Axos Financial - Earnings Call - Q3 2025

Executive Summary

• Axos delivered solid Q3 FY25 results: diluted EPS of $1.81 (flat QoQ, down 5% YoY) on net income of $105.2M; net loan growth was strong at ~$706.9M, NIM compressed 5 bps to 4.78% as excess liquidity weighed on margin.
• Versus estimates: EPS beat consensus by ~4% ($1.81 vs $1.735), while S&P Global “Revenue” missed ($294.3M vs $305.0M); 6 EPS and 5 revenue estimates contributed to the consensus* [GetEstimates].
• Credit quality improved: non‑accrual loans fell to 0.89% of loans (from 1.26% in Q2), NPAs declined to 0.79% of assets; provision rose to $14.5M, driven by C&I growth and CECL macro inputs.
• Management reiterated NIM ex-FDIC accretion at the high end of the targeted 4.25–4.35% and expects organic loan growth in the high single-digit to low‑teens range; buybacks continued ($28M in Q3 and another $30M in April) and the Board added $100M to the repurchase program on May 12, 2025, a potential stock support catalyst.

What Went Well and What Went Wrong

What Went Well

• Robust loan growth: “We generated over $700 million in net loan growth, the strongest quarter so far in fiscal year 2025” – Greg Garrabrants, CEO.
• Credit improvement: “Our credit quality remains good, with non‑performing and non‑accrual loans declining… compared to the linked quarter” – CEO.
• Deposit cost management and NIM target: Deposit costs fell; management expects consolidated NIM ex‑FDIC accretion to stay at the high end of the 4.25–4.35% range.

What Went Wrong

• Margin pressure: Consolidated NIM eased to 4.78% (−5 bps QoQ) as excess liquidity was a 13 bps drag; competitive spread compression (~3 bps) also weighed on NIM.
• Provision higher: Provision for credit losses rose to $14.5M (vs $12.2M in Q2), primarily in C&I, reflecting loan growth and CECL macro variables (tariff fears, economic factors).
• Operating expense: Non‑interest expense increased to $146.3M YoY (+$13.0M) on higher salaries, processing, and FDIC/regulatory fees (though only +$0.9M QoQ).

Transcript

Operator (participant)

Greetings and welcome to the Axos 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.

Johnny Lai (SVP of Corporate Development and Investor Relations)

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 Garrabrants, and Executive Vice President and Chief Financial Officer, Derrick Walsh. Greg and Derrick 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 forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking 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 is being webcast, and there will be an audio replay available in the investor relations section of the company's website located at axosfinancial.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 8-K, 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.

Greg Garrabrants (President and CEO)

Thank you, Johnny. 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% on the quarter ended March 31st, 2024. We continue to benefit from a best-in-class net interest margin with 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 $20.1 billion. 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 31st, 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-preserved relative to our low current and historic net credit losses. Total non-accrual loans declined by $66.5 million linked quarter, resulting in our non-accrual loans to total loan ratio improving from 1.26% 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 for the quarter ended March 31st, 2025, compared to $1.80 in the prior quarter. Net growth in non-purchased loans for investment was $700 million for the month ended at the quarter ended March 31st, 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 in the jumbo single-family and multifamily 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 and competitive environment remains unstable, we feel good about keeping our jumbo single-family and multifamily loan balances flat to down $100 million per quarter versus the prior $200-$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-purchased loans was 7.66%, and average yields for purchased 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%, multifamily 7.3%, C&I 7.6%, and auto 8.5%. Ending deposit balances were $20.1 billion, were up 1% linked quarter and up 5.4% year-over-year.

Demand money market and savings accounts represent 96% of total deposits at December 31st, 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%, Axos Fiduciary Services representing 6%, and Axos Securities, which is our custody and clearing business combined, representing 4%. Non-interest-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 grow our assets under custody and cash balances. In addition to our Axos 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 excess 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 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 cost. 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 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 high-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 4.25%-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 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, 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 linked quarter at $71.2 million. All C&I loans classified as non-accrual at March 31st, 2025, but three, totaling $12.2 million, continue to meet 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 do not 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 our custody businesses, had a good quarter.

Total deposits at Axos Clearing were $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 RAA 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.

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 clearing clients we can serve profitably.

One important strategic initiative in the securities business is the development of Axos Professional Workstation, our proprietary client service platform, that will replace the current third-party workstations used by our clearing 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 RIAs and IBDs. Now I'll turn the call over to Derrick to share other further details.

Derrick Walsh (CFO)

Thanks, Greg. Quick reminder that in addition to our press release, an 8-K 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 million for the three months ended March 31st, 2025, up by about $900,000 from the three months ended December 31st , 2024. Salaries and benefit expenses were $74.6 million, up by $0.6 million compared to the three months ended December 31st , 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 31st, 2025. We remained 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% in the corresponding year-ago period. We still expect our corporate tax rate to be approximately 29%-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 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 Axos' deferred tax asset would decrease by approximately $6 million-$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 in which the law is enacted.

If enacted, management expects the effective tax rate for the fiscal year ended June 30th, 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 25th, 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 multi-family 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.

Johnny Lai (SVP of Corporate Development and Investor Relations)

Thanks, Derrick. Kevin, we're ready to take questions.

Operator (participant)

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 one on your telephone keypad. One moment, please, while we pull for questions. Our first question is coming from Kyle Peterson from Needham & Company. Your line is now live.

Kyle Peterson (Senior Analyst)

Great. Good afternoon. Thanks for taking the questions and nice results. I wanted 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?

Greg Garrabrants (President and CEO)

Yeah. I think there are certain C&I segments that, in anticipation of the administration change or the potential administration change, we've been cautious about for a while. We have been shying away from logistical sort of deals. Obviously, we got caught up in that one that's still paying but is on non-accrual. We generally have shy away from those as far as adding a lot of exposure in that sector. There have been a few others that we've had views about from an economic perspective, but those are either segments within C&I or specific companies that have unique exposure. As far as it's a little early to tell, 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.

I think that's partially related to the fact that in certain instances, some of the takeouts or some of our lines or whatnot, the revolving lines are securitizations. To the extent you get any difference in that market, that can flow through. I think that's positive there. In general, the pipelines are pretty good. I would say the biggest impacts it will have is just with respect to whether we can hit an 11% sort of loan growth in the year 2015. Is this really going to be more related to prepays? We had some periods during COVID that we were very cautious on any kind of project financing, construction stuff. 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.

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. 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. I feel okay about loan growth, actually.

Kyle Peterson (Senior Analyst)

Okay. That's really helpful. Maybe just a follow-up, more of a housekeeping item, but I noticed the fee income jumped up quite a bit this quarter, I guess. Could you just clarify whether there was anything, 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?

Greg Garrabrants (President and CEO)

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. There were some additional loan fees that came through unrelated to origination. 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 $750,000. That only happens once a year, and so that gave us a little bump up, but that was only $750,000.

Kyle Peterson (Senior Analyst)

Okay. Appreciate it. I'll call her next quarter. Thanks, guys.

Greg Garrabrants (President and CEO)

Thank you.

Operator (participant)

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

Andrew Liesch (Senior Equity Research Analyst)

Hey, guys. Good afternoon.

Greg Garrabrants (President and CEO)

Hi, Andrew.

Andrew Liesch (Senior Equity Research Analyst)

Greg, you 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?

Greg Garrabrants (President and CEO)

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 cost under control. 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. 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.

I'm looking forward to cracking the whip on our organization to make all of us, including myself, run faster. 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.

Andrew Liesch (Senior Equity Research Analyst)

Got it. All right. Very helpful. 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. Maybe that may have been why NII was down sequentially. If you're looking into your fourth quarter, maybe a little bit more margin compression if that continues. Should we see NII step up from here?

Greg Garrabrants (President and CEO)

You'll answer that, Derrick.

Derrick Walsh (CFO)

Yeah. Yeah. We should. It was, to your point, from a point-in-time basis, loan growth was $700 million. It was closer to $100 million on an average basis during the quarter. We expect that average this next quarter to go up, and that will, in turn, increase the net interest income impact. That is why there was kind of a somewhat weak net interest income performance there. As we look forward, it should return to an increasing value.

Andrew Liesch (Senior Equity Research Analyst)

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?

Greg Garrabrants (President and CEO)

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. 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, not that we have a lot, but we still have hybrids adjusting. That will certainly happen going forward. There is still a decent number of hybrid loans that have to adjust and things like that. I feel pretty good about where margin is looking forward. I mean, could it be a little bit down? If we also use up some of the excess liquidity, that is also going to move it the other way too.

I think that three basis points is an interesting number because if you have a flat-rate environment, that was sort of that's the number that takes out the lagging decline just from index and floating-rate loans.

Andrew Liesch (Senior Equity Research Analyst)

Got it. That's helpful, guys. Thanks for taking the questions. I will step back.

Greg Garrabrants (President and CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, that is star one to be placed into the question queue. Our next question is coming from Gary Tenner from D.A. Davidson. Your line is now live.

Gary Tenner (Managing Director and Senior Research Analyst)

Thanks. Good afternoon, everybody. I wanted to ask about the sequential quarter improvement in special mention substandard loans. Can you talk to kind of where that kind of improved credit rating was driven by and the color on there? I know NPLs were down quite a bit, but kind of looking deeper, we'll have some additional color.

Greg Garrabrants (President and CEO)

Yeah. In a number of cases, some of the loans 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 refinanced that happened to hit at the end. I think that in a lot of cases, even if you look at the two large C&I loans that are on non-accrual, they're both still paying. They both still arguably have strong borrowing bases. I think we're always cautious about this stuff, and we try to be conservative about how we look at it. In a lot of cases, there really isn't a lot of loss content there. Frankly, a lot of those loans just paid off, and then we did sell some of them too.

Gary Tenner (Managing Director and Senior Research Analyst)

At par.

Greg Garrabrants (President and CEO)

At par. Yeah. We sold them at par. Yeah, par plus accrued. We got our interest and whatnot. 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? 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. In any event, that's kind of what we did there.

Gary Tenner (Managing Director and Senior Research Analyst)

Okay. 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 specific to multifamily and commercial mortgage by 30 basis points and increased the C&I reserve by a pretty similar amount. Can you talk about the moving parts there and the thoughts around those two categories?

Derrick Walsh (CFO)

Yeah. I'll start with C&I. The loan growth was primarily in C&I, and that was obviously a major factor in that category. The other results were really coming from the quantitative model, which incorporates the economic factors. What were some of the key economic factors? When you look at what was happening in kind of late February and into March, there was a lot of tariff fears and driving more negative outlooks on the economic factors. When we run that through the model, what portfolio gets kind of hit a bit harder was the C&I portfolio. That is what drove some of those. That combined with the growth were what drove some of those increases in that portfolio. The real estate portfolio still is continuing to perform.

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. That is what drove some of the benefits there.

Greg Garrabrants (President and CEO)

Yeah. These models are hooked up to Moody's stuff. If Moody's gets in a mood, then that's going to move the model around.

Gary Tenner (Managing Director and Senior Research Analyst)

I'm sure we've got a lot of that to look forward to in the June quarter.

Greg Garrabrants (President and CEO)

Probably.

Operator (participant)

Thank you. Our next question today is coming from Kelly Motta from KBW. Your line is now live.

Kelly Motta (Director of Equity Research)

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.

Greg Garrabrants (President and CEO)

Hi, Kelly. Yeah. Look, I think we do have excess capital. Obviously, we look at where loan growth is. I think this is a nice opportunity to 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 do not get opportunities like this all the time. We think it is a good opportunity, and we still think we can do right now good solid loan growth. We think our capital ratios are good. We are not really seeing anything that we feel good about where non-performers are and those kind of things. Things feel okay to be doing a little buyback. It is not really we do not ever go get too crazy and do something that is too abrupt, right?

We're in there in the market and making incremental buybacks, which are helpful. I mean, we did, it was almost a little bit more than 1% of the stock or about 1%, something like that for the quarter and including this month. It is a nice opportunity. If we see M&A type stuff floating around, then maybe we will not do as much. Yeah, I think it is a really nice opportunity for us right now. The IRR pencils really, really well when we look at our internal forecasts and stuff like that about where we think we are going to be.

Kelly Motta (Director of Equity Research)

Got it. 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?

Greg Garrabrants (President and CEO)

Yeah. We'd love to buy 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. We do look at stuff like that. Obviously, we pay attention to what's going on in banking, but our model is somewhat unique. We're not the natural owner of a lot of banks, particularly if they're heavy branch-based. There are specialty type of banks that we might look at at different times if they really made a lot of sense. We look at SPAC 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.

I mean, we looked at different, we looked at a premium finance business that a bank was selling. We lost a bid on it. We looked at a 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 some people like to overpay for things. I do not. We keep on looking at it. I think when we do something, we do it in a way that has enough margin of safety in it, so.

Kelly Motta (Director of Equity Research)

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 C&I loans and other construction elements of the portfolio. If you could just help frame that for me, that would be helpful.

Greg Garrabrants (President and CEO)

Yeah. I mean, the types of projects that we, I think the answer is not much. 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. That usually is a very high proportion. I mean, it varies depending on the strength of the sponsor and our junior lender. You also have Subguard insurance that bonds those subs. With respect to that, you do not 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. Theoretically, tariffs might be a reason, but there are plenty of things that happen in construction that have nothing to do with tariffs that blow out budgets.

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 $5 million multifamily project or something. 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 CRESL. It's a very different kind of risk that we bear with respect to that because of how we structure our deals.

Kelly Motta (Director of Equity Research)

Thanks, Greg. I appreciate all the color. I'll step back.

Greg Garrabrants (President and CEO)

Yeah. Thank you.

Operator (participant)

Thank you. As a reminder, that is star one to be placed into the question queue. Our next question is coming from Edward Hemmelgarn from Shaker Investments. Your line is now live.

Edward Hemmelgarn (CEO and Co-Chief Investment Officer)

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 like to see the share repurchase. That was good. 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 just being conservative? Are you anticipating rougher times or what?

Greg Garrabrants (President and CEO)

You know it. I am a conservative guy, as we've discussed many times. No, look, I think there's a couple of things going on. One is that if you looked at our balance sheet when you first became enamored with us, we were much more of a 50% risk-weighted shop. That has changed over time, right? You sort of, if you have a much higher percentage of 50% risk-weighted assets, then you've got that leverage and that risk-weighted ratio tends to have a bigger disparity. As we've added fund finance and C&I and all these different categories, and we've kind of shied away, well, single family is not shied away from. It's just become a smaller portion of the portfolio. That ratio has sort of kind of moved together. That is an element that you're seeing. That is not all of it, though.

I mean, I think there is a recognition that we obviously want to continue to make sure that we have a very strong balance sheet. That is a piece of that as well. Generally, in comparison with a longer period ago, we are targeting a higher equity ratio. I feel like we're good where we are. As I said, credit performance looks to continue to be solid. I think we are able to buy back stock, and we had good growth this period. I think we're doing an appropriate job of balancing, taking appropriate risks, and making sure that we're really protecting the institution.

Edward Hemmelgarn (CEO and Co-Chief Investment Officer)

Yeah. I was looking at the just looked at the loans' balances, and it seemed to be getting better in terms of current payments and so forth as opposed to worse balances. I was a little surprised by the loan loss decision for the quarter. The other thing is.

Greg Garrabrants (President and CEO)

Yeah. I mean, what I would say on the loan loss, what I say on the loan loss provision that 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 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.

Edward Hemmelgarn (CEO and Co-Chief Investment Officer)

Okay. 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. The whole idea of CECL is it's the lifetime of the loan so that you're projecting forward multiple different waves of economic ups and downs, right? 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.

Greg Garrabrants (President and CEO)

Yeah. 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 a positive. I think the, I think it's, I've talked to a lot of pretty smart people over the last couple of months about where they see things going. I think the one commonality is everyone agrees that there's just more volatility, right? There's more, I said, more potential for volatility and a higher sort of distribution of potential outcomes. I think that's reasonable that the model predicts that.

Edward Hemmelgarn (CEO and Co-Chief Investment Officer)

Yeah. Okay. That's fine. I mean, I also appreciate the conservatives. The other thing is just about your spending. I've noticed it's really going up for IT and data processing and so forth. I mean, you briefly talked about that. You saw some real opportunities there. Can you talk about that a little bit more? I mean, maybe with some examples of where you're seeing opportunities to really deploy AI and so forth.

Greg Garrabrants (President and CEO)

Yeah. 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. We're replacing it with our own workstation. We use the low-code platform to do that. I believe it took, I think, about maybe 50%-60% of the resources and about half the time to get that product out. We do think that there's a lot of really interesting AI opportunities happening in the software development life cycle. 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 refactor it much more quickly or to be able to extract 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 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. There is a lot of that. We are using software that can take a document that has unstructured data and appraisal or whatnot. 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? 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, which to me means that for each dollar you earn, you don't spend as much on people and technology, right? 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, there really is. We have a good strategy there. We're not fully at the agentic AI sort of level yet, but we'll have to keep on pushing for that.

Edward Hemmelgarn (CEO and Co-Chief Investment Officer)

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

Greg Garrabrants (President and CEO)

Thank you. Thanks, Ed.

Operator (participant)

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.

Greg Garrabrants (President and CEO)

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

Operator (participant)

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