Axos Financial, Inc.

Ladies and gentlemen, greetings and welcome to the Axos Financial second quarter 2019 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the program, please push star zero on your telephone keypad. As a reminder, this program is being recorded. It is now my pleasure to introduce your host, Johnny Lai, VP Corporate Development and IR. Thank you. You may begin.

Thanks, Adam. Good afternoon, everyone. Thanks for your interest in Axos Financial and Axos Bank. Joining us today for Axos Financial Inc.' 's second quarter 2019 financial results conference call are the company's president and chief executive officer, Greg Gerbrandt, and executive vice president and chief financial officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the three and six months ended December 31st 2018, and they 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. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims to save harbor protection pertaining to forward-looking statements contained in the Private Security Litigation Reform Act of 1995. 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 Axos Financial for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. At this time, I would like to turn the call over to Greg for his opening remarks.

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axios Financial's conference call for the second quarter of fiscal 2019, ended December 31, 2018. I thank you for your interest in Axios Financial and Axios Bank. Axos announced record net income of $38.8 million for the fiscal second quarter ended December 31, 2018, up 22.7% from the $31.7 million earned in the fiscal second quarter ended December 31, 2017, and up 5.4% when compared to the $36.8 million earned in the prior quarter. Earnings attributable to Axos' common stockholders were $38.8 million, or $0.62 per diluted share, for the quarter ended December 31, 2018, a 26.5% increase from the $0.49 for diluted share for the quarter ended December 31, 2017, and $0.58 per diluted share for the quarter ended September 30, 2018. Excluding non-recurring expenses, non-GAAP adjusted earnings and earnings per share were $39.6 million and $0.63, respectively, for the quarter ended December 31st, 2018. Other highlights for the second quarter included ending loan and lease balances increasing by 363 million, up 4.2% on a linked quarter basis, or 17% annualized from the first quarter of 2019. Total assets remained unchanged from 9.8 billion in September 30th, 2018, and up 0.9 billion from the second quarter of 2018. Net interest margin was 3.87 percent for the quarter ended December 31st, 2018, up 11 basis points from 3.76 in the first quarter of fiscal 2019. Average loan yield increased by nine basis points to 5.6 percent compared to 5.51 percent in the quarter ended December 30th, 2018. Excluding the impact from H&R Block seasonal loan products and excess liquidity and our subordinated debt, Net interest margin in the quarter ended December 31, 2018 would have been approximately 3.83% compared to the 3.92% in the second quarter of 2018 and 3.76% in the first quarter of 2019. Capital levels remain strong with Tier 1 leverage ratio of 9.03% at the bank and 9.41% at the holding company, both well above our regulatory requirements. We took steps to redeploy some of our excess capital this quarter buying back $48 million of common stock at an average price of $28 per share. Return on equity was 15.29% for the second quarter of 2018, compared to 14.37% in the corresponding period last year, reflecting the bank's year-over-year increase in earnings. Our credit quality remains strong with six basis points of net charge-offs and a non-performing asset-to-total asset ratio of 53 basis points this quarter. We received approximately $1 million of payments in the quarter ended December 31st, 2018 for refund advance loans originated during the 2018 tax season, which offset the increase in our loan loss provision this quarter. Our allowance for loan loss represents 124.9% coverage of our non-performing loans and leases. While we have a small number of loans to borrowers secured by real estate properties located in areas affected by wildfires and mudslides in California, Our net exposure after insurance appears to minimize. Our efficiency ratio was 46.47% for the second quarter of 2019, compared to 51.47% in the first quarter of fiscal 2019, and 40.28% for the second quarter of fiscal 2018. We incurred one-time expenses related to mergers and acquisitions this quarter. Excluding $1 million of deal-related expenses, the efficiency ratio would have been 45.5% in the second quarter of 2019. We originated approximately $2.5 billion of gross loans in the second quarter, up 20% year over year. Originations for investment increased 35.6% year over year to $1.8 billion, and originations for sale decreased 11.1% to $610.2 million. Ending loan balances increased by 14.5% year-over-year to $9 billion, led by strong growth in single-family jumbo, multifamily, other commercial real estate, and C&I lender finance. Our loan production for the second quarter ended December 31, 2018, consisted of $81 million of single-family agency-eligible gain-on-sale production, $4 to $31 million of single-family jumbo portfolio production, 182 million of multifamily and other commercial real estate portfolio production, 1 billion 43 million of CNI production, 42 million of auto and consumer unsecured lending production, 401 million of Emerald Advance loan originations, and 30 million of seasonal H&R Block franchise loans. For the second quarter 2019 originations are as follows. The average FICO for single family agency eligible production was 744, with an average LTV of 69.3%. The average FICO for the single-family production was 730, with an average loan-to-value ratio of 64.1%. The average loan-to-value ratio of the originated multifamily loans was 51.5%, and the debt service coverage was 1.27%. The average loan-to-value ratio of the originated small balanced commercial real estate loans was 49.2%, and the debt service coverage was 1.31%. The average FICO score of our auto production was 763. At December 31, 2018, the weighted average loan-to-value ratio of our entire portfolio of real estate loans was 56%. We had approximately $4.3 billion of single-family loans, representing approximately 48% of our loan portfolio. Lifetime credit losses in our originated single-family loan portfolio is four basis points of loans originated. We had approximately $1.9 billion of multifamily loans outstanding at December 31, 2018, representing 21% of our total loan book. The rated average loan-to-value ratio of our multifamily loan book is 53%, based on the appraised value at the time of origination. The lifetime credit losses in our originated multifamily portfolio is less than one basis point of loans originated. We had no losses in our CNI business since inception, other than our equipment finance group with approximately 160 million of outstanding balances at December 31st, 2018, and 27 basis points of cumulative net charge-offs since we entered the business in March 2016 through acquisition. We had only 43 basis points of cumulative loss on our originated portfolio of auto loans since we entered the business approximately three and a half years ago. Loan demand remains solid overall and across most of our lending segments, with the exception of single-family agency mortgages, which are down from prior quarters as it is across the industry generally. Our loan pipeline was $1.12 billion at December 31, 2018, consisting of $420 million of single-family jumbo loans, $58 million of single-family agency-eligible mortgages, $116 million of income property loans, and $527 million of CNI loans. We continue to gradually rebalance our portfolio from jumbo single-family lending into CNI and commercial real estate lending. While we anticipate strong originations across most lending categories, our average and ending loan balances will fluctuate from quarter to quarter based on the pace of prepayments. Switching to funding, total deposits increased by $2.3 billion quarter over quarter as we repositioned our balance sheet in anticipation of the transfer of deposits we acquired from Nationwide in late November. Total not interest-bearing deposit balances were approximately $1 billion at December 31, 2018, up by $139.5 million from September 30, 2018. The increase in non-interest-bearing deposits was driven by the addition of Chapter 7 bankruptcy deposits and other commercial deposits. On December 31, 2018, approximately 30% of our deposit balances were business and consumer checking accounts, 24% money market accounts, 5% IRA accounts, 5% savings accounts, and 4% prepaid accounts. Checking and savings deposits represented 67% of total deposits at December 31, 2018, compared to 77% at September 30, 2018. The December 31, 2018 deposit max was impacted by the addition of approximately $1.7 billion in time deposits from Nationwide. We deployed some of our excess capital across a variety of businesses and initiatives in the past 12 months. We made significant progress in our ongoing efforts to diversify and grow our deposit franchise and seed-based businesses with four separate transactions. First, we completed the acquisition of approximately $2.4 billion of deposits from Nationwide Bank in November, adding approximately 80,000 new accounts and over 40,000 new relationships to access. These deposits, comprised of $1.7 billion of retail CDs and $700 million of checking, savings, and money market deposits when the transaction closed on November 16, 2018, helped increase our core deposits and reduce our cost of funds. With a successful nationwide deposit conversion behind us, we are excited to start our strategic partnership with Nationwide to offer co-branded banking and insurance products and services to Nationwide's associates, policyholders, and general market customers. The agreement, with an initial term of five years, focuses primarily on a variety of consumer lending and deposit products. We intend to leverage our flexible digital banking platform and our collective marketing expertise to make it easy and convenient for existing and new customers to purchase banking and insurance products from Axos and Nationwide. The collective teams are working through data and marketing strategies to prioritize products and channels. We see additional opportunities to offer banking products and services to Nationwide's over 600,000 small business customers that are included in the partnership scope. While we incur incremental marketing expense related to our partnership with Nationwide, the cost will be well controlled and largely success-based. We look forward to working with our partners at Nationwide to make this collaboration a success. The second strategic action we took was the acquisition of Core Clearing, a leading independent clearing firm that serves approximately 60 correspondent broker-dealers with over 90,000 underlying client accounts. The acquisition provides an experienced team, a profitable business, and an established technology platform from which we intend to build our securities business. Core generated approximately $47 million in revenue when their fiscal year ended June 30, 2018, including $34.7 million of fee-based revenue. On a pro forma basis, the addition of CORE would have increased our fiscal 2018 fee income from $70.9 million to $105.6 million, representing an increase of approximately 49%. They also earned about $12 million in margin lending and interest income from client deposits placed at other banks. The $470 million of low-cost off-balance sheet deposits provide us with the flexibility to reduce our cost of funds by bringing some or all deposits to our bank or keeping them at partner banks and earning high margin fee income streams that are tied to short-term interest rates. After spending the last four years researching the clearing, custody, and asset servicing marketplace, we see opportunities to provide a more holistic service offering to small and medium-sized independent broker-dealers that will help improve the efficiency of their back office and enable advisors and brokers to successfully transition from a commission-based to a fee-based model. We also believe that we can expand CORE's revenue and profitability by providing more capital enhancing their sales and marketing capabilities, and growing existing high-margin services such as securities and margin lending. We are evaluating opportunities to add new banking and non-banking services to CORE's existing clients and to expanding into adjacent markets such as RIA custody, securities-based lending, and robo-advisory services. Our projection is that the CORE acquisition will be accretive to our earnings per share by approximately 6% in the 2020 fiscal year beginning July 1st of 2019, assumes no benefit from entering new markets, cost synergies, or accelerated growth. The clearing business runs at a higher efficiency ratio than Axos Bank, but is significantly more capital efficient. For comparative purposes, Core generated approximately $47 million in revenue and $10.4 million of adjusted net income in the 12 months ended June 30, 2018. Core had $32.5 million of operating expenses, excluding non-recurring legal and regulatory costs, which translated into an efficiency ratio of approximately 70%. Given the capital-efficient nature of their clearing business, Core had a return on equity of approximately 40.5% for their fiscal 2018. Starting in the quarter ended March 31, 2019, we will provide consolidated and segment reporting for Axos and Core so that investors can better track the underlying financial metrics of Axos Financial's bank and securities segments. We received all required regulatory and shareholder approval and closed the core transaction yesterday. I'd like to welcome the 131 team members joining us from core. We intend to rebrand the firm to access clearing over the next three to six months. The third strategic action we made this year from an M&A perspective was the addition of the trustee and fiduciary service business from Epic in April 2018, adding a new source of low-cost core deposits. We added an experienced team with established relationships with bankruptcy trustees and fiduciaries nationwide and a technology platform that will integrate and improve over time to serve not only Chapter 7 bankruptcy trustees, but also non-7 trustees and fiduciaries. When the deal was announced, the acquired business had approximately $1 billion of Chapter 7 bankruptcy and non-7 deposit balances held at seven bank partners on behalf of clients serviced through approximately 400 trustees using Epic software. Through the hard work of our team members, we have transitioned dozens of trustees with over $200 million of deposit balances to our bank, with more slated to transition in the coming weeks and months. Axos Fiduciary Services fits our strategic vision of providing banking services to a specialized industry vertical through a low-cost, scalable software and service-enabled model. We're committed to serving trustees in this market and expanding our product and service offering over time. Our most recent transaction announced in December 2018 is the acquisition of approximately $225 million of deposits from MWA Bank. Similar to our prior deposit acquisitions from Principal, H&R Block, and Nationwide, the parent company of MWA Bank is looking to wind down their OCC charter and focus on their core business. We'll be adding approximately 25,000 new accounts with $225 million of low-cost deposits, including $194 million of checking, savings, and money market balances and $31 million of time deposits from MWA Bank. We will not pay a premium on the deposits we're acquiring and will not assume any assets, employees, or branches from MWA Bank. While the deposit balances are small relatively and compared to our $8.3 billion in deposits, the national branchless nature of these accounts are a terrific fit for us and help us improve our funding costs. The OCC approved our acquisition of MWA Bank deposits last week. we're excited to offer our full suite of banking and cash management services to MWA banks, retail and business customers, and fraternal chapters when the transaction closes in mid-March 2019. Our net interest margins have held up well, improving by 11 basis points from September 2018 to December 2018 quarter, even though we've only realized partial benefits from two of our four deposit-related acquisitions. Deposit betas continue to increase across the industry, and a flat yield curve has generally created downward pressure on net interest margin for many banks. We remain focused on closing the announced acquisitions, transitioning the acquired no- or low-cost deposits to our bank, and growing non-interest-bearing deposits through our commercial small business and specialty deposit verticals. From an asset perspective, we continue to grow our asset-backed commercial loan portfolios, which have premium yields relative to our multifamily and jumbo single-family mortgages, and look for opportunities to enhance the yield in our relatively modestly sized securities book. Since the Fed began raising interest rates, we have been able to maintain our core net interest margin in a relatively tight band of 3.8 to 4.0%. If you include the H&R Block-related businesses, our reported net interest margins have steadily increased since the Fed started raising rates, from 3.91 in fiscal year 2016 to 3.95 in fiscal year 2017, to 4.11 in fiscal year 2018. Our proactive actions to diversify both our funding and asset generation capabilities have held up well and should hold up well in the future irrespective of Fed actions. The 2018 and 2019 tax season marks the fourth year of our seven-year partnership to provide various banking and payment services to H&R Block's clients. In the quarter ended December 31st, 2018, We originated approximately $401 million of Emerald Advance unsecured consumer loans and $30 million of H&R Block franchisee loans. Since January 2nd, we started offering refund advance loans to H&R Block customers for the second consecutive year as Block's exclusive provider of refund advance loans. Refund advance loans are interest-free, no-fee advances secured by qualified taxpayers' refunds. We received fees from H&R Block Bank based on the principal amount of refund advance loans we originate. Similar to prior years, we expect a seasonal surge in refund advance loans, refund transfers, and ML cards to result in a significant quarter-over-quarter increase in our fee income and noninterest-bearing deposits in the quarter ended March 31st. While still very early in the tax season, we have not experienced any disruption in the tax-related businesses as a result of the partial government shutdown. We look forward to completing another successful tax season helping H&R Block Bank's customers. Our capital ratio remains strong, despite recent action to deploy some of our excess capital into accretive M&A transactions and share repurchases. We spent $48 million of excess capital in the December quarter to repurchase approximately $1.7 million of common stock. Our Tier 1 leverage ratio was 9.41 at the holding company, and 9.03 at the bank at December 31, 2018, more than sufficient to fund core and the Wise Banyan acquisition without raising capital. Our priorities for excess capital have not changed. We will continue to fund organic growth and investments in our business and consider opportunistic share repurchases, accretive M&A transactions, and potentially a dividend. Last quarter, we announced a small but strategic acquisition of a digital advisory and personal financial management platform Wise Banyan. Wise Banyan offers a comprehensive and user-friendly platform for individual investors to manage their finances and create custom investment portfolios tailored to meet their life goals. We diligence dozens of robo-advisory firms, business models, and third-party technology providers through the course of our evaluation. What we determined was the economic model that most fintechs currently have, limited asset-based revenue streams with high customer acquisition costs, and limited control over the technology stack, Utilization of a third-party clearing firm and a limited ability to monetize the deposit and lending relationship is an unsustainable one. The combination of Wise Banyan, which has a talented entrepreneurial team who built the entire technology stack, combined with CORE's back office platform, accelerates our time to market by one to two years and provides us with the essential components to add a profitable and scalable digital wealth management business to our consumer product offering. Over time, we will integrate the wealth advisory services into the Universal Digital Bank, providing an integrated banking and wealth management experience to our clients and to Wise Banyan's clients as well. We look forward to closing the Wise Banyan transaction in the next few months. In closing, we are seeing the tangible benefits from investments we are making in technology, personnel, infrastructure, and new businesses. The addition of low-cost deposits from Nationwide and Epic help keep our deposit costs essentially flat quarter over quarter, despite only a partial quarter's impact from Nationwide. Investments in our small, balanced commercial real estate and asset-based commercial lending groups resulted in $363 million of sequential growth in net loan balances this quarter. The deployment of our universal digital banking platform with additional features such as personal financial management, biometric authentication, personalization, and gamification slated for rollout in the next 12 months will allow us to continually improve our user experience and become more relevant to our customers and partners. With control of our platform, we will increase the value of our product offering through the addition of wealth management services to the Universal Digital Bank to differentiate our consumer product offering. The addition of Axos fiduciary services and core and our multi-year partnership with Nationwide further expands our product capabilities, distribution channels, and revenue sources. The opportunities we have are abundant. We will continue to prudently prioritize and allocate capital and resources with a focus on ensuring that we're building a technologically forward, customer-centric consumer and commercial bank, as well as developing our clearing business to better serve our existing customers and to expand beyond our current market. Now I'll turn the call over to Andy, who will provide additional details on our financial results.