Axos Financial, Inc.

Greetings and welcome to the Access Financial first quarter 2021 earnings results conference call. At this time, all participants are in a listen-only mode. A 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 your host, Johnny Lai, Vice President, Corporate Development and Investor Relations. Thank you. You may begin.

Thanks, Jesse, and good afternoon, everyone. Thanks for your interest in Axos. Joining us today for the Axos Financial Inc.' 's first quarter 2021 financial results conference call are the company's president and chief executive officer, Greg Garabrantz, 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 months ended September 30th, 2020, and they will be available to answer questions after the prepared remarks. Before we 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 for 30 days in the Investor Relations section of the company's website located at axosfinancial.com. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing the call over to Greg, I'd like to remind our listeners that in addition to the earnings press release and 10Q, we also issued an earnings supplement for this call. All of these documents can be found on the Axios Financial website. With that, 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 year 2021, ended September 30, 2020. I thank you for your interest in Axos Financial and Axos Bank. Axos announced record first quarter net income of $53 million for the three months ended September 30, 2020, up 30% over the $40.8 million earned for the quarter ended September 30, 2019, despite a $9.1 million increase in our provision for loan losses. Our pre-tax pre-provision income was $87.6 million, a 47.6% increase compared to $59.4 million in the quarter ended September 30, 2019. Axios' return on average equity for our first fiscal quarter of 2021 was 17.26%, and the bank's efficiency ratio was 39.95%. Q1 2021 earnings per share increased 33.3% to $0.88 per diluted share compared to $0.66 per diluted share in Q1 2020. Excluding acquisition-related expenses, non-GAAP earnings per share increased 33.82% to $0.91 per share in Q1 2021, equating to a non-GAAP ROE of 17.78%. Our book value per share was $20.80 at September 30, 2021, up 14.7% from the prior year. We had an outstanding quarter with stable net interest margins, double-digit growth in net interest income and non-interest income, positive operating leverage, and solid credit performance. The highlights this quarter include the following. Ending loans and leases increased by approximately $294.1 million. up 11.1% annualized from the fourth quarter of 2020, and up 11.7% year-over-year. Strong originations in multifamily, commercial specialty real estate, and mortgage warehouse were offset by lower production and lender finance and higher payoffs in jumbo single-family and certain C&I loan portfolios. Net interest margin was 3.84% for the first quarter, up seven basis points from 3.77% in the first quarter of fiscal 2020, and down slightly from 3.89% in the quarter ended June 30, 2020. Loan yields were up three basis points linked quarter to 5.22%, and average interest-bearing deposit costs were down 41 basis points to 86 basis points. Excluding approximately $900 million of excess liquidity deployed in lower-yielding cash and cash equivalents, our net interest margin would have been 4.02%, up 13 basis points, from 3.89 percent in the quarter ended June 30, 2020. Our efficiency ratio for the three months ended September 30, 2020 was 46.3 percent compared to 52.44 percent in the comparable period ended September 30, 2019. Efficiency for the banking business segment was 39.95 percent for the first quarter of 2021, an improvement from 43.93 percent in the comparable period last year and 41.02 percent in the prior quarter. Earnings per share were 88 cents, up 33.3 percent, compared to 66 cents in the first quarter of 2019, despite a 337 percent year-over-year increase in our loan loss provision and a 30.1 percent tax rate this quarter, compared to 28 percent in the prior corresponding quarter a year ago. Capital levels remain strong, with Tier 1 leverage ratio of 8.83 percent at the bank and 8.52% at the holding company, both well above our regulatory requirements. We issued $175 million of subordinated debt at an annual interest rate of 4.875% earlier this month and used some of our excess capital to repurchase approximately 582,000 shares of common stock at an average price of $21.89 in the three months ended September 30, 2020. Our credit quality remains strong with no loans in forbearance and only a small percentage that are delinquent on principal and interest payments. Our conservative underwriting with an emphasis on retained asset values with low loan-to-values on our balance sheet continues to serve us well as real estate values are holding up in most markets. Total loan originations for the first quarter ended September 30, 2020, was $1.78 billion, essentially flat from $1.79 billion in the year-ago period. Q1 2021 originations are as follows. We had $408.4 million of single family agency gain on sale production, $334.4 million of single family jumbo portfolio production, $87.2 million of multifamily production, $26.2 million of small balance commercial real estate production, $25.5 million of auto and unsecured consumer loan production, and $569.6 million of CNI and specialty real estate production, resulting in a net increase of $127.8 million of portfolio growth. Our gain-on-sale mortgage banking group had another record quarter, generating $19.6 million of mortgage banking income compared to $2.8 million in the corresponding quarter last year. Originations increased by approximately 40% linked quarter to $408 million, Record low interest rates drove demand for refinances and purchase transactions, and capacity constraints within the single-family mortgage industry resulted in a gain on sale margin of 394 basis points compared to 321 basis points in the quarter ended June 30, 2020. The outlook for mortgage banking remains strong. Our pipeline of single-family agency mortgages was $444 million at the end of this month. Our mortgage warehouse also benefited from record low interest rates and robust demand for mortgage purchase and refinancing. Pending balances in our mortgage warehouse portfolio increased by $249.1 million, or 52.5%, from $474.3 million at 6-30-2020. We took advantage of certain competitors pulling back in mortgage warehouse lending. Our growth in our mortgage warehouse business came from financing our customers' agency and government guaranteed mortgages. Our track record of execution and expertise in different types of mortgages allow us to gain market share in this environment. Our net interest margin for the banking business was 3.91% in the first quarter compared to 3.95% in the prior quarter and 3.83% in the first quarter of 2020. On the asset side, our loan yields continue to hold up well with an average loan yield of 5.22% compared to 5.19% in the quarter ended June 30, 2020. The vast majority of our asset-based loans are variable rate loans, with 94% of all variable rate loans being at their floor rate as of September 30, 2020. We had approximately $900 million of excess liquidity in the September quarter, which negatively impacted our net interest margin by 18 basis points. Yields for loans originated in the quarter ended 9-30-2020, where 4.85% for Jumbo Single Family, 5% Approximately 55% of our loans are 5-1 arms with single-family and multifamily mortgages as the underlying collateral. In our CNI loan book, our asset-based lender finance and commercial specialty real estate loans have rates that adjust to an index. Of the $2.8 billion of lender finance and commercial specialty real estate loans outstanding at 9-30-2020, approximately 91% are at their floor rate. Our equipment leasing portfolio, which accounts for the remaining $148 million of CNI loans outstanding, is comprised of fixed-rate loans and leases. Our consumer and commercial deposit businesses continue to benefit from investments we have made in improving our technology, marketing, and user experience. Consumer deposits, representing approximately 46% of our total deposits at 9-30-2020, is comprised of consumer direct checking, savings, money market, and non-interest-bearing prepaid accounts. Our checking, savings, and money market deposit balance is increased by almost $2 billion from 9-30-2019 with strong growth in consumer, small business, and commercial deposit accounts and balances. Our consumer checking and small business checking accounts were recently named best checking accounts for college students and the best free business checking accounts by Newsweek and NerdWallet, respectively. Average non-interest-bearing deposits was $1.9 billion in the quarter ended September 30, 2020, essentially flat-link quarter when you exclude prepaid deposit balances. We were making good progress in our specialty commercial and treasury management business as the number of bankruptcies rise. Our credit quality remains good. Annualized net charge-offs to average loans and leases was seven basis points this quarter compared to two basis points in the corresponding period last year. Non-performing assets, the total assets, was 1.31% for the quarter ended September 30, 2020, compared to 68 basis points in the fourth quarter ended June 30, 2020. The sequential increase in our non-performing assets is attributed primarily to loans coming off of forbearance and a reclassification of two hotel loans that were previously held for sale but are currently subject to Oregon's foreclosure moratorium. We ended forbearance for all borrowers on July 1, 2020, compared to $127.5 million of loans on forbearance as of June 30, 2020. The majority of our non-performing assets are comprised of real estate secured loans with low loan devalues. We have 91.2 million of single-family loans come off forbearance on July 1, 2020. Of our non-performing loans, 77% are single-family first mortgages where we've historically had very low realized losses. Of our non-performing single-family mortgage loans at 9-30-2020, Approximately 77% had an estimated current loan-to-value ratio at or below 70%, and approximately 92% are below 80% of our best estimate of their current loan-to-values. Given the low loan-to-values of our single-family mortgage loans, we did not anticipate incurring material losses on the vast majority of our delinquent loans. We had seven multifamily and commercial real estate loans that were delinquent at 9-30-2020, consisting of two hotel loans, that we previously earmarked for sale with a current loan-to-value ratio of 56% and five multifamily loans with an average loan-to-value ratio of 48.9% with no single delinquent multifamily loan with a balance greater than $2 million or an LTV greater than 57%. The only non-performing loan in our CNI loan portfolio is a $5.6 million equipment lease to a fracking company. We had no other CNI loans that were delinquent on September 30, 2020. We have a consistent track record of maintaining low credit losses through multiple economic cycles, given our conservative underwriting guidelines, senior structures in our commercial lines and loans, and the collateralized nature of our loan book. During the great financial crisis, our peak annual net charge-offs for loans we originated was less than one basis point for single-family and multi-family loans. We adopted the CECL accounting standard this quarter, adding $53 million to our allowance for loan loss consisting of $47.3 million of allocated loan loss reserves and $5.7 million of reserves for unfunded commitments. We further increased our loan reserve provisions this quarter by $11.8 million, up from $6.5 million in the June 30, 2020 quarter, and $2.7 million when the quarter ended September 30, 2019. The $11.8 million loan loss provision this quarter consisted of $6.5 million related to H&R Block refund advanced loans and $5.3 million to non-RA loans, reflecting growth in our loan balances and economic uncertainty. Our total allowance for losses was $139.6 million at September 30, 2020, which represented approximately 1.26 percent of our total loans and leases and 17.5 times our annualized net charge-offs. Approximately 94 percent of our loans outstanding at September 30, 2020 were collateralized by hard assets with LTVs in the 50s, including $9.7 billion of real estate assets and $544 million of loans secured primarily by consumer receivables. Single-family mortgages, representing 38% of our loan portfolio, had a weighted average loan-to-value of 58%. At the end of September 30, 2020 quarter, 64% of our single-family mortgages have loan-to-value ratios at or below 60. 30% have loan-to-value ratios between 61 and 70. 5% have loan-to-value ratios between 71 and 80, and less than 1% had a loan-to-value ratio greater than 80. We have a well-established track record of strong credit performance in these asset classes. Multifamily and commercial real estate loans, representing 17% of our total loan portfolio at 9-30-2020, had a weighted average loan-to-value ratio of 56%. The lifetime credit losses in our originated multifamily portfolio are less than one basis point originated over the 18 years we have originated these loans. At the end of September 30, 2020, 46% of our multifamily mortgages have loan-to-value ratios at or below 55%. 34% have loan-to-value ratios between 56% and 65%. 19% have loan-to-value ratios between 66% and 75%. And loans with a loan-to-value ratio greater than 75% are less than 1% of the portfolio. The average debt service cover of our multifamily loans is 1.78 at 9-30-2020. As stated, we granted no deferrals in the multifamily loan book. Our commercial real estate portfolio of $393 million, representing 3.6% of our total loans at 9-30-2020, had a weighted LTV of 52%. At the end of September 30, 2020, 49% of commercial real estate loans have loan-to-value ratios that are below 50%. 23% have loan-to-value ratios between 51 and 60. 21% have loan-to-value ratios between 61 and 70. 2% are between 71 and 75. And 5% are between 76 and 80% loan-to-value. In our commercial real estate loan portfolio, we had approximately $77 million of loans to hotels and resorts, representing less than 1% of our total loans outstanding. The weighted average loan-to-value of the hotel and resort loans is 51%. The average debt service cover of our small-balance commercial real estate portfolio was $1.65 at 9-30-2020. We have no loans and forbearance or delinquencies in our commercial real estate portfolio at 9-30-2020, other than the hotel loans we mentioned and the multifamily loans we previously discussed. Our commercial real estate loan book includes lender finance. and commercial specialty real estate, and is comprised in loans and lines of credit secured by single-family, multifamily, commercial real estate, land, and consumer receivables. The lender finance book is comprised of real estate and non-real estate transactions. The weighted average advance rate on the real estate lender finance book is 30%, with no transaction with an advance rate greater than 50%. The non-real estate lender finance book, backed by primarily consumer loans, is approximately $650, balances. These structures generally require rapid paydowns in the event of any significant collateral deterioration in the receivables and are also paid down rapidly in the event of any origination decline. We have granted no deferrals in our lender finance loan book. The weighted average loan to cost of our commercial specialty real estate loan portfolio was 39% with strong junior partners supporting the capital structure. We hold the senior position in all of our lender finance and commercial specialty real estate loans and every deal has significant capital support from borrowers and sponsors. We monitor performance of the underlying collateral, housed in bankruptcy remote special purpose vehicles, allowing us to identify credit deterioration and take swift action to protect our principal and interest. Our non-real estate consumer lending is comprised of $274 million of auto loans, $56 million of personal unsecured loans, and $13.2 million of H&R Block refund advance loans. We source our auto loans primarily from dealers located in 10 states and lend to prime borrowers with an average FICO score of 764. We fully underwrite and service every auto loan we hold on our balance sheet, and the portfolio continues to perform in line with expectations. Credit performance in auto lending is further supported by value of used cars in general at this point in time. We have managed the credit risk of our personal and secured loan book by focusing on prime borrowers with an average FICO score of 760 and an average loan size of $20,000. We have no auto or unsecured consumer loans on forbearance at September 30, 2020. In our securities business, we ended the quarter with approximately 253 million of margin loans, up 46 million from June 30, 2020, as some introducing broker-dealer clients became more bullish in the September quarter. Despite elevated price volatility in the stock market since the start of the pandemic, we have successfully managed our March loan business with no losses. As I mentioned earlier, we adopted the current expected credit losses methodology, or CECL, on July 1, 2020, the original required date for our year end. The immediate impact of adopting CECL, otherwise known as the day one adjustment, is an increase in the bank's allowance for current loan losses of $53 million. The adoption of CECL means we are now considering loan losses well beyond the approximately one-year timeframe generally used under the incurred loss method. The after-tax impact of the Day 1 adjustment is recorded directly against stockholders' equity in accordance with GAAP. For regulatory purposes, we elected to defer and phase in the impact on our capital ratio over five years. Under this phase-in, the Day 1 adjustment does not reduce Tier 1 capital for the first two years, and then phases in one-third of the impact over the last three years of the five-year election. We continue to generate strong returns, with return on average common shareholder equity of 17.26% and 14.85% in the three months ending September 30, 2020, and September 30, 2019, respectively. Our efficiency ratio for the banking business segment was 39.95% for the quarter ended September 30, 2020, year-ago period. We continue to maintain strong operation efficiencies while investing prudently in each of our business units. Our capital ratio remains strong at 8.82% of the bank, 8.63% of the holding company. Despite a higher provision for loan losses and $12.6 million of common stock repurchases, our Tier 1 and CET Capital ratios remain healthy at 8.83% and 11.52% respectively for the bank at September 30, 2020. We will use the proceeds from our $175 million subordinated debt offering to support the growth in our banking and securities business, to retire the existing $51 million of subordinated debt issued in March 2016 when it becomes callable on the fifth anniversary, and to opportunistically buy back stock or to engage in accretive strategic M&A transactions. Our loan pipeline remains solid with approximately $1.2 billion of consolidated loans in the pipeline at September 30, 2020. We have a healthy liquidity position and a diverse set of funding sources. Our on-balance sheet deposits increased by 14.6% year-over-year, with checking and savings deposits increasing by 28.2%. Our consumer, commercial cash, and treasury management, small business, and specialty deposit business continues to show solid growth. Concurrently, we reduced our average interest-bearing funding cost by 34 basis points linked quarter and 108 basis points year-over-year to 0.91. Client cash deposits from Axos Securities, currently held at other banks, was approximately $673 million at 9-30-2020, an increase of $186 million from the 6-30-2020 balance. We have the ability to redeploy our off-balance sheet deposits to fund growth at Axos Bank if and when it is economically advantageous to do so. We have access to approximately $3 billion of FHLB borrowing, $2.8 billion in excess of the $243 million we had outstanding at the end of the first quarter. Furthermore, we had $1.7 billion of liquidity available at the Federal Reserve discount window at September 30, 2020. Our outlook with respect to loan growth and net interest margin remains unchanged from our expectations three months ago. Demand for single-family jumbo mortgages continues to be reasonably strong, as reflected in our $479.2 million pipeline on October 27th. Pricing on new jumbo mortgages remain attractive, despite some activity in the secondary market for non-agency mortgages and the reemergence of a few non-bank lenders. The purchase market for single-family mortgages remains robust, with mortgage rates near record lows and housing inventories rebounding in most markets. Our efficient digital marketing, underwriting, and funding processes in our direct lending and third-party origination teams allow us to provide a superior experience for our borrowers and partners. In our two largest CNI lending categories, lender finance and commercial specialty real estate, we continue to see new opportunities to partner with respected non-bank lenders on secured lending transactions with conservative structures and terms. While the pace of new commercial specialty real estate transactions as we approach the election, we expect activity to rebound later this year. We continue to see demand for our lending products at our tightened credit standards. Axos Clearing continues to benefit from a flight to safety, with ending deposits increasing by approximately 38% linked quarter to $673 million. We signed eight new correspondent clearing clients in the September quarter, onboarded two of them, and signed and onboarded an RIA custody client this quarter, adding incremental fee income and low-cost client deposits. We see additional upside to providing white-label banking services to the more than 100,000 high-net-worth clients of our introducing broker-dealers and RIAs, and continue to invest in technological integration to offer these services to our corresponding clients. Like other broker-dealers, such as Suave and TD Ameritrade, Axos Clearing's profitability has been temporarily hampered by low rates earned from cash sweep deposits. As we develop and roll out additional products and services at Axos Clearing and Axos Invest, there is a clear path to higher profitability for Axos Securities. Furthermore, we remain bullish on the medium to long-term costs and revenue synergies provided by Axos Clearing and Axos Invest to our banking business. Overall, we feel good about our ability to maintain an annual net interest margin within a range of 3.8% to 4%. Our loan yields remain relatively stable and we intend to reduce the amount of excess liquidity on our balance sheet over the next few quarters if loan demand does not meaningfully improve. We started submitting loan forgiveness applications on behalf of our PPP borrowers in early October. As of last Friday, we submitted 149 forgiveness applications with a combined loan balance of $15.5 million to the SBA. We expect to receive forgiveness for the vast majority of our PPP loans in the first half of calendar 2021. We've made good progress reducing our funding costs as a result of our investments and acquisitions we've made across our consumer, commercial, and specialty deposit businesses. Accelerated adoption of digital banking, which is occurring in many of our deposit businesses, gives us confidence that we will be successful in growing deposits and optimizing funding costs. We have a full pipeline of features and product enhancements that we will roll out over the next 12 months including free self-directed trading, a streamlined account opening system, and new user experience for small business banking, and significant enhancements to our digital mortgage platform, as well as integration of Axos Invest and Axos Bank functionality and new personal financial management tools in the online and mobile banking platforms. These new products and features will provide incremental value to our customers, lower acquisition costs, improve retention, and add an additional source of fee income and deposits for the companies. While it is unclear how quickly the economy will rebound and what potential regulatory and policy changes may take place in whatever political environment we may find ourselves in, we remain focused on positioning our company to sustain profitable growth. Now I'll turn the call over to Andy, hoping to get additional details on our financial results.