Axos Financial, Inc.

Welcome to Axos Financial Inc. First Twitter 2022 Earnings 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. Please note this conference is being recorded. I will now turn the conference over to John Eli, Vice President, Investor Relations and Corporate Development. Thank you. You may begin.

Thank you, Sherry. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc.' 's first quarter 2022 financial results conference call are the company's president and chief executive officer, Greg Gerbrandt, executive vice president and chief financial officer, Derek Walsh, and executive vice president, finance, Andy Micheletti. Greg and Eric will review and comment on the financial and operational results for the three-month end at September 30th, 2021, and we will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. 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 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 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 our investor relations website. With that, I'll turn it over to Greg. 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 2020, ended September 30th, 2021. I thank you for your interest in Axos Financial and Axos Bank. We had an excellent start to our fiscal 2020 with double-digit growth in net interest income, loan originations, and earnings per share. We bucked the industry trend and increased our net interest margins on a linked quarter and year-over-year basis on a consolidated level and at the bank. Access reported first quarter net income of $60.2 million for the three months ended September 30, 2021, and earnings for diluted share of $0.99, representing year-over-year growth of 13.6% and 12.5% respectively. Our book value per share was $24.52 at September 30, 2021, up 17.9% from September 30, 2020. The highlights this quarter include the following. Ending loan and lease balances were $11.9 billion, up 4.1% linked quarter, or 16.3% annualized. Our loan production was strong across a variety of categories, including auto, single-family mortgage, single-family warehouse, and various C&I lending types. Net interest margin was 4.22% for the first quarter, up from 3.92% in the fourth quarter of fiscal 2021. and up 38 basis points from 3.84% in the first quarter of 2021. Net interest margin for the banking business was 4.48%, compared to 4.11% in the quarter ended June 30, 2021, and 3.91% for the quarter ended September 30, 2020, up 57 basis points over the prior year's comparable quarter. We maintained our loan yields at 5.12%, and reduced our cost of interest-bearing deposits by nine basis points, length quarter, to 39 basis points. We continue to make steady improvements in our funding mix, with non-interest-bearing deposits increasing by approximately $1.5 billion from June 30th, 2021. Non-interest-bearing deposits now represent approximately 31% of our total deposits at September 30th, 2021, a significant improvement from 19% in the corresponding period a year ago. Axos Securities contributed to overall earnings for a second consecutive quarter. Excluding one-time merger-related expenses associated with the E-Trade Advisor Services acquisition, Axos Clearing, which includes our Clearing and Custody businesses, generated $1.5 million of pre-tax income. Both the Clearing and Custody businesses were profitable, even after accounting for the non-cast appreciation and amortization expenses associated with the acquisition. Our efficiency ratio for the three months ended September 30th, 2021 was 48.71% compared to 48.84% in the fourth quarter of 2021. The efficiency ratio for the banking business segment was 39.93% for the first quarter of 2021 versus 41.95% in the fourth quarter of 2021 as a result of strong net interest income growth. Diluted earnings per share was 99 cents up 12.5% from the $0.88 in the year-ago quarter. Our corporate tax rate increased from 28% in the fourth quarter of 2021 to 29.1% this quarter. We continue to generate strong returns while maintaining excess capital. We generated a return on equity of 16.55% in the first quarter and a return on assets of 1.67%. Capital levels remain strong, with Tier 1 leverage ratio of 10.14% at the bank and 9.22% at the holding company, both well above our regulatory requirements. Our credit quality remains strong, with no loans in forbearance and a decline in nonperforming assets. Net annualized charge-offs to average loans was one basis point, down from seven basis points in the first quarter of fiscal 2021. Non-performing loans represented 1.12% of total loans at September 30, 2021, compared to 1.26% at June 30, 2021. Total loan originations for the first quarter and at September 30, 2021, were $2.3 billion, up 28% from $1.8 billion in the year-ago period. The first quarter 2022 originations were as follows. $201 million of single-family agency gain-on-sale production $430 million of single-family jumbo portfolio production, $107 million of multifamily production, $25 million of commercial real estate production, $132 million of auto and unsecured consumer loan production, and $1.3 billion of C&I and Crestle lending production, resulting in a net increase of $429 million of balances. Mortgage banking gain on sale generated $5.3 million of mortgage banking income compared to $2.9 million in the fourth quarter of 2021 and $19.6 million in the corresponding quarter last year. Originations decreased by approximately 16.9% linked quarter to $201 million, while gain on sale margins increased slightly to 339 basis points from 323 basis points in the fourth quarter of 2021. The outlook for mortgage banking remains stable from fiscal 2021 fourth quarter with a solid pipeline and lower expected gain on sale margins. Our pipeline of single family agency mortgages was 184 million at October 25th, 2021. Our single family jumbo mortgage business had a max quarter. Loan production was strong at 430 million, while high prepayments resulted in a net $63 million decline in ending loan balances as of September 30th, 2021. We're seeing good demand for our jumbo prime products and the pipeline has risen since September 30th to slightly under $600 million. The combination of slightly lower prepays and solid new loan originations should allow us to stabilize our single-family jumbo loan balances. C&I Lending had a very good quarter. Loan originations were $1.3 billion, reflecting strong growth across Crestle, construction, and commercial assets-backed lending. Our growing relationships, knowledge and structuring, and selective adjustments in loan pricing on some new deals and a track record of execution have resulted in a steady expansion in loan production and net balances. Demand remains strong with a backlog of approximately $687 million as of September 30, 2021. Ending balances in our mortgage warehouse portfolio were $656 million, up $42 million from $614 million at June 30, 2021. While our single-family warehouse balances will fluctuate based on underlying demand for mortgage refinancing, our goal is to opportunistically grow with new and existing customers. We continue to make improvements in our consumer, commercial, and securities deposit franchises by investing in our front- and back-end technologies, customer service, and product capabilities. Consumer deposits, representing approximately 47% of our total deposits as of September 30, 2021, is comprised of consumer direct checking, savings, money market, and non-interest-bearing accounts. The weighted average demand and savings deposit cost was 18 basis points at September 30th, 2021, down by 26 basis points, compared to 41 basis points as of September 30th, 2020. Average non-interest-bearing demand deposits were $3.6 billion in the quarter ended September 30th, 2021, up 46.8% from the prior quarter. Ending time deposits as of September 30th, 2021 were down 132 million link quarter and 532.8 million year-over-year as we replaced higher cost non-core CDs with lower cost transactional deposits. Of the approximately 1.44 billion of certificates of deposits as of September 30th, 2021 on the balance sheet, approximately 1 billion at a weighted average rate of 68 basis points will mature in the next 12 months, with the bulk of the runoff expected to occur in the next six months. Our small business and specialty commercial and treasury management businesses, including our fiduciary service businesses, continue to contribute to low-cost core deposits. Axos Clearing continues to generate low-cost deposits that we're able to put on or off balance sheet. The acquisition of the E-Trade Advisory Services RIA custody business which closed on August 2nd, added approximately $1 billion to our September 30th, 2021 ending deposit balances at Axos Bank. We had approximately $714 million of client cash deposits from Axos Clearing at the end of the first quarter of 2022, of which $408 million were placed at partner banks. The flexibility to keep those lower cost deposits off balance sheet and generate fee income from other banks or to place them on Axos balance sheets to support our bank's loan growth will be an even bigger advantage when interest rates rise and competition for deposits increase. Our Q1 2022 net interest margin benefited from several factors, some of which are structural and a few that are transitory in nature. First, we significantly reduced our excess liquidity with average deposits at other financial institutions dropping by approximately $767 million from $1.9 billion in the fourth quarter of 2021 to $1.1 billion in the first quarter of 2022. We do not anticipate meaningful declines in our excess liquidity going forward. On the loan side, we have successfully held loan yields relatively steady over the past several quarters. However, we have started to selectively reduce pricing on new loans in order to be more competitive for high-quality deals. Yields on loans originated in our single-family jumbo, multifamily, and C&I lending groups were 4.26%, 4.39%, and 4.2%, respectively, in the first three months ended 9-30-2021, compared to 5.12% average loan yield in the first quarter that just ended last month. Excuse me. We feel it's prudent to price more competitively on certain high-quality deals while maintaining our credit standards and terms given our success reducing our cost of funds. Lastly, we have dramatically reduced our funding costs across each of our consumer and commercial deposit businesses over the past year in anticipation of having access to over a billion dollars of low-cost deposits from the RIA custody acquisition. With new interest-bearing deposits coming in at 18 basis points in the first quarter of fiscal 2022, we have transformed our deposit franchise to be much more in line with that of a traditional consumer or commercial bank. As such, our ability to continue reducing our funding costs is more limited than it was a year ago. When you consider all these factors, we are confident that our full year net interest margin will be at the high end or slightly above that of our 3.8 to 4.0 range in fiscal 2022. Our credit quality remains solid, Annualized net charge-offs to average loans and leases excluding seasonal tax loan products was one basis point this quarter compared to seven basis points in the corresponding period last year. We charged off the remaining $7.3 million of refunded advance loans outstanding in the fourth quarter of 2021, all of which were fully provisioned for previously. Non-performing assets, the total asset ratio was 9.94 basis points for the quarter ended September 30th, 2021, down from 107 basis points in the fourth quarter of fiscal 2021. Of our non-performing loans, 82.94% are single-family first mortgages where we have had historically very low realized losses. Of our non-performing single-family mortgages, as of September 30th, 2021, approximately 86% had a current estimated loan-to-value ratio at or below 70%, and approximately 94.5% are below 80% of our best estimates of current loan devalues. Given the low loan devalues on our single-family mortgages, we did not anticipate incurring material losses on the vast majority of our delinquent loans. We had no loans in foreclosure as of September 30, 2021. Our loan loss provision this quarter was $4 million compared to $1.3 million in the June 30, 2021 quarter and $11.8 million in the quarter ended September 30, 2020. The sequential increase in loan loss provision supports the $464 million increase in ending loan balances. Our total allowance for loan losses was $136.8 million at September 30th, 2021, which represents approximately 1.14% of our total loans and leases, which is approximately 48 times our total annualized net charge-offs in the three months ended September 30th, 2021. Our loan pipeline remains solid, with approximately $1.7 billion of consolidated loans in the pipeline at September 30, 2021, consisting of $180 million of single-family agency gain-on-sale mortgages, $514 million of jumbo single-family mortgages, $235 million of multifamily and small-balance commercial real estate loans, and $687 million of C&I and commercial specialty real estate loans, with $94 million of auto and consumer unsecured loans in the pipeline. With healthy demand for loans across multiple loan categories, the slight deceleration in prepayments, we remain confident in our ability to achieve a high single digits to low teens loan growth in fiscal 2022. We continue to generate strong returns with return on average common shareholder equity of 16.55% and return on average assets of 1.66% in the three months that is September 30th, 2021 respectively. Our efficiency ratio for the banking segment was 39.93% for the quarter ended September 30, 2021, compared to 45.2% in the last quarter. In the short two months since we closed the E-Trade Advisory Services acquisition, we have already identified dozens of cost synergies by streamlining various processes and procedures. We see additional opportunity to generate operating efficiencies from our clearing, custody, and retail securities business in the next 12 to 24 months, as we further integrate systems, processes, and personnel. Our capital ratios remain strong with Tier 1 leverage to adjusted assets of 9.22% at the holding company and 10.14% at Axos Bank. We have access to approximately $1.7 billion of FHLB borrowing, $1.6 billion in excess of the $158 million we had outstanding at the end of the first quarter. Furthermore, We have $2 billion of liquidity available at the Federal Reserve discount window as of September 30, 2021. Our strong organic growth and returns, coupled with a clean capital structure, allow us to make opportunistic stock buyback and acquisitions, such as the E-Trade Advisory Service acquisition that we announced last quarter. Our securities business had a great quarter with strong growth in fee income and net interest income. Broker-dealer fee income increased 106.4% in the first quarter compared to the corresponding period last year due to the addition of fee income from the AAS acquisition. Excluding one-time merger related expenses, Axios Clearing generated $1.5 million in pre-tax income. Axios Clearing ended the first quarter of fiscal 2022 with approximately $40 billion of assets under custody or administration, including $25 billion of assets under custody and $15 billion of assets under administration in the clearing business. Securities margin balances increased 35% year-over-year to $341 million, while stock lending increased from $263 million in the first quarter of 2021 to $457 million this quarter. FDIC-insured deposits held at partner banks were $712.5 million this at 9-30-2021, up from $672 million at June 30, 2021. AAS, the RIA custody business, had approximately $1.3 billion of total client deposits in Q1 of fiscal 2022, of which $1 billion was held by Axos Bank and $284 million were held by partner banks. We completed the acquisition of the E-Trade Advisory Services business on August 2nd and rebranded the business Axos Advisory Services. I want to thank the Axos Clearing, Axos Advisory Team, and Axos Bank team members who worked tirelessly over the past several months to successfully plan and execute a very complex and rigorous transition and integration plan. The acquisition provides us with turnkey technology platform and an experienced team of approximately 130 professionals who serve around 190 independent registered investment advisors with approximately $25 billion of assets under custody, including the $1.3 billion of client cash deposits. We see tremendous opportunity to help advisors and their end clients become more successful by growing the scope and volume of custody, lending, and banking services we do with them. Axos Advisory Services, becoming a part of Axos Security, will provide significant contributions term. For example, by converting the RIA custody business from a bank platform to a broker-dealer platform, we will be able to offer additional products such as margin lending, options trading, and securities-based lines of credit to existing and new custody clients. We have identified and started to implement various process improvements through the Access Advisory Services Group that will further improve our customer service levels and help the business become more efficient and scalable. In the next 12 to 18 months, we intend to streamline the custody and clearing systems and workflow to further integrate the businesses. We remain on track to meet or exceed our prior guidance for Axios Advisory Services and it will be slightly accretive to our fiscal 2022 earnings per share. We soft-launched our self-directed trading platform at the end of June. Version 1 of our self-directed trading platform offering is focused 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 login or mobile application. We deliberately controlled the rollout and limited the amount of marketing campaigns during this initial phase in order to perfect various client onboarding and servicing workflows. We see self-directed trading as an additional customer acquisition tool that will expand in terms of the scope of products over time. Once we reach a larger base of self-directed trading clients, we will start experimenting with cross-sell opportunities across our lending and fee-based businesses, including our Axos Invest robo-advisor. One product under development is our retail crypto trading service, which will allow Axos Invest customers to easily open a crypto trading account, fund the account quickly by transferring funds from an Axos bank account, trade a limited number of cryptocurrencies, and see their positions and values all in an Axos app. The cost of developing and operating a retail crypto trading business is well controlled, and we will generate incremental fee-based revenue once clients open accounts and trade. We anticipate launching our retail crypto trading business in the next six months. Investments we have made over the past several years across each of our businesses in consumer, commercial, and securities have provided significant strategic and financial rewards to our firm and our shareholders. One example is our deposit platform investments, both organic and through acquisitions, that have generated meaningful growth in our non-interest-bearing deposits, significantly lowered our cost of interest-bearing deposits, and allowed us the flexibility to earn fees from placing certain deposits at other banking institutions or funding our bank's organic loan growth like we did this quarter. We are making additional investments in the securities business, including adding more talented team members and investing in technology and infrastructure in order to grow the business profitably. As we leverage the expertise and leadership from each of our businesses and further implement cost and revenue synergy initiatives, we see continued opportunity to accelerate top and bottom line growth. Now I'll turn the call over to Andy and Derek, who will provide additional details on our financial results.