possibly assimilate that data with the humans. We have some really smart, sharp humans. Nobody can do it anywhere near as fast as our AI model. We built it ourselves, of course, about three years back we did it. In Canada, holy smokes. I'm not very pleased about what's going on in the GTA and GVA. Really feel sorry for people. From our perspective, we'll just take some market share, and we'll be growing probably fast than we've ever grown.

Speaker #4: And it's made possible by using AI. Folks I'm sure on the video here have heard a lot about AI. And what it can do for banking industry.

Speaker #4: So this is a real-time application of AI you couldn't possibly assimilate that data with the humans. We have some really smart sharp humans. We're using the data but nobody can do it anywhere near as fast as our AI model.

Speaker #4: And we built it ourselves, of course. About three years back, three years back, we did it. So in Canada, holy smokes, I'm not very pleased about what's going on in the GTA and VTA.

Speaker #4: I really feel sorry for people. But from our perspective, we'll just take some market share. And we'll be going probably fast than we've ever gone.

Speaker #3: Great. I'll leave it there. Thanks for taking my questions.

Eli Rodney: Great. I'll leave it there. Thanks for taking my questions.

Speaker #4: Well, thank you. Thank you. Sorry. And on a sad note, they're Canadians. Hopefully, there's light at the end of the tunnel. But it's a rough, rough time when your house has dropped in value, dramatically.

David Taylor: Well, thank you. Sorry, end on a sad note there, Canadians. Hopefully there's light at the end of the tunnel. It's a rough time when your house has dropped in value dramatically and your mortgage payment's likely doubling.

Speaker #4: And your mortgage payments likely doubling.

Speaker #1: Your next question comes from Joe Yanchunis with Raymond James. Your line is now open.

Operator: Your next question comes from Joseph Yanchunis with Raymond James. Your line is now open.

Speaker #3: Hey, guys. Thanks for letting me back in the queue here. I just have a couple I wanted to just hit on. So starting with DRTC, can you provide an update on the divestor process?

Joseph Yanchunis: Hey, guys. Thanks for letting me back in the queue here. I just have a couple wanted to just hit on. Starting with DRTC, can you provide an update on the divestiture process? Where do you stand in discussions with potential buyers and whether you expect for a transaction to occur before September 2026?

Joe Yanchunis: Hey, guys. Thanks for letting me back in the queue here. I just have a couple wanted to just hit on. Starting with DRTC, can you provide an update on the divestiture process? Where do you stand in discussions with potential buyers and whether you expect for a transaction to occur before September 2026?

Speaker #3: Where do you stand discussions? With potential buyers and whether you expect for a transaction to occur before September 2026?

Speaker #4: Well, Joe, good question. And tactically, we've put it on pause. The divestor. And the things in the background that I'm not ready to publicly announce, but there was a good tactical reason to put the brakes on the sale process.

David Taylor: Well, Joe, good question. Tactically, we've put it on pause, the divestiture. There's things in the background that I'm not ready to publicly announce, but there was a good tactical reason to put the brakes on the sale process. KBW did a fantastic job for us. I think they lined up about 100 eager bidders, but there was something else in the background that I thought it's best we just put the brakes on the sale process just for a while.

Speaker #4: KBW did a fantastic job for us. I think they lined up about 100 eager bidders. But there was something else in the background that I thought it's best we just put the brakes on the sale process just for a while.

Speaker #3: Okay. And then I was under the impression that you had to have that out of the bank before September 2026. Have you gone back to regulators to seek permission to hold onto it a little longer?

Joseph Yanchunis: Okay. I was under the impression that you had to have that out of the bank before September 2026. Have you gone back to regulators to seek permission to hold onto it a little longer? Or what's the process there?

Joe Yanchunis: Okay. I was under the impression that you had to have that out of the bank before September 2026. Have you gone back to regulators to seek permission to hold onto it a little longer? Or what's the process there?

Speaker #3: Or what's the process?

Speaker #4: Yes, we have. Yeah. Yes, we have. Certain aspects of DRTC are permissible. The one that appears not to be permissible is the penetration testing aspect that we do with the component DBG, Digital Boundary Group.

David Taylor: Yes, we have. Certain aspects of DRTC are permissible. The one that appears not to be permissible is the penetration testing aspect that we do with the component DBG, Digital Boundary Group. The RealBank Deposit Tokens and that sort of stuff with VersaVault seems to be quite permissible. Yeah, we have gone back and asked for a little extension in order to sort out these tactical things that I think benefit the entire banking industry in the United States in particular. I mean, we have state-of-the-art cybersecurity for small FIs and well, some large FIs here in Canada. We provide those services and the large retailers. There's an onslaught of cybercriminals out there. There's certain tactical things I thought maybe put a little pause on it to see what we could do on that front.

Speaker #4: The real deposit tokens and that sort of stuff with VersaVault seems to be quite permissible. But yeah, we have gone back and asked for a little extension in order to sort out these tactical things that I think benefit the entire banking industry in the United States in particular.

Speaker #4: And we have state-of-the-art cybersecurity for a small size and we'll have some large FIs here in Canada. We provide those services. And the large retailers.

Speaker #4: But there's an onslaught of cybercriminals out there. And there's certain tactical things I thought may be a little pause on it to see what we could do on that front.

Speaker #3: Okay. So if you've received that extension, what's the new kind of drop-dead date?

Joseph Yanchunis: Okay. If you've received that extension, what's the new kind of drop-dead date?

Joe Yanchunis: Okay. If you've received that extension, what's the new kind of drop-dead date?

Speaker #4: Oh, I haven't heard back from them yet. I don't know. Maybe on the long side, I'd say about a year.

David Taylor: Oh, we haven't heard back from them yet. I don't know, maybe on the long side, I'd say about a year.

David Taylor: We haven't heard back from them yet. I don't know, maybe on the long side, I'd say about a year.

Speaker #3: Okay. I appreciate that. And then just one more kind of housekeeping question for me. Within that $605 million of US SRP assets at quarter end, what was the mix between your legacy offering and securitization?

Joseph Yanchunis: Okay. I appreciate that. Just one more kind of housekeeping question from me. Within that $605 million of US SRP assets at quarter end, what was the mix between your legacy offering and securitization? You happen to have that handy.

Joe Yanchunis: Okay. I appreciate that. Just one more kind of housekeeping question from me. Within that $605 million of US SRP assets at quarter end, what was the mix between your legacy offering and securitization? You happen to have that handy.

Speaker #3: You haven't had that handy.

Speaker #4: Well, we had said we expected to put on about a billion in US SRPs. And 650 was the homegrown. And about 350 was the purchased.

David Taylor: Well, we had said we expected to put on about $1 billion in US SRPs, and $650 million was the homegrown and about $350 million was the purchased. That was the original plan.

Speaker #4: That was the original plan.

Speaker #3: Got it. Okay.

Joseph Yanchunis: Got it. Okay.

Joe Yanchunis: Got it. Okay.

Speaker #4: And now we're thinking the 650 could be a lot higher because of that demand that's flowing mainly through the advent of the real-time purchases.

David Taylor: Now we're thinking the 650 could be a lot higher because of that demand that's flowing mainly through the advent of the real-time purchases.

Speaker #3: Okay. I appreciate that.

Nicolás Ospina: Okay. I appreciate that.

Speaker #1: A little more precise, a little more precise Joe, there. I will have around for the securitized portion for around 18% of the 650 that we have currently.

Nicolás Ospina: A little more precise, Joe. There, we have around for the securitized portion, around 18% of the CAD 650 that we have currently.

Nicolás Ospina: Cool.

Speaker #1: We can discuss more offline.

Nicolás Ospina: We can discuss more offline.

Speaker #3: Okay. Perfect. That was the number I was looking for. Thank you.

Joseph Yanchunis: Okay, perfect. That was the number I was looking for. Thank you.

Joe Yanchunis: Okay, perfect. That was the number I was looking for. Thank you.

Speaker #4: Okay. Sorry, Joe. Thank you, Nico. It's a good thing to have your CFO online listening when the CEO is bound off numbers top his head.

David Taylor: Okay. Sorry, Joe. Thank you, Nico. It's a good thing to have your CFO online listening when the CEO is spouting off numbers top of his head. All righty.

Speaker #4: All righty.

Speaker #1: No further questions.

Operator: There are no further questions.

Speaker #4: No further questions, operator?

David Taylor: Operator?

Operator: Sorry about that.

David Taylor: No further questions, operator?

Speaker #1: No.

Operator: No.

Speaker #4: All righty. Well, thank you very much for your interest. And look forward to talking to next quarter. So Joel, we'll hang up and I guess take some direct calls offline.

David Taylor: All righty. Well, thank you very much for your interest and look forward to talking to you next quarter. Joel, we'll hang up and I guess take some direct calls offline.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and I say please disconnect your lines.

Q2 2026 VersaBank Earnings Call

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