Axos Financial, Inc.

Greetings. Welcome to Access Financial Incorporated's first quarter 2024 earnings column webcast. At this time, all participants are in 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 from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Mr. Lai, you may begin.

Thanks, Rob. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for Axos Financial Inc.' 's first quarter 2024 financial results conference call are the company's president and chief executive officer, Greg Gerbrandt, and executive vice president and chief financial officer, Derek Walsh. Greg and Derek will review and comment on the financial and operational results for the three-month-ended September 30, 2023 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. Please refer to the safe harbor statement found in today's earnings press release and in our investor presentation for additional details. This call is being worked past 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. All of the documents, including the earnings press release and 10-Q and earnings supplement, can be found on the Access Financial website. With that, I would 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 first quarter of fiscal 2024, ended September 30th, 2023. I thank you for your interest in Axos Financial and Axos Bank. We generated double-digit year-over-year growth in earnings per share, book value per share, and ending loan and deposit balances for a fourth quarter, for four consecutive quarters. Broad-based loan growth coupled with net interest margin expansion resulted in double-digit net income growth year-over-year and link quarter annualized. We grew deposits by approximately $440 million link quarter despite intense competition for deposits in the execution of our previously announced exit of approximately $235 million of deposits for cryptocurrency and digital asset companies. We reported net income of $83 million and earnings per share of $1.38 for the three months ended September 30, 2023, representing year-over-year growth of 42% for each. Our book value per share was $33.78 September 30, 2023, up 19% from September 30, 2022. Other highlights this quarter include the following. Ending net loans for investment balances were $17 billion, up 3% link quarter or 12% annualized. Growth was broad-based with growth in CNI loans, single-family jumbo mortgages, and single-family warehouses, offsetting deliberate runoffs of auto, multifamily, and small-balance commercial real estate loans. The acquisition of the LV Marine Finance business added approximately $50 million of floor plan loans in the quarter ended September 30, 2023. Net interest margin was 4.36% for the first quarter ended September 30, 2023, up 17 basis points from 4.19% in the quarter ended June 30, 2023, ended September 30, 2022. We grew net interest margin despite holding excess liquidity for a third consecutive quarter. EXO Securities, comprised primarily of our custody and clearing businesses, had another strong contribution to our fee and net income. Broker-dealer fee income increased 36% year-over-year due to higher interest rates and increased client activity. Advisory fee income increased 18% year-over-year due to higher mutual fund fees and higher average assets under custody. Quarterly pre-tax income for our securities business was $12.6 million in the first quarter of 2024, up 41% from the corresponding period a year ago. Our credit quality remains strong with net annualized charge-offs to average loans of four basis points in the three months ended September 30, 2023. Of the four basis points of charge-offs, Two basis points were from auto loans that are covered by insurance policies. Non-performing loans is the percentage of total loans improved from 0.78% in the comparable quarter ended September 3rd of 2022 to 0.62%, but up from 0.52% in the prior quarter. While a few loans in our jumbo single family mortgage and commercial real estate portfolios resulted in a small sequential increase in our non-performing assets, These non-performing loans are reasonably well secured by the current adjusted value of the underlying properties. Our capital levels remain strong with Tier 1 leverage of 9.9% at the bank and 9.3% at the holding company, both well above our regulatory requirements. We repurchased approximately $25 million of common stock in the first quarter in addition to the $18 million we repurchased in the prior quarter to take advantage of the warranted decline in our share price. This brings our total share repurchase through September 30th to $74 million at an average share price of $37.47 per share, representing 3.3% of the shares outstanding at 12-31-2022. From October 1st to October 20th, we repurchased an additional $35.2 million of stock, representing 1.6% of the shares outstanding at September 30th, 2023, at an average share price of $36.55. We have approximately $44 million remaining in our share repurchased authorization as of October 20th, 2023. With our consistently high returns and strong capital position, we continue to believe that buying back our stock at these attractive valuations is a prudent use of excess capital generated by our strong earnings. We grew ending loan balances 11% year over year in the first quarter. Loan growth was a bit back-ended this quarter, as several large commercial deals closed in the last month of the quarter. We had strong originations in our real estate and non-real estate lender finance and asset-backed lending groups, including our capital call lines. Single-family mortgages grew net ending loan balances by $95 million, despite a tough environment for purchase and refinance activity in the single-family mortgage market. We continue to reduce our multifamily, small-balance commercial real estate and auto loan balances, given our preference for originating and retaining loans with lower durations, floating rates, and a better risk-adjusted return in the current environment. At September 30 of 2023, approximately 61% of our loans were floating, 32% were hybrid 5-1 arms, and 7% were fixed. The average duration of our commercial loan portfolio was only two years, with multifamily being the longest at an average of less than three years, and a vast majority of our commercial specialty real estate and lender finance portfolios floating rate with contractual maturities of less than three years. Average loan yields for the three months ended September 30 of 2024 was 7.85%, up 34 basis points from 7.51% in the prior quarter, and up 220 basis points from the corresponding period a year ago. We have successfully remixed our loan portfolio as rates continue to rise by replacing lower yield hybrid loans with higher yielding adjustable rate loans. Our new loan yields this quarter were the following. Single family mortgages, 8.06%, multifamily, 8.58%, C&I, 9.09%, and auto, 10.34%. Our commercial real estate loans continue to perform well. The low loan-to-value in senior structures we have in place for an overwhelming majority of our commercial specialty real estate loans provides us with significant downside protection in the event of a significant deterioration in the borrower's ability or willingness to repay, devaluation of the underlying properties, or cost overruns or project delays. Of the $5.5 billion of commercial specialty real estate loans outstanding as of September 30, 2023, multifamily was the largest segment, representing 33% of total loans. while hotel, office, and retail represent 19%, 8%, and 4% respectively. On a consolidated basis, the weighted average loan-to-value of our commercial specialty real estate portfolio was 41%. For the retail and office segment of the commercial real estate loan book, the weighted average loan-to-value was 43% and 38% respectively. Total commercial real estate loans secured by office properties declined by $96 million linked quarter to $456 million. Two large office loans paid off this quarter, totaling approximately $100 million. Of the 456 million commercial real estate specialty loans secured by office properties, at the end of the quarter, 70% are A-notes or note-on-note structures, all with significant subordination, with some having recourse to funds or cross-collateralization with other asset types from fund partners and mezzanine lenders. These loans have an average loan-to-value ratio of 38%, excluding the recourse and cross-collateralization. In a commercial specialty real estate portfolio, we had approximately $26 million of non-performing loans at September 30, 2023, representing 42 basis points of the total CRE loans outstanding. Currently, with respect to these two loans, we are working with the borrowers and the mezzanine lenders who are either putting in new money currently or are in the process of working with the borrower to provide additional support. In both cases, we believe we will not incur significant losses if we occur any at all, given the current and expected commitments from the subordinate capital and the borrowers. Nonperforming loans in our multifamily and commercial mortgage portfolio increased by $3.7 million to $38.8 million in the September quarter. The largest nonperforming loan in this category is a $25 million loan to an assisted living facility in Van Nuys, California that has been included in our nonperforming loans since the fourth quarter of 2022. We filed a notice to foreclose four months ago and recently filed a notice to sell. The property has an appraised value of $27 million, and we have over $5 million of unaccrued defaulted interest in this loan. We also have personal guarantees from the two principal owners of this property. One multifamily and commercial mortgage with an outstanding principal balance of $5 million became delinquent this quarter. The guarantor has provided $750,000 in principal curtailment since 8-31-2022. The guarantor has a net worth of over $100 million. The only other meaningful new non-performing loan in the multifamily and commercial category was a $1.3 million loan on a multi-tenant retail building in San Diego. The loan to value is 34%, and the debt service cover is 1.52. Although we cannot be certain, we do not expect to incur a material loss on any of these asset-backed loans currently categorized as non-performing. We had another strong quarter of deposit growth, with ending balances increasing by $443 million from June 30, 2023, or 10% annualized. Checking and savings accounts represent 94% of total deposits at September 30, 2023, grew even faster at a 16% annualized pace. Our deposits remain well diversified from a business max perspective, with consumer and small business representing 59% of total deposits, commercial cash, treasury management, and institutional representing 19%, commercial specialty, 6%, Axos fiduciary services, 6%, and Axos securities, including custody and clearing, 5%. Our total non-interest-bearing deposits were essentially flat quarter over quarter, with ending balances of approximately $2.9 billion, while the number of accounts increased approximately 2% link quarter, reflecting growth in various commercial deposit verticals. Excluding the divestiture of approximately $235 million of deposits related to operating and institutional accounts for digital asset companies, total non-interest-bearing deposits were up approximately $235 million from June 30, 2023 to September 30, 2023. Due to recent regulatory changes in the landscape for U.S. banks and digital asset companies, we completed our previously announced exit of our small business incubator, of our small incubator deposit gathering business that focused on selected digital asset companies such as exchanges, brokers, and firms engaged in activities related to non-fungible tokens. Given recent banter by known short sellers about our alleged exposure to cryptocurrency companies, particularly Binance.com, I'll provide a factual summary of our brief involvement in this business. Axos has never had any relationship or opened any accounts for Binance.com, a global exchange. Between March 14, 2023, and August 10, 2023, Axos maintained limited-purpose accounts for Binance U.S. and selected subsidiaries, wholly different entities than Binance.com. The initial contact with Binance U.S. began after Silvergate and Signature Bank failed. During the entire period when Binance U.S. accounts were open, Axos maintained strict risk controls and transaction restrictions, including but not limited to controls to ensure that no transactions were processed between Binance U.S. and Binance.com or its controlling shareholders. All significancefinance.com U.S. counterparties required preapproval from the bank's risk and compliance teams prior to any transaction activity being processed. The approved activity within these accounts was primarily limited to payroll, rents, and other similar routine business expenses of the type that any business would need to process. Individual retail customer funds were not permitted to be deposited into any of these accounts. Access's internal risk assessment of the digital asset business concluded that that the regulatory treatment for retail accounts was indeterminable and therefore could not meet the bank's client acceptance criteria. Accordingly, Axos did not process retail customer accounts or process retail customer wallet transactions for Binance U.S. This restriction severely limited the number of counterparties that Axos was required to diligence. As previously stated, Axos processed no transactions between Binance.com and Global Exchange and Binance U.S. Prior to opening the Binance U.S. accounts, Axos performed significant due diligence, including by way of example and not limitation, a comprehensive review of corporate formation documents, prior bank statements, financial reports, and transaction counterparties, utilizing multiple BSA and AML, OFAC, and CFT tools, including chain analysis, blockchain, and surveillance software. Following the SEC's action against Binance U.S., Axos reassessed the regulatory landscape for the cryptocurrency and digital asset businesses in the U.S., and exited our small incubator deposit gathering business for digital asset companies that included exchanges, brokers, and firms engaged in activities related to digital coins, including all business with Binance U.S. Axios never extended credit to Binance U.S. or any other company involved in cryptocurrency or digital assets and never accepted digital assets or cryptocurrency as loan collateral for any credit or loan made. As such, Axios never had and currently does not have any risk of loss in connection with digital assets or cryptocurrencies. or entities participating in cryptocurrency-related businesses. Within the bank's longstanding trustee and fiduciary deposit verticals, Axios manages an immaterial amount of bankruptcy trustee deposits related to failed cryptocurrency and digital asset businesses that have filed for bankruptcy protection or some other form of corporate restructuring and are managed by trustees or fiduciaries. Axios had no deposits with Binance U.S. after it exited from the relationship on August 10, 2023. While Axos invested to build technologies related to its own stablecoin, Axpay, and real-time payment technologies, the product and service was never launched and no customers were allowed to access the network that was under construction. No payments were ever processed for any third party on such network. Axos never operated any real-time payment networks based on blockchain technologies or our own stablecoin or other crypto network. Axos also never offered any direct-to-consumer services related to cryptocurrency trading, non-fungible tokens, or other digital assets. The granularity and diversity of our deposits, particularly consumer savings and money market accounts, provides us with flexibility to match the duration and cost of our funding to the duration and cost of our adjustable and hybrid loans. This quarter, our consolidated net interest margin was 4.36%, while our bank-only net interest margin was 4.46%. Our consolidated and bank-only net interest margins were above our guidance of 4.25 to 4.35, despite maintaining a higher level of excess liquidity than we have maintained historically. Total ending deposit balances at Axos Advisory Services, including those on and off Axos' balance sheet, declined by $50 million in the quarter, an improvement from $188 million declined in the prior quarter, and the $383 million decline in the quarter ended March 30, 2023. We believe that the pace of cash sorting at Axos Advisory Service has stabilized at or near the bottom, representing 4.5% of assets under custody as of September 30, 2023, compared to the historic range of 6% to 7%. In addition to our Axos securities deposits on our balance sheet, it approximately $550 million of deposits off balance sheet at partner banks, and another $750 million of deposits held at other banks by software clients in our Zenith accounting and deposit business management verticals. We are starting to see increased traction and deposit inflows from teams we hired over the past six months and from newer commercial deposit verticals. As we slowly unwind our excess liquidity and grow deposits from lower cost sources, such as our commercial and treasury management, Axios fiduciary services, Axios advisory services, and other sources, we feel confident in our ability to maintain our 4.25% to 4.35% net interest margin guidance for the next few quarters. Our profitability, liquidity, balance sheet positioning, and growth outlook all remain favorable. We completed a strategic acquisition of the marine finance business named La Victoria in the September quarter. This transaction added approximately $50 million of marine floor plan loans a $500 million servicing portfolio of retail marine loans held by purchasers of those loans, and a dedicated team with more than 15 years of experience in the marine finance industry. This acquisition provides us with another specialty lending vertical with attractive risk-adjusted returns, particularly in the dealer floor plan line of credit segment. Our relationships with leading boat manufacturers and dealers and high net worth retail customers provide tremendous cross-sell opportunities for our consumer and commercial bank. We are excited to welcome the LV team to Access. From a technology perspective, we continue to invest in front and back end systems, infrastructure, IT security, and other enterprise software and systems that will further optimize our business and functional units. We launched our Universal Digital Bank 2.0, the latest version of our consumer and mobile banking application in September. The platform has new features and functionality and a better, more integrated user experience across all consumer lending, deposit, and securities products. It's only been a few months, but we are seeing good engagement with our new consumer banking application from new and existing customers. Our white-label banking for registered investment advisors and introducing broker-dealers continues to make progress, with a beta launch expected in the next three to six months. At our recent advisor event earlier this month, we received tremendous interest in our white-label banking solution. Over time, we believe the ability to leverage our relationships with advisors and broker-dealers to cross-sell excess consumer deposits and lending products will be a good source of incremental growth. Axios Clearing, which includes our correspondent clearing and RIA custody business, continues to make steady progress. Non-interest income from the securities business increased 18% year-over-year to $34.6 million. The primary drivers of growth in fee and pre-tax income for Axios Securities is higher interest rates. Total deposits at Axios Clearing was $1.6 billion as of September 30, 2023, essentially flat from $1.6 billion as of June 30, 2023. Of the $1.6 billion of deposits from Axios Clearing, approximately $1 billion was on our balance sheet and $550 million were held at partner banks. Net new assets in our custody business increased by approximately $163 million in the three months ended September 30, 2023. The pipeline for new custody clients remains healthy, comprised of 11 advisory firms with more than $700 million of combined assets under custody. We continue to see more RIAs considering an alternative custodian and moving some or all their assets from Schwab TD Ameritrade to us. We remain focused on executing our strategic and operational initiatives. We are in a better position today relative to others because we are more diverse and we do not make critical mistakes that others have. With strong liquidity and capital, a de minimis unrealized loss on our small investment securities portfolio, and solid growth prospects given the diverse nature of our banking and securities businesses, we are operating from a position of strength relative to our competitors. Our returns, credit, and margin are best in class because we focus on asset-based lending opportunities with the best risk-adjusted returns, and we structure deals with low leverage and credit enhancements. We continue to evaluate opportunistic asset and business purchases, such as the LV Marine Finance acquisition we closed in the September quarter. We will deploy our capital judiciously between internal investments, accretive acquisitions of businesses and talent, and opportunistic share buybacks. We are well positioned to maintain strong profitability and EPS growth, irrespective of the interest rate, regulatory, or economic environment. Now I'll turn the call over to Derek, who will provide additional details on our financial results.