Axos Financial, Inc.

Greetings and welcome to the Axos Financial Incorporated Q2 2024 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you, Donnie. You may begin.

Thanks, Alicia. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for the Axos Financial Inc. Second Quarter 2024 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Geragrantz, Executive Vice President and 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 and six months ended December 31st, 2023, and we will be available to answer questions after those prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forelinking statements, that are subject to risks and uncertainties and that management may make additional foreliking 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 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 listeners that in addition to the earnings press release and 10Q, we also issued an earnings supplement for this call with additional information regarding the FDIC loan acquisition. All of these documents can be found on accessfinancial.com. 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 Axios Financial's conference call for the second quarter of fiscal 2024, ended December 31st, 2023. I thank you for your interest in Axios Financial. We delivered outstanding results, generating double-digit year-over-year growth in earnings per share, book value per share, and ending loan balances for a sixth consecutive quarter. Strong organic loan growth and deposit growth, coupled with further net interest margin expansion, resulted in double-digit net interest income growth year-over-year and linked quarter annualized. We grew deposits by approximately $638 million linked quarter. We reported net income of $152 million and earnings per share of $2.62 for the three months ended December 31, 2023, representing year-over-year growth of 86% and 94% respectively. Excluding the one-time gain and loss provision associated with the FDIC loan purchase, our non-GAAP adjusted earnings 15.7% year-over-year to $1.56. Our tangible book value per share was $33.45 at December 31, 2023, up 25% from December 31, 2022. Other highlights for this quarter include the following. Ending loans for investment balance net of discount were $18.5 billion, up 8% link quarter, or 32% annualized. including the FDIC loan purchase ending non-purchase loans held for investment increased by $443 million linked quarter, or 10% annualized. Growth was broad-based, with growth in real estate and non-real estate lender finance, equipment leasing and fund finance, offsetting lower origination volumes in single-family warehouse and higher payoffs in commercial specialty real estate, and a deliberate runoff of our auto book. Net interest margin was 4.55%. for the first quarter ended December 31st, 2023, up 19 basis points from 4.36% in the quarter ended September 30th, 2023, and up nine basis points from 4.49% in the quarter ended December 31st, 2022. Excluding the benefit from the FDIC loan purchase, our consolidated net interest margin was 4.36% in the quarter ended December 31st, 2023. Taxo Securities, comprised primarily of our custody and clearing businesses, had another strong contribution to our fee and interest income. Broker-dealer fee income increased 27.6% year-over-year due to higher interest rates and increased client activity. Advisory fee income increased 5.4% year-over-year due to higher mutual fund fees and higher average assets under custody. Quarterly pre-tax income for our securities business was $10.8 million in the second quarter of 2024. Our credit quality remains strong, with net annualized charge-offs to average loans of two basis points in the three months ended December 31, 2023. The majority of the two basis points of net charge-offs this quarter were from auto loans that are covered by insurance policies, with proceeds from those insurance policies accounted for as fee income. We completed the purchase of two performing commercial real estate and multifamily loan pools from the FDIC with a combined unpaid principal balance of approximately $101.25 billion in We recognized a $65 million after-tax gain and increased our allowance for loan loss by $75 million on the purchase in the quarter ended December 31, 2023. We believe this opportunistic loan purchase will provide incremental net interest income and after-tax income over the next several years. I'll provide more detail regarding this transaction later on the call. Our capital levels remain strong with Tier 1 leverage ratio of 10.2% at the bank and 9.4% at the holding company both well above our regulatory requirements. We repurchased approximately 59 million of common stock in the second quarter, in addition to the 24 million we repurchased in the prior quarter to take advantage of the unwarranted decline in our share price. This brings our total share repurchases in fiscal year 2024 to $83 million at an average share price of $36.49 per share, representing 2.8% of the shares outstanding as of 12-31-2023. We had strong organic loan originations in our commercial and industrial group, non-real estate, lender finance, equipment finance, and fund finance lending businesses. We continue to reduce our small-bounce commercial real estate, consumer, and auto loan balances, given our preference for originating and retaining loans with a lower duration, floating rate, and better risk-adjusted return in the current environment. Average loan yields for the three months ended December 31, 2023. six basis points from the corresponding period a year ago. Average loan yields for non-purchase loans were 8.02%, and average yields for purchase loans were 18.51%, which includes the accretion of our purchase discount. We continue to see wider spreads in some of our lending categories as competitors have pulled back or exited. New loan yields were the following. Single-family mortgages, 8.1%. Multifamily, 8.6%. CNI, 9.1%, and auto, 10.3%. Our commercial real estate loans continue to perform well. The low loan-to-value and senior structures we have in place for an overwhelming majority of our commercial specialty real estate loans provide us with significant downside protection in the event of a significant deterioration in the borrower's ability or willingness to repay the valuation of our underlying properties or project delays. Of the $5 billion of commercial specialty real estate loans outstanding at December 31, 2023, Multifamily was the largest segment, representing 34% of the total commercial real estate specialty loans, while hotel, office, and retail represent 20%, 8%, and 4% respectively. On a consolidated basis, the weighted average loan-to-value of our commercial specialty real estate portfolio was 40%. For the retail and office segment of our commercial specialty real estate book, the weighted average LTV is 40% and 38% respectively. Total Crestle loans secured by office properties declined by $38 million linked quarter to $418 million. Of the $418 million Crestle loans secured by office properties at the end of the quarter, 69% are A-notes or note-on-note structures, all with significant subordination, with some having recourse to funds or sponsors or cross-collateralization with other asset types from fund partners and mezzanine lenders. These loans have an average loan-to-value of 32%, excluding any recourse across collateralization. Non-performing loans in our commercial specialty real estate portfolio were approximately $26 million at December 31, 2023, identical to the September 30, 2023 ending balances, representing five basis points of our total CRE loans outstanding. We do not anticipate incurring a material loss on either of these loans. Non-performing loans in our multifamily and commercial mortgage portfolio were approximately $37 million at December 31, 2023, down by $1.5 million from the September 2023 balance. The average loan-to-value of our non-performing multifamily and commercial mortgages is approximately 60%. Although we cannot be certain, we do not expect to incur a material loss at any of the asset-backed loans currently categorized as non-performing. Non-performing single-family mortgages increased from $36.6 million at September 30, 2023, to $54.3 million at December 31, 2023. The increase was primarily the result of a $14.3 million loan becoming delinquent. The property has an updated loan-to-value of approximately 81%, and the property is listed for sale and for rent. The average loan-to-value of other single-family mortgages that became delinquent this quarter was 49.5%. On December 7, 2023, we completed the purchase of two loan pools with approximately $1.25 billion of UPB for $786 million from the FDIC at a 37% discount to par value. Of that discount, we recognized $92 million pre-tax as part of a bargain purchase gain, recorded a $70 million loan loss. As a result, assuming any loan loss in the pool is at or below the amount allocated in the loan loss Axos will accrete approximately $301 million of discount over the life of these loans into income. The loan pools are comprised of approximately $578 million of commercial real estate loans with a weighted average loan-to-value of 50% and a remaining term of 41 months and $676 million of multifamily loans with a weighted average loan-to-value of 67% and a remaining term of 120 months. All 58 loans are current on principal and interest payments with a borrower paying an average fixed rate of 3.8%. As part of a cash purchase, we received a series of back-to-back interest rate swaps that allow access to receive a variable note rate of approximately 6.9% without discount. We provided additional details regarding the FDIC loan purchase in our earnings supplement. We also broke out the purchase and non-purchase loans in the rate volume table on page 35 and 36 of our 10-Q. This is an extremely accretive transaction from a net interest margin and net income perspective that we expect to remain over the next several years. I'll provide additional details regarding how investors think about the net interest margin impact at the end of my prepared comments. We had another strong quarter of deposit growth, with ending balances increasing by $1 billion from June 30, 2023, or 12.6% annualized. checking and savings accounts representing 95% of total deposits at 12-31-2023 grew even faster at 20% annualized. Our deposits remain well diversified from a business max perspective, with consumer and small business representing 61% of total deposits, commercial cash, TM, and institutional representing 21%, commercial specialty representing 7%, access fiduciary service representing relatively flat quarter-over-quarter. Cash sweep deposits fell by approximately $200 million, offset by a $133 million sequential increase in noninterest-bearing commercial deposits. The new commercial deposit teams, including fund finance, are starting to contribute meaningfully to our noninterest-bearing deposit growth. We're also seeing upticks in our Axios fiduciary service deposit balances. Our balance sheet remains asset sensitive given the shorter duration variable rate of our loans, and the granularity and diversity of our consumer, commercial, and securities deposits. For the quarter ended December 31st, 2023, our consolidated net interest margin was 4.55%, while our banking business net interest margin was 4.62%. Our consolidated and banking business net interest margin remain well above our prior consolidated net interest margin guidance of 4.25% to 4.35%, aided by strong organic loan growth accretion from the FDIC loan purchase, and some normalization in our Axos liquidity. Total ending deposit balances at Axos Advisory Services, including those on and off Axos' balance sheet, declined by $200 million in the quarter, reflecting advisor investing excess cash into risk assets in reaction to the year-end stock market rally. We believe that the pace of cash sorting at Axos Advisory Services has stabilized and at or near the bottom, representing 4% of assets under custody as of December 31st, 2023, compared to an historic range of 6% to 7%. In addition to our access securities deposits on our balance sheet, we had 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 ZNS accounting and business management vertical. We expect our net interest margin to be augmented by the FDIC loan purchase. Given that the borrowers pay a fixed rate substantially below current market rates, we expect that these loans will have a relatively long duration and prepays will be relatively low, if any. Our baseline assumption is that none of the acquired loans prepay and that we do not sell any of our acquired loans prior to maturity. Under those assumptions, we expect our consolidated net interest margin will increase by approximately 40 to 50 basis points above our prior 4.25 to 4.35 consolidated targets for the next four to six quarters. As we grow net new loans by $500 million to $700 million per quarter, assuming our high single-digit to low teens loan growth target, the net interest margin boost from the purchase loans will gradually decline over time. In the event that one or more loans prepays, our net interest margin will be further enhanced due to the immediate recognition of the remaining purchase price discount. With respect to the question of net interest margin sensitivity in the event of a Fed fund's decline, several dynamics are worth considering. First, approximately 28% of our loans, representing $5.2 billion, were hybrid arms as of December 31, 2023, of which 16% will reprice in one year, 18% will reprice in two years, and 18% will reprice in calendar 2020. and five-year hybrid single-family loans. Of the approximately $2.2 billion of hybrid multifamily loans, yielding approximately 5.15%, 28% adjust in calendar 2024, 28% adjust in calendar 2025, 14% in calendar 2026, and a remaining 30% lower price in 2027 and beyond. Of the approximately $3 billion of single-family loans, yielding approximately 5.24%, adjusting calendar 2024, 10% adjusting calendar 2025, 21% adjusting calendar 2026, and the remaining 61% over price in 2027 and beyond. At 12-31-2023, approximately 64% of our loans were floating and 28% are hybrid arms and 8% were fixed. With respect to the 64% of our loans that are a floating rate, we work hard to have strong index floors in our loans, but these index floors are generally well below the current index rate. Therefore, the margin offset to rate reductions in floating rate loans, other than the repricing of hybrid loans, will be a reduction in the rate we pay on deposits. Although it is difficult to predict how quickly we can lower deposit rates when the Fed fund rate goes down, approximately 16% of our total deposits are tied or sensitized to Fed funds, and they should adjust quickly. Given that more than 90 percent of our consumer deposits are non-maturity deposits, we have the ability to lower those rates depending on deposit competition, loan growth, and the sensitivity of our depositors to reduced rates. We continue to invest in front and back-end systems, IT infrastructure and security, and other enterprise software and systems that will further optimize our business and functional units. After launching our Universal Digital Bank 2.0, the latest version of our consumer and mobile banking applications in September, We are working on transitioning our small business banking platform from a legacy system to UDB, a move that has been completed for new customers with a transition for most existing small business customers occurring before the end of this current fiscal year. This platform transition will leverage the investments we have made in UDB and make our SBB offering more modern and user-friendly. Our white-label banking for RIAs and IPAs We believe the ability to provide a turnkey banking solution to the hundreds of thousands of affluent and high-net-worth clients of our custody and clearing business will be a differentiator from a service and efficiency perspective. In our Zenith Business Management Vertical, we are investing to modernize the user experience and add new features to the software. We see tremendous long-term opportunity to grow market share of fee income, deposit and cross-sell other banking products to clients in the Business Management Vertical. Axios Clearing, which includes our corresponding clearing and RIA custody business, continues to make steady progress. Non-interest income from the securities business increased 3% year-over-year to $67 million. The primary driver of growth in the fee income from Axios Securities is higher interest rates, partially offset by lower average balance of deposits held at partner banks. Total deposits at Axios Clearing were $1.4 billion at December 31, 2023, down from $1.6 billion in the prior quarter. Of the $1.4 billion of deposits from Axos Clearing, approximately $0.8 billion was on our balance sheet and $550 million were held at partner banks. Net new assets in our custody business increased by approximately $172 million in the three months ending December 31st. We onboarded 13 new advisors this quarter. The pipeline for new custody clients remains healthy, comprised of 233 advisory firms with approximately $22 billion of combined assets under custody. We have made good progress on the systems and product front, launching a refreshed client portal and securities baseline of credit for RIA clients towards the end of the year. We see tremendous opportunities to grow our existing businesses and improve operational efficiencies across business and functional units. The market dislocation and corporate restructuring among our bank and non-bank competitors have created a once-in-a-decade opportunity to add talented individuals and teams to Axos. Many of the additions we have made over the past nine months have already contributed meaningfully to our growth, and we're actively recruiting across various commercial deposit, lending, and business verticals to help build and accelerate several strategic and operational initiatives on our long-term roadmap. With strong liquidity and excess capital, a de minimis unrealized loss in our investment securities portfolio, a multi-year boost in earnings and margin from the FDIC loan purchase, and solid organic growth prospects given the diverse nature of our banking and securities businesses, we are focused on widening our lead relative to our competitors. Our returns, credit, and margins 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 have a proven track record of repositioning ourselves during pivotal turning points during the banking and economic cycle. We are confident the investments we are making in our business, systems, processes, and people will generate attractive future returns for our shareholders. Now I'll turn the call over to Derek, who will provide additional details on our financial details.