Axos Financial, Inc.

Good day, ladies and gentlemen, and welcome to your Axos Financial Inc. Fiscal Fourth Quarter 2022 conference call. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. As a reminder, today's call is being recorded. If you should require assistance throughout the conference, please press star zero. At this time, it is my pleasure to turn the floor over to your host, Johnny Lai, Corporate Development and IR. Sir, the floor is yours.

Thanks, Melinda. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for Axos Financial Inc.' 's fourth quarter 2022 financial results conference call are the company's president and chief executive officer, Fred Garabrantz, 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 operational results for the three and 12 months ended June 30th, 2022, and we will be available to answer your 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. We also issued an earnings supplement in conjunction with this call. All of these documents can be found on the Axios Financial website. With that, I would 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 fourth quarter of fiscal year 2022, ended June 30, 2022. I thank you for your interest in Axios Financial and Axios Bank. We had another excellent quarter, with double-digit growth in loan originations for our fourth consecutive quarter. Our strong results were broad-based, with net interest margins exceeding the high end of our target and double-digit net interest income growth on a sequential and year-over-year basis. We grew deposits by 9.5% link quarter and almost 29% year-over-year, led by strong growth in deposits from Axos Securities. We reported net income of $57.9 million and $240.7 million for the three and 12 months ended June 30, 2022, representing year-over-year growth of 6.7% and 11.6% respectively. Our book value per share was $27.48 per share at June 30, 2022, up 16.3% from June 30, 2021. The highlights this quarter include the following. Ending net loans for investment balances were $14.1 billion, up 7.6% linked quarter, or 30.4% annualized. Excluding single-family mortgage warehouse, ending loan balances increased by 9% linked quarter. Net interest margin was 4.21% for the fourth quarter, up 19 basis points from 4.02% in the quarter ended March 31, 2022, and up 29 basis points from 3.92% in the quarter ended June 30, 2021. Net interest margin for the banking business unit was 4.45% compared to 4.21% in the quarter ended March 31, 2022, and 4.16% in the quarter ended June 30, 2021. In contrast to most of our peers, we have successfully maintained a strong net interest margin and generated loan growth from the high end of our annual target through the fiscal year of 2022. We continue to make steady improvements in our funding mix, with non-interest-sparing deposits increasing by approximately $900 million from March 31, 2022. Non-interest-sparing deposits represented approximately 36% of our total deposits at June 30, 2022, a significant improvement from approximately 23% in the corresponding period a year ago. The steady growth of non-interest-sparing deposits positions us well in a rising-rate environment. Deposits from Axos Securities, our clearing and custody business, was $3.5 billion at 6-30-2022, up by approximately $600 million from March 31, 2022. Our efficiency ratio for the three months ended June 30, 2022 was 54.44% compared to 51.3% in the third quarter of 2022. The efficiency ratio for the banking business segment was 46.7% for the fourth quarter of 2022 versus 3.98% in the third quarter of 2022. Operating expenses for the bank for the fourth quarter included an $11 million charge primarily for a one-time resolution of a contractual claim. Excluding the $11 million charge, our banking efficiency ratio for the fourth quarter would have been 40.6%. Diluted earnings per share were at 96 cents, up 6.7% from 90 cents in the year-ago quarter. We continue to generate strong returns while we maintain excess capital. We generated a return on equity of 14.14% in the fourth quarter and a return on assets of 1.4%. Capital levels remain strong with Tier 1 leverage of 10.65% at the bank and 9.29% at the holding company, both well above our regulatory requirements. Our credit quality remains strong, with net annualized charge-offs to average loans of two basis points versus 22 basis points in the fourth quarter of fiscal 2021. We added $6 million to our loan loss provision this quarter to support our loan growth. Total allowance for credit losses was $148.6 million at June 30, 2022, representing 49 times our annualized net charge-offs and 1.04% of total ending loans. Our total loan originations for the fourth quarter ended June 30, 2022, were $3.2 billion, up approximately 41% from $2.3 billion in the year-ago period. Loan originations for investment were approximately $3.2 billion, an increase of 55% from the corresponding quarter a year ago. Q4 2022 originations were as follows. $57.6 million of single-family agency gain-on-sale production, $545 million of single-family jumbo portfolio production, $148.6 million of multifamily production, $230.6 million of commercial real estate production, $105.6 million of auto and unsecured consumer loan production, and $2.1 billion of CNI loan production, resulting in a net increase in ending CNI loan balances of $737 million. We generated $3.4 million of mortgage banking income compared to $5.7 million in the quarter ended March 31, 2022, and $2.9 million in the corresponding quarter last year. The single-family agency origination decreased by approximately 57.6 linked quarter to $57.6 million as a result of industry-wide declines in refinancing activity, while margins were down due to normalization and single-family mortgage gain on sale across the industry. Our MSR valuation generated a $1.5 million gain this quarter, benefiting from a 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 valuation gains, as rising interest rates further reduce demand for mortgage refinancing. Our pipeline of single-family agency mortgages was $33 million as of 8-1-2022. Ending loan balances in our jumbo single-family mortgage business increased by $158 million to $3.7 billion, the strongest quarterly net loan growth we've had in the past three years. We generated $545 million of loan production in the fourth quarter of 2022, benefiting from dislocation in the jumbo SFR mortgage securitization market. Prepayments in our jumbo single-family business were down. They were $390.4 million in the three months ended 6-30-2022, down from $455.6 million of prepayments in the prior quarter. While rising interest rates and economic uncertainty remain headwinds for our jumbo refi and purchase transactions, we are better positioned than most of our competitors given our efficient operations and established track record of execution. Our jumbo single-family mortgage pipeline was approximately $475 million as of 8-1-22. Based on this pipeline and our expectations for a continued decline in prepayments, we anticipate modest growth in our jumbo single-family loan balances in the next few quarters. CNI lending had another tremendous quarter. Loan originations were $2.1 billion, reflecting strong growth across Crestle, asset-backed lending, and construction lending. Our strong relationships, knowledge and 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 $970 million as of 8-1-22. We have positive momentum across multiple CNI lending verticals, and we remain confident that we'll be able to sustain strong growth in our net balances while maintaining credit and loan yields. Auto lending had a good quarter, with ending loan balances increasing by $39 million, or 8.7% linked quarter. We are getting good risk-adjusted returns in our auto lending business, focusing on prime borrowers with a strong mix of used vehicles in both direct and indirect channels. Our auto loan pipeline was approximately $105.9 million at August 1, 2022. Strong underlying profitability in our banking business was partially offset by ongoing growth investments at the bank and in our securities business. Our banking efficiency ratio was 47% and 42% for the three and 12 months ended 6-30-2022. As noted earlier, non-interest expense this quarter included a one-time charge of $9.5 million for the resolution of a contractual claim and an accrual for unrelated non-final jury verdict of $1.5 million. The $11 million aggregate charge was included in other general and administrative expenses for the fourth quarter. The contractual claim underlying the $9.5 million DART payment was based upon an indemnification obligation related to an acquisition. The settlement fully and finally resolved any claim that might be made under that provision. Representation and warranty insurance was purchased as part of this acquisition with a policy limit of $6.5 million, but present collection of those proceeds under that policy remain uncertain. The $1.5 million legal accrual was made in connection with employment litigation initiated in 2015 by a former employee. We have a series of operational efficiencies across business units that will result in cost savings as we grow. Including the $11 million of discrete contractual and legal charges, the efficiency ratio in our banking business unit would have been 40.58% and 39.94% in the three and 12 months into June 30, 2022, respectively. AXO Securities, which includes our securities clearing and custody, self-directed trading, and managed portfolio businesses, generated $0.8 million of pre-tax income, excluding non-cash amortization expenses in the fourth quarter of 2022, an improvement from a loss of $0.1 million in the prior quarter. Our securities businesses are starting to benefit from rising rates, partially offset by declines in custody and clearing fees as a result of a decline in the overall stock market activity. 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 our new Axos clearing core system. We believe these investments are appropriately sized relative to future growth and cost savings they will generate from a fee income, deposit, and customer service perspective. We grew deposits by 9.5% link quarter to $13.9 billion with broad-brace growth across our small business, commercial, and securities deposits. Checking and savings accounts represent 92% of total deposits at 6-30-2022. Consumer deposits, representing 54% of our total deposits at 6-30-2022, is comprised of consumer direct checking, savings, and money market accounts. The weighted average demand and savings and deposit costs were 29 basis points for the three months ended June 30, 2022, compared to 14 basis points for the three months ended March 31, 2022. We continue to make steady progress cross-selling deposit products to our lending customers. Non-interest-bearing deposits increased by $900 million quarter-over-quarter to $5 billion. Total client deposits from our custody and clearing business was approximately $3.5 billion at 6-30-2022 as advisors increased their cash holdings as a percentage of client assets in reaction to elevated stock market activity. We kept... $2.5 billion of the $3.5 billion on Axos Bank's balance sheet. The optionality of deploying these low to no-cost deposits to fund our bank's loan growth or earning fee income from partner banks is a significant competitive advantage relative to other banks our size. Continued growth in our non-interest-bearing deposits has been instrumental in our ability to fund our strong organic loan growth while maintaining a net interest margin above our target range for the past three quarters. Our diverse lending and deposit businesses and modest security portfolio positions us well for a rising rate environment. Our securities book with approximately $264 million in lending balances is less than 2% of total assets as of 6-30-2022. About half of our securities are floating rate, and the average duration of our securities portfolio is 2.4 years. Our single-family jumbo mortgage and multifamily loan portfolios, with $3.7 and $2.1 billion of loan principal outstanding as of June 30, 2022, represent approximately 26% and 15% of our total loans outstanding, much lower than they were in prior uprate cycles. With the exception of a small portfolio of prime jumbo mortgages, 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 2.3 and 3.8 years, respectively. Note rates on loans originated in our single-family jumbo, multifamily, and CNI loans were 5.01%, 4.75%, and 5.16% respectively in the three months ended 6-30-2022, up 89 basis points, 58 basis points, and 42 basis points respectively from the prior quarter. We have raised rates for our newly originated 5-1 jumbo single-family and multi-family loans an additional amount in July, 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 June 30, 2022, CNI loans increased by $700 million linked quarter to $6.8 billion, representing nearly half of our gross loans outstanding. With the exception of our $114.7 million of equipment finance portfolio, all of our other CNI loans are adjustable rate. At June 30, 2022, approximately 79% of our variable rate CNI loans were above their floors, and following the rate increase announced on July 27, 86% are above their floors. With another additional 75 basis points increase, 95% of CNI loans will be above their floor. Demand for our commercial specialty real estate and other CNI loans remain strong, as reflected in the $970 million of CNI loans in our pipeline at 8-1-2022. We believe our balance sheet remains asset sensitive. With floor rates reaching effectively on the vast majority of CNI loans with the next rate increase, and with aggressive repricing of newly originated single-family and multifamily mortgages, and continued, although slower, levels of prepayment of lower-yielding single- and multifamily hybrid mortgages, our asset yields will continue to increase. Furthermore, the approximately $0.9 billion of deposits at partner banks will generate higher fees for access as rates rise. While we expect deposit betas to rise as competition for deposits increase in the back half of calendar 2022 and beyond, particularly for new deposits, our deposit betas will be meaningfully lower than they were in prior Fed tightening cycles due to the granularity and diversity of our tech-enabled, customer-centric deposit servicing model. One of the key strategic benefits of being a bank-like access owning an RIA custodian is having access to low-cost deposits that we can use to fund our loan growth. Historically, the cash deposit balances held by our advisory clients have fluctuated between 6% to 8% of assets under custody. In the quarter ended 6-30-2022, advisors held more cash in reaction to elevated levels of market volatility. The additional $670 million of no-cost deposits, which represent the difference between the 9% average cash balance held by advisory clients and the 6% that we typically expect, boosted our net interest margin by approximately 12 basis points in this quarter. Our net interest margin in the fourth quarter of 2022 also benefited from non-recurring interest income from two loans that were previously categorized as non-performing that were paid off in full. We received full interest in principle on both loans, including default interest. These two loans combined added approximately $3.5 million of net interest income, boosting our net interest margin by approximately nine basis points. Excluding these two aforementioned items, our net interest margin would have been 4.02 when the three months ended June 30, 2022, up six basis points year over year. Looking forward, our outlook is that our net interest margin for the fiscal year end, June 30, 2023, will remain at or above our long-term target of 3.8 to 4. The biggest factors impacting our net interest margin will be how fast our loan portfolio grows and where our Axos advisory deposit balances are relative to the June 30, 2022 levels. As we stated previously, our expectation is that net loans will grow in their mid-teens in fiscal 2023. grew net loans by nearly $1 billion in this quarter, representing an annualized growth of over 30%. If we continue to grow net loans at that rate, or a rate above our mid-teens base case target, then the incremental cost to fund our loan growth will be on the higher end of expectations. With respect to our advisory deposits, we have a healthy pipeline of new advisors looking to transition their custody assets to us. However, relative to the size of our existing $22.4 billion of assets under custody at the end of this quarter, the biggest source of incremental low-cost deposits will come from our existing RIA clients. The amount of cash held by RIAs in their client accounts, commonly described as cash sorting, fluctuates based on advisors' risk appetite, which can change quickly. For example, when we closed the advisory acquisition last August, advisor clients held a record low of 4.8% of assets they managed in cash. Fast forward to this quarter, the cash percentage dramatically increased to 11.9% by the end of the quarter as the Fed's aggressive monetary tightening significantly reduced advisors' risk tolerance. Our baseline assumption is that the percentage of cash held by advisory clients will normalize to 7% of assets under custody in fiscal 2023. If clients become more risk-averse and continue to hold a higher cash balance, then our full-year net interest margin would be higher than our baseline targets. However, if clients reduced their cash percentage and we had to replace those low-cost deposits with relatively higher-cost deposits, then our full-year net interest margin would be reduced, depending on the percentage of cash sorted. 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, were 68 basis points for this quarter, a decrease from 87 basis points for the quarter ended March 31, 2022. Of our non-performing loans, 56% are single-family first mortgages where we've had historically very low realized losses. Of our non-performing single-family mortgages, at the end of this quarter, approximately 84.3% had an estimated current loan-to-value ratio below 70, and approximately 90.5% are below 80% of our best estimates of current loan-to-value. The property of our largest non-performing single-family mortgages was sold in the fourth quarter of 2022, and we were paid back 100% of our principal and interest, including our default interest. Given the low loan-to-values of our asset-backed loans, we remain confident that we will incur minimal credit losses even if our asset values decline. Our loan loss provisions this quarter was $6 million, which is up by $1.5 million from the last quarter and up $4.7 million year over year. The increase in loan loss provision primarily reflects a record quarter of loan originations for investments and changes in loan portfolio MECs with CNI and auto accounting for a greater percentage of our total loans. Our total allowance for loan losses was $148.6 million at June 30, 2022, approximately 1.04% of our total loans and approximately 49 times our total annualized net charge-offs in the three-month end of June 30, 2022. Our loan pipeline remains solid, with approximately $1.9 billion of consolidated loans in our pipeline at August 1, 2022, consisting of $33 million of single-family agency gain-on-sale mortgages, $475 million of single-family jumbo mortgages, $273 million of multifamily and small-balance commercial real estate loans, $970 million of CNI and Crestle loans, and $109 million of auto and consumer unsecured loans. With healthy demand for loans across multiple loan categories, we are confident in achieving the mid-teens loan growth target we established at our investor day for fiscal 2023. We are making good progress with the integration of the Access Advisory Services business, which is the RA custody business we acquired from Morgan Stanley a year ago. Overall profitability for Access Securities in this quarter improved from the prior quarter primarily due to an increase in broker-dealer fee income. We see meaningful opportunities to grow assets under custody, fee income and deposit balances at advisory services by adding new clients and rolling out new products and services. We've opportunistically added a few seasoned team members to our advisory sales team to take advantage of advisors looking to move some or all of their custody business. We signed five new deals this quarter that will increase our assets under custody by approximately $200 million once they are fully onboarded. Our pipeline of custody clients is healthy and growing, and market volatility provides opportunities for a nimble and client-centric organization such as ours. Our capital ratios remain strong with Tier 1 leverage to adjusted asset leverage of 9.29% at the holding company and 10.65% at Axos Bank. We have access to approximately $2 billion of federal home loan bank borrowing and $1.9 billion in excess of the $117 million we had outstanding at the end of the fourth quarter. Furthermore, we had $2.8 billion of liquidity available at the Fed discount window as of the end of this quarter. 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 solid quarter with higher client deposit balances and lower custody and clearing fees due to an overall decline in equity markets. Broker-dealer fee income increased 105% in the fourth quarter compared to the corresponding period last year due to the addition of fee income from the Exos Advisory Services acquisition. Excluding one-time merger-related expenses and non-cash depreciation and amortization costs, Exos Clearing generated $2.1 million of pre-tax income for the quarter ended June 30, 2022. Exos Clearing ended the fourth quarter of 2022 with approximately $32 billion of assets under custody and administration, including $22 billion of assets under custody and $10 billion of assets under administration in the clearing business. Total RIA and IDB relationships increased from 254 at March 31, 2022, to 263 at the end of this quarter. Revenue from clearing activity was relatively flat, with an increase in stock borrowed balances being offset by a decline in ending margin balances. The increase in broker-dealer fee income of $3.4 million was primarily driven by multiple Fed rate hikes, resulting in FDI sweep fee income growing from $2.9 million to $6.6 million. We continue to make good progress in our ongoing effort to streamline the operations and infrastructure at Axos Clearing and Advisory Services. We have automated certain manual processes and eliminated redundant reconciliations and other internal workflows. As we discussed at our investor day in May, Axos Clearing is transitioning to a modern SaaS-based platform that will reduce our operating costs, increase the flexibility to introduce new products and features quickly and cost-effectively, and allow us to serve FinTechs that we are not able to serve today. This multi-year transition started last quarter, and the incremental costs associated with the development and implementation are in the run rate today. The rollout will occur in several stages, and we do not expect any meaningful one-time expenses associated with any one specific stage. The consistency in our growth, margins, and profitability is a testament to the diversity and efficiency of our model and the solid execution by our team. We have a long track record of managing through change and competition, interest rates, partnerships, and business max, while increasing our earnings and book value per share. Our strong loan growth and net interest margin support, continued net income growth, and growth in our broker-dealer fee will help us offset declines in mortgage banking gain on sale revenue. While the uncertain environment presents short-term challenges, we will 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. Our strong profitability, excess capital, and ability to be nimble positions us well to take advantage of market dislocations. We remain focused on generating strong organic growth that will translate into excess returns for our shareholders over time. Now I'll turn the call over to Derek who will provide additional detail on our financial results. Thanks, Greg.