Axos Financial, Inc.

Greetings. Welcome to the Axos Financial Inc. Q1 2023 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'll now turn the conference over to you, Johnny Lai. You may begin.

Thank you, and good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc's first quarter 2023 financial results conference call are the company's President and Chief Executive Officer, Greg Garabrantz, and Executive Vice President, Chief Financial Officer, Derek Walsh, and Executive Vice President of Finance, Andy Micheletti. Greg and Derek will review and comment on the financial and operational results for the three months ended September 30th, 2022, 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 maturely from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims to 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 over the call to Greg, I'd like to remind our listeners that in addition to the earnings press release, we also issue an earnings supplement for this call. All of these documents can be found on the Axios Financial website. With that, I'd like to turn the call over to Greg.

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the first fiscal quarter ended September 30th, 2022. I thank you for your interest in Axos Financial and Axos Bank. We had another excellent quarter with double-digit growth year-over-year in book value per share and ending loan and deposit balances. Our strong results were broad-based with net interest margins exceeding the high end of our target and double-digit net interest income growth year-over-year. We grew deposits by approximately 29% year-over-year, led by strong growth in consumer deposits and deposits from Axos Securities. Excluding a one-time legal reserve, which I'll discuss later, we reported adjusted net income of $69.6 million for the three months ended September 30, 2022, representing year-over-year growth of 15.6%. Our book value for share was $28.35 on September 30, 2022, also up 15.6% for September 30, 2021. Highlights for this quarter include the following. Deposits increased 8.8% link quarter and 29.2% year-over-year to $15.2 billion. We continue to make steady improvements in our funding mix with non-interest-bearing deposits increasing by approximately $1 billion from September 30, 2021. Non-interest-bearing deposits represented approximately 30% of our total deposits in September 2022. The diversity of our funding mix compared to the last rate cycle positions us well to maintain our best-in-class net interest margin. Ending net loans for investment balances were $15.2 billion, up 8% linked quarter, or 28.1% annualized. Despite rate increases rapidly since the start of the year, we continue to see good demand for well-secured C&I and commercial real estate loans. Net interest margin was 4.26% for the fourth quarter, up seven basis points from 4.19% in the quarter ended June 30, 2022, and up four basis points from 4.26%. at September 30, 2021. Net interest margin for the banking business unit was 4.5% compared to 4.45% in the quarter ended June 30, 2022, and 4.48% in the quarter ended September 30, 2021. Higher loan yields more than offset the increase in funding costs. Axo Securities, comprised primarily of our custody and clearing businesses, made positive contributions to our fee income, deposits, and net income. Total deposits from Axo Securities were approximately $3.3 billion as advisor and broker-dealer clients continue to hold higher cash balances in light of elevated market volatility. Quarterly pre-tax income improved by $9 million year-over-year to $8.9 million due primarily to higher interest rates. Adjusted diluted earnings per share was $1.18, up 15% from $1.03 in the year-ago quarter. Capital levels remain strong with Tier 1 leverage ratio of 10.3% at the bank and 8.98% at the holding company, well above our regulatory requirements. Our credit quality remains strong with annualized net charge-offs to average loans of five basis point versus one basis point in the first quarter of fiscal 2022. The slight uptick in our net charge-offs was from very low levels solely due to losses in our personal and secured and auto loan portfolios some of which are later offset on the auto side by collection of credit insurance we have purchased on certain auto FICO bands. We added $8.75 million to our loan loss provision this quarter to support our strong loan growth. Total allowance for credit losses was $155.5 million at September 30, 2022, representing 21 times our annualized net charge-offs and 1% of our ending loan total loans. Loan originations for investments for the quarter ended September 30th, 2022 were 2.5 billion, approximately 19% from 2.1 billion in the comparable quarter one year ago. The first quarter 2023 fiscal year originations were as follows. 312 million of single family jumbo production, 129 million of multifamily production, 59 million of commercial real estate production, 125 million of auto and unsecured consumer loan production, and $1.9 billion of CNI loan production, resulting in a net increase in ending CNI loan balances of $960 million. Ending loan balances in our jumbo single family business increased by $124 million to $3.8 billion, marking a second consecutive quarter of over $100 million of net growth in our jumbo single family mortgage portfolio. We generated $313 million of loan production in the first quarter of 2023, jumbo single-family mortgage securitization market. Prepayments in our jumbo single-family mortgage business were $184.3 million in the three months ended September 30, 2022, down from $390 million of prepayments in the prior quarter. While rising interest rates have resulted in reduced overall market demand for jumbo refinances and purchase transactions, we are better positioned than most of our competitors to capture a greater share of the available market and given our efficient operations and established track record of execution. Our jumbo single-family mortgage pipeline was approximately $311 million as of October 24, 2022. CNI lending had another tremendous quarter. Demand remained strong across loan types and geographies, with a backlog of approximately $790 million at October 24, 2022. 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 our credit quality and loan yields. Our loan pipeline remains solid with approximately $1.4 billion of consolidated loans in our pipeline at October 24, 2022, consisting approximately of $20 million of single-family agency gain-on-sale mortgages, $311 million of jumbo single-family mortgages, $155 million of multifamily and small-balance commercial real estate term loans, 790 million of CNI and commercial real estate specialty loans, and 170 million of auto and unsecured loans. We are off to a strong start to our fiscal year with over $1 billion of net loan growth in the first quarter of fiscal 2023. While the near-term outlook remains good, we expect loan growth to moderate from the elevated pace we've seen in the past two quarters as the impact of higher interest rates begin to have a more pronounced effect on loan demand in the first half of calendar Nevertheless, we remain confident that we will achieve the mid-teens loan growth target for our fiscal 2023. Deposits increased 8.8% link quarter and 29.2% year-over-year. Growth in small business and consumer deposits were offset by declines in certain commercial banking and clearing and custody deposits from elevated levels at the end of the prior quarter. Competition for deposits has increased across most of our deposit categories. We have been successfully retaining and growing consumer checking, savings, and money market deposits through cross-sell and relationship pricing initiatives. In commercial banking, our low-cost nationwide deposit gathering and specialized servicing approach has allowed us to be more competitive in retaining and growing deposits from existing clients. Our investments in cash and treasury management capabilities and teams have increased the pipeline of prospective new treasury management clients. In Axos fiduciary services, our bankruptcy trustee business Total deposits were approximately $1.1 billion at the end of the first quarter. We expect a gradual pickup in Chapter 7 and non-Chapter 7 cases and deposits over the next 12 months as the economy decelerates and bankruptcy filings rebound from multi-decade lows. Access clearing continues to generate a significant source of low-cost deposits. We had approximately $3.3 billion of clearing and custody deposits on September 30, 2022, including $2.4 billion that was on our balance sheet and $0.9 billion that was placed at partner banks. While the level of cash sorting by advisors and broker-dealer clients has increased, the cash held at Axos Clearing remains elevated at approximately 11% of total assets under custody and administration. The weighted average cost of our clearing and custody deposits remain very low, even with a rapid rise in the Fed fund rates. We have a healthy pipeline of new custody and clearing clients that will help offset the eventual normalization in cash holdings, if and when advisors and broker-dealers become less risk-adverse. We maintained a net interest margin well above our long-term annual target of 3.8% to 4% once again this quarter, with consolidated and bank-only NIM of 4.26% and 4.5% respectively. New loan yields during the quarter were as follows. Single-family jumbo mortgages, 6.03%. Multifamily mortgages, 5.92%. Auto, 6.5%. CNI, 7.33%. We remain slightly asset-sensitive with 38% of our loans comprised of 5-1 hybrid arms in the jumbo single-family and multifamily portfolio, and 53% of our loans comprised primarily of floating-rate CNI loans. With the exception of a small portfolio of prime jumbo mortgages, we have no other 30-year fixed-rate jumbo single-family loans or multifamily loans on our balance sheet. The overwhelming majority of our CNI loans are variable rate, excluding the $138 million equipment leasing portfolio. 58% of our variable rate CNI loans adjust to LIBOR, and the other 42% adjust to SOFR, Ameribor, or other indexes. At September 30, 2022, approximately 93% of our CNI loans were above their floors, with another 75 basis point increase in Fed funds expected in November. All the CNI loans will be above their floor rates. Demand for our commercial specialty real estate and other CNI loans remains strong, as reflected in the $790 million CNI loan pipeline as of October 24, 2022. Axos Securities, which includes our securities clearing and custody, self-directed trading, and managed portfolio businesses, generates $10 million of pre-tax income, excluding non-cash amortization expense in the first quarter of fiscal 2023, an improvement from adjusted pre-tax income of $0.8 million in the linked quarter. Our securities businesses are benefiting from rising interest rates, partially offset by declines in asset-based fees as a result of market depreciation. Axos Advisor Services held its first in-person advisor conference since 2019 in Denver last month. Over 100 existing and prospective advisors attended, reflecting strong interest from independent RIAs seeking an alternative non-competitive tech-focused Axos Advisory Services is seeing good momentum, adding approximately $200 million of net new assets in the quarter ended September 30th, 2022, and a pipeline of 10 new advisors with those of 500 million of new client assets that is committed to transfer to Axos over the next 12 months. The pipeline for AAS remains robust with active discussions with several multi-billion dollar firms who are looking to move portions of their assets from their existing custodians. We are making good progress with various operational and infrastructure initiatives in our clearing and custody businesses. We continue to make progress on the build-out of our proprietary securities core that will reduce operational costs in our securities business by reducing third-party vendor costs, allow greater levels of straight-through processing, and enable us to pursue more cost-competitive business opportunities. Higher fee income from Axel Securities was instrumental in helping offset expected declines in mortgage banking gain on sale. As rates continue to rise, we expect this dynamic to continue with higher fee income from off-balance sheet deposits offsetting lower mortgage banking income. We expect higher margin businesses such as stock borrow and margin lending to rebound from current levels when market conditions improve. Additionally, we have several initiatives at AAS and Axos Clearing that will optimize and grow the fee income from new and existing sources such as mutual funds, ETFs, our model management marketplace, and alternative assets. Our efficiency ratio was 55.9% for the three-month end of September 30, 2022, up from 54.4% in the prior quarter. Excluding a $16 million one-time legal reserve, our efficiency ratio was 48.2% in the first fiscal quarter of 2023. Yesterday, we received an unfavorable outcome in the litigation initiated by Union Bank related to our purchase of our Axos Fiduciary Services business. This litigation pertained to issues related to the sale of the business to Axos by Epic Systems and the termination of a prior contract between Union Bank and Axos. Axos' relationship with Union Bank ended a number of years ago, and this matter has no impact on any aspect of the Axos fiduciary services business going forward. The jury awarded Union Bank damages totaling $18.3 million, which is offset by a prior amount received by Union of approximately $8 million for a net amount of $10.3 million plus estimates of prejudgment interest. While the company strongly disagrees with the verdict and plans to appeal the decision and the damage awarded, Axos took a $16 million pre-tax reserve and the quarter ended September 30th, 2022. Our diverse lending and deposit businesses and modest securities portfolio position us well for a rising interest rate environment. Our securities book with approximately $258 million in ending balances is less than 2% of the total assets as of 9-30-2022. About half of our securities are floating rate, and the average duration of our securities portfolio is 2.1 years. Unlike other banks, we are not and do not anticipate having material AOCI marks for our securities portfolio. Our single-family jumbo mortgages and multifamily loan portfolios with $4 billion and $3 billion of loan principal outstanding as of September 30, 2022, represent approximately 26% and 19% of our total loans outstanding. much lower than they were in prior upgrade cycles. While we expect deposit betas to rise to the end of the Fed tightening cycle, we have more tools from a loan and deposit perspective to help alleviate some of the expected funding pressure. Looking forward, our outlook is that our net interest margin for the fiscal year end of June 30, 2023 will remain 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 Services deposit balances are relative to their September 30th, 2022 levels. As we stated previously, our expectation is that net loan growth will moderate from the high levels seen in the prior two quarters and grow by mid-teens in fiscal 2023. If loan growth exceeds our mid-teens-based target, then the incremental cost to fund our loan growth will be on the higher end of expectations. With respect to our Axos Advisory Services deposits, The biggest source of incremental low-cost deposits will come from our existing RIA clients. The amount of cash held by RIAs and their client accounts fluctuate based on advisor risk appetite, which can change quickly. Another factor impacting Axos Advisory's clearing cash balances is the relative rates paid by money market funds and other liquid cash alternatives. Historically, advisors and broker-dealers have not viewed cash sweeps as an asset class and have not actively looked to maximize the return on that cash. However, given the Fed's aggressive tightening, some advisors are starting to evaluate higher-yielding cash alternatives. We have started to engage in productive discussions with custody and clearing clients to come up with solutions that are mutually beneficial for the RIAs and their clients' needs. We are also actively exploring relationship-based pricing that could accelerate the transfer of new custody assets to Axos. Our baseline assumption is that the percent of cash held by Axos Advisory Services clients will normalize to 7%. 11% at September 30th, 2022. If clients become more risk averse and continue holding a higher cash balance, then our full year NEM will be higher than our baseline target. However, if clients reduce their cash percentages and we had to replace those low cost deposits with relatively higher cost deposits, then our full year net interest margin would come in to the lower end of our target of 4% or higher. Our credit quality remains healthy. and we're not seeing any signs that our borrowers are struggling to finance their debt obligations with us. Net charge off to total loans remains low, and our asset-based low LTV lending makes us extremely comfortable about our credit outlook, even in adverse economic scenarios. Non-performing assets of total assets were 68 basis points for the quarter ended September 30th, 2022, no change from 68 basis points for the quarter ended June 30th, 2022. Of our non-performing loans, approximately 55% are single family mortgages, where we've had historically very low realized losses. Of our non-performing single family mortgage loans, at September 30th, approximately 95% had an estimated current loan-to-value at or below 70%, and approximately 97% are below 80% of our best estimates of current loan-to-value. Given the low loan-to-value of our asset-backed loans, we remain confident that our incurred credit losses will remain manageable. even if asset values decline. We had an excellent start to our fiscal 2023 with loan growth and net interest margins well above our full-year guidance. While the uncertain environment presents short-term challenges, we will continue to manage the aspects of our business that we have direct control over, credit, operational efficiencies, capital, liquidity, and strategic investments. Our strong profitability, excess capital, and ability to be nimble positions us well to take advantage of market dislocations similar to what we've done in prior cycles. I'm excited to execute on the various strategic initiatives we have in place across each of our businesses. Now I'll turn the call over to Derek, who will provide additional detail on our financial results.