Axos Financial, Inc.

Greetings, and welcome to Axel's Financial Inc's Fiscal 3, 2021, earnings call and webcast. At this time, all participants are in a listen-only mode. A question in the next session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Johnny Lott, Vice President of Corporate Development and Investor Relations. Thank you. You may begin.

Thank you, Devin. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial's third quarter 2021 financial results conference call are the company's president and chief executive officer, Greg Darabrand, 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 nine months ended March 31st, 2021, 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 four linking statements that are subject to risks and uncertainties, and that management may make additional four linking statements in response to your questions. These four linking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ maturely from those expressed or implied in such four linking statements as a result of risks and uncertainties. Therefore, the company claims to safe harbor protection pertaining to the four looking statements contained in the Private Security Litigation Reform Act of 1995. This call is being repcast, and there will be an audio replay available in the Investor Relations section of the company's website located at accessfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing over the call to Greg, I'd like to remind our listeners that in addition to the earnings press release and 10-Q, we also issued an earnings supplement for this call. All of these documents can be found on the AxiosFinancial.com website. And with that, I'd like to turn the call over to Greg.

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 third quarter of fiscal year 2021, ended March 31, 2021. I thank you for your interest in Axos Financial and Axos Bank. We delivered another strong quarter with positive sequential growth and ending loan balances and net interest income, net interest margin expansion, and solid credit performance. The year-over-year comparison is distorted by the seasonal H&R Block tax products, which we no longer provide. Axos announced third fiscal quarter net income of $53.6 million for the three months ended March 31, 2021, and earnings per diluted share of $0.89. Excluding net interest income and non-interest income related to the discontinued H&R Block relationship, net interest income and fee income increased by 21.9% and 43.7% respectively, reflecting solid growth in mortgage banking and Axios securities. Axios' return on average equity for the third quarter of 2021 was 16.12%, and the bank's efficiency ratio was 42.33%. Our tangible book value per share was $20.44 at March 31, 2021, up 17.1% from March 31, 2020. The highlights this quarter included the following. Ending loan and leases increased by approximately $102 million, up 3.5% annualized from the first quarter of 2021, and up 12.9% year-over-year. Excluding mortgage warehouse, ending loan balances increased by approximately $318 million, up 12.4% annualized from the first quarter of 2021. Strong originations in multifamily, commercial real estate, and CNI were offset by higher payoffs and jumbled single-family loan balances. Net interest margin was 3.96% for the third quarter, up two basis points from 3.94% in the second quarter of fiscal 2021. Excluding the impact of H&R Block-related refund advance, and Emerald Advance Loans in the prior year's third quarter, overall net interest margin was up nine basis points year over year. Loan yields continue to hold up well at 5.1%, essentially flat from 5.16% in the quarter ended December 31st, 2020. The cost of interest-bearing deposits is 81 basis points, down four basis points from the quarter ended December 31st, 2020. Net interest margin for the banking business unit was 4.23%, compared to 4.11% in the quarter ended December 31, 2020. PPP loan fees continue to have a negative, and loan balances continue to have a negligible impact on our overall banking business unit NIM. Our efficiency ratio for the three months ended March 31, 2021, was 50.64%, compared to 46.86% in the second quarter of 2021. The efficiency ratio for the banking business segment was 42.33%, for the third quarter of 2021 versus 40.45% in the second quarter of 2021. The sequential increase in overall banking business efficiency was a result of higher professional service expenses related to one-time legal costs and higher marketing costs related to mortgage banking. Capital levels remain strong with Tier 1 leverage ratio of 9.56% at the bank and 8.99% at the holding company, both well above our regulatory requirements. On 3-31-2021, we redeemed all the outstanding 6.25% subordinated notes due February 28, 2026, representing an aggregate principal balance of $51 million. The redemption was principally funded with proceeds from the issuance of $175 million of subdebt that was completed in September of 2020. Our credit quality remained strong with no loans in forbearance, non-performing assets fell by 20% link quarter, representing 1.14% of total loans and leases at March 31, 2021, compared to 1.44% at December 31, 2020. Our focus on retaining asset-based loans with low loan devalues on our balance sheet has contributed to the low loss content on the small number of loans that become delinquent. Total loan originations for the third quarter ended March 31, 2021, was $1.8 billion, down 36.8%, from $2.9 billion in the year-ago period. Excluding H&R Block-related loans in the year-ago period, total loan originations increased by 47.9% year-over-year. Q3 2021 originations were as follows. $381 million of single-family agency gain-on-sale production, $251 million of single-family jumbo portfolio production, $97 million of multifamily production, $46 million of commercial real estate production, $37 million of auto and unsecured consumer loan production, and $956 million of CNI loan production, resulting in a net increase of $420 million. Our gain-on-sale mortgage banking group had another strong quarter, generating $9 million of mortgage banking income compared to $10.7 million in the second quarter of 2021 and $3 million in the corresponding quarter last year. Originations decreased by approximately 16.3% link quarter to $381 million due to a steady increase in interest rates from the end of 2020 to March 31, 2021. The outlook for mortgage banking remains solid, although the overall industry slowdown in refinancing activity may result in either lower loan originations and or lower margins or both relative to what we have been experiencing over the past two or three quarters. Our loan pipeline of single-family agency mortgages was $229 million at 4-22-2021. Our mortgage warehouse business continues to benefit from strong demand for agency mortgages. Ending balances in our mortgage warehouse portfolio was up significantly from $380 million in March 31, 2020, and down $217 million from the elevated 12-31-2020 balance of $1.2 billion. We continue to expand our relationships with existing mortgage warehouse customers and establish new relationships. Our single-family warehouse business generates strong risk-adjusted returns for us and provides a counter-cyclical balance to our more asset-sensitive commercial lending businesses. Our net interest margin for the banking business unit was 4.23% in the third quarter compared to 4.11% in the prior quarter and 4.9% in the third quarter of fiscal 2020. Excluding the impact of H&R Block, our net interest margin for the banking business unit was up 12 basis points linked quarter and up 38 basis points year over year. On the asset side in the banking business, our loan yields continue to hold up well, with average loan yields of 5.1 percent compared to 5.16 percent in the quarter ended December 31st, 2020. The vast majority of our asset-based loans are variable rate loans, with 95 percent of all variable rate loans being at the floor as of March 31st, 2021. Yields for loan originations in the quarter ended 3-31-21 were 4.81% for jumbo single-family mortgages, 5.01% for multifamily, and 5.7% for C&I loans. Approximately 48% of our loans are 5-1 arms, with single-family and multifamily mortgages as underlying collateral. In our C&I loan book, our asset-based lending facilities and commercial specialty real estate loan portfolios have rates that adjust to an index. Of the $3.4 billion of lender finance and commercial specialty real estate loans outstanding, At March 31, 2021, approximately 94% are at their floor rates. Our equipment leasing portfolio, which accounts for the remaining $120 million of C&I loans outstanding, is comprised of fixed-rate loans and leases. Our checking and savings and money market balance was increased by approximately $3 billion from March 31, 2020, with strong growth in consumer, small business, and commercial deposit accounts and balances. Our consumer checking and small business checking accounts continue to receive accolades for offering the best value and services for our customers, benefiting from our technology-enabled service models. Ending non-interest-bearing demand deposits were $2.6 billion in the quarter ended March 31, 2021, up by approximately 19% from the prior quarter. We are making good progress in our specialty commercial and treasury management businesses, including our fiduciary services businesses. Axos Clearing continues to generate low-cost deposits that we were able to put on our off-balance sheet. Ending cash deposit balances of Axos Securities were approximately $800 million, with approximately $480 million of those balances placed at other banks at March 31, 2021. Our credit quality remains solid. Annualized net charge-offs to average loans and leases was three basis points this quarter, compared to three basis points in the corresponding period last year. Non-performing assets at total assets were 114 basis points for the quarter ended March 31, 2021, down from 144 basis points in the second quarter of fiscal 2021. Of our non-performing loans, 60% are single-family mortgages where we've had historically very low realized losses. Of our non-performing single-family mortgage loans at March 31, 2021, approximately 85% had an estimated current loan-to-value ratio at or below 70%, and approximately 95% are below 80% of our best estimates of current loan-to-values. Given this low loan-to-value on our single-family delinquent mortgages, we do not anticipate occurring material losses on the vast majority of these loans. Other than single-family delinquencies, the remaining delinquencies consist of two hotel loans we previously discussed, which are around $24.5 million of unpaid principal balance, We had six multifamily loans that were 30 to 59 days delinquent for a total value of around $3.1 million that are at origination LTVs of around 46% on average. One multifamily loan that is 60 to 90 days delinquent for $1 million with an origination loan to value of 44%. We continue to work with borrowers to bring delinquent loans current, and we have no loans on forbearance as of March 31st, 2021. Our loan loss provision for this quarter was $2.7 million. compared to $8 million in the December 31, 2020 quarter and $28.5 million in the quarter ended March 31, 2020. The primary reason for the sequential decline in loan loss provisions are lower loan growth and a sequential improvement in our non-performing loan balances. Our total allowance for loan loss was $143.8 million at March 31, 2021, which represents 1.16% of our total loans and leases. While we have seen steady improvement in the economy since COVID-related restrictions have been rolled back and resilient housing values in the vast majority of markets where we lend have continued, we do not anticipate making significant changes to our loan loss provisions in calendar 2021. Approximately 95% of our loans outstanding at March 31, 2021, were collateralized by hard assets with an average loan-to-value in the 50s, including $10.6 billion by real estate assets and $523 million of loans secured by commercial receivables. We continue to generate strong returns, with average return on common equity of 16.12% and 18.65% in the three months ended March 31, 2021 and March 31, 2020, respectively. Our efficiency ratio for the banking business segment was 42.33% for the quarter ended March 31, 2021, compared to 40.45% in the last quarter. We continue to invest in people, infrastructure, technology, and processes in each of our businesses so that we can continue to grow at a similar percentage on our ever-larger asset base. Our capital ratios remain strong, with Tier 1 leverage to adjusted assets at 8.99% of the holding company and 9.56% of Axos Bank. We also have access to approximately $2.8 billion of federal home loan bank borrowings, $2.6 billion in excess of the $173 million we had outstanding at the end of the third quarter. Furthermore, we have $2.3 billion of liquidity available at the Federal Reserve discount window as of March 31, 2021. Our strong organic growth and returns, coupled with excess capital at Axos Financial, allows us to make opportunistic acquisitions, such as the E-Trade Advisory Services acquisition that we announced last week. I will discuss the strategic and financial benefits of this transaction later on the call. Our loan pipeline remains solid with approximately $1.8 billion of consolidated loans in our pipeline at March 31, 2021, consisting of $229 million of single-family agency gain-on-sell mortgages, $473 million of jumbo single-family mortgages, $192 million of multifamily and small-balance commercial real estate term loans, $845 million of CNI and other commercial specialty real estate loans, and $45 million of auto and unsecured loans. We expect to be able to grow loans in the high single digits to low double digit percentages and maintain our net interest margin in the mid to high end of our 3.8 to 4.0 target range for the remainder of this calendar year. Although we are above this net interest margin range at the bank currently, and we do expect to be able to lower our cost of funds significantly, particularly given our recent acquisition of EAS and the runoff of our acquired book of higher rate certificates of deposit from Nationwide, we anticipate that loan competition in certain segments will require us to lend at rates that would result in less margin expansion in this coming year than the reduction in our cost of funds might otherwise indicate. Our securities businesses continue to make steady progress. EXO's clearing increased total tickets processed by almost 52% linked quarter to almost 2 million tickets, and ending deposits grew by approximately 3% linked quarter. We signed three new correspondent clearing clients in the December quarter. and signed three new RIA clients this quarter, which will add incremental fee income and low-cost deposits with a two- to three-quarter lag between signing and onboarding. On prior calls and on our most recent Investor Day in 2019, we've talked about the importance of growing our securities clearing and custody business. Last week, we announced an agreement to acquire certain assets and liabilities of E-Trade Advisory Service, EAS, as they are called. EAS is a top five RIA custodian with proprietary technology platforms that hundreds of independent RIAs and TAMPs use to serve their wealthy management clients. With approximately $23 billion of assets under custody, including $1.2 billion of client cash deposits, EAS significantly increases our scale, total addressable marketing capabilities. EAS is focused on providing high-tech services to RIAs with assets under management and between $50 million and $1 billion is a perfect complement to the clearing services we provide to independent broker-dealers. We believe that our entrepreneurial culture, commitment to servicing clients with no conflict of interest, and our ability to provide additional technology and banking services to RIAs, advisors, and their end clients makes us a credible alternative to the largest competitors in the custody space. What makes me most excited about this transaction is that the team of custody experts who are dedicated to serving independent RIAs and turnkey asset management program managers, and the Liberty Technology Platform we are purchasing. The EAS team, headquartered in Centennial, Colorado, is comprised of approximately 180 team members, including over 50 software engineers, application and system support and other technology infrastructure and service FTEs, and over 100 client-facing operations and business strategy FTEs. Liberty is a proprietary client-facing technology platform that interfaces with a variety of third-party middle and back office systems that RIAs use for portfolio management, tax reporting, transaction processing, marketing, and client service functions. Adding a flexible technology platform and an experienced relationship management and operations team dramatically accelerates our time to scale and credibility in this business. EAS's model and market opportunities share similarities and differences with those from Axos Clearing. Independent RIAs continue to grow in number in AUM as more advisors leave wirehouses to gain greater control over their practices and enhance their economics. We believe EAS is well positioned to gain market share in this growing market as more advisors look for alternatives to large custodians. Like the clearing business, securities custody generates significant amounts of no-to-low-cost deposits that becomes substantially more valuable as interest rates rise, offsetting the effect of businesses such as mortgage banking that benefit from a lower rate environment. Client sweep deposits from clearing and custody also provide optionality for us, as we have sole discretion in determining whether we use the deposits to fund the bank's asset growth or hold them off balance sheet at a partner bank to optimize our capital efficiency. Deposits from the RIA custody business will provide us with a new source of low-cost funding that can scale dramatically faster and more cost-effectively than consumer deposits. Unlike the clearing business, where fee income is generated primarily through transaction-based ticket charges that have corresponding operating expenses, the custody business generates both transaction-based fees and asset-based fees. For example, EES charges a custody fee based on the amount of assets under custody. When AUC balances increase, either from growth in the net new assets from new or existing custody clients or for market appreciation, the custody fee paid to EAS also increases. In this respect, the financial model is very similar to that of asset or wealth management businesses that charge an annual management fee based on assets under management. EAS also collects commissions from third-party mutual funds and ETF providers where advisors who custody with EAS use those mutual funds and ETFs in their investment portfolios. Finally, EAS generates transaction-based fees related to paper statements and other ancillary services. In total, EAS generates about $58 million of net revenue in 2020, with approximately half of that coming from net interest income. Going forward, depending on how much of the client deposits are held off balance sheet at partner banks and on Axos Bank's balance sheet, and the rate paid on those deposits to EAS. The net revenue from EAS will vary from year to year. We expect to extend offers to all EAS team members and invest to grow this business. From an operating expense perspective, about 70% of the 2020 non-interest expenses were compensation benefits and sales commissions. If you exclude some one-time expenses related to prior initiatives that E-Trade has discontinued, the annual operating expense run rate is approximately $39 million. The operating expenses are offset largely by fee income generated from asset and transaction-based revenues. When we consider the net operating cost of the RIA custody business and the low cost and stable funding we are able to generate from client cash sweeps, we believe this provides us with another attractive and relatively efficient source of core deposits. We are confident that we'll identify cost synergies, particularly with respect to incremental costs at Axel's Clearing, that might otherwise have been incurred as we grow our clearing customer base. To be conservative, we are not assuming meaningful cost synergies in year one and only incremental cost synergies of between $1 and $1.5 million starting in year two. This is an attractive transaction from a strategic and financial perspective. We will fund the entire $55 million cash purchase price with excess capital from the holding company. Using fairly conservative assumptions, we expect the acquisition to be at least 1% accretive in our EPS in year one and 5% accretive to our EPS in year two. Over the next few months, we will be transitioning the business from a bank-owned custody platform to a broker-dealer platform prior to the projected calendar Q3 2021 close. We will unlock potential cost and revenue synergies, which we have not modeled in our EPS accretion and tangible earn-back forecasts. Once EAS is fully integrated with Axos, we see meaningful revenue opportunities with Axos Clearing, Axos Invest, and Axos Bank. We believe that the consumer technology we have developed as a front-end banking and securities platform and our account opening technology will be valuable to RIAs that custody with Axos, as they will have the benefit of partnering with us for the provision of banking products to their clients with a custodian that does not compete with them with its own proprietary wealth management arm, as is typical with other large custodians. The combination of a broker-dealer compliant RIA custody and clearing platform and our host of white-label banking products and services at our consumer and commercial bank makes us extremely excited about the long-term cross-sell potential across our entire organization. We have not modeled additional banking cross-sell opportunities into our estimated accretion numbers, however. Furthermore, The flexibility of being able to move these low-cost deposits on or off balance sheet has the potential to increase our annual net interest margin above the 3.8 to 4 range or accelerate our loan growth above the low teens rate while maintaining our 3.8 to 4.0 NIM range. This transaction will require FINRA approval, and we submitted our application to FINRA last week. We continue to beta test our self-directed trading platform. The preliminary launch date will be sometime in the June quarter. Version 1.0 of our self-directed trading offering will focus on existing clients who value the simplicity and convenience of being able to see and transact across various Axos banking and investment products through one online mobile application. More importantly, it will allow us to experiment with various pricing models and do more detailed customer segmentation with the goal of delivering a more customized client experience. It's the beginning of an ambitious and exciting journey, that would be much more cost-prohibitive if we did not own our own clearing company. The ability to have a direct-to-consumer managed portfolio product through our robo-advisor, self-directed trading, and banking should enable us over time to reduce the cost of customer acquisition, increase revenue per customer, and enhance retention. We are also actively working on adding cryptocurrency custody and trading into our self-directed platform and expect that that will be in beta launch by the end of this calendar year. I'm more excited than ever about the opportunities we have in each of our businesses. Some of the investments we have made, like mortgage banking and C&I lending, are generating meaningful profits today, and others, such as Axios Clearing and Axios Invest, have only scratched the surface relative to their long-term potential. Our future launches of self-directed trading and cryptocurrency trading have the opportunity to drive significant consumer account growth. By operating a diversified set of lending, funding, and fee-based businesses across our consumer bank, commercial bank, securities, and investment subsidiaries, by continuing to make improvements in our user experience and technological capabilities, and creating product offerings that are cultivated through direct and indirect customer acquisition channels, we are better positioned than most to maintain consistent profitable growth, irrespective of economic, regulatory, and competitive changes. Now I'll turn the call over to Andy, who will provide additional details on our financial results.