Axos Financial, Inc. Price & Performance (AX)

Please refer to the Safe Harbor statement found in today's earnings press release and in our investor presentation for additional details. This call is being webcast and there will be an audio available in the Investor Relations section of the company's website located at axosfinancial.com for thirty days. Details for this call were provided on the conference call announced 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 eight ks, 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, John, and 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 twenty twenty five ended 03/31/2025. I thank you for your interest in Axos Financial. We delivered solid results this quarter generating over $700,000,000 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 03/31/2025. Deployed some of our excess capital to repurchase approximately $28,000,000 of common stock in the quarter, ended 03/31/2025 and an additional 517,000 shares of common stock for $30,300,000 from April 1 to April 30 after the quarter end.

Other highlights in the quarter include net interest income was $275,000,000 for the three months ended ended 03/31/2025, up 5.3% from the $262,000,000 in the prior year period. Net interest margin was 4.78% for the quarter ended 03/31/2025, down five basis points from the 4.83% in the quarter ended 03/31/2024. We continue to benefit from best in class net interest margin within and without the benefit of the accretion from loans purchased from the FDIC. Total on balance sheet deposits increased 5.4% year over year to $20,100,000 Our diverse and granular deposit base across consumer and commercial banking in 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 03/31/2025 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 the three months ended March 31 compared to seven basis points in the correspondent 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 twenty twenty five. We remain well reserved relative to our low current and historic net credit losses. Total non accrual loans declined by $66,500,000 linked quarter resulting in our non accrual loans to total loan ratio improving from 1.26% in the quarter ended 12/31/2024 to 89 basis points in the quarter ended 03/31/2025.

Net income was approximately $105,200,000 in the quarter ended March 31 compared to $104,700,000 in the December quarter. Diluted EPS was $1.81 for the quarter ended 03/31/2025 compared to $1.8 in the prior quarter. Net growth in non purchased loans for investment was $700,000,000 for the month ended the quarter ended March thirty one, an increase of 3.6% linked 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 of the jumbo single family and multifamily mortgage business improved significantly, with net declines of only $36,000,000 in those two loan categories combined in this quarter compared with a $384,000,000 decline in the December. While the interest rate and competitive environment remains unstable, we feel good about keeping our jumbo single family and multi family loan balances flat to down $100,000,000 per quarter, versus the prior $200,000,000 to $400,000,000 quarterly headwind experienced since the Fed started raising rates in 2023.

Average loan yields for the three months ended March 31, 2025 was 7.99% down from 8.37% in the prior quarter. Average loan yields for non purchased loans was 7.66% and average yields for purchased loans were 14.32% which includes the accretion of our purchase price discount. 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% multifamily 7.3%, C and I 7.6% and auto 8.5%. Ending deposit balances were 20,100,000,000.0 or up 1% linked quarter and up 5.4% year over year. Demand money market and savings accounts represent 96% of total deposits at 12/31/2024, 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 nine Axos Fiduciary Services representing six and Axos Securities, which is our custody and clearing business combined representing 4%. Non interest bearing deposits were approximately $3,000,000,000 at the end of the quarter, roughly the same as the prior quarter. Client cash sorting deposit balances have been volatile increasing to over $1,200,000,000 during the peak of the market sell off in March 2025 before ending the quarter around $900,000,000 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 grow our assets under custody and cash balances. In addition to our Axos securities deposits on our balance sheet, we had approximately $450,000,000 of deposits off balance sheet at partner banks. Our consolidated net interest margin was 4.78% for the quarter ended 03/31/2025, compared to 4.83% in the quarter ended 12/31/2024. Even though we deployed some of our Axos 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 in the quarter ended 03/31/2025, 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 earnings asset yields with corresponding decreases in our funding cost. Total interest bearing demand and savings deposit costs were 3.59% for the quarter ended 03/31/2025 down 36 basis points from the prior quarter. We're seeing strong growth in account and balances from our Axos One consumer bundled deposit product, which includes a checking and a savings account. Growth in Axos 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 normalized and cash sorting will be a tailwind in our ability to grow lower cost deposit balance going forward.

Expect our consolidated net interest margin ex FDIC loan purchase accretion to stay at the high end of our 4.25% to 4.35% 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 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 improve loan growth and pipeline.

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 the potential impact of tariffs and interest rates on loan demand. The credit quality of our loan book continues to be solid our historical and current net charge offs remain low.

Total non performing assets declined by $63,300,000 linked quarter, representing 79 basis points of total assets compared to 1.06% in the quarter ended December 31. The sequential decrease in non accrual loans was broad based declining by $26,000,000 in our single family mortgage and warehouse businesses by $15,000,000 in our multifamily and commercial mortgage business and by $25,700,000 in our commercial real estate lending business. We did 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 and I lending portfolio were roughly flat linked quarter at $71,200,000 All C and I loans classified as non accrual at 03/31/2025 but three, totaling $12,200,000 continue to make contractual interest principal and curtailment payment. 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 expected to have an outsized negative impact from proposed or enacted tariffs. Axos Clearing, which includes our corresponding clearing and RA custody businesses had a good quarter.

Total deposits at Axos Clearing were $134,000,000 at the end of the quarter, roughly consistent with where they were in the prior quarter. Of the $1,340,000,000 of deposits, from Axos Clearing approximately $900,000,000 was on our balance sheet and $450,000,000 held at partner banks. Client margin balances grew by 2.9% up from $274,500,000 at December 31, to $282,400,000 at 03/31/2025. Net new assets for our custody business were $289,000,000 in the March 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 in Axos Advisory Services. Pretax income for the Securities business segment increased by 236% year over year to $9,100,000 due primarily to better operating expense control. From a product perspective, we continue to identify ways to generate incremental fee and partners partner with third parties to offer additional services such as access to new asset classes and strategies.

We are consolidating certain back office and servicing functions in our clearing and custody business to leverage the processes and systems we have 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 client clients we can serve profitably. One important strategic initiative in the securities business that is the development of Axos Professional Workstation our proprietary client service platform that will replace the current third party workstations used in our by our clearing clients and allow better integration of banking and lending to those clients. We leverage low cost 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, 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 friction frictions caused by reliance on third party integrations.

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 RIAs and IBDs.

I'll turn the call over to Derek to share other further details.

Thanks, Greg. Quick reminder that in addition to our press release and eight ks with supplemental schedules and our 10 Q were filed with the SEC today. And are available online through EDGAR or through our website at axosfinancial.com. I'll 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 $146,000,000 for the three months ended 03/31/2025. Up by about $900,000 from the three months ended December to 2024. Salaries and benefit expenses were $74,600,000 up by $600,000 compared to the three months ended 12/31/2024. Excluding the seasonal increases in FICA expenses, the March, Salaries and benefit expenses were down by $800,000 on a linked quarter basis. Professional service expenses were $8,200,000 compared to the $9,100,000 in fiscal Q2 twenty twenty five. General and administrative expenses were down to $6,800,000 for March 2025, compared to $9,300,000 for December 2024. We had a payment of a legal judgment that was previously previously accrued and resulted in a reduction to general and administrative expenses by approximately $2,000,000 in the quarter ended 03/31/2025. We remain focused on managing our expenses 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 03/31/2025. Compared to 28.8% in the corresponding year ago period. We still expect our corporate tax rate be approximately 29% to 30%. 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 01/01/2025, the provision if passed would require financial institutions to use a single sales factor for portioning 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 Axos deferred tax asset would decrease by approximately $6,000,000 to $7,000,000 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 laws enacted. If enacted, management expects the effective tax rate for the fiscal year ended 06/30/2026, and beyond, would be reduced by approximately 3% or approximately $5,000,000 per quarter compared to the current effective tax rate. I'll wrap up with our loan pipeline, which remains healthy with $2,100,000,000 of total loans in the pipeline as of 04/25/2025. Consisting of $576,000,000 of single family residential jumbo mortgage, dollars 57,000,000 of single family gain on sale mortgage, dollars $346,000,000 of multifamily and small balance commercial, $63,000,000 of auto and consumer and $1,100,000,000 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 twelve months. Excluding the impact of the loan portfolio purchased from the FDIC or any other potential loan or asset acquisition. 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. Our first question is coming from Kyle Peterson from Needham and 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 you know, loan growth and kinda what you you guys are 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, like, there areas you guys see are seeing competitors maybe be a little more cautious or shy where you guys think might be up opportunities to to go and and take share?

Yes. I think the logistic well, I think there are certain C and I segments that in anticipation of the administration change or potential administration change that we've been cautious about for a while. So we've been been shying away from logistical sort of deals Obviously, we got caught up in that one, the still paying, but is on non accrual. So 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 we've had views about from an economic perspective. But those are either segments within C and I or specific companies that have unique exposure. As far as it's a little early to tell but I do think that 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, some of the takeouts or some of our lines whatnot, the revolving lines are securitizations. So to the extent you get any difference in that market, that can flow through. I think that's positive there.

But in general, the pipelines are pretty good. I would say the biggest impacts that we'll have is just with respect to whether we can hit an 11 or percent sort of loan growth in the year or 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. 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 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 multi family. And that tailwind is 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. Then maybe just a a follow-up, more of a a housekeeping item, but, noticed the fee income jump [indiscernible] Quite a bit this quarter, I guess. Could you just clarify whether there was anything like, whether it's seasonal or or onetime or or if what we saw in in the March quarter is a good run rate to use moving forward?

Yeah. There were some 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, [indiscernible] fair value mark on our DTC stock that we have to hold for the clearing company, that was $750,000 that was only happens once a year. And so that gave us a little bump up. That was only 750,000.

Okay.

Appreciate all the color. Nice quarter. Thanks, guys.

Thank you. Thank Next question is coming from Andrew Liesch from Piper Sandler. Your line is now live.

Hey, guys. Good afternoon. Hi, Andrew.

Greg, you've highlighted some some good investment opportunities maybe streamline the company. I'm just curious, like, what's like the cadence of some of these investments? And is it 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 we're gonna 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 we've been developing to ensure that that we're 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 noninterest income. I think we can do that. 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. Even in a company such as ours there's always an opportunity for people to step it up and do more. And so looking forward to cracking the whip on our organization to make all of us, myself or I'm faster. So yes, so I think going to be a very 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 the four into your fourth quarter, maybe a little bit more margin compression if that continues. But should we see NII step up from here? [indiscernible] to your point, from a point in time basis loan growth of 700,000,000 it was closer to $100,000,000 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 [indiscernible] somewhat weak net interest income performance there. But as we look forward, it should return to return to an increasing value.

Got it. Do you think the margin could step up here, or is there too much yield pressure where it's gonna be hard to replicate April? So I, you know, I asked the the team to go and look at the difference between what was the net spread compression versus what was lagging adjustments from interest rate declines. And it was about a three basis point net spread compression.

So 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 little bit down 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 that 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 that's helpful, guys. Thanks for taking the questions. I will step back. Thank you.

Thank you. 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 substandard loans. Can you talk to kind of where those where that kind of improved credit you know, grading was driven by and and but, you know, the color on there. I know MPS were down quite a bit, but you know, kinda looking deeper. We'll love we'll love some additional color. Yes.

In a number of cases, some of the loans were that were placed on substandard had payoffs that were coming that just happened to come at the end of the quarter [indiscernible] there was a loan being sold or refinance that happened to hit at the end.

So I think I think that in a lot of cases, like even if you look at the two large C and I loans that are on nonaccrual, they're both still paying They both still arguably have strong borrowing basis.

So I think 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 lost content there. And so frankly, lot of those loans just paid off or and then we did sell some of them too.

At par.

At par.

Yeah. So we sold them at par. So and, yeah, par plus accrued. So we got our interest and whatnot.

So yes, it was it was a good quarter for that. I mean, 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 But in any event, that's kind of what we did there.

So Okay.

And then another question, I guess, also around credit. In terms of the ACL, build this quarter, based on what's in your supplemental deck. Looks like you lowered the reserve specific to multifamily and commercial mortgage by, call it, 30 basis points and increase the C and I 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'm sorry. C and I. The loan growth was primarily in C and I, and so that was obviously a major factor in that category. The other results were really coming from the quantitative model where they 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 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 C and I portfolio. So that's what drove some of those. That and combined with the growth were what drove some of those increases in that portfolio.

And in the real estate portfolio, [indiscernible] is continuing to perform and then the some of the HBI index 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.

Yes. 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.

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.

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 your viewing continuing the buyback here.

Hi, Kelly.

Yeah. You know, look, I think I think we do have excess capital Obviously, we look at we look at where loan growth is I think this is a nice opportunity 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 think it's a good opportunity and we still think we can do right now [indiscernible] solid loan growth. Think our capital ratios are good.

We're not really seeing anything that we feel good about where non performers are and those kind of things. So things feel feel okay to be doing a little buyback. And it's not really we don't ever go get too crazy and do something that's too abrupt, right? We kind of we're in there in the market and 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 for the quarter and including this month. It's a nice opportunity. If we see M and A type stuff floating around then 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.

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 and a front, can you remind us what kinds of business would be top of mind in terms of being additive to Axos.

Yeah. Know, we'd love to we'd love to buy wealth and custody stuff, but there's not a lot out there and 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 obviously we pay attention to what's going on in bank but our model is somewhat unique. So we're not the natural owner [indiscernible] of a lot of banks, particularly if they're heavy branch based. But there are specialty type of banks that we might look at different times if they really made a lot of sense. And then we look at spec fin 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 we've looked we I mean we looked at different we looked at a premium finance business that a bank was selling. We We lost a bid on it We looked at kind of a leasing business that was a that was a vendor leasing business. Also lost that bid on price. We thought we had a good price, but there's some people like to overpay for things.

I do not. So 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 in it.

Got it. That's helpful. Last question from me, just changing gears. Greg, it sounds like [indiscernible] 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 if you could just help frame that for me, that would be helpful.

Yeah. I mean, the the types of projects that we I think the answer is not much. And the reason it's not much isn't because the input factor 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 depending on the strength of the sponsor and [indiscernible] junior lender. But then you also have SubGuard insurance that bonds those those subs.

So with respect to that, you don't want to leave in a general 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 theoretically tariffs might be a reason, but there's plenty of things that happen in construction. 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 a smaller mom and pop builder and they're doing a a $5,000,000 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 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 Cressle.

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. Next question is coming from Edward Hemmelgarn 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 your, I think, your equity I'd like to see the share repurchase. That was good.

But your 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? Are you anticipating grips rougher times or what?

Well, you know, Ed, I am a conservative guy. As we've discussed many times, No, look, think there's a couple of things going on. One is that you looked at our balance sheet [indiscernible] you first became enamored with us, we were much more of a 50% risk weighted shop And so that's changed over time, right? So you sort of you get if you have a much higher percentage of 50% risk weighted assets and you've got that that leverage and that risk weighted ratio tends to have a bigger disparity And then as we've added finance and C and I and all these different categories and we've kind of shied away single family has not shied away from it. 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, think there is a recognition that you know, that 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, are targeting a higher equity ratio.

But I feel like we're good where we are And as I said, credit performance looks looks to be continue to be solid. So I think we are able to buy back stock and we had good growth this period.

So I think I think we're doing an appropriate job of balancing taking appropriate risks and making sure that we're really protecting the institution.

Well, yeah. I was looking at the just look at the loans balances and your they they seem to be getting better in terms of current payments and and so forth. Opposed to work preferences.

A little [indiscernible] By that. Loan loss decision for the quarter. The other thing is Yeah. I mean, what I what I would say on the loan loss what I said on the loan loss provision, Ed, is you have to remember is that with CECL, what happens is there's external inputs for us that are 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, can have my doubts, but that's it's model based part of it. Okay. I mean And the one 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 the lifetime of the loan. So that you're going 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 well, 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. Yes. But look, I mean, that being said, we are 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 where it is. I think that's that's a positive. It is I think think I've talked to a lot of pretty smart people over the last couple months about 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 I think that's reasonable that the model predicts that. [indiscernible] I also appreciate the conservatives. The other thing is just about your your spending, I've noticed, has really gone up for you know, IT and data processing and so forth. I mean and you you briefly talked about that. You saw some some real opportunities there. You know, can you talk about that a little bit more? I mean, maybe seen examples of you know, where you're seeing opportunities to really deploy AI and so forth. Yeah.

So we just 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 aided replacing it with our own workstation. And we use the 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 life cycle.

And we've seen some stuff that's quite extraordinary. The ability to lift and shift old code that is in a basic or in some sort of old, language and be able to read factor it much more quickly or to be able to extract and document the code would normally require somebody who was very skilled in 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 business requirements document and bring it into a set of stories and a set of of documents that can be utilized by developers to 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 and 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 we have to hold ourselves accountable for actually seeing that in the results which to me means that you have for each dollar you earn, you don't spend as much on on people and technologies. Right?

And that's the way I think you have to be able to eat AI I think it's possible. It's not always easy at every step of the way, but there's a lot of opportunity. I mean, really is. We have a good strategy there and we're not fully at the AgenTik AI you know, sort of level yet, but, you know, we'll have to keep on pushing for that.

Okay. Great. Thanks. It's a good quarter. Thank you.

Thanks, Ed. Thank you. We've reached the end of our question and answer session. I'd like turn the floor back over for any further or closing comments.

Thank you, everyone. We'll talk to you next quarter. I appreciate your interest.

You. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.