Axos Financial, Inc.

Greetings. Welcome to the Axos Financial Inc. Q2 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 your host, Johnny Lai, VP of Corporate Development and IR. Thank you. You may begin.

Thanks, Alex. Good afternoon, everyone, and thanks for joining us for today's Axos Financial Links second quarter 2022 financial results conference call. Joining us today are the company's president and chief executive officer, Greg Gerbrandt, and executive vice president and chief financial officer, Derek Walsh, and executive vice president of finance, Andy Micheletti. Greg, Derek, and Andy will review and comment on the financial and operating results for the three and six months ended December 31st, 2021, and we will be available to answer questions after the prepared remarks. Before I begin, I'd 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 AptosFinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. All of these documents, including the 10-Q and an earnings supplement, are now available on our Investor Relations website. With that, I'd like to turn the call over to Greg for 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 second quarter of fiscal year 2022, ended December 31, 2021. I thank you for your interest in Axos Financial and Axos Bank. We had an excellent quarter with double-digit growth in loan originations, net income, book value per share, and earnings per share. Our strong results were broad-based, with net interest margins exceeding the high end of our targets. and balance net interest income and fee income growth across our consumer banking and commercial banking segments. Securities, which is comprised of the direct-to-consumer securities trading business, managed portfolios, and our B2B security clearing and custody business, maintain solid client assets and sweep deposit balances despite a challenging quarter for the industry. Axos reported second quarter net income of $60.8 million for the three months ended December 31, 2021, and earnings per diluted share of $1, representing year-over-year growth of 11% and 9.9% respectively. Our book value per share was $25.60 at December 31st, 2021, up 17.5% from December 30th, 2020. The highlights for this quarter include the following. Ending loan balances were $12.6 billion, up 6.1% link quarter, are 24.4% annualized. Strong loan originations on our auto and various C&I lending loan types more than offset a small decline in our single family mortgage warehouse lending business. Net interest margin was 4.1% for the second quarter, down from 4.22% in the quarter ended September 30th, 2021, and up 16 basis points from 3.94% in the quarter ended December 31st, 2020. Net interest margin for the banking business was 4.3%, compared to 4.48% in the quarter ended September 30 of 2021, and 4.11% in the quarter ended December 31, 2020. We have successfully maintained a strong net interest margin and generated loan growth toward the higher end of our annual target through the first six months of our fiscal 2022. We continue to make steady improvements in our funding mix, with non-interest bearing deposits increasing by approximately 215 million from September 30th, 2021. Non-interest bearing deposits represented approximately 31% of our total deposits at December 31st, 2021, a significant improvement from 19% in the corresponding period a year ago. Our efficiency ratio for the three months ended December 31st, 2021 was 48.78% compared to 48.71% in the first quarter of 2022. ratio for the banking business segment was 39.39% for the second quarter of 2022 versus 39.93% in the first quarter of 2022. We achieved positive operating leverage in our banking business as a result of strong net interest income growth year over year and continuous focus on managing our operating costs. Diluted earnings per share of $1 were up 10% from $0.91 in the year-ago quarter. Including one-time operating costs and non-cash merger-related depreciation and amortization expenses, our diluted earnings per share was $1.04 for the three months ended 12-31-2021, an increase of 10.6% year-over-year. We continue to generate strong returns while maintaining excess capital. We generated a return on equity of 16.29% in the second quarter and a return on assets of 1.63%. Capital levels remain strong with Tier 1 leverage of 10.13% at the bank and 9.42% at the holding company, both well above our regulatory requirements. Our credit quality remains strong with annualized net charge-offs to average loans of one basis point down from 16 basis points in the second quarter of fiscal 2021. We added $4 million to our loan loss provision this quarter to support our strong loan growth. Total allowance for credit losses was $140.5 million at December 31, 2021, representing 121 times our annualized net charge-offs and 1.1% of ending total loans. Total loan originations for the second quarter ended December 31, 2021, or $2.8 billion, up 15.8% from the $2.4 billion in the year-ago period. Loan originations for investment were approximately $2.6 billion, an increase of 35% from the corresponding quarter a year ago. Q2 2022 originations were as follows. $179 million of single family agency gain on sale production, $385 million of single family jumbo portfolio production, $132 million of multifamily production, $26 million of commercial real estate production, $85 million of auto and unsecured consumer loan production, and $2 billion of C&I loan production resulting in a net increase in C&I lending loan balances of $758 million. Mortgage banking gain on sale income generated $4.6 million compared to $5.3 million in the quarter ended December 31, 2021, and $10.6 million in the corresponding quarter last year. Originations decreased by approximately 11% late quarter to $179 million while margins were down due to normalization in the single family mortgage gain on sale market across the industry. We anticipate lower mortgage banking gain on sale in the next few quarters as rising interest rates reduce demand for mortgage refinancing. Our pipeline of single family agency mortgages was $141 million at January 25, 2022. Our jumbo single family mortgage business continues to be stable. We generated $385 million of loan production, offsetting elevated prepayments. Ending loan balances at December 31, 2021 were flat, in line with expectations. Demand for purchase transactions continues to be solid, as reflected in our jumbo single-family mortgage pipeline of approximately $600 million at January 25, 2022. We are working on a few initiatives that could potentially generate fee income in our jumbo single-family lending businesses in the second half of calendar 2022. CNI lending had a tremendous quarter. Loan originations were $2 billion, reflecting strong growth across our commercial specialty real estate business, lender finance, and construction lending. Our strong relationships, knowledge and structuring, and track record of execution have resulted in a steady expansion in loan production and net balances. Demand remains strong across loan types and geographies with a backlog of approximately 572 million at January 25, 2022. Given the large average loan size for CNI versus our jumbo single-family and multifamily loans and competition from banks and non-bank lenders, a few deals can have an outsized impact on our ending CNI loan balances. Ending balances in our mortgage warehouse portfolio were $595 million, down $60 million from $655 million at September 30, 2021. Our single-family warehouse business continues to focus on growing with existing and new customers. While balances will fluctuate based on underlying demand for mortgage refinancing, we continue to generate strong returns in this business. We have maintained operational efficiency while investing and upgrading our technology, infrastructure, leadership, and team members in incubating new businesses. Our business banking segment efficiency ratio was 39.4%, and 39.7% for the three and six months ended 12.5%. salary and benefit expenses were up 4.7% and 5.1% for the three and six months ended December 31st, 2021. With merit-based increases in additional staffing hiring expected in calendar 2022, we anticipate that the year-over-year increase in salaries and benefit expenses will likely be up a few points around the 7% to 8% range in line with what we've seen in prior years. We have a series of operational efficiency initiatives across each business unit that will result in cost savings as we grow and various businesses become more mature. Additionally, we continue to incur incremental expenses related to the integration and modernization of our tech infrastructure in our clearing and custody business. Once we complete the transition of access advisory services to self-clearing and sunset redundant conversion-related workflows, we expect to make more meaningful improvements in the overall efficiency of our securities business. We grew deposits by 4.4% linked quarter to $12.3 billion, with broad-based growth across our small business, commercial, and securities deposits. Checking and savings, representing 90% of total deposits at 12-31-2021, grew at the fastest clip, increasing by 5.9% linked quarter. Consumer deposits, representing approximately 30% of total deposits at 12-31-2021, is comprised of consumer direct checking, savings, and money market accounts. The weighted average demand and savings deposit costs were 17 basis points at December 31st, 2021, down 18 basis points compared to 35 basis points as of December 31st, 2020. We strategically repriced our consumer deposits six months ago in advance of closing the Axos Advisory Service acquisition. Since then, we've focused on increasing the share of wallet with existing consumer banking clients and on adding new consumer deposit relationships through affiliate marketing and cross-sell. We're optimistic that additions of new features in the online and mobile banking platform, including the upcoming release of what we're calling UDB 2.0, and further product enhancements in our self-directed trading and managed portfolios, will generate incremental growth in consumer deposit balances. Average non-interest-bearing demand deposits was $3.7 billion in the quarter ended December 31, 2021, up from $3.5 billion in the quarter ended September 30, 2021. Growth in non-interest-bearing deposits came from our securities and commercial deposit businesses. Axos Clearing continues to generate low-cost deposits that we were able to put on or off balance sheet. Total client deposits from our custody and clearing business was approximately $2.2 billion at December 31, 2021. We kept $1.5 billion of that $2.2 billion on Axos' balance sheet. The flexibility to keep these low-cost deposits off balance sheet and generate fee income from other banks or on access as balance sheet to support our bank's loan growth will be an even bigger advantage when interest rates rise and competition for deposits increases. Our small business and specialty commercial and treasury management business, including our fiduciary service business, continues to contribute to low-cost core deposit growth. We continue to opportunistically hire commercial bankers to our team and leverage our low-cost, high-service model to attract new commercial banking customers from branch-based competitors. We remain slightly asset sensitive to changes in interest rates. Yields on loans originated in our single family jumbo, multifamily, and CNI loans were 3.94%, 4.26%, and 4.55% respectively in the three months ended December 31st, 2021, compared to the 4.93% average loan yield in the second quarter that just ended last month. We tactically reduced pricing on high quality lending opportunities while maintaining our credit standards and terms given our success reducing our cost of funds. Competition and demand remains high across most of our lending categories. Approximately 46% of our loans are 5-1 arms with a rated average duration of three years. All of our CNI loans, with the exception of our $96 million equipment leasing portfolio, have rates that adjust to changes in the underlying index rate. While we're not currently seeing any meaningful changes in deposit competition, Our ability to continue reducing our funding cost is more limited than it was a year ago, particularly in periods when we have loan growth at or above the high end of our target. We have additional funding flexibility with our $2.2 billion clearing and custody deposits. Currently, approximately $725 million of that $2.2 billion of deposits from our securities businesses are held at partner banks, earning an average interest rate of 44 basis points. Depending upon our organic loan growth and our incremental funding costs for new deposits, we may decide to bring more of those deposits on our bank's balance sheet or push more of the deposits off to partner banks. For internal modeling purposes, we assume that the marginal benefit from the first Fed Fund's rate increase to be slightly north of 50% with a higher beta on each successive rate increase. We will continue to evaluate the tradeoff between maintaining a strong net interest margin and a healthy rate of growth in our loan portfolio. With a strong start in the first six months of our fiscal 2022, we are confident that our full-year net interest margin will exceed the top end of our 3.8 to 4.0 range for the full year of fiscal 2022. Our credit quality remains healthy. Annualized net charge-off to average loans was one basis point, same as September 30, 2021 quarter. Non-performing assets and total assets was 94 basis points for the quarterly same as the quarter ended September 30th, 2021. Of our non-performing loans, 83.8% are single-family first mortgages where we've had historically very low realized losses. Of our non-performing single-family mortgage loans at December 31st, 2021, approximately 91.8% have an estimated current loan-to-value at or below 70%, and approximately 98.9% are below 80% of our best estimate of current loan-to-value. Given the low loan-to-value on our single-family mortgages, we do not anticipate incurring material losses on the vast majority of our delinquent single-family loans. We had no loans in forbearance at December 31, 2021. Our loan loss provision this quarter was $4 million, which is the same as the loan loss provision of $4 million in the quarter ended September 30, 2021, and down from the loss provision of $8 million in the quarter ended December 31, 2020. The decrease in loan loss provision from one year ago reflects adjustments in loan portfolio max and changes in macroeconomic factors impacting our credit loss models. The $4 million of loan loss provision for each of the past two quarters reflects strong loan growth in our overall loan balances led by C&I lending. Our total allowance for loan losses was $140.5 million at December 31st, 2021, approximately 1.1% of our total loans and approximately 121 times our total annualized net charge-offs in the three months ended December 31, 2021. Our loan pipeline remains solid with approximately $1.7 billion of consolidated loans in our pipeline as of January 25, 2022, consisting of $141 million of single-family agency gain-on-sale mortgages, $600 million of jumbo single-family mortgages, $284 million of multifamily and small-balance commercial real estate loans, $572 million of CNI and commercial specialty real estate loans, and $71 million of auto and consumer unsecured loans. With healthy demand for loans across multiple loan categories and growth above our target range for the first six months of fiscal 2022, we remain confident in achieving low-teens loan growth in fiscal 2022. We continue to generate strong returns, with return on average common equity of 16.29%, and a return on average assets of 1.63% in the three months ended December 31st, 2021, respectively. Our overall banking and business efficiency ratios are 48.8% and 39.4% for the three months ended December 31st, 2021, respectively. We're making good progress with the integration of Axos Advisory Services, the RIA custody business we acquired from Morgan Stanley approximately five months ago. Overall profitability for Axos Securities in the December 2021 quarter was negatively impacted by lower average margin lending balances and lower transaction-based revenue at Axos Clearing due to industry-wide declines in trading volume. We see meaningful opportunities to improve the profitability of our security business over time as we consolidate systems, automate manual processes, eliminate redundant workflows, and transition to a more efficient, more scalable tech infrastructure. We remain on track to generate slight accretion for the AAS acquisition in fiscal 2022. Our capital ratios remain strong, with Tier 1 leverage to adjusted assets at 9.42% at the holding company and 10.13% at Axos Bank. We have access to approximately $1.9 billion of federal home loan bank borrowing, $1.8 billion in excess of the $158 million we had outstanding at the end of the second quarter. Furthermore, we have $2.4 billion of liquidity available at the Fed discount window as of December 31, 2021. Our capital priorities remain unchanged with a focus on using our capital to support organic loan growth, reinvest in our existing and emerging businesses, and deploying excess capital for opportunistic buybacks and accretive M&A. Our securities business had a next quarter with stable assets under custody and higher client deposit balances and lower trading fees and margin lendings. Broker-dealer fee income increased 128.5% in the second quarter compared to the corresponding period last year due to the addition of fee income from the AAS acquisition. Excluding one-time related merger expenses and non-cash depreciation and amortization, Exos Clearing generated $1.8 million of pre-tax income for the quarter ended December 31, 2021. Exos Clearing ended the first quarter of 2022 with approximately $37 billion of assets under custody or administration, including $26 billion of assets under custody and $11 billion of assets under administration in the clearing business. Transaction-based fees for Axios Clearing in the second quarter of fiscal 2022 were negatively impacted by lower transaction volumes from introducing broker-dealer clients and reduced security lending. We completed the RIA custody acquisition approximately five months ago, and we're excited as ever about the long-term opportunity to grow the combined Axios Clearing business. We see four primary strategic and financial benefits from this business, which we rebranded Axos Advisory Services. First, we see significant opportunity to gain wallet share from existing RIAs and broker-dealers that clear a custody sum or all of their assets with another custodian other than Axos today. As a non-competitive custodian with a high-touch service-centric model and a strong capital base, we're in active communication with dozens of RIA firms about adding Axos as their custodian. We're laying the foundation to become a more integrated clearing custodian by streamlining back-end systems and processes and completing some important and needed conversion activities. One example of a deferred conversion activity is to make Axos Advisory Services self-clearing. Doing so will eliminate redundant processes, reduce operating costs, and potentially free up capital that is required to run the business, particularly during times of extreme market volatility. Third, we see strategic opportunities to add banking, lending, and other services to RIA broker-dealer and their end clients. Competition for advisory clients and advisors is fierce, and we can provide a comprehensive set of banking, clearing, and custody services to help our advisors retain and grow their practices. Whether it's integrated banking, tech integration to third-party service providers, succession or M&A financing, or mortgage lending for advisors' wealth management clients, Access is committed to serving our advisors. Finally, the integration of our clearing and custody teams, systems, and operations will expand the product and revenue opportunities for both. For example, Axos Advisory Services has not historically offered margin lending or options trading because it operated as a bank custodian. Now that we're operating as a broker-dealer custodian, we intend to make the necessary technological investments to enable custody clients to access margin and option trading. We have a healthy pipeline of technology and product enhancements that we intend to roll out over the next four to six quarters. First, we intend to add new features such as multi-owner, multi-signer enrollment for our small business banking and convert our digital small business banking platform to the universal digital bank. We will further integrate our self-directed trading and managed portfolio user experience into UDB. And by refining the front and back-end processes and making it easier to transition an open new accounts through UDB, we hope to increase cross-sell of consumer lending, trading, and deposit products. Second, we are exploring a few new businesses that would generate incremental fee income. As I mentioned earlier, we're expanding our capabilities in single-family mortgage lending to add securitization for agency and non-agency mortgages. This will generate incremental fee income and help offset the expected normalization in our mortgage banking gain-on-sale agency business. Another product under development is our retail cryptocurrency trading service. which will allow Axos Invest customers to easily open a cryptocurrency trading account, fund the account quickly by transferring funds from an Axos bank account, trade a limited number of cryptocurrencies, and hold their digital assets in a secure Axos digital wallet, and see their positions and values all in the Axos application. Many individuals lack the understanding and confidence to open a separate crypto brokerage account. And while they are interested in diversifying and yield benefits from owning cryptocurrencies, They are fearful of the security complexity and lack of transparency in trading and holding these assets, either in a private or exchange-hosted wallet. Our initial direct-to-consumer crypto offering will reduce the friction, complexities, and costs associated with trading and owning crypto for retail clients. We anticipate launching our retail cryptocurrency trading in the next two to three months. Finally, we're making good progress building out our white-label banking solutions for introducing broker-dealers and RIAs. Our vision is to enable advisors, broker dealers, and their reps to offer checking, savings, mortgages, and other consumer banking products to their mass affluent and high net worth clients through an easy-to-use digital app that is powered by Access. At the same time, we'll provide us with a new low-cost acquisition channel for our consumer bank. I'm proud of the performance we've achieved and excited about the opportunities we have to further grow our securities consumer and commercial banking businesses. We have successfully navigated through multiple credit and interest rate cycles, various regulatory policy changes, periods of intense and benign competition, and shifts in technology and end user behavior by maintaining a consistent focus on product development, operational efficiency, and human and capital management. Our future success will depend on our ability to execute on our strategic and operational initiatives in a timely and productive manner. The great news is we have a strong foundation that includes a seasoned management team, diverse businesses that generate above average returns, and a tech-enabled model that provides the potential for positive operating leverage. We'll continue to invest in our platforms, teams, and processes and strike the optimal balance between near-term profitability and long-term growth. Now I'll turn the call over to Derek, who will provide additional details on our financial results.