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Axos Financial, Inc.
4/30/2025
Greetings and welcome to the Access Financial Third Quarter 2025 Earnings Call and Webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation, and you may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Please go ahead, Johnny.
Thank you, Kevin. Good afternoon, everyone, and thanks for joining us for today's third quarter 2025 Financial Results Conference Call. Joining us today are the company's President and Chief Executive Officer, Greg Garabrant, and Executive Vice President and Chief Financial Officer, Derek Walsh. Greg and Derek will review and comment on the financial and operating results for the three and nine months ended March 31st, 2025, and we will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forelicking statements that are subject to risks and uncertainties, and that management may make additional forelicking statements in response to your questions. Please refer to the safe harbor statement found in today's earnings press release and in our investor presentation for additional details. This call was being webcast, and there will be an audio replay available in the investor relations section of the company's website located at accessfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before I hand over the call to Greg, I'd like to remind listeners that in addition to the earnings press release, we also issued an earnings supplement, an 8K, with additional with additional information. All of these documents can be found on axosfinancial.com. With that, I'd like to turn the call over to Greg. Thank you, Jonny.
Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the third quarter of fiscal 2025, ended March 31st, 2025. I thank you for your interest in Axos Financial. We delivered solid results this quarter, generating over $700 million of net loan growth linked quarter, stable net interest margins, and a 19% year-over-year increase in book value per share. We continue to generate high returns as evidenced by the 16% return on average common equity and the 1.8 return on average assets in the three months ended March 31st, 2025. We deployed some of our excess capital to repurchase approximately $28 million of common stock in the quarter ended March 31st, 2025, and an additional 517,000 shares of common stock for $30.3 million from April 1st to April 30th after the quarter end. Other highlights in the quarter include net interest income was $275 million for the three months ended March 31st, 2025, up 5.3% from the $262 million in the prior year period. Net interest margin was 4.78% for the quarter ended March 31st, 2025, down five basis points from the 4.83% in the quarter ended March 31st, We continue to benefit from a best-in-class net interest margin within and without the benefit of the accretion from loans purchased from the FDIC. Total unbalanced sheet deposits increased 5.4% year-over-year to $20.1 million. Our diverse and granular deposit base across consumer and commercial banking and our securities businesses continue to support our organic loan growth. We managed our operating expenses well this quarter, with total non-interest expense for the quarter ended March 31, 2025, up by only 0.6% from the prior quarter. Excluding the seasonal increase in FICA expenses and legal accrual reversals, non-interest expense increased slightly quarter over quarter. Net annualized charge-offs to average loans were nine basis points in the three months ended March 31st, compared to seven basis points in the corresponding period last year. Excluding the auto loans covered by insurance, net annualized charge-offs to average loans were eight basis points in our fiscal third quarter of 2025. we remain well-reserved relative to our low current and historic net credit losses. Total non-accrual loans declined by 66.5 million link quarter, resulting in our non-accrual loans, the total loan ratio improving from 1.26 percent in the quarter ended December 31st, 2024, to 89 basis points in the quarter ended March 31st, 2025. Net income was approximately 105.2 million in the quarter ended March 31st, compared to 104.7 million in the December quarter. Diluted EPS was 1.81 cents for the quarter ended March 31st, 2025, compared to $1.80 in the prior quarter. Net growth in non-purchase loans for investment was $700 million for the month end of the quarter ended March 31st, an increase of 3.6% in quarter or 14.5% annualized. Fund finance, equipment leasing, and lender finance had strong originations and net loan growth this quarter. Headwinds from high levels of repayment in the jumbo single-family and multi-family mortgage business improved significantly, with net declines of only $36 million in those two loan categories combined in this quarter, compared with a $384 million decline in the December quarter. While the interest rate in competitive environment remains unstable, we feel good about keeping our jumbo single-family and multi-family loan balances flat to down $100 million per quarter and versus the prior $200 to $400 million quarterly headwind we experienced since the Fed started raising rates in 2023. Average loan yields for the three months ended March 31st, 2025, was 7.99%, down from 8.37% in the prior quarter. Average loan yields for non-purchase loans was 7.66%, and average yields for purchase loans were 14.32%, which includes the accretion of our purchase price discount. The FDIC-purchased loans continue to perform well, and all loans in that portfolio remain current. New loan interest rates were the following. SFR mortgages, 7.5 percent, multifamily, 7.3 percent, C&I, 7.6 percent, and auto, 8.5 percent. Ending deposit balances were 20.1 billion, or up 1 percent link quarter and up 5.4 percent year-over-year. Demand, money market, and savings accounts represent 96% of total deposits at December 31, 2024, increasing by 6.9% year-over-year. We have a diverse mix of funding across a variety of business verticals, with consumer and small business representing 58% of total deposits, commercial cash, treasury, management, and institutional representing 23%, commercial specialty representing 9%, access fiduciary representing 4%. Noninterest-bearing deposits were approximately $3 billion at the end of the quarter, roughly the same as the prior quarter. Client cash sorting deposit balances have been volatile, increasing to over $1.2 billion during the peak of the market sell-off in March 2025, before ending the quarter around $900 million, as advisors made tactical changes throughout the quarter in a turbulent market. We're focused on adding net new assets from existing and new advisors to grower assets, under custody and cash balances. In addition to our exos securities deposits on our balance sheet, we had approximately $450 million of deposits off balance sheet at partner banks. Our consolidated net interest margin was 4.78% for the quarter ended March 31st, 2025, compared to 4.83% in the quarter ended December 31st, 2024. Even though we deployed some of our exos liquidity and organic loan growth this quarter, we still have more deposits than we typically carry on our balance sheet. The excess liquidity was a 13 basis point drag on our net interest margin, and the quarter ended March 31st, 2025, down from 18 basis points last quarter. Our net interest margin remains above the high end of our target, with and without the benefits of the FDIC loan purchases, largely because we've been able to offset the gradual decline in our earning asset yields with corresponding decreases in our funding costs. Total interest-bearing demand and savings deposit costs were 3.59% for the quarter ended March 31st, 2025, down 36 basis points from the prior quarter. We're seeing strong growth in account and balances from our EXOS One consumer bundled deposit product, which includes a checking and a savings account. Growth in EXOS One and other deposit businesses has allowed us to reduce our cost consumer high-yield savings and wholesale funding. We continue to grow our lower-cost deposits in our commercial cash treasury management and specialty businesses. We're also making good progress cross-selling deposits across selected lending businesses, such as fund finance and multifamily lending. Continued strong net new asset growth and normalizing and cash sorting will be a tailwind in our ability to grow lower-cost deposit balances going forward. We expect our consolidated net interest margin ex-FDIC loan purchase accretion to stay at the high end of our 425 to 435 range we have targeted over the past year. Despite increased competition from banks and non-banks driving new loan yields lower in many lending categories we compete in, we continue to win our share of new lending opportunities. Our loan pipelines have improved meaningfully in our auto and multifamily lending businesses over the past few quarters as a result of strategic actions we have taken. Better execution and expanding our distribution channels across certain commercial lending categories, including equipment leasing, have contributed to improved loan growth and pipelines. We expect loan growth to come in somewhere between the high single-digit and low teens range on an annual basis that we have targeted for the past several years. We may have more variance from quarter to quarter due to uncertainty regarding the pace and timing of payoffs and the potential impact of tariffs and interest rates on loan demand. The credit quality of our loan book continues to be solid, and our historical and current net charge-offs remain low. Total non-performing assets declined by $63.3 million linked quarter to representing 79 basis points of total assets compared to 1.06% in the quarter ended December 31st. The sequential decrease in non-accrual loans was broad-based, declining by $26 million in our single-family mortgage and warehouse businesses, by $15 million in our multifamily and commercial mortgage business, and by $25.7 million in our commercial real estate lending business. We do not anticipate a material loss from loans currently classified as non-performing in our single-family, multifamily, or commercial real estate loan portfolios. Our commercial real estate specialty portfolio continues to perform very well and in line with our expectations. Non-accrual loan balances in our C&I lending portfolio were roughly flat in quarter at $71.2 million. All C&I loans classified as non-accrual at March 31, 2025, but three, totaling $12.2 million, continue to make contractual interest, principal, and curtailment payments. We continue to monitor the credit trends across all loan portfolios and have not seen any broad-based deterioration in any individual lending category. We don't have significant exposure to any specific industry that is expected to have an outsized negative impact from proposed or enacted tariffs. Axos Clearing, which includes our correspondent clearing and RA custody businesses, had a good quarter. $134 million at the end of the quarter, roughly consistent with where they were in the prior quarter. Of the $1.34 billion of deposits from Axos Clearing, approximately $900 million was on our balance sheet and $450 million were held at partner banks. Client margin balances grew by 2.9%, up from $274.5 million at December 31st to $282.4 million at March 31st, 2025. Net new assets for our custody business were $289 million in the March quarter, extending the positive net asset momentum we had experienced in the past several quarters. Despite a turbulent first few months of 2025, many of our legacy and new RIA clients have increased their AUM. The pipeline for new custody clients remains healthy, and we expect continued organic net new asset growth and access advisory services. Pre-tax income for the securities business segment increased by 23.6% year-over-year to $9.1 million due primarily to better operating expense control. From a product perspective, we continue to identify ways to generate incremental fee and partner with third parties to offer additional services such as access to new asset classes and investment strategies. We are consolidating certain back office and servicing functions in our clearing and custody business to leverage the processes and systems we have to more efficiently serve broker dealers and advisory clients. Once completed, we will have a more competitive and stable cost structure in order to expand the types of custody and clearance clients we can serve profitably. One important strategic initiative in the securities business that is the development of access professional workstation, our proprietary client service platform that will replace the current third party workstations used by our clearance clients and allow better integration of banking and lending to those clients. We leverage low-code development to reduce the time, cost, and resources required to complete our Axos professional workstation build-out. We're also actively using artificial intelligence in our software development and across a wider set of workflows to enhance development and operating efficiency, which should result in better operating leverage over time. Additionally, we're modernizing core components of the technology infrastructure for Axos Invest, our direct-to-consumer securities trading and digital wealth management business. The primary objectives are to make the platform more flexible so we can add new products and services faster and cheaper, as well as improve the customer experience by eliminating frictions caused by a reliance on third-party integrations. We see Axos Invest as a channel for low-cost consumer acquisition and cross-sell to existing Axos clients, as well as a white-label offering to institutional clients such as RAs and IBDs. Now I'll turn the call over to Derek to share other further details.
Thanks, Greg. Quick reminder that in addition to our press release, an 8K with supplemental schedules and our 10Q were filed with the SEC today and are available online through EDGAR or through our website at accessfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details. Non-interest expenses were approximately $146 million for the three months ended March 31, 2025, up by about $900,000 from the three months ended December 31, 2024. Salaries and benefit expenses were $74.6 million, up by $0.6 million compared to the three months ended December 31, 2024. Excluding the seasonal increases in FICA expenses in the March 31st quarter, salaries and benefit expenses were down by $0.8 million on a linked quarter basis. Professional service expenses were $8.2 million compared to the $9.1 million in fiscal Q2 2025. General and administrative expenses were down to $6.8 million for March 2025 compared to $9.3 million for December 2024. We had a payment of a legal judgment that was previously accrued and resulted in a reduction to general and administrative expenses by approximately $2 million in the quarter ended March 31, 2025. We remain focused on managing our expenses and investments in a controlled manner in order to maintain and improve our operating efficiency ratio. Next, our income tax rate was 29%. for the three months ended March 31st, 2025, compared to 28.8 percent in the corresponding year-ago period. We still expect our corporate tax rate to be approximately 29 to 30 percent, with one caveat. The California budget proposal currently includes a provision that would change the taxation of financial institutions. For tax years beginning on or after January 1st, 2025, the provision, if passed, would require financial institutions to use a single sales factor for apportioning multi-state income to California. Financial institutions are currently required to use a three-factor apportionment formula, which includes a corporate property factor, a payroll factor, in addition to a sales factor. If the provision changing this tax apportionment from the three-factor test to a single sales factor is enacted, the change would require the company to remeasure its deferred tax assets. Management estimates act as deferred tax asset would decrease by approximately $6 million to $7 million as a result of the change. The impact of the remeasurement will be a non-cash charge recognized through continuing operations in the period which the law is enacted. If enacted, rate for the fiscal year ended June 30, 2026 and beyond would be reduced by approximately 3%, or approximately $5 million per quarter compared to the current effective tax rate. I'll wrap up with our loan pipeline, which remains healthy, with $2.1 billion of total loans in the pipeline as of April 25, 2025, consisting of $576 million of single-family residential jumbo mortgage, $57 million of single-family gain-on-sale mortgage, $346 million of multifamily and small-balance commercial, $63 million of auto and consumer, and $1.1 billion of commercial loans. As Greg noted, We believe that we will be able to grow loan balances organically by high single digits to low teens year over year over the next 12 months, excluding the impact of the loan portfolio purchased from the FDIC or any other potential loan or asset acquisitions. Our pipelines are up across several lending businesses, and we expect the headwinds we faced from single-family and multifamily mortgages to subside. Due to elevated levels of uncertainty regarding interest rates, the economy, and the shape of the yield curve, we may see more volatility in our net loan growth over the next few quarters. With that, I'll turn the call back to Johnny.
Thanks, Derek. Kevin, we're ready to take questions.
Certainly. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our first question is coming from Kyle Peterson from Neiman Company. Your line is now live.
Great. Good afternoon. Thanks for taking the questions and nice results. I want to start off a little bit on loan growth and kind of what you guys are seeing. Obviously, there's been a lot more volatility and uncertainty. I guess, are there any areas either that you guys are being a little more cautious in? Or on the flip side, are there areas you guys are seeing competitors maybe be a little more cautious or shy where you guys think might be opportunities to go and take share?
Yeah, you know, I think there are certain CNI segments that in anticipation of the administration change or the potential administration change that we've been cautious about for a while. So, you know, we've been shying away from logistical sort of deals and Obviously, we got, you know, caught up in that one that's still paying but is on non-accrual. So we, you know, we generally have shied away from those as far as adding a lot of exposure in that sector. And there's been a few others that, you know, we've had views about from an economic perspective. But those are either segments within CNI or specific companies that have unique exposure. As far as... You know, it's a little early to tell, but I do think that we were seeing more spread compression, and we've been able to push back against that a little bit as a result of volatility. And I think that's partially related to the fact that in certain instances, you know, some of the takeouts or some of our lines or whatnot, the revolving lines are and securitizations. And so to the extent you get any difference in that market, that can flow through. So I think that's positive there. But in general, the pipelines are pretty good. I would say the biggest impacts it will have is just, you know, with respect to, you know, whether we can hit an 11 or, you know, percent sort of loan growth in the year 15. Is this really going to be more related to prepays and We had some periods during COVID that we were very cautious on any kind of project, financing, construction stuff, and so that means we sort of have a little gap where some of those loans kind of pay off, and we may have a little gap there. But I feel pretty good about where loan growth is. I mean, if you look at the single-family pipeline, it's a lot higher. It doesn't mean every quarter it's going to be perfect, but we've been really – fighting against a pretty nasty tailwind of single-family and multifamily, and that tailwind's over. So we may have areas like commercial specialty real estate that might have high payoff quarters just because of timing, but I don't think that's going to be something that will occur every quarter. And so I feel okay about loan growth, actually.
Okay. That's really helpful. And then maybe just a follow-up, more of a housekeeping item, but notice the fee income jumped up quite a bit this quarter, I guess. Could you just clarify whether there was anything, like whether it's seasonal or one-time, or if what we saw in the March quarter is a good run rate to use moving forward?
Yeah, we had had some mortgage banking impacts from the prior quarter, so that was where the prior quarter was somewhat depressed. This quarter is a little bit more representative of where we're at. We had added BOLI in the December quarter, so that's part of it. We did have a blip up in auto insurance recoveries, which come through that line item. and then there were some additional loan fees that came through unrelated to origination. So nothing necessarily of significant one-time that were in there this quarter. One item, actually, sorry, just remembered, there is a – fair value mark on our DTC stock that we have to hold for the clearing company. That was $750K. That only happens once a year, and so that gave us a little bump up. But that was only $750K. Okay.
Appreciate it, O'Culler. Next quarter. Thanks, guys.
Thank you. Thank you. Next question is coming from Andrew Leash from Piper Sandler. Your line is now live.
Hey guys, good afternoon. Greg, you've highlighted some good investment opportunities to maybe streamline the company. I'm just curious, what's the cadence of some of these investments? Do you have enough revenue to keep that efficiency ratio at this 48% level, or do you think it might step up here in the near term?
We're going to really work extremely hard to keep it where it is. I don't really think it's acceptable for it to go up, and I think it's the responsibility of me and my team to take advantage of all this amazing technology and operating efficiencies that we've been developing to ensure that we're definitely keeping costs under control. So we're targeting next year that personnel expenses will go up no more. than 30% of the combination of net interest and non-interest income. I think we can do that. You know, we want to make sure we're getting operating leverage in the business. There's a lot of AI improvements that can be made from an efficiency perspective. There's, even in a company such as ours, there's always an opportunity for people to step it up and do more. And so I'm looking forward to... cracking the whip on our organization to make all of us, including myself, run faster. So, yeah, I think it's going to be a very cost-efficient year going forward, and my team is smiling about how excited they are to make that happen.
Got it. All right. Very helpful. And then just looking at net interest income going into the quarter, it looked like a lot of the loan growth may have come on later in the quarter. So maybe that may have been why NII was down sequentially. But if you're looking into your fourth quarter, maybe a little bit more margin compression if that continues. But should we see NII step up from here?
Yes, we should. It was, to your point, from a point-in-time basis, loan growth of $700 million. It was closer to $100 million on an average basis during the quarter. So we expect that average this next quarter to go up, and that will, in turn, increase the net interest income impact. But that's why there was kind of a somewhat weak net interest income performance there. return to an increasing value.
Got it. Do you think the margin could step up here, or is there just too much yield pressure where it's going to be hard to replicate 478?
So I asked the team to go and look at the difference between what was the net spread compression versus what was just lagging adjustments from interest rate declines. And it was about a three basis point net spread compression. So, you know, it's – I would say that on average the loans are coming in probably at a lower spread than in the past, but we also still have – you know, not that we have a lot, but we still have hybrids adjusting. That will certainly happen going forward. There's still a decent number of hybrid loans that have to adjust and things like that. So – I feel pretty good about where margin is looking forward. I mean, could it be a little bit down? But if we also use up some of the excess liquidity, that's also going to move it the other way too. But I think that three basis points is an interesting number because if you have a flat rate environment, that's the number that takes out the the lagging decline just from index and floating rate loans.
Got it. That's helpful, guys. Thanks for taking the questions. I will step back.
Thank you. Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Gary Tenner from D.A. Davidson. Your line is now live.
Thanks. Good afternoon, everybody. I wanted to ask about the sequential quarter improvement in special mentions substandard loans. Could you talk to kind of where those – where that kind of improved credit rating was driven by and, you know, the color on there? I know MPS were down quite a bit, but, you know, kind of looking deeper, we'll look at some additional color.
Yeah. In a number of cases, some of the loans were, you know – that were placed on substandard had payoffs that were coming that just happened to come at the end of the quarter or there was a loan being sold or refinance that happened to hit at the end. So, you know, I think that in a lot of cases, like even if you look at the two large C&I loans that are on accrual, they're both still paying – They both, you know, still arguably have strong borrowing bases. So I think, you know, we're always cautious about this stuff, and we try to be conservative about how we look at it. But in a lot of cases, there really isn't a lot of loss content there. And so, frankly, a lot of those loans just paid off, and then we did sell some of them too. At par. At par, yeah. So we sold them at par. So, yeah, par plus accrued, so we got our interest and whatnot. So, yeah, it was a good quarter for that. I mean, I think the reality of our real estate loans, mostly with extremely small exceptions, if the borrower has something going on, the real estate is still worth so much more than what we've lent on it that, someone wants it, right? And so we're not really in the business of doing that, although sometimes I feel like we should be when I look at how much money people make on stuff that we sell to them. But in any event, that's kind of, you know, what we did there.
Okay, and then another question, I guess, also around credit. In terms of the ACL build this quarter, just based on what's in your supplemental deck, Looks like you lowered the reserve specifics of multifamily and commercial mortgage by call 30 basis points and increased the CNI reserve by a pretty similar amount. So if you talk about the moving parts there and the thoughts around those two categories.
Yeah, there were, I'll start with CNI. The loan growth was primarily in CNI. And so that was obviously a major factor in that category. The other results were really coming from the quantitative model, which incorporates the economic factors. So what were some of the key economic factors when you look at what was happening in kind of late February and into March was a lot of tariff fears and driving more negative outlooks on the economic factors. So when we run that through the model, what portfolio gets kind of, hit a bit harder was the CNI portfolio, and so that's what drove some of those. That, combined with the growth, were what drove some of those increases in that portfolio. And then the real estate portfolio still is continuing to perform, and then some of the HPI indexes, housing price indexes, were continuing to remain positive or turn positive compared to where they were in the prior quarters. And so that's what drove some of the benefits there.
Yeah, these models are hooked up to Moody's stuff. So if Moody's gets in a mood, then that's going to move the model around.
I'm sure we've got a lot of that to look forward to in the June quarter. Probably.
Thank you. Our next question today is coming from Kelly Molta from KBW. Your line is now live.
Hey, good afternoon. Thanks for the question. I guess starting off on capital, you noted you were active on the buyback here this quarter and continued into April. Wondering, especially given your outlook for what's still pretty strong growth, how you're viewing continuing the buyback here.
Hi, Kelly. Yeah, you know, look, I think we do have excess capital. You know, obviously, you know, we look at where loan growth is. I think this is a nice opportunity to, you know, where our stock is right now to be looking at buybacks. Obviously, we put our money where our mouth is this quarter and we'll probably keep on looking at that. We don't get opportunities like this all the time. And so we think it's a good opportunity, and we still think we can do right now, you know, good solid loan growth. We think our capital ratios are good. We're not really seeing anything that, you know, we feel good about where non-performers are and those kind of things. So, you know, things feel okay to be doing a little buyback. And it's not really – You know, we don't ever go get too crazy and do something that's too abrupt, right? We kind of were in there in the market and, you know, making incremental buybacks, which are helpful. I mean, we did – it was like almost a little bit more than 1% of the stock or about 1%, something like that, you know, for the quarter and including this month. So, you know, it's a nice opportunity. If we see – you know, M&A type stuff floating around that maybe we won't do as much. But, yeah, I think it's a really nice opportunity for us right now. The IRR pencils really, really well. You know, when we look at our internal forecasts and stuff like that about where we think we're going to be.
Got it. And on the M&A front, can you remind us what kinds of businesses would be top of mind in terms of being additive to Axos?
Yeah. You know, we'd love to buy, you know, wealth and custody stuff, but there's not a lot out there, and it tends to trade at multiples that are just so high that it makes it a little difficult. So we do look at stuff like that. And then, you know, obviously we pay attention to what's going on in banking, but our model is somewhat unique, so we're not the natural owner of of a lot of banks, particularly if they're heavy branch-based. But there are specialty type of banks that we might look at at different times if they really made a lot of sense. And then we look at thin companies if they're the type of companies that would have bank-like credits and would be a benefit from our platform. from the operational synergies we could bring and the tech and that kind of stuff. So, you know, we looked at different – we looked at a premium finance business that a bank was selling. We lost the bid on it. You know, we looked at kind of a leasing business that was a vendor leasing business. Also lost that bid on price. We thought we had a good price, but, you know, there's – Some people like to overpay for things. I do not. So, you know, but we keep on looking at it, and I think when we do something, we do it in a way that has enough margin of safety in it.
Got it. That's helpful. Last question from me, just changing gears. Greg, it sounds like you still feel good about growth, even with kind of the noise and uncertainty about tariffs. I'm wondering if you could size your exposure directly or indirectly to construction and what implications rising input costs could have on maybe Crestle and other, like, construction elements of the portfolio. If you could just help frame that for me, that would be helpful.
Yeah, I mean, the types of projects that we – I think the answer is not much because And the reason it's not much isn't because the input factors may not go up, but we generally require that a substantial portion of the trades are bought out, and that usually is a very high proportion. I mean, it varies, you know, depending on the strength of the sponsor and our junior lender. But then you also have sub-guard insurance that bonds those subs. With respect to that, you know, you don't want to leave in a general instance the idea that you're going to have a project that could have a budget that blows out for whatever reason. And so, you know, theoretically tariffs might be a reason, but there's plenty of things that happen in construction that have nothing to do with tariffs that blow out budgets. And so that's the thing you've got to get good at and you should make sure you don't do it. I mean, I think where it's harder is, frankly, which we don't have a lot of, is when you have, you know, a smaller mom and pop builder and, you know, they're doing a $5 million, you know, multifamily project or something. And so having institutional level GCs, with very strong balance sheets that are able to get all the subs bought out and then buy insurance for the subs and whatever, that's a much different kind of lending that really doesn't have anything to do with Crestle. So it's a very different kind of risk that we bear with respect to that because of how we structure our deals.
Thanks, Greg. I appreciate all the color. I'll step back.
Yeah, thank you. Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Edward Hemmelhorn from Shaker Investments. Your line is now live.
Great. Thanks. Greg, got a couple of questions. One is you seem to be a higher level of conservatism, both in your allowance for loan losses, but also I think your equity. I'd like to see the share repurchase. That was good. but your equity as a percentage of the asset base was higher than I've ever seen it. Are you trying to – I mean, are you being conservative, or are you anticipating grips, gruffer times, or what?
Well, you know, Ed, I am a conservative guy, as we've discussed many times. You know, no, look, I think there's a couple things going on. One is that if you looked at our balance sheet when, you know, you – first became enamored with us. Um, you know, we were much more of a 50% risk weighted shop. And so, you know, that's changed over time, right? So you sort of, you know, you get, if you have a much higher percentage of 50% risk weighted assets, then you've got that, that leverage and that risk weighted ratio tends to have a bigger disparity. Um, And then as we've added fund finance and CNI and all these different categories and we've kind of shied away – a single family has not shied away. It has become a smaller portion of the portfolio. That ratio has sort of kind of moved together. And so that's an element that you're seeing. That's not all of it, though. I mean, I think there is a recognition that, you know, that we – we obviously want to continue to make sure that we have a very strong balance sheet. So that is a piece of that as well. So generally, in comparison with a longer period ago, we are targeting a higher equity ratio. But I feel like we're good where we are. And as I said, credit performance looks to continue to be solid. So You know, I think we are able to buy back stock, and we had good growth this period. So, you know, I think we're doing an appropriate job of balancing, you know, taking appropriate risks and making sure that we're really protecting the institution.
Well, yeah, I was looking at the loans balances, and they seem to be getting better in terms of, you know, current payments and so forth, as opposed to the worst. I was a little surprised by the loan loss provision for the quarter.
The other thing is, I mean, what I would say on a loan loss, what I'd say on a loan loss provision, Ed, is you have to remember is that with CECL, what happens is there's external inputs for us that are not, they're marginally related to anything with respect to due to our loan portfolio. So if we have So if Moody's says the probability of recession is greater, that's going to increase our loan loss. Now, whether or not that ultimately ends up meaning anything for us, I mean, I can have my doubts, but it's a model-based part of it.
And the one other thing is that certainly it comes into effect a little bit, a portion, what's happened the last three months or what have you, right, from quarter to quarter. But the whole idea of CECL is it's a lifetime of the loan so that you're projecting forward multiple different waves of economic ups and downs, right? So you're not trying to necessarily move the allowance massively based on wealth. non-accruals were up this quarter, but they're down next quarter, you'd have loan losses going kind of spiking up and down across the industry if you were solely using that as your one input, right? To Greg's point, there's a lot of different inputs that come into play to help inform the allowance and the provision each quarter.
Yeah, but look, I mean, that being said, we are, you know, I think we've done, I think it's a good thing that we can be as profitable as we are and continue to increase and make our loan loss balance, you know, where it is. I think that's a positive. You know, it is, I think, you know, I've talked to a lot of pretty smart people over the last couple months about, you know, where they see things going, and I think the one commonality is everyone agrees that there's just more volatility, right? There's more potential for volatility and a higher, sort of distribution of potential outcomes. So, you know, I think that's reasonable that the model predicts that.
Yeah. Okay. Well, that's fine. I mean, I also appreciate the conservatives. The other thing is just about your spending, I've noticed, has really gone up for, you know, IT and data processing and so forth. I mean, and you briefly talked about that. You saw some real opportunities there. You know, And can you talk about that a little bit more? I mean, maybe you'll see examples of, you know, where you're seeing opportunities to really deploy AI and so forth.
Yeah. So we just released and we're getting ready to do a transition for our clearing clients away from a couple of old workstations that are quite common in the industry but have been around for a long time and are sort of universally hated, and we're replacing it with our own workstation. And we used a low-code platform to do that, and it, I believe, took I think about maybe 50%, 60% of the resources and about half the time to get that product out. So we do think that there's a lot of really interesting – interesting AI opportunities happening in the software development lifecycle, and we've seen some stuff that's quite extraordinary. The ability to lift and shift old code that is, you know, in a, you know, basic or in some sort of old language and be able to refactor it much more quickly or to be able to extract data and document the code, which would normally require somebody who was very skilled at reading the code and documenting it and all those things. The documentation of code, for example, is becoming much more able to be done by artificial intelligence. The ability to take a plain language document business requirements document and bring it into a set of stories and a set of documents that can be utilized by developers to code is a lot greater too. So there's a lot of that. We're using software that can take a document that has unstructured data an appraisal or whatnot, and let's say you had to pull 100 fields out of it, the AI can pull those fields out and put them into structured data, right? So those are just some examples. I give you a lot of them. I mean, we're really working hard on this. We have an AI task force. I think we have to hold ourselves accountable for actually seeing that in the results of which to me means that you have, for each dollar you earn, you don't spend as much on people and technology, right? And that's the way I think you have to be able to eat AI. And I think it's possible. You know, it's not always easy at every step of the way, but there's a lot of opportunity. I mean, there really is. You know, we have a good strategy there, and, you know, we're not fully at the agentic AI level, you know, sort of level yet, but, you know, we'll have to keep on pushing for that.
Okay. Great. Thanks. Good quarter.
Thank you.
Thanks, Ed. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.
Thank you, everyone. We'll talk to you next quarter. Appreciate your interest.
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