Axos Financial, Inc.

Greetings. Welcome to the Axios Financial Inc. Q3 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, Senior Vice President of Corporate Development and Investor Relations, Johnny Lai. You may begin.

Thanks, Kyle. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Links' third quarter 2022 financial results conference call are the company's President and Chief Executive Officer, Greg Garabrantz, and Executive Vice President and Chief Financial Officer, Derek Walsh, and Executive Vice President of Finance, Andy Micheletti. Greg and Andy will review Greg and Eric will review and comment on the financial and operational results for the three and nine months ended March 31st, 2022, and they will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risk and uncertainties. Therefore, the company claims a 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 AxiosFinancial.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 can be found on the Axios Financial website. With that, I would 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 Axios Financial's conference call for the third quarter of fiscal year 2022, ended March 31st, 2022. I thank you for your interest in Axios Financial and Axios Bank. We had an excellent quarter with double-digit growth in loan originations, net income, book value per share, and earnings per share for the third consecutive quarter. Our strong results were broad-based with net interest margins exceeding the high end of our target and balance net interest income and fee income growth across our consumer and banking segments. Axos Securities increased client accounts and deposit balances despite a challenging quarter for the industry due to headwinds caused by macroeconomic and geopolitical turmoil. Axos reported third quarter net income of $61.8 million for the three months ended March 31, 2022, earnings per diluted share of $1.02, representing year-over-year growth of 15.3% and 14.6% respectively. Our book value per share was $26.58 at March 31, 2022, up 17% from March 31, 2021. The highlights for this quarter include ending loan balances of $13.1 billion, up 3.9% linked quarter, or 15.4% annualized. Strong loan originations in our auto, commercial real estate, and various C&I lending loan types more than offset an expected decline in our single-family mortgage warehouse loans. Excluding single-family jumbo and single-family mortgage warehouse, ending loan balance has increased by 9.5% in quarter. Net interest margin was 4.02% for the third quarter, down from 4.10 in the quarter ended December 31, 2021, and up six basis points, from 3.96 in the quarter ended March 31st, 2021. Net interest margin for the banking business was 4.21% compared to 4.3% in the quarter ended December 31st, 2021, and 4.23% in the quarter ended March 31st, 2021. Counter to most of our peers, we have successfully maintained a strong net interest margin and generated loan growth toward the higher end of our annual target through the first nine months of fiscal 2022. We continue to make steady improvements in our funding mix, with non-interest-bearing deposits increasing by approximately $287.8 million from December 31, 2021. Non-interest-bearing deposits represent approximately 33% of our total deposits at March 31, 2022, a significant improvement from 23% in the corresponding period a year ago. The steady growth of non-interest-bearing deposits positions us well in a rising rate environment. Our efficiency ratio for the three months ended March 31, 2022, was 51.21% compared to 48.78% in the second quarter of 2022. The efficiency ratio for the banking business segment was 39.79% for the third quarter of 2022 versus 39.39% in the second 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 were $1.02, up 15% from 89 cents in the year-ago quarter. Strong growth in our pre-tax, pre-provision income more than offset a 1.8 million or 67% year-over-year increase in our provision for loan losses. We continue to generate strong returns while maintaining excess capital. We generated a return on equity of 15.89% in the third quarter, and a return on assets of 1.59%. Capital levels remain strong with a Tier 1 leverage ratio of 10.51% at the bank and 9.43% at the holding company, both well above our regulatory requirements. In February, we raised $150 million of subordinated debt at the holding company to further augment our capital. Our credit quality remains strong with net annualized charge-offs to average loans of five basis points versus three basis points in the third quarter of fiscal 2021. We added 4.5 million to our loan loss provision this quarter to support our strong loan growth. Total allowance for credit losses was 143 million at March 31st, 2022, representing 22 times our annualized net charge off and 1.1% of our ending total loans. Total loan originations for the third quarter ended March 31st, 2022, were 2.5 billion, up 57% from 1.6 billion in the year-ago period. Loan originations for investment were approximately 2.4 billion, an increase of 99% from the corresponding quarter a year ago. Q3 2022 originations were as follows. 136 million of single-family agency gain-on-sale production, 378 million of single-family jumbo portfolio production, 194 million of multifamily production, 147 million of commercial real estate production, 105 million of auto and unsecured consumer loan production, and $1.7 billion of CNI loan production, resulting in a net increase in ending CNI loan balances of $584 million. We generated $5.7 million of mortgage banking income, compared to $4.6 million in the quarter ended December 31, 2021, and $9 million in the corresponding quarter last year, when refinancing activity was near record high levels. Originations decreased by approximately 24% linked quarter to $136 million, while margins were down due to a normalization in single-family mortgage gain on sale across the industry. Our MSR evaluations generated a $3.1 million gain this quarter, benefiting from the rapid increase in mortgage rates since the end of 2021. We anticipate lower mortgage banking gain on sale in the foreseeable future, partially offset by MSR evaluation gains as rising interest rates reduce demand for mortgage refinancing. Our pipeline of single-family agency mortgages was $59 million, at 4-25-2022. Our jumbo single-family mortgage business appears to have stabilized. We generated $378 million of loan production, offsetting elevated prepayments. Ending loan balances at March 31, 2021, were reduced by $58 million as a result of prime jumbo loans we sold during the quarter. With this location in the secondary market for jumbo single-family mortgages, we expect to gain market share while repricing our loan rates up. Our jumbo single-family mortgage pipeline was approximately $761 million at 4-25-2022. CNI lending had another tremendous quarter. Loan originations were $1.7 billion, reflecting strong growth across commercial specialty real estate, asset-backed lending, and construction lending. Our strong relationships, knowledge in structuring, and track record of execution have resulted in steady expansion in loan production and net balances. Demand remains strong across loan types and geographies, with a backlog of approximately $886 million at 4-25-2022. We have positive momentum across multiple CNI lending verticals and remain confident that we will be able to sustain strong loan growth in our net balances while maintaining our credit and loan yield standards. Ending balances in our mortgage warehouse portfolio were $423 million down $172 million from $595 million at December 31, 2021. We continue to look for opportunistic ways to grow our single-family warehouse business with existing and new customers. We continue to focus on generating good returns while maintaining an efficient operating structure. Our core banking business continues to generate strong and positive operating leverage. Our business banking efficiency ratio was 39.79%, and 39.79% for the three and nine months ended 3-31-2022. We have a series of operational efficiency becomes more mature. Additionally, we continue to incur incremental expenses related to the growth initiatives such as crypto trading, tech infrastructure upgrades for the bank and our securities business, and new products and feature enhancements in consumer and commercial banking. We will be carefully balancing investments in the future while maintaining best-in-class operating efficiency ratios at the bank. We grew deposits by 3.8% linked quarter to $12.7 billion with broad-based growth across our small business commercial and securities deposits. Checking and savings accounts representing 92% of total deposits at the end of the quarter grew at a faster clip, increasing by 6.5% in quarter. Consumer deposits representing half of our total deposits at 3-31-2022 are comprised of consumer direct checking, savings, and money market accounts. The weighted average demand and savings deposits were 22 basis points of cost at March 31, 2022, compared to 38 basis points of cost as of March 31, 2022. We strategically repriced our consumer deposits nine months ago in advance of closing the AAS acquisition. Since then, we've focused on increasing the share of wallet with existing consumer banking clients and on adding new customer deposit relationships through affiliate marketing and cross-sell. Our small business banking and cash and treasury management businesses continue to generate solid deposit growth, providing granular low-cost deposits to fund our organic loan growth. Average non-interest-bearing deposits were $4.2 billion at March 31, 2022, up from $3.7 billion at December 31, 2021. Growth in non-interest-bearing deposits came from 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 businesses were approximately $2.9 billion at March 31, 2022, as advisors increased their cash holdings as a percentage of client assets in reaction to elevated stock market volatility. We kept $2.1 billion of the $2.9 billion on Axos Bank's balance sheet. The flexibility to keep these low-cost deposits off balance sheet and generate fee income from other banks or on Axos Bank's balance sheet to support our loan growth will be an even bigger advantage when interest rates rise and competition for deposits increase. Our diverse lending and deposit businesses and modest securities portfolio Our securities book with approximately $230 million in ending balances is less than 2% of total assets at March 31st, 2022. About half of our securities are floating rate and the average duration of our securities portfolio is only 2.4 years. Our single family jumbo and multifamily loan portfolio with $3.5 billion and $2.1 billion of loan principal outstanding at March 31st, 2022 is representing approximately 27% and 16% of our total loans outstanding, is much lower than what it was in the prior rate cycle. These loans are 5-1 arms and adjust after five years. With the exception of prime jumbo mortgages we originated and less than $50 million of agency mortgages we purchased last quarter for the CRA purposes, we have no other 30-year fixed-rate jumbo single-family or multifamily loans on our balance sheet. The weighted average duration of the jumbo single-family mortgages and multifamily mortgages on our balance sheet were approximately three and four years, respectively. Note rates on loans originated in our single-family jumbo, multifamily, and CNI loans were 4.12%, 4.24%, and 4.86%, respectively, and the three months ended March 31, 2022, up 18 basis points, down two basis points, and up 31 basis points from the prior quarter. We raised rates for our newly originated 5-1 jumbo single-family and multifamily loans in April, and demand remains solid. CNI loans have been the biggest contributor to our overall loan growth over the past several years. For the quarter ended March 31, 2022, CNI loans increased by $584 million linked quarter to $6.1 billion, representing nearly half of our gross loans outstanding. With the exception of $107 million of equipment finance loans, all of our other CNI loans are adjustable rate. 84% of our variable rate CNI loans adjust to LIBOR, and the other 16% adjust to SOFR, Ameribor, or other indexes. At March 31, 2022, approximately 24% of our CNI loans are above their floor, and 73% of our CNI loans will be above their floor with another 100 basis points up, and 97% will be above their floor at 200 basis points up. While competition for well-secured CNI loans from high-quality borrowers remain elevated, We expect upward pricing on new loans as rates continue to rise, putting further pressure on non-bank competitors. We have transformed our deposit franchise since the last uprate cycle and feel good about our ability to fund our robust loan growth with a variety of deposits from our consumer, commercial, banking, and securities businesses. Our core Axos consumer checking accounts continue to offer tremendous value with a state-of-the-art, easy-to-use mobile app and no fees. We have made further progress cross-selling consumer checking and savings accounts to our agency mortgage and jumbo mortgage customers, with an increasing percentage of our new customers opting for direct deposit and bill pay with our deposit products. Our cash and treasury management teams are winning operating accounts by offering superior customer service and API integrations for middle market clients that are already transacting digitally without the need for a branch location. Our specialty deposit groups, including HOA and Axos fiduciary services, continue to add sticky no-cost deposits. We have additional funding flexibility with our $2.9 billion clearing and custody deposits. With approximately $0.8 billion of the $2.9 billion from our security businesses are held at partner banks, earning an average rate of 45 basis points. Approximately 70% of the $800 million of deposits at partner banks repriced immediately to changes in Fed funds, while another 30% repriced within three months. While we expect deposit betas to rise as competition for deposits increases in the back half of calendar 2022 and beyond, our deposit betas will be meaningfully lower than they were in the prior Fed tightening cycle due to the granularity and diversity of our tech-enabled, customer-centered deposit services model. Our credit quality remains healthy. Net charge-offs to total loans remain low, and our asset-based low LTV lending makes us extremely comfortable about our credit outlook, even in adverse economic scenarios. Non-performing assets, the total assets, was 87 basis points for the quarter ended March 31, 2022, a decrease from 94 basis points for the quarter ended December 31, 2021. Of our non-performing loans, 81.7% are single-family first mortgages where we've had historically very low realized losses. Of our non-performing single-family mortgages at March 31, 2022, approximately 93.6% had an estimated current loan-to-value at or below 70%, and approximately 98.8% are below 80% of our best estimates of current loan-to-values. Given the low loan-to-values on our single-family mortgages, we do not anticipate occurring material losses on the vast majority of our delinquent loans. Our loan loss provision this quarter was $4.5 million, which is up by half a million dollars higher from the last quarter and up $1.8 million year over year. The increase in loan loss provision primarily reflects changes in loan MACs, with CNI and auto accounting for a greater percentage of our total loans. Our total allowance for loan loss was $143.4 million at March 31, 2022, which is approximately 1.1% of our total loans and approximately 22 times our total annualized net charge-offs in the three months ended March 31, 2022. Our loan pipeline remains solid with approximately $2.2 billion of consolidated loans in our pipeline at April 25, 2022, consisting of $59 million of single-family agency gain-on-sale mortgages, $761 million of jumbo single-family mortgages, $402 million of multifamily and small-balance commercial real estate term loans, $886 million of CNI and commercial specialty real estate loans, and $89 million of auto and consumer unsecured loans. With healthy demand from loans across multiple loan categories and growth above our target range for the first nine months of fiscal 2022, we remain confident in achieving the higher end of our low-teens loan growth target in fiscal 2022. We are making good progress with the integration of Axos Advisory Services, the RIA custody business we acquired from Morgan Stanley approximately eight months ago. Overall profitability for Axos Securities in March of 2022 were 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 continue 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 stack. We successfully converted Axos Advisory Services from J.P. Morgan to Axos Clearing this quarter. This will provide us with more flexibility and reduce operating costs by approximately $1 million per year. We have dozens of operational efficiency initiatives for our clearing and custody businesses that are in various phases of implementation. We remain on track to generate slight accretion for the AAS acquisition in fiscal 22, with or without the benefit of future Fed funds rate increases. Our capital ratios remain strong with Tier 1 leverage to adjusted assets of 9.43 at the holding company and 10.51 at Axos Bank. We have access to approximately 1.8 billion of FHLB borrowing, 1.6 billion in excess of the 154 million we had outstanding at the end of the third quarter, We took advantage of favorable market conditions to augment our capital through $150 million subordinated debt raise in February. Furthermore, we had $2.8 billion of liquidity available at the Fed discount window as of March 31st, 2022. 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 deploy excess capital for opportunistic buybacks and accretive M&A. Our securities business had a mixed quarter. with higher client deposit balances and lower securities and margin lending activity as broker-dealer clients reduced risk. Broker-dealer fee income increased 62.6% in the third 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 and non-cash depreciation and amortization costs, Axios Clearing generated $2.1 million of pre-tax income for the quarter ended March 31, 2022. Axios Clearing ended the third quarter of 2022 with approximately $36 billion of assets under custody and assets under administration, including $25 billion of assets under AAS and $11 billion of assets under administration in the clearing business. Total client relationships and underlying accounts were up, and client assets were down slightly due to the decline in equity markets overall. Transaction-based fees for Axios Clearing in the third quarter of 2022 We're negatively impacted by lower transaction volumes from our introducing broker-dealers and reduced securities lending activity. We completed the RIA custody acquisition approximately eight months ago, and we're making good progress on a variety of tactical and strategic initiatives. With a self-clearing conversion behind us, we have pivoted our focus to growing new assets for existing and new clients. As a non-competitive custodian with a high-touch service-centric model and a strong capital base, We are in active communications with dozens of RIA firms about adding access to their custodian. Second, we're expanding our capabilities and investing in the necessary infrastructure to add banking, lending, and other services to RIAs and broker-dealers and their end clients. In conversations with advisors, large and small, we have heard that integrated banking, tech integration into third-party service providers, succession or M&A financing, or mortgage lending for advisors' wealth management clients are important, value-added services that would benefit their practice and their end investor clients. We are expanding the number of relationships we have with third parties to introduce RIAs and advisors who are interested in using Axos for their clearing, custody, and banking needs. One last important strategic initiative for Axos Securities is upgrading our core clearing infrastructure to improve our flexibility and scalability. It's a multi-pronged, multi-year process that will generate incremental benefits over each stage of implementation. While market volatility and turmoil may adversely impact our business in the short term, they present tremendous opportunities for our securities business as well as those of our clients. As clients reassess their needs from a product and technology perspective, we see exciting opportunities to gain market share by becoming their strategic partner for banking and security services. We look forward to sharing more details at our Investor Day in Centennial, Colorado, next week on initiatives we have underway and plan to implement over the next 12 to 18 months to help access and our clients grow and scale. We've successfully overcome the loss of H&R Block and other Durban-related revenue and navigated through periods of competitor pressure in our jumbo single-family and multifamily businesses by building and scaling our commercial bank and securities business. Our ability to generate double-digit loan growth and maintain a 4% net interest margin is a testament to the diversity and resiliency of our business model. We continue to invest in initiatives such as our Universal Digital Bank 2.0, retail crypto trading, commercial real-time payments, and a modern core for access clearing that will make us more competitive from a cost, product, technology, and scale perspective. Not only are these initiatives will generate short-term benefits, but they will help us become even more differentiated and competitive with fintech and other non-bank competitors. Our strong profitability, excess capital, and ability to be nimble position us well to take advantage of market dislocations. We'll aggressively deploy resources when we see these opportunities to accelerate our growth. Now I'll turn the call over to Derek who will provide additional details on our financial results.