Greetings and welcome to Axos Financial, Inc.'s Fourth Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference to Johnny Lai, Vice President-Corporate Development and IR. Thank you. Please begin.

Great, thank you. I' like to welcome everyone to Axos Financial, Inc.'s Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. With me today 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 three and 12 months ended June 30, 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 today 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 Garrabrants 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 our fourth quarter and fiscal 2019 year-end ended June 30, 2019. I thank you for your interest in Axos Financial, Axos Bank and Axos Securities. Axos announced record net income of $155.1 million for the fiscal year ended June 30 2019 up 1.8% over the $152.4 million earned for the fiscal year ended June 30, 2018. Axos’ return on average equity for fiscal 2019 was 15.4% and the bank’s efficiency ratio is 40.51%. Fiscal 2019 earnings per share increased 4.6% to $2.48 per diluted share compared to $2.37 per diluted share in the fiscal year-end 2018. Excluding acquisition related expenses and nonrecurring costs related to excess FDIC expenses and a client related trading loss in our clearing business, non-GAAP earnings per share increased 15.1% to $2.75 per share in fiscal 2019 equating to non-GAAP return on equity of 17.1%. Net income for Axos’ fourth quarter ended June 30, 2019 was $40.6 million up 9.5% when compared to the $37.1 million earned in the fourth quarter ended June 30, 2018. Earnings attributable to Axos’ common stockholders were $40.6 million or $0.66 per diluted share for the quarter ended June 30 2019 compared to $0.58 per diluted share for the quarter ended June 30, 2018 and $0.63 cents per diluted share for the linked quarter ended March 31, 2019 in which we recognized the vast majority of our tax related revenue. Other highlights for the 2019 fiscal year and the fourth quarter include, net loans and leases increased by $283.7 million in the fourth quarter, representing 3.1% growth linked quarter and an annualized growth rate of 12.4%. For the full year ended June 30, 2019, net loans and leases…

Thanks Greg. First I wanted to note that in addition to our press release, our 8-K was filed with the SEC today, it is available online through EDGAR or through our website at axosfinancial.com. Since our fiscal year ended on June 30th, we will file our 10 K by the end of August. Second, I will highlight a few areas rather than go through every individual financial line item. Please refer to our press release or 8-K for additional details. For the quarter ended June 30, 2019, net interest margin was 3.81%, up 10 basis points from the quarter ended June 30, 2018. As a result of the acquisition of COR Clearing in March 31, 2019 quarter the consolidated net interest margin includes the impacts of securities margin lending and borrowing to fund those securities activities. In our press release and 8-K this quarter, we have added a separate banking segment calculation of our net interest margin. For the quarter ended June 30, 2019, the banking segment net interest margin was 3.87% up 12 basis points from the quarter ended June 30, 2018. The banking segment net interest margin, when excluding the seasonal impact of H&R Block for the quarter ended June 30, 2019 was 3.87% up 4 basis points from the fourth quarter of 2018. There was no math to impact in this year's fourth quarter from the H&R Block loans and excess liquidity versus a 9 basis point impact in the fourth quarter of 2018, due to capital constraints relating to the seasonal excess liquidity that no longer exists. Deposit – despite deposit competition and challenging yield curve, we had a solid improvement in our bank’s net interest margin, helped in part by strong growth in our non-interest bearing deposits. Shifting now, our credit quality remains good with…

Thanks, Andy. Operator, we're ready to take questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Brad Berning with Craig Hallum. Please proceed.

Good afternoon, guys. So congrats on the progress. Wanted to talk a little bit further in regards to the balance sheet restructuring on the deposit side. And I was wondering, if you could talk through a couple more details on that. To start with, what is the period end net interest margin look like versus the quarter average, given it looks like period end balances had some pretty major restructurings versus the average balances during the course of the quarter, given loan-to-deposit ratios? How much CDs were down and how much federal home loan banks were down? Can you talk about where that's at? And then talk about the progress of how you expect the rest of that restructuring to take – kind of take course over the remainder of the calendar year here?

Yes. I think in Greg's prepared remarks, he kind of summarized what our broad thoughts are. And that, generally we expect to maintain our NIM in that 380 to 4% going forward. So with that, he also highlighted kind of some of the repricing we have. So some of our C&I loans will reprice, if we have a 25 basis point or more cut tomorrow or actually on Friday, sorry. So we're looking at that as small tailwind versus the ability to reduce our deposit rates and our lending rates going forward. So, right now, we’d estimate that we're in a pretty good equilibrium whether to that 3.87% to 3.8% range. And as we would go forward, we would look to both reduce deposit rates, commensurate with any reduction in the loan rates.

And we also do have off balance sheet deposits, significant off balance sheet deposits still from Axos Clearing, as well as from Axos Fiduciary Services as well. So that will be a benefit associated, with that, obviously in each case you're trading off fee income for deposit benefits and lower – $9 lower interest expense. But those are out there as well with respect to thinking about how NIM will be evolved in the future.

One benchmark would be our bankruptcy fiduciary services were at about $550 million at the end of June 30. So as you know that grand total is closer to $900 million. So we've got a ways to go on that product. So we'll get something of a lift as that continues to grow, but I think our summary is exactly that.

It's just a quick follow-up. Would it be safe to assume given the average deposit mix versus the period end deposit mixes that we see that you're starting the quarter at a higher point on the NIM?

I don’t – well, I think that there early has been a reduction in LIBOR that has flowed through prior to the rate cut. So I think – I don't think that's a great assumption…

Understood.

Because we remember that, and I know you know, I mean obviously the benchmarks are different, so that's something to this lend through.

Yes. Understood. Okay, and that's very helpful. Much appreciated.

Thank you. Our next question comes from the line of Andrew Liesch with Sandler O'Neill. Please proceed.

Hey guys, how is it going?

Good. Hi Andrew, how are you?

Good, thanks. I noticed the warehouse loan lines were up $113 million or so. And presumably every year those eventually end up paying off, and I mean does those payoffs do then serve as a headwind to loan growth later on. So, I guess with that headwind later on in this calendar year, I mean, what gives you confidence that you'll be able to continue to reach that low teens annualized loan growth?

Well, with respect to the warehouse lines, I think remember, those are primarily government low warehouse lines to independent mortgage bankers. So if rates continue to decline, we would expect those balances to go up. So, if you're looking forward in a very long period to another rate cycle, then you always have to think of through that. But frankly, the demand in that business is very high and the pipeline in that business is very good. So I think when we look – and we're forecasting what we have from a loan pipeline perspective that's how we are getting to those estimates. Now, that being said, prepayments are high and competition is high, so there is obviously always the potential that we don't reach that objective. But we think we have a reasonably good shot at it. And I don't believe that the warehouse – the agency warehouse business will be a decrement from that loan growth, I think it will be a net contributor, particularly given the rate environment that at least it appears that we're entering into.

Okay, thanks. That's really helpful. That, on the broker dealer fees here in the quarter that the $6.7 million. Is that a good number to model off going forward? This is the first full quarter with that revenue stream. So just curious if that's what we should be using?

Yes, we would use that number.

Okay. I just think I'll step back. Thanks, you covered my other question.

Thank you.

Thank you. Our next question comes from the line of Michael Perito with KBW. Please proceed.

Hey, good afternoon. Just on the mortgage banking gain on sale, it obviously had a nice quarter. I imagine the rate in environment got a support of them. It’s kind of two-fold question here, can you talk about kind of the sources of that origination activity? And how you expect that trend moving forward now? Assuming we enter kind of percentage rate outlook. And also, secondly with the margins, a gain on sale margins were like, and whether do you think there is some good market conditions for those types of rates to be sustained?

Yes. So total originations for the quarter were $102 million, producing the net gain of $2.3 million. So quick math, it's a 2.3 margin. However, we do have adjustments, for example the MSR adjustment is in there and the one negative about rates coming down is that you take a small cope on your MSR. So – but at $100 million in originations and $2.3 million of gain, you have a rough estimate.

I think that – so with respect to where they're coming from, we have – that’s – it is a marketing driven and data driven process to bring those loans to us. But we think the marketing cost has trended in a very strong way, in a good way for us. We continue to cross-sell mortgages to an ever increasing group of customers. We've had some decent success with the nationwide marketing, and that's just getting started. So I think that’s – obviously the rate environment helps. So I think that should be a positive coming into the next year, hopefully.

Got it. Thank you. And then on the expense side with fiscal 2019 kind of in the books here and as you look out and I imagine, this would be a topic discussed at your Investor Day in October. But just the – I was wondering if you could maybe just repeat or remind us kind of your thoughts on overall efficiencies for fiscal 2020, but also more broadly what’s some of the more meaningful investments you think that are going to be completed next year? And kind of just, I know it's kind of a broad question, but why you think you’re so critical and what type of revenue opportunities you think they should drive long-term? It would be just great to get an update? Thanks.

Sure, no problem. So let's talk about Axos Clearing first. So the platform that we built, the universal digital banking platform, we call it a banking platform. But it really is a very flexible platform that can be utilized to add the securities information and services inside that platform. So the first opportunity that we have is with the more than 100,000 high net worth customers that clear through COR, those independent broker dealers are starving for an integrated solution and a portal for their clients. So over the next year, we will create that portal and deploy that portal to those clients. Those clients will then benefit from Axos banking services. But what they'll also – but the broker dealers will also benefit from the fact that they're providing these services to their clients and those clients aren't seeking those banking services elsewhere, two more integrated banks. So first and foremost, we have a fantastic group of clients, high net worth individuals that are serviced through these independent broker dealers that need that service. They also need a great account opening platform. The good news is we have a great one on the banking side, it needs to be modified for the securities business. But that those two things alone are very exciting to drive independent broker dealers to the Axos platform. And we've had several nice wins with respect to firms that are switching, from firms that just having cater to those technology needs. So these smaller IBDs are very, very focused on how they can get technology to those end customers. So that's a big part of that. And it's a great source of client acquisition as well. In fact, over the last several months since we bought COR, we added 8,000 high net worth clients from…

Helpful. And then just, sorry, just I'm sure you guys mentioned it, but I jumped on the call couple of minutes late, but just the efficiency ratio, do you guys have any initial thoughts on fiscal 2020, if you don't mind repeating them if you mentioned already? Thank you so much guys.

Yes. I think that having a – that looking at a full year banking efficiency ratio where we were in that below 40 range is a reasonable modeling measure for you as a banking segment. And then the security segments we guided into that high 80s, low-90 range for the entire fiscal year, given the investment that needs to be made there. And obviously we don't expect it to stay there over the long-term, but this is a longer-term strategy and so we need to ensure that we're investing there appropriately to accomplish some fairly critical objectives.

Thank you.

Thank you. Our next question comes from the line of Scott Valentin with Compass Point Research. Please proceed

Yes. Good afternoon, thanks for taking my question. Just with regard to the C&I portfolio, just wondering how much of that is coming from sponsors, is most of that still coming from sponsored transaction? Just wondering what the environment is that, we're hearing more and more competition in that space with regard to covenants and other items?

Well, so most of it is coming from sponsors, but we’re not participating in the cash flow side of that business. So the typical leverage lending business sponsor back leverage lending business, we don't do that business at all or let's say I shouldn't say at all, maybe there is a couple of very small pieces of transactions, but that's not the business. So yes, we don't – we are – we definitely, there is no loosening of standards, loosening of covenants, loosening of collateral protection there with respect to what we have. And so yes, I don't – I think that's a different animal.

Okay. And then just – I understood you have some New York City commercial real estate, any impact on the change in the housing loans there?

Not really. I think that's the reality of our portfolio – we have some low LTV, permanent multifamily loans there. But we were never really competitive in that market because it was a – the rent control laws resulted in most of the big competitors having an 80% loan-to-value and doing non-recourse transactions. And we were – we are very low LTV shops, so we were never able to really compete there. It's sort of interesting because you do see some of the New York competitors backing off on their concentrations now, with respect to that market a little bit because I think there is a little bit of consternation. But it's not particularly impactful on us, it's kind of interesting because obviously, what it should do is it should shift. We'll have a lot of impacts, but one of the impacts of the lab is it will shift development towards newer development right, which would not be constrained by some prior set of contractual relationships, which are now going to be binding on the future in that interesting way that was past.

Okay. And then just one final question on – you mentioned in your capital management you guys are generating excess capital, in terms of M&A opportunities I understand you guys are working on integrating and building products, but just wondering would you be able to take advantage of any M&A opportunities that come your way?

I think, certainly that's something we're always looking at and we have a fairly narrow focus with respect to what we're interested in doing from an M&A perspective. I think we're reasonably well set up strategically to do what we need to do. And I don't foresee a need to do something more right now. However, there are components of the securities business that might be interesting as bolt-on or things like that as we would certainly be able to look at those. But, yes I mean, it obviously depends on the size, it depends on a lot of things with respect to – it depends on the currency you utilize those sort of things, but we're certainly not limiting ourselves with respect to what we look at.

Okay. All right. Thanks for taking my questions.

Sure. Thank you.

Thank you. Our next question comes from line of Edward Hemmelgarn with Shaker Investments. Please proceed.

Yes. Greg, just one question but actually two, when – do you look at your all the investments that you're making, which are pretty good. When did you expect to move more from the investment phase? I mean, what you're doing now to more of where we start seeing more of harvesting or improvement in margins? How do you think that?

Well, I think the reality with respect to things like, the terms of what you're talking about, right, if you're thinking about let's say the Axos Fiduciary Services investments, the reality is that a lot of banks with a primarily fixed rate loan portfolio saw their margins have a significant negative impact associated with them. So if someone would've come back and say, years ago that we were asset sensitive, I think that would have – people would have been skeptical of that given the fact that we have such great downside protection in the rates in the way we structure our lending book, which was primarily a fixed rate book. So I think that you are seeing those benefits with respect to loan and margin rates in a lot of the things that we're doing, because we aren't competing in an online savings environment that has big competitors like Goldman Sachs, offering 2.80 [ph] rates. So I think that, that's very important to understand that you are seeing those benefits already in the fact that we've been able to diversify the loan book in a significant way. And we've been able to increase margins with a 75% fixed loan book in a flat yield curve environment. I mean, if you step back it's always difficult to do because, yes, obviously the answer is, I want more, but that's one answer. So that's with respect to those things. The next answer is with respect to the new developments with respect to what we're looking to do on the consumer banking platform and side. And I'll tell you that, those benefits continue to generate incremental improvement in a lots of different ways and they offset lots of other costs that otherwise would accrue going over $10 billion doing all these other…

Alright, I guess another way to think about it, two questions. When would you expect to start seeing margins in the securities business improving?

I think we'll see gradual – I think we'll see – we'll definitely see improvements in that business in fiscal year 2020, but you'll see gradual improvements in it, let's put it this way. There are already and we're already seeing improvements in that business in a number of ways. One is that the credibility of the firm broadly is bringing in clients. We are been able to streamline our operations there. We have lots of initiatives and ability to make the businesses more efficient. However, we will also be investing that money, all of it and more in improving that business such that it is legitimate competitor to approaching and to national and those sorts of things or Fidelity National. So what you're going to see is there are improvements happening but those funds are going to go to getting better personnel. We just hired a Head of Ops from one of the big three guys, who the head of ops for that whole place and so we're upgrading the team, we're investing in technology, we're investing in their systems and processes, we're investing in risk, we're doing all that stuff. And so that's going to offset what we're doing, but then when you're looking into that 2020 period, what you're having is you're actually having an incredible source of customer acquisition and also an amazing source of very stable cash balances that arise from this. You can look at other competitors that have done this and it's been an incredibly successful strategy with respect to gathering low cost deposits that have strong longevity.

They'll certainly, I mean, I don't disagree with the strategy, I was just trying to think about it as like a, – is it going to be like a 2021 time frame or you really start to see that driving improved results for the Axos as a whole?

Yes, I think that this year with respect to the securities business is, you should focus on investing in that and I think that coming into that June time frame of next year, that their defined length will be – it will be set to go with respect to what we're doing there.

Okay. And then lastly, just one more question. Have you note, you’ve had the universal – the digital bank, I mean being a platform up and running for a quarter, is there – can you give any examples of something that you're doing right now? I mean success that you've had that you couldn't have had in the past?

Oh yes, I can give you many, many examples. So the first and foremost example was that we were able to take the nationwide customers all on and create specific profiles with respect to the way they wanted to treat certain risks segments of their customers. They both had a very high-end customer segment and they had some other customer segments that needed to have a variety of different limits in a variety of different risk parameters and we were able to customize those. The next thing we're able to do is, go through every customer interaction, every fax that comes into the bank, every wire form, every one of those elements and we were able to create digitized interactions in the platform so that customers now have a seamless experience. And they don't have to interact with the bank telephonically or through fax with respect to any service that they need or any account maintenance opportunity. Another was that we were able to integrate driver's license capture and liveness photo capture match to be able to reduce fraud and to increase the quality of CIP within the platform. So it's a better user experience, because of the speed at which it auto fills everything. And also it allows us to have a great way of identifying someone and when someone – because obviously there's been a lot of identity compromises over time. So the quality of credit data with respect to being able to make risk based decisions, let's say on the credit data that's reported through different types of questions is declined over time as that credit data's become more widely available to the bad guys. So our ability to enhance security is another example of that. So there's lots of – another one was that if you…

Okay. Thanks.

Sure.

Thank you. Our next question comes from the line of Steve Moss with B. Riley FBR. Please proceed.

Good afternoon, this is actually Nick Duafala stepping in for Steve Moss. You mentioned in your prepared remarks that jumbo single-family originations rebounded last quarter. So just wondering what the rate you were seeing in these mortgages today. And also how overall new loan origination rates compared to existing portfolio run-off rate?

Sure. So I think that there, with respect to the quest, basically is say mid-to-lower fives is roughly where they are and I would say that they're relatively consistent with respect to run offs and others. But we do think obviously with what's happening in the rate environment, we're going to have to be looking carefully at that, and whether or not we will need to be looking at some of the fixed rate lending products and what rates we're charging based on market competition. We think the answer to that is yes. Now we have run our models forecasting what we will need to do from a rate reduction perspective if market rates go down. And we are forecasting that we will have to reduce rates there and we're still getting to that NIM guidance. So that's obviously in an environment where we're going to be looking at what happens from a competitive standpoint, but we're going have to react to it to some extent. I'm sure.

Okay, that's helpful. And could you give us some flavor the beta on interest bearing deposits, if we were to see 50 basis point cuts by year-end?

That question is very dependent upon, what type of deposits we're talking about. And so with the way that we have provided guidance with respect to that, is giving you some guidance with respect to the reprising of loans and then giving you margin guidance. I think with respect to that, that implies a deposit beta, but the reality of this – the reason why I'm not giving you that is because it's complicated, because we have current off balance sheet deposits that are very low cost both in clearing and to AFS that can come on balance sheet depending upon what we see from a growth perspective in our different units. We also have great pipelines for deposits in some of the commercial businesses, how those come into fruition and the timing of them are quite influential. So all of those together we've looked at and we've modeled those out and come up with the conclusions that we've provided to you.

Okay, makes sense. Thanks guys.

Sure.

Thank you. Our next question comes from the Line of Gary Tenner with D.A. Davidson. Please proceed.

Thanks. Actually my questions were asked and answered. Appreciate it.

Okay, that's good. Thank you.

Thank you. We have reached the end of our question-and-answer session. I’d like to hand the floor back over for closing remarks.

Thank you everyone for your interest in Axos Financial and we'll talk to you next quarter. Have a good rest of the day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.