Core Viewpoint - VersaBank is advancing its Digital Deposit Receipts (DDRs) pilot programs in Canada and the U.S., aiming to leverage its unique position as the only nationally licensed bank with tokenized deposit capabilities in both countries, to facilitate secure and efficient cross-border transactions [1][2][3]. Group 1: Pilot Programs - The CADVB Pilot Refresh is designed to validate the functionality, security, and compliance of DDRs with Canadian regulations, following enhancements to the bank's core technology since the initial pilot in 2022 [1][2]. - The integration of the CADVB Pilot Refresh with the USDVB Pilot Program aims to showcase the bank's capacity for high-speed, low-cost, and secure cross-border payments using DDRs as digital representations of actual deposits [2]. - Both pilot programs are expected to conclude by the end of 2025, with a commercial launch anticipated shortly thereafter, subject to regulatory requirements [2]. Group 2: Market Opportunity - Approximately CAN$1 trillion in trade occurs annually between the U.S. and Canada, presenting a significant opportunity for VersaBank to provide blockchain-secured foreign exchange transactions [3]. - DDRs offer advantages over non-bank stablecoins, including the ability to pay interest and provide deposit insurance, which are critical for businesses seeking secure digital transaction solutions [3][4]. - The bank is actively pursuing opportunities to monetize its proprietary DDR technology, which is positioned as a market-ready solution for various financial entities [3]. Group 3: Technology and Security - DDRs are bank-issued tokenized deposits that provide enhanced security, stability, and regulatory compliance compared to traditional stablecoins, combining traditional banking safety with blockchain efficiency [4][6]. - The issuance and management of CADVBs will utilize VersaBank's proprietary VersaVault platform, ensuring secure handling of sensitive data and compliance with regulatory standards [5][8]. - VersaVault is designed to manage highly sensitive digital assets and ensure end-to-end security for the lifecycle of DDRs, addressing the need for regulated custody in the digital asset space [8]. Group 4: Company Overview - VersaBank operates as a branchless, digital bank in North America, focusing on underserved segments of the banking industry through its innovative technology [9]. - The bank has successfully launched its Receivable Purchase Program in the U.S., expanding its operations into a multi-trillion-dollar market [9]. - VersaBank also owns DRT Cyber Inc., a leader in cybersecurity services, enhancing its capabilities to address the growing cyber threats faced by financial institutions [9].

Core Viewpoint - VersaBank has launched a pilot program for its proprietary Digital Deposit Receipts (DDRs) in the United States, positioning them as a secure and compliant alternative to traditional stablecoins, with the ability to pay interest and FDIC insurance [1][2][3] Group 1: Digital Deposit Receipts (DDRs) - DDRs are bank-issued tokenized deposits that represent actual cash deposits on a 1:1 basis, offering enhanced security, stability, and regulatory compliance compared to stablecoins [1][4] - The USDVB Pilot Program aims to demonstrate the functionality and operational integrity of DDRs in a US dollar environment while ensuring compliance with US banking regulations [2][3] - DDRs were developed in collaboration with law enforcement to serve as a trusted alternative for mainstream financial applications, addressing the growing trend of digital asset management [4] Group 2: Pilot Program Details - The USDVB Pilot Program will involve phased testing with thousands of transactions, starting with controlled internal testing and expanding to limited external deployment [3] - USDVBs will be issued at a rate of 1 USDVB for each US$1.00 on deposit, managed through VersaBank's proprietary digital vault platform [3][6] - The pilot program is expected to be completed by the end of 2025, with plans for commercial launch shortly thereafter [3] Group 3: Company Overview - VersaBank operates as a federally chartered bank in both Canada and the US, focusing on a digital, business-to-business banking model [7] - The bank has successfully launched a Receivable Purchase Program in the US, expanding its services to underserved markets [7] - VersaBank also owns DRT Cyber Inc., a leader in cybersecurity services, enhancing its capabilities in managing digital assets securely [7]

Regulatory Landscape & Key Questions - The industry awaits clarity on whether banks can issue tokenized deposits under the GENIUS Act [1] - Uncertainty persists regarding the capital reserve requirements for banks holding stablecoins [1] - Non-bank entities, especially fintech firms in the crypto space, are lagging in meeting banking compliance standards [1] - Regulators, such as the Federal Reserve, are expected to foster a level playing field, addressing potential competitive disadvantages for banks [1] - Ambiguity remains regarding whether a recipient customer must complete onboarding at the originating bank when tokenized deposits are transferred between banks [1] Potential Developments & Challenges - Information sharing between banks, currently not possible, could significantly benefit community banks burdened by high compliance costs [1]

Financial Data and Key Metrics Changes - The company reported second quarter net earnings of $243 million, reflecting a 28% improvement over the prior year period and a 44% increase compared to the first quarter [5][7] - The efficiency ratio improved to 62.2%, and the net interest margin increased for the sixth consecutive quarter to 3.17% due to lower funding costs and an improved earning asset mix [8][12] - Average customer deposits increased by 0.5% year-over-year but decreased by 1.4% on a linked quarter basis [9] - Average loans grew by 5.6% on an annualized linked quarter basis and 3.7% year-over-year [10][17] Business Line Data and Key Metrics Changes - The company experienced a 91% increase in the number of deals booked through the SBA seven program in the first nine months of the fiscal year compared to the same period last year [6] - Customer-related non-interest income was $164 million for the quarter, a 4% increase on a linked quarter basis and a 7% increase year-over-year [13] - Adjusted non-interest expenses decreased by $12 million compared to the prior year, reflecting lower technology costs [14][15] Market Data and Key Metrics Changes - The company noted stability in non-interest bearing deposits at 34% of total deposits [9] - Average non-interest bearing deposits grew approximately $480 million or 2% compared to the prior quarter [18] Company Strategy and Development Direction - The company is focusing on growing customer relationships, particularly in small business banking, and has launched a consumer gold account offering in the Nevada market [6][7] - The management is optimistic about the potential for growth in the outlook, citing reduced tariff-related risks and a more favorable economic environment [5][31] Management's Comments on Operating Environment and Future Outlook - Management expressed a more positive outlook compared to the previous quarter, noting that the economy is weathering challenges better than anticipated [32] - The company expects continued growth in net interest income and customer-related fee income for 2026, supported by increased customer activity and new client acquisition [12][14] Other Important Information - The allowance for credit losses as a percentage of loans and leases declined to 1.2%, with non-performing assets remaining low at 0.51% [21][24] - The common equity Tier one ratio was reported at 11%, indicating strong capital levels [24] Q&A Session Summary Question: What are you hearing from clients in the small business and middle market side? - Management noted a more positive sentiment among clients due to reduced uncertainty in the macro environment and some businesses seeing opportunities despite challenges [30][31] Question: Are you seeing any elevated competition on the deposit side? - Management acknowledged a competitive market for deposits but emphasized a focus on maintaining margin while growing the deposit base [33][34] Question: Can you provide color on the increase in loan growth? - Loan growth was solid, primarily driven by commercial and industrial loans, with increased utilization and new originations contributing significantly [41][42] Question: Can you discuss the potential benefits of deregulation for the company? - Management highlighted the potential benefits of tiering in regulatory requirements and expressed a strategic approach to M&A, focusing on organic growth [46][49] Question: What is the outlook for capital markets business? - The capital markets business is growing nicely, with expectations to double in size over a four to five-year period, driven by various segments including loan syndications and M&A advisory work [110][111]