VersaBank's 2025 Q1 Earnings Call: Contradictions Emerge on U.S. RPP Growth, Regulatory Delays, and Expansion Timelines

Date of Call: None provided

Financials Results

• Revenue: $29.2M (Q4), up 20% YOY and up 9% sequentially
• EPS: $0.47 per share (Q4), up 104% YOY and up 24% sequentially

Guidance:

• Interest margins expected to be in the range of this year's number but may see volatility due to term-deposit market uncertainty.
• Expect to reach $5.0B in total assets during 2024 on current business growth (≈19% above $4.2B).
• Only a modest increase in non-interest expenses in 2024, roughly in-line with inflation (excluding acquisition-related costs).
• Provisions for credit losses expected to remain de minimis given conservative lending/holdback model.
• U.S. regulatory approval and Stearns acquisition would enable broad U.S. RPP rollout and materially accelerate growth.

Business Commentary:

• Record Financial Performance:
• VersaBank reported 94% growth in net income for the fourth quarter, more than tripling the 29% growth in its loan portfolio.
• This significant increase was driven by the operating leverage of the bank's branchless, business-to-business, partner-based digital banking model, with total assets crossing the $4 billion mark.

• Efficiency and Cost Management:
• The bank's digital banking efficiency ratio improved to 45% from 51%, holding non-interest expenses flat despite a 9% sequential revenue growth.

• This improvement was attributed to the bank's ability to manage non-interest expenses, which has led to higher returns on equity.

• Loan Portfolio Growth:

• The total loan portfolio expanded to $3.85 billion, representing a 29% year-over-year and 5% sequential increase.

• The growth was primarily due to the Point-of-Sale financing business, which increased 30% year-over-year, driven by strong demand and the growth in the U.S. market.

• Cybersecurity Subsidiary Success:

• DRTC's revenue increased 108% year-over-year and 83% sequentially to $3.7 million.
• The growth was driven by expanded services provided to digital banking operations and increased demand for cybersecurity services, particularly in penetration testing and app testing.

Sentiment Analysis:

Overall Tone: Positive

• Management emphasized record results and operating leverage: "Another record quarter...94% year-over-year growth in net income"; highlighted efficiency gains (digital banking efficiency ratio improved to 45% from 51% Q/Q and 43% from 55% Y/Y) and stated "2024 is expected to be a year that takes our efficiency, profitability, and return on equity to even higher levels."

Q&A:

• Question from David Feaster (Raymond James): How do you view growth trajectory and the contribution from the U.S. RPP relative to Canada; is the $5B target exclusive of Stearns?
  Response: Canada organic run-rate ~6% per quarter (~25% annual); U.S. adds incremental growth today and would be additive once licensed, but $5B target is achievable on Canadian growth alone.

• Question from David Feaster (Raymond James): What drove the recent loan portfolio sale/repurchase you mentioned?
  Response: A counterparty requested repurchase of a low-yield receivables parcel; sale improved overall portfolio yield and was an opportunistic, non-routine transaction.

• Question from David Feaster (Raymond James): What caused the accelerated CRE growth and how are you thinking about credit quality and underwriting amid higher rates?
  Response: Quarterly CRE growth driven by seasonal construction drawdowns; management is cautious—preferring CMHC-insured residential construction mortgages to mitigate risk and obtain favorable capital treatment.

• Question from David Feaster (Raymond James): How is the DRT Cyber pipeline trending and what product initiatives are planned?
  Response: Pipeline has increased materially (notably November vs prior year); demand rising with U.S. wins; rolling out products like RAVEN anti-spam and machine-learning monitoring and expecting continued revenue growth.

• Question from Unidentified Analyst (Unknown): With the U.S. regulator, is there ongoing back-and-forth or have you provided all needed information?
  Response: Very little recent back-and-forth; management believes it has answered substantive questions and remaining items are routine tidy-ups (e.g., inquiries about major shareholder).

• Question from Unidentified Analyst (Unknown): Does the protracted approval process require renegotiating the Stearns deal?
  Response: No renegotiation required; Stearns remains cooperative and both parties are patient to close the transaction.

• Question from Unidentified Analyst (Unknown): Any anticipated issues with OSFI on this transaction?
  Response: No—OSFI interactions have been positive and management reports recent 'green lights' from OSFI on the matter.

• Question from Unidentified Analyst (Unknown): Is there an active NCIB or is it paused?
  Response: NCIB is paused at OSFI's request pending clarity on capital post-closing.

Contradiction Point 1

U.S. RPP Program Growth Trajectory

It concerns the expected growth trajectory of the U.S. RPP program, which directly impacts the company's growth strategy and market expectations.

How do you view the growth trajectory and the U.S. RPP program's contribution to the $5 billion target? - David Feaster (Raymond James)

2023Q4: We have got three customers now in the United States, and the product is very keenly being thought after. So, it looks like despite not having the U.S. banking license at this point, that will be additional growth on top of the Canadian market. - David Taylor(CEO)

How should we expect the growth in U.S. RPT volume to progress over the year, and at what pace can you scale it? - Joe Yanchunis (Raymond James)

2025Q1: The U.S. RPT volume growth is expected to gain momentum. The initial funding of $10 million and $15 million was provided to Watercress. More funding is anticipated, and the original target of $290 million in U.S. RPP volume is easily attainable with additional partners. - David Taylor(CEO)

Contradiction Point 2

Impact of Yield Curve Flattening

It involves the impact of a flattening yield curve on the company's financial performance, which affects investor expectations and market positioning.

Can you provide more details on the impact of the flattening yield curve and what you expect for the 2025 outlook considering current deposit roll-off? - Andrew Scutt (Roth Capital Partners)

2023Q4: The flattening of the yield curve is favorable for VersaBank. Historically high deposit margins are expected to decline, benefiting VersaBank's margins. Increased bankruptcies provide more deposit opportunities. - David Taylor(CEO)

Can you break down the impact of the flattening yield curve, including the current deposit roll-off and your 2025 trajectory expectations? - Andrew Scutt (Roth Capital Partners)

2025Q1: The flattening of the yield curve is favorable for VersaBank. Historically high deposit margins are expected to decline, benefiting VersaBank's margins. Increased bankruptcies provide more deposit opportunities. - David Taylor(CEO)

Contradiction Point 3

Expansion into the U.S. Market

It involves differing opinions on the timeline and expectations for expansion into the U.S. market, which is a strategic initiative for the company's growth.

How do you assess the growth trajectory and the contribution of the U.S. RPP program to the $5 billion target? - David Feaster (Raymond James)

2023Q4: We have got three customers now in the United States, and the product is very keenly being thought after. So, it looks like despite not having the U.S. banking license at this point, that will be additional growth on top of the Canadian market. - David Taylor(CEO)

Update on new partner discussions in the U.S. and expected number to launch in the next few quarters? - Tim Switzer (KBW)

2024Q4: We are in the final stages of documentation, and additional partners may be signed up once the paperwork is completed. We aim for CAD250 million on our balance sheet and CAD500 million in total by year-end, with potential for faster growth depending on contracting speed. - David Taylor(CEO)

Contradiction Point 4

U.S. Regulatory Process

It involves differing explanations of the status and timelines related to the U.S. regulatory process, which is crucial for the company's expansion plans.

Are there ongoing communications with U.S. regulators, are they requesting additional information, or have they already received all necessary information and are simply following their internal process? - Unidentified Analyst

2023Q4: There's very little back and forth between us and the U.S. regulators for the last few months. We feel we've answered all the questions they had about our banking business. - David Taylor(CEO)

Does the extended time to receive approval require renegotiating the Stearns Bank deal? - Unidentified Analyst

2024Q4: We have guidance that we are not looking at -- this would be to continue the -- as I said, we have the technology to put it in place within 24 hours. But at the moment, they're just trying to finalize that paperwork, and they have begun to seek input from third parties. - David Taylor(CEO)

Contradiction Point 5

Growth Outlook

The response on the growth outlook seems to have been adjusted between quarters, potentially impacting investor expectations.

How do you assess the growth trajectory and the U.S. RPP program's contribution to the $5 billion target? - David Feaster (Raymond James)

2023Q4: Just purely based on Canada, the quarter we've just completed would have been about 6% prior to the sale of that portfolio. So, we're running in Canada about 6% a quarter. We have got three customers now in the United States, and the product is very keenly being thought after. So, it looks like despite not having the U.S. banking license at this point, that will be additional growth on top of the Canadian market. - David Taylor(CEO)

Does the current growth rate in Canada represent the expected rate for the coming years, or is improvement anticipated? Is the U.S. growth rate expected to outperform Canada's over time? - Unidentified Analyst

2024Q3: We have a growth rate target of 5% per annum for our Canadian retail delivery product. And we expect to have 5% per annum growth within the United States. - David Taylor(CEO)