Axos Financial, Inc.

Greetings and welcome to the Access Financial, Inc. First Quarter 2020 Earnings Results. 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 conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Johnny Lai, Vice President, Corporate Development and IR. Thank you. Please begin.

Thank you, and good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc.' 's first quarter fiscal 2020 financial results conference call are the company's president and chief executive officer, Greg Gerbrand, and executive vice president and chief financial officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operating results for the three months ended September 30, 2019, 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 the safe 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 holding company 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. At this time, I'd 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 Axos Financial's conference call for the first quarter of fiscal 2020, ended September 30th, 2019. I thank you for your interest in Axos Financial, Axos Securities, and Axos Bank. Axos announced record net income of $40.8 million for the fiscal first quarter, ended September 30th, 2019, up 10.7% from the $36.8 million earned in the fiscal first quarter, ended September 30th, 2018. Earnings attributable to Axis's common stockholders were $40.7 million, or 66% per diluted share, for the quarter ended September 30th, 2019, compared to 58 cents per diluted share for the quarter ended September 30th, 2018. Excluding non-recurring expenses, non-GAAP adjusted earnings and earnings per share were $42 million and 68 cents, respectively, for the quarter ended September 30th, 2019. Other highlights for the first quarter include Ending loans and leases increased by $402 million, up 4.3% on a linked quarter basis, or 17.1% annualized for the fourth quarter of 2019, and 13.1% year-over-year. Excluding our mortgage warehouse, which fluctuates quarter-to-quarter, and $57.9 million of structured settlement sales this quarter, ending loan balances increased $369.7 million, or 16.3% annualized from June 30 to September 30. Total assets reached $11.8 billion at September 30, 2019, up $600 million compared to June 30, 2019, and up $2 billion from the first quarter in 2019. Net interest margin was 3.77% for the quarter ended September 30, 2019, up one basis point compared to 3.76% in last year's first quarter. Our bank-only net interest margin was 3.83% in the first quarter of fiscal 2020, up four basis points from the corresponding period a year ago. Non-interest income increased 30.2% year-over-year to $21.5 million due to the addition of fees from Axos Clearing and higher gain on sale from structured settlement sales this quarter. Capital levels remain strong with Tier 1 leverage of 9.12% at the bank and 8.8% at the holding company, both well above our regulatory requirements. Return on equity was 14.85% for the first quarter of 2020, compared to 14.98% in the corresponding period last year, reflecting the bank's year-over-year increase in capital levels. Our credit quality remains strong with two basis points of net charge-offs and a non-performing asset-to-total asset ratio of 54 basis points this quarter. Our allowance for loan loss represents 105.9% coverage of our non-performing loans and leases. Our efficiency ratio is 52.44% for the first quarter of 2020, compared to 53.0% in the fourth quarter of fiscal 2019 and 51.47% for the first quarter of fiscal 2019. Our banking business segment efficiency ratio was 43.93%, down slightly from 44.46% in the first quarter of fiscal 2019. The primary driver of the year-over-year increase in our reported efficiency ratio was the inclusion of the clearing and digital wealth management business and higher depreciation and amortization expenses related to software development and deposit acquisitions. As the security segment develops, we believe we will attain operating leverage in the security segment. We have made significant investments across our businesses in personnel, technology, marketing, and infrastructure that will help strengthen our organization as well as increase the mix of fee income business, and we expect that over the next several years, we should be in a harvesting phase getting these synergies and growth from these initiatives. We originated approximately $1.8 billion of gross loans in the first quarter, up 8.3% year-over-year. Originations for investments increased 8.3% year-over-year to $1.46 billion, and originations for sale increased by 8.2% to $327.8 million. Ending loan balances increased by 3.1% year-over-year to $9.8 billion. Strong originations by our commercial specialty real estate, commercial and multifamily lender finance, and warehouse were partially offset by higher than average payoffs in our single family jumbo mortgage and lender finance portfolios. Our loan production for the first quarter ended September 30, 2019, consisted of $164 million of single family agency eligible gain on sale production, $245 million of single family jumbo portfolio production, $174 million of multifamily and other commercial real estate portfolio production, $858 million of CNI production, resulting in $4 to $20 million of net CNI loan growth, and $50 million of auto and consumer unsecured loan production. For the first quarter 2020 origination, statistics are as follows. The average FICO for single-family agency-eligible production was 746, with an average loan-to-value of 70%. The average FICO of the single-family jumbo production was 728, with an average loan-to-value ratio of 59.8%. The average loan-to-value ratio of the originated multifamily loans was 59%, and the average debt service cover was 1.26%. The average loan-to-value ratio of the originated small-balance commercial real estate loans was 62.8%, and the average debt service coverage was 1.42%. The average FICO of the auto production was 757. At September 30th, 2019, the weighted average loan-to-value ratio of our entire portfolio of real estate loans was 56%. These loan-to-value ratios use origination date appraisals over current amortized balances. As of September 30th, 2019, 62% of our single-family mortgages have loan-to-value ratios at or below 60%. 30% have loan-to-value ratios between 61 and 70%. 2% have loan-to-value ratios between 71 and 75%. Approximately 5% between 75 and 80%, and less than 1% have a greater than 80% loan-to-value ratio. We have a well-established track record of strong credit performance in our jumbo single-family mortgage lending business. with lifetime credit losses in our originated single-family portfolio of three basis points of loans originated. Given increased competition from private securitization of jumbo single-family mortgages, we've created a new legal entity within our security subsidiary, Axo Securities Investments, LLC. In order to expand the type of jumbo single-family lending products we can originate and sell to generate fee incomes, without compromising the credit standards we have maintained in our jumbo single-family mortgage portfolio. We had approximately $2.2 billion of multifamily loans outstanding at September 30, 2019, representing approximately 22% of our total loan book. Growth in our multifamily loan production has been solid. The weighted average loan-to-value ratio of our multifamily loan book is 52%, based on appraised value at the time of origination. Approximately 65% of our multifamily loans are under 60%, 29% are between 60% and 70%, and 4% are between 70% and 75%, and less than 2% of our multifamily loans have a loan-to-value ratio above 75%. The lifetime credit losses in our originated multifamily loan portfolio are less than one basis points of loan originations over the 18 years we've originated multifamily loans. Our CNI lending business posted a strong quarter with record quarterly loan originations of $858 million, and ending balance was increasing by approximately $420 million. We're continuing to see good demand from creditworthy borrowers for high-quality projects in attractive markets in our lender finance and commercial specialty real estate business. While the average size of our CNI loans are larger than our single-family and multifamily loans, we maintain the same rigorous underwriting standards and low loan-to-value principles that have served us well through prior credit cycles. We have no credit losses in our lender finance or commercial specialty real estate loan books. Our leverage and loan-to-value ratios or cost ratios in our lender finance, commercial specialty real estate, and Crestle loans remain in the 45% to 55% range. Loan demand remains solid with a loan pipeline of $1.1 billion in September 30, 2019, consisting of $437 million of single-family jumbo loans, $123 million of single-family agency mortgages, $190 million of multifamily income property loans, and $389 million of CNI loans. With our diverse mix of lending products, as we grow, we expect our portfolio mix to move slightly away from single-family lending into C&I lending and commercial real estate lending, although single-family lending will remain an important part of the portfolio. 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 $3.1 billion, or 51.6% year-over-year, as we repositioned our balance sheet in anticipation of the transfer of deposits we acquired from Nationwide in the year-ago period. We had deposit growth across small business, cash and treasury management, specialty deposits, including Axos fiduciary services. At September 30, 2019, approximately 40% of our deposit balances were business and consumer checking, 22% money market accounts, 4% IRA accounts, 5% savings accounts, and 3% prepaid accounts. Checking and savings deposits represent 74% of total deposits at September 30, 2019, compared to 77% at September 30, 2018. Our securities segment, which includes Axos Clearing, our securities clearing and custody business for introducing broker-dealers and independent RIAs, and Axos Invest, our direct-to-consumer digital wealth management, continues to make good progress. We have added talented team members across sales and marketing, risk management and operations, and Axos Clearing and Axos Invest since we closed the acquisitions in the first calendar quarter of 2019. We recently rebranded Wise Banyan to Axos Invest and reinitiated low-cost marketing of our freemium digital wealth management service offering. Securities lending revenue and margin lending revenue both increased this quarter, while average client cash balances declined. as our independent broker-dealer clients increased their risk tolerance and as rates for free cash balances declined. We signed multi-year clearing contracts with a few new correspondent firms, and our sales pipeline remains strong. We also have a number of technology and product initiatives that will be introduced over the next three to 12 months, including integration of Axos Invest inside of our universal digital banking platform, enhanced RIA custodial capabilities, and additional premium features for our digital wealth management product suites. We made further progress growing and diversifying our commercial and specialty deposit businesses. We selectively added talented commercial bankers in our downtown LA and midtown Manhattan office markets, where we already had a significant customer base and personnel presence. These strategic office locations will serve to attract new customers in these markets, serve our existing significant client base of commercial customers, and allow us to acquire talent that was not otherwise available in San Diego. As we scale the bank to a $20 billion and larger institution, having a local presence in these two large metropolitan centers will help us expand our client and talent base. The integration of Axos fiduciary services with the bank is complete, and we are now moving forward to grow this business. We have successfully added new Chapter 7 and non-Chapter 7 trustees and fiduciaries, and hundreds of existing trustees have voluntarily moved their deposit balances to Axos Bank. We plan to integrate various banking functionality with our bankruptcy software in the medium term in order to reduce the time, cost, and friction for our trustees' case management and reporting requirements and expand the utilization of this software to other verticals. Our capital ratios remain strong despite recent action to deploy some of our excess capital into organic investments and share buybacks over the past few quarters. Our Tier 1 leverage ratio was 9.12% at the bank, down from 9.21% at June 30, 2019. The Board approved the new $100 million share repurchase program in August. We will continue to opportunistically deploy excess capital where we see the best risk-adjusted returns, whether it's for organic investment, accretive M&A, or share buybacks. Earlier this month, we announced our agreement with H&R Block, I'm sorry, earlier this month we renewed our agreement with H&R Block to be the exclusive provider of interest-free refund advance loans to H&R Block's customers during the program year ending June 30, 2020. Axos will originate and fund all of H&R Block's interest-free refund advance loans to its tax preparation clients for the 2020 tax season. This will be the third year that Axos will be the exclusive provider of H&R Block's refund advance loans. This one-year renewal is separate from the seven-year program management agreement entered into on August 31, 2015, and filed with the Securities and Exchange Commission between Axos and affiliates of H&R Block, which provides that Axos will provide H&R Block-branded financial services products known as Emerald prepaid cards, refund transfers, and Emerald advance lines of credit through H&R Block's retail and digital channels. The current terms of the program management agreement end on June 30, 2022, and may be terminated earlier by H&R Block in the event that Axios no longer qualifies as exempt from the provisions of the Dodd-Frank Act, known as the Durbin Amendment, as fully described in the filed agreement. Such provisions limit the level of interchange fees that may be charged by institutions with greater than $10 billion in total assets beginning July 1 of the following year in which the institution exceeds such size as of the December 31st, 2019 measurement date. If the total assets of Axos exceed $10 billion on December 31st, 2019, the Durbin Amendment would apply to us starting in July of 2020. If our asset size remains greater than $10 billion as of December 31st, the reduced direct and indirect interchange revenue would begin on July 1st, 2020. Although there are a number of options to reduce this loss of interchange revenue or potentially avoid it for a period of time, each option has a cost or other trade-off associated with it, so it is not possible to predict whether we will be able to mitigate this potential interchange loss. If we are unable to agree to a solution with H&R Block that would alleviate the loss of interchange from the Emerald Card program that is acceptable to both parties, Axos has the right to avoid early termination of the program management agreement by compensating H&R Block for the loss of its actual interchange income. We estimate that such compensation would be approximately $25 million per year or approximately 18 cents on earnings per share based on current transaction volumes if no mitigating actions or program restructuring is taken. The impact from reduced interchange fees or expected program mitigation related to non-H&R Block prepaid BIN sponsors and our own checking accounts is approximately $4 million pre-tax per year. From a timing standpoint, since the majority of the interchange fees from the Emerald Card are generated during the tax season, we have most of calendar 2020 to come up with and execute a solution if one can be mutually agreed to to mitigate the majority of the compensation we would have to pay H&R Block after the 2020 tax season. We have an established infrastructure and an experienced team that has worked alongside H&R Block to deliver valuable financial services to millions of H&R Block customers over the past four years. We will continue to work with H&R Block to determine if a solution exists that is mutually agreeable and announce an agreement if one is executed. In the meantime, given our ongoing discussions with H&R Block regarding this matter, we'll not be able to discuss additional detail regarding our H&R Block program management agreement until our negotiations conclude. We are pleased with the progress we have made integrating our acquisitions and expanding our core consumer, commercial, and securities businesses. We're excited about the abundant opportunities we have to provide a broader set of services to new and existing clients by providing them with a more robust set of tools and a better user experience. You will hear more about our cross-marketing, personalization, operational efficiencies, and new product development initiatives at our Investor Day later this week. I hope to see many of you in San Diego this Thursday. Now I'll turn the call over to Andy, who will provide additional details on our financial results. Thanks, Greg. We have issued our press release.