Thanks for your interest in Axos. Joining us today for Axos Financial, Inc.'s Third Quarter 2019 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the 3 and 9 months ended March 31, 2019, 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 risks and uncertainties. Therefore, the company claims the safe harbor protection pertaining to forward-looking statements contained in the Private Securities 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 axosfinancial.com for 30 days. Details of this call were provided on the conference call announcement in today's earnings press release. At this time, 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 third quarter of 2019 ended March 31, 2019. I thank you for your interest in Axos Financial, Axos Bank and Axos Securities. Axos announced net income of $38.8 million for the fiscal third quarter ended March 31, 2019, down from $51.3 million earned in the fiscal third quarter ended March 31, 2018, and unchanged when compared to the $38.8 million earned in the prior quarter. Earnings attributable to Axos' common stockholders were $38.7 million or $0.63 per diluted share for the quarter ended March 31, 2019, compared to $0.80 per diluted share for the quarter ended March 31, 2018, and $0.62 per diluted share for the quarter ended December 31, 2018. Excluding non-recurring expenses, non-GAAP adjusted earnings and earnings per share were $51.5 million or $0.84 respectively for the quarter ended March 31, 2019. Other highlights for the third quarter include ending loan and leases increased by approximately $1 billion, up 12.8% year-over-year and 4% annualized from the second quarter of 2019. Strong originations in multifamily, small balance, CRE and C&I were offset by lower production in jumbo single-family and a few large payoffs in our commercial specialty real estate loan portfolio. Repayment of H&R Block franchise and Emerald advance loans also accounted for $65 million of sequential decline in the ending loan balances at March 31, 2019. Total assets reached $10.9 billion at March 31, 2019, up by $1.1 billion compared to December 31, 2018, and up $0.9 billion from the third quarter of 2018. Net interest margin was 4.82 for the quarter ended March 31, 2019, up 95 basis points from 3.87 in the second quarter of fiscal 2019. Average loan yields increased by…

Thanks, Greg. First, I wanted to note that in addition to our press release, our 10-Q was filed with the SEC today and is available online through EDGAR or through our website, axosfinancial. Second, I will highlight a few areas rather than go through every individual financial line item. Please refer to our press release or 10-Q for additional details. For the quarter ended March 31, 2019, our net interest margin was 4.82%, up 5 basis points from the quarter ended March 31, 2018, and up 95 basis points from the 3.87% in the quarter ended December 31, 2018. The March quarters include the seasonal impact of our co-branded H&R Block refund advance loans. As a result of the acquisition of COR Clearing this quarter, the consolidated net interest margin includes the impact of interest income from securities margin lending and interest expense to fund securities activities. In our 10-Q filing this quarter, we have added a separate banking business segment calculation of our net interest margin. For the quarter ended March 31, 2019 the banking business segment net interest margin was 4.94%, up 14 basis points from the quarter ended March 31, 2018, and up 104 basis points from the banking segment margin for the quarter ended December 31, 2018. The banking business segment net interest margin, when excluding the seasonal impact of H&R Block, for the quarter ended March 31, 2019 was 3.90%, up 8 basis points from the quarter ended March 31, 2018, and up 9 basis points from the banking business segment net interest margin for the quarter ended December 31, 2018. Despite continuing deposit competition, we had solid improvement in our bank net interest margin. As I indicated, the consolidated net interest margin for the quarter ended March 31, 2019 was 4.82% and the banking…

Thank you, Andy. Adam, we're ready to take questions.

[Operator Instructions]. Our first question comes from the line of Austin Nicholas from Stephens.

With the COR NIM up nicely to the 390 level when you back out kind of the non-banking-related businesses, is it fair to say that we could see that margin kind of holding here in that mid-, kind of that 390 range? And I guess what would maybe get you to the low - back to the low end of that 380 to 4? And what would get you to the high end of the 4 - 380 to 4?

I think it depends on the mix of the loan growth that we have going forward. To the extent that loan growth continues to be focused in the C&I vertical area, including equipment leasing which is having a good quarter this quarter, that that will boost loan yields. If single-family rebounds some - we believe it will rebound some this quarter - but if it becomes a larger portion of growth, then I think the lower end of that range is probably more likely. So that's, I believe, the biggest element that we have. And then the other component, of course, would be how successful we are with some of the new commercial deposit teams that we have. And frankly, the pipelines look exciting for those teams. They've really - in one case, one team just landed about six weeks ago and they have a very nice pipeline. The commercial banking transitions take some time, but those would also, if they come to fruition, would help us keep our NIM in the high end of the range.

Got it. That's really helpful. And then maybe just on the deposit side of the question. You had another kind of nice quarter of bankruptcy-related deposits move over to the bank. I guess maybe can you remind us of what maybe total percentage of deposits that you've brought over so far of kind of the total pie that's in that business right now? And then maybe just kind of remind us of the outlook for what you're seeing there. And then kind of any thoughts that you're seeing any pickup in those deposit flows given maybe some increases in bankruptcies we're seeing across the country.

Yes. We haven't seen a lot on an aggregate basis yet of pickups in the overall balances there. Although we are seeing some success in some of our initiatives with respect to the non-Chapter 7 space with SEC receivers and some things like that. But they're still not at the size we'd like. Epiq had 800-ish of deposits and the - and we have a good trustee pipeline that's continuing to transition. And the pipeline continues to really be dictated more by our capacity to bring the trustees over and get them set up in the system than anything else. So we expect that we'll have more transition of deposits in this quarter. We are having more transition of deposits. And I think that it probably will take a little bit more of an aggregate pickup in bankruptcy activity for us to necessarily see those balances start to meaningfully increase from an aggregate perspective. We have about 40% of the market so obviously, to the extent that that increase actually occurs, we should see some of it.

Got it. That makes a lot a sense. And then maybe just one last one on the, call it, 11%-or-so of prepaid deposits. Any update on kind of the strategy with that business and kind of any thoughts on the impact as you cross $10 billion?

We're still working on it. We're still working through that with our partners. We're engaged with them as to exactly how to work through the different components of that business. It's interesting; we're also still, frankly, having clients interested in us issuing for them as well. So it's - we're working through that with them and when we get it definitively worked through, we'll definitely talk about it.

Our next question comes from the line of Andrew Liesch from Sandler O'Neill.

Greg, you talked about opening up a New York office. Can you just explain more of the rationale on that?

Sure. So there's really three rationales. First our loan portfolio size has gotten to the point there where we have enough individuals who are acting on our behalf out there and employed there that I think it makes sense to have a - it's a reasonably sized - reasonably small-sized geographic presence. The second is that for the securities business, we have personnel out there now and are adding a few folks, looking to add a few folks on the sales side there. And that's more fertile territory. Omaha, where the location of Axos Clearing is, is good for operations. And then finally, we also added a commercial banking team there to service not only our existing clients, but a specific industry vertical where that - which was the group that I was talking about where the pipeline is looking good. So we've, frankly, when we've gone out and - we have a very nice and sophisticated treasury management platform we've developed over time and we have a lot of sophisticated and large clients in New York, who have been willing to move deposits our way. But they have wanted some sort of, even if it's something central to some folks out there in order to do that. So the physical location presences that we have ended up with from the commercial banking side are dictated - are Orange County, Los Angeles and New York. And they've been dictated partially by talent that we need in those geographies; our existing loan books, which are strong in all three of those areas; and then by clients that, on the commercial side, have wanted folks in market.

Okay. And then just on overall expenses. I know you provided a breakout of your expectation for the efficiency ratio for both the banking segment and the securities business. But I guess am I reading this correctly that the efficiency ratio on a combined basis should now be higher than your previous thoughts just with some of the buildout of the risk controls associated with the clearing business?

I think with respect to the loan growth side on single-family, we're forecasting that that's going to be a little bit lower than I think maybe you guys might have had. With respect to adding expenses beyond the base that we have now from a perspective of significant additional investments, we actually are pretty well suited right now for what we need to do. We may need to add a few people here and there, but I think we're actually in a pretty good place. And we have the developers we need. We've got pretty much most of the folks we need. I think it's more with respect to what we're looking now with the clearing side maybe de-risking it a little bit and some of that occurring and just focusing on the risk management side very intently is just maybe going to delay a few of the revenue based opportunities and some of the client opportunities that we have. And we're still focused on them, but we just have to make sure that we're incredibly solid on the risk side there.

Our next question comes from the line of Michael Perito from KBW.

I had a few things I wanted to hit. I wanted to maybe ask the efficiency question a bit differently. Based on your prepared remarks and the partial, I think it was 2 to 3 months contribution from the COR transaction. Andy can you maybe just give us a little more color or some specific thoughts about where you think that the expense figure could trend in the fiscal fourth quarter as we start to think out towards fiscal 2020 here? It seemed like there were maybe a couple items that, outside of this stuff you highlighted, that might have still been elevated, and just trying to get a better sense of what the full run rate will look like as we move into the end of the year.

Sure, yes. Yes, no, when you look at the one-time items that are identified, the one area where we will continue to have a little bit of growth is in depreciation and amortization as we add in more items for amortization of intangibles. You can expect an increase of around $1 million associated with the amortization over the next quarter or so, as we look at that. The non-one-time items, the - we had about $1 million charge for the MSR. That MSR was the result of Treasuries diving at the end of the quarter. I don't think we're going to see that happen in the short term over the next couple of quarters. So I wouldn't expect that level of an MSR write-down for that item. So I would expect that to come back up as a result of those details for that. We are adding more office expense over the next couple of quarters. So you'll see rather - not huge amounts, but smaller amounts associated with the office expense, running maybe $300,000-$400,000 over that quarter. So those are the primary items that we've involved. As Greg mentioned, when looking at the overall business on the securities side, we want to make sure that our risk-based systems and everything are in solid shape. So we may have to invest in the securities side of the business. That's why we've guided the efficiency ratio that we did in the securities side of the business. So we'll have some plusses. We'll have some minuses. But in general, the guidance Greg gave in the prepared remarks is where you should focus.

Okay, helpful color. I had just two more things I wanted to touch on. One, on COR Clearing, the loss experienced in the quarter, can you help us kind of grapple our hands around what the risk profile of that business looks like? Is that loss kind of indicative of where the risks are in that business and we could expect, maybe not to that magnitude, but if there are losses in that business it will look like something similar to what happened? Or was that kind of an extreme circumstance and we should be thinking about the risk profile of the business differently?

Yes, that's a great question. So the vast majority of the business, 88%-plus of the business, is a straightforward service to retail clients. This particular customer was a market maker and so it's not - the profile of the customer, first of all, is different than the vast majority of the customer profiles. The particular individual, as well, engaged in a deliberate subversion of the risk systems in a sophisticated way to avoid the activity being caught. That being said, there are ways that that activity could have been caught with enhanced systems, which we will ensure we have. And to put this in perspective; lucky us, this business has been in operation since the time it was in Mutual of Omaha, I guess 30-ish years. I think they've lost around $20,000-$30,000 total with respect to similar types of losses. So this was something that was very unique, had not remotely happened closely before in decades of history and required a set of intentional acts that were beyond what should have occurred. Now that being said, it doesn't mean that there's not a potential to ensure that it doesn't happen again even if you experience similar sorts of behavior. So yes, I think the answer to that would be we certainly don't expect that and we'll ensure that the risk systems or the risk profile of the clients or both would ensure that that doesn't happen. And there's a lot of work being devoted just to ensuring that a bad actor can't do those sort of things again.

If I could just add. No I think that covers it.

Our next question comes from the line of Steve Moss.

I just want to follow up on the loan side here just with 2 things. Just wondering, what were overall origination yields for the quarter? And what was the rate on - that you're seeing for jumbos, single-family resi mortgages these days?

Yes. The rate on the jumbo single-family side, the new origination side, is between 525 to 550-ish range. And then, Andy, I don't know if you've got that number handy.

Yes. I can give you kind of the overall without Block loan rate is 5.53% for the bank segment for the quarter.

Okay, that's helpful. And then in terms the puts and takes within the portfolio, you guys mentioned that lender finance book was under pressure. Just wondering what's driving the payoffs there. Conversely, you did see some pretty good commercial real estate multifamily growth. And just what are you seeing there in terms of opportunities?

I think with respect to any pressure on lender finance is related primarily to advance rates and deal structure that we won't be as competitive in. But I think that that business actually, frankly, we have a decent pipeline there and I think that's actually looking fine. I don't think we'll be - I think we'll be able to increase balances in that segment broadly on a continual basis. We've had to - it's a little bit lumpy just given the size of the deals. And I think those other businesses have good pipelines. And even single-family is not doing terribly. It's just not going to be - it's going to be, we think, in the more 300 to 325 range, just not as high, unless we sort of shift to more of a conduit style gain-on-sale model, just given some of the non-bank competitors and where they are on an LTV perspective and think that that's just not where we're going to put - what we're going to put on our balance sheet. But I think most of the businesses actually are actually looking pretty good. I mean leasing is having a great quarter. I think we'll be okay from this. One of the things about that January-February timeframe is that it was a fairly turbulent time. Then you put the holidays on top of it. So the activity levels felt a little differently, and a lot of the folks that we work with particularly on the fund side is a lot of our partners in these deals; there was a distant air of distraction that was a little bit different. And it's definitely calmed down. People are focused and things are just feeling more normal.

Okay. And then just on the commercial real estate side, just it seems like you've been growing that business at a pretty steady state. I believe it's mostly small balance. So I'm just wondering what kind of - where you see the opportunities in the market.

Yes, I think it's - the multifamily small balance and then small balance commercial have sort of similar profiles in the sense that they're coastal markets, infill areas, with generally good debt service covers, and we have a pretty decent sized client base that we've been working with there. And as we've gotten, I think, more sophisticated with our treasury management services there's been a lot of cross-selling going on there. And we also can add some other products for those customers. So they'll come to us for a line of credit that allows them to place assets on line so they can opportunistically acquire and then they can flip those loans into the 5-year ARM loans and more permanent financing off those lines into a more permanent product. And so I think we have a pretty good range of services that we can provide now to real estate investors. And I just think that that client base is growing and I think we have a decent understanding of how to serve those clients and I think it's paying off.

Okay. And one last question just on capital here. It looks like you guys did not repurchase any shares during the quarter. Just wondering any updated thoughts on that.

No, we didn't repurchase any shares in the quarter. It was a fairly busy quarter just with respect to just to all the acquisitions closing and that short of things. And so, look, it's either going to be that obviously we look at our loan growth and we look at the capital required in order to facilitate that loan growth. And if capital ratios start to demonstrate that there's excess capital, then we'll clearly be looking at the share price and determining whether we think it's right to repurchase shares. So I think the good part of the model is that we have an ability to obviously if we have a return on equity that we believe is going to be above even slightly our loan growth and as we get fee income for businesses that are more capital-efficient, we'll have excess capital that we can deploy. And so I think we have to go through and see how our loan growth goes and continue to look at that.

Our next question comes from the line of Scott Valentin from Compass Point.

Just, Greg, you made some comments about jumbo originations being down and I think you mentioned the volatility in the market early in the quarter. But also wondering if the tax law change regarding SALT had any impact. I know in the Northeast we've seen anecdotally some declining jumbo home price. I was just wondering if that had maybe any impact on origination volumes and if you expect any impact going forward.

Yes, I think it's definitely possible. And I do see a differential in impact between the West and the East Coast generally, particularly in the Hamptons, Connecticut area, things like that. We're being quite conservative there because we don't trust the valuations on some of those homes. And I think - I don't have data on it, but I do believe that there is some measurable impact associated with people saying, "Well I just - why should I continue to bother with this in state that is disrespectful of my productive activity?" So I don't have any kind of way of actually quantifying that other than to say that anecdotally I do see it and I also see it - what's interesting a differential impact, apparently differential impact on the East and West Coast. Although, again, it depends on the market. Frankly, Los Angeles and that area is still doing pretty well. It's sort of maybe a little bit less frothy from a standpoint of price increases. And then there's certain other areas where you definitely, I think, see the prices topping out, see some weaknesses, see some concerns in certain markets. So yes, I think that's a fair point.

And then just in response to that, have you guys adjusted your underwriting at all? It sounded like maybe on the East Coast you've maybe lowered LTV requirements or something like that.

Well, we've always been very conservative on our LTV requirements. It really is more about not increasing them. I mean we're very low on our loan-to-value ratios. And when we look at larger homes, we're looking at these often on an exception basis and our LTV standards are in the 50 or sub-50 range. So I think it's more about the - that ends up getting reflected in the appraisals. And our adjustments have really been an unwillingness to match what we see as some fairly aggressive lending outside of, mostly outside of the bank environment.

Okay, fair enough. And then just another question regarding credit. You mentioned, I think, in response to the NIM question; if C&I grows and the commercial grows as a percent of the portfolio that's positive for NIM. But wondering how to think about provision expense going forward given I would think those types of credits carry a little bit more risk than the residential credits.

Well, it's interesting; I think we end up reserving more for them. I think the question of whether they actually carry more risk in the way that they're structured depends. I think it's probably true on the leasing side that they do carry more risk. And I think in the structured transactions with large subordinate partners I'm not so sure about that. But in any event, when the C&I mix goes up, the provision cost will go up commensurately with it.

Our next question comes from the line of Edward Hemmelgarn with Shaker Investment.

Yes. I just have several questions. On the WiseBanyan acquisition I think you talked about it being - you're forecasting $3 million to $4 million at a loss. I'm assuming for calendar 2019. Or is that just for this year?

They're running probably, and what we're going to put into it, they're running around more 350-ish of a loss per quarter. So if we - what we're assuming is that we put some marketing against this and then as that marketing has legs associated with the customer acquisition so that's probably a conservative number. And obviously, we're - this is a transitional timeframe for them as we - calling it an acquisition is fine in the sense that we did get a customer base and we hired a small team of people, but the reality of it is it was sort of an aquihire hire with a nominal cost of acquiring a technology that costs 10x what we bought it for to build. So yes, that's about the negative run rate right now currently on the operating side.

How are you generating revenues to offset the OpEx?

So right now, currently the model is that folks are coming in and have a basic level of service for no cost and then they subsequently upgrade to a set of other products within the platform for which they pay a monthly fee. The plan is to integrate the products such that folks that are getting a checking account are able to get the services for sets of prices that are different than folks that don't have the checking and other relationships with the institution. Their cost of acquisition with respect to customers is significantly lower than the cost experienced by folks chasing checking accounts. And so their cost of acquisition is great and we believe that we'll be able to integrate those products. So that's the primary way we're focusing in this next 6-month period of time is driving those customers through to UDB, cross-selling them the checking account and making money from that. They have a very good level of uptake with respect to the number of customers that they have that actually subscribe to premium services over time. So there's sort of this tradeoff with respect to the cost of a customer acquisition and the immediate monetization of the customer. And so at the level that we're looking at this, we're interested in trying to see how well we can generate checking accounts with a low customer acquisition cost through this model. And I will say that even because we have not lost, Ed, our focus on frugality and efficiency, those folks there are also helping across a variety of initiatives including the personalization initiative and a variety of other initiatives so that the net effect is a set of very smart folks who are adding a lot of incremental value across a variety of projects. And so how do you quantify that? You can do it. It's a little bit harder. But for example, currently in order to board customers at Axos Clearing, there's lots of systems integrations that need to occur. Well the way that that needs to happen is through a middleware API layer, which they are building. So that will benefit from an eventual movement to vertically integrate and reduce the cost associated with the clearing side, but what it will also do is enable us to much more rapidly board customers into COR. So we're definitely utilizing all those resources. And that's one of the reasons why I'm reasonably confident that even though the strategy is relatively complex that we don't need to add a lot more folks. We may need to add some people here and there. But we don't need to add a lot more folks because we got some good talent there and they can be leveraged in some pretty interesting ways.

What is your timetable to reach breakeven?

12 months.

12 months, okay. Can you elaborate a little bit more on the loss at COR Clearing. I mean it still is -

No, I'm not going to - yes, I'm not going to elaborate more on it because we're involved in multiple litigations. And I would say that if you're interested in seeing elaborations on it, there's public court documents with respect to our complaints and what we're going to be doing. So I won't be saying any more about it at this time.

Okay. And lastly, just in terms of I think you highlighted in your release that the acquisition-related cost was about $2.5 million for the quarter. Specifically, I mean was most of that or was all of it in other general and administrative? Or [indiscernible]?

Yes. When you break it down, about $283,000 was in professional services. $1,266,000 was in depreciation and amortization for the bank, $384,000 in depreciation and amortization for the securities side. $55,000 was in other G&A and then $523,000 was actually in compensation expense.

Which includes folks that are moving on and those sorts of things.

But the depreciation and amortization is a permanent expense?

It's not permanent, I think. But it will recur and will, as I mentioned in my remarks, there will be an increase in the amortization associated with intangibles. Because obviously, we've just acquired a number of businesses, we have not fully run through a full year of deployment of those intangibles as well as amortization of those pieces. So yes, there will be some increase in that.

I guess I'm just trying to understand what's one-time and what is ongoing. I mean you talked about $2.5 million. Usually people refer to that acquisition as more of a one-time thing. How much was one-time --?

Sure. So $1.6 million of that would be of the amortization flavor.

But I mean also the - well, is the personnel cost, is that done with now?

No, that would be one time.

Our final question is a follow-up from the line of Michael Perito with KBW.

Just really quickly on capital. Greg, I appreciate your comments to the prior question. Just curious, as you look at the capital ratios today, obviously they're levered a bit from where they were 18 months ago after the acquisition activity and the organic growth. How do you view the capital ratios today in terms of kind of the balance sheet at the optimal point of leverage? I mean is there still some excess today? Or do you think that these levels are pretty indicative of where you'd like them to be in kind of a steady-state perfect environment?

Right. Well one of the elements you have to recognize in this quarter is that we do have seasonal deposits that impact the capital ratio. So when you look at, let's say you look at Tier 1 leverage ratio, it's absolutely impacted - I don't have - probably 45-ish, something like that, basis points with respect to just excess deposits. So I do believe we have some excess capital today, but I think just it's probably more fruitful to just look at it on a going-forward basis and think about differentials in loan growth versus ROE as really the primary way that capital is built. This quarter is a little strange when you look at the numbers. The other element that we just have to be thoughtful about, which is as we - one of the benefits that we've had is we've had a good mix of 50% and 100% of risk-weighted capital, which results in a very, a pretty strong risk-weighted asset - or risk-weighted capital ratio. If the ratio of commercial goes up too much with respect to single- and multifamily, which I'm expecting is actually not going to happen given that multifamily growth is reasonably good and we still expect some single-family growth, that could become a constraint at some point in time. Although, I don't foresee that in the next couple of years. So.

Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing.

All right. Thank you, everyone. I appreciate your time. Talk to you next quarter.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day.