Greetings, and welcome to the Axos Financial Fourth Quarter 2020 Financial Results. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instruction] Please note that this conference is being recorded. I will now turn the conference over to our host, Johnny Lai, Vice President of Corporate Development and Investor Relations. Thank you, you may begin.

Great, thank you, good afternoon everyone. Thanks for interest in Axos'. Joining us today for Axos' Financial Inc’s fourth quarter 2020 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 our financial and operational results for the three and 12 months ended June 30, 2020 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 these expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore the company claims that Safe Harbor protection pertaining to the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast and there'll be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. At this time, I would like to turn the call over to Greg for his opening remarks.

Thank you. Johnny. Good afternoon everyone and thank you for joining us. I'd like to welcome everyone to Axos’ Financials conference call for the fourth quarter of fiscal year 2020 ended June 30, 2020. I thank you for your interest in Axos’ Financial and Axos’ Bank. Axos announced record net income of $183.4 million for the fiscal year ended June 30, 2020 of 18.2% over the $155.1 million earned in the fiscal year ended June 30, 2019. Axos return on average equity for fiscal 2020 was 15.65% and the banks efficiency ratio was 39.81%. Fiscal year 2020 earnings per share increased 20.2% to $2.98 per diluted share compared to $2.48 per diluted share in the fiscal year 2019. Excluding acquisition related expenses, non-GAAP earnings per share increased 20.59% to $3.13 per share in fiscal year 2020 equating to a non-GAAP return on equity of 16.49%. Our book value per share was 20.56% at June 30, 2020, up 17.7% from the prior year. We had an excellent quarter with higher net interest margins, double-digit growth and net interest income and non-interest income, strong deposit growth, positive operating leverage and stable credit performance. The highlights of this quarter include the following. Ending loans and leases increased by approximately $258.4 million, up 10% annualized from the first quarter of 2020 and up 13.3% year-over-year. Strong originations in jumbo single-family, commercial specialty real estate and mortgage warehouse were offset by lower production in non-real estate, lender finance and higher payoffs in multifamily in certain C&I loan portfolios. Excluding PPP loans ending loan and leases increased by 11.6% year-over-year. Net interest margin was 3.89% for the quarter ended June 30, 2020 up 8 basis points from 3.81% in the fourth quarter of fiscal 2020 and up 10 basis points from March 31, 2020 excluding HRB…

Thanks Greg. First, I wanted to note that in addition to our press release an 8-K was filed with the SEC today and is available online through EDGAR or through our website at axosfinancial. Second, I will provide brief comments on two topics. Please refer to our press release or the 8-K for any additional details. First, as Greg mentioned Axos Financial has adopted CECL effective July 1, 2020 and expects its day one entry to increase the allowance for current low losses by between $35 million and $55 million. We do not expect a significant impact from CECL on any other balance sheet category, other than our loan portfolio. Like many banks, we elected to provide a range for our day one entry since that entry is pending review and testing in the normal course of our quarter ended September 30, 2020. To implement CECL, we developed six portfolio models, which use Moody's forecasts of key macroeconomic variables to predict the probability of default and the loss given default or the severity of loss throughout the life of our loans. The formulas for probability of default were developed for 15 years of historic loss data and more than 1,800 Moody's macroeconomic variables measured historically each quarter. Moody's historical variables, were systematically tested and eliminated using our square regression with back testing leaving those Moody's variables most predictive of historical default results. The severity of loss in our CECL model is primarily based upon loan level collateral values adjusted for liquidation cost and estimated changes in value over future periods of the loan life. Current liquidation collateral values are adjusted for value decreases or increases by using price indices, for example Case-Shiller’s monthly home price index and Moody's RCA Commercial Property Price Index. When the adjusted value of the loan…

Thank Andy. Operator, we're ready to take question.

[Operator Instructions] Our first question comes from Andrew Liesch with Piper Sandler. Please state your question.

So just a quick question on the margin here. So cost of interest-bearing liabilities at 1.25 and it sounds like there's more room for us to go down on further here this quarter, given some of the movements you made even this month. And recognizing that the 3% to 4% margin has been a good guide now for the last several years. Do you think we can get to the point where now it's near the higher end of that on a core basis, just given the room on the funding side and fixed rate nature of the loan book?

I think there's a potential for it, but I'd give it at least another quarter to see how that plays out. I think we are very focused on credit quality. And so when we look at some of the institutional relationships that we're interested in developing, we think they're very high quality. And at times, we're making some rate concessions with respect to certain loan products just given the nature of the index rate. So I do believe that there is an opportunity to lower our funding cost. But I also we do tend to have reasonable levels of prepayments, and we have reasonable levels of originations. So depending upon the nature of those and our - the fact that we've tightened credit criteria across the board, we have to be thoughtful about where loan rates go. And now that being said, we don't have, obviously, the issues that other banks do with respect to margin compression. And also, given where we are with respect to our fixed rate our floating rate loans, adjusting the vast majority of those adjustments are behind us.

And then on the nonperforming loans, sound correct me if I'm wrong, like 82 million of them are single-family mortgages. The total NPA of up to $94 million from $65 million a quarter ago, was the bulk of the increase related to single-family mortgages?

Yes.

And was there anything unique or not. I guess, not unique, but anything common between all of them? Just curious what drove the increase.

No. I think that it's related to the economy. There is nothing particular with respect to it or a particular geography. It's not a really, it's not a particularly high number. And when we go through when we look at our collateral valuations, we think we're very well secured. So I think it's and I think that with respect to folks are coming current, they're rejiggering their business models. Some of them got confused and thought that everything was for free, and they didn't have to pay. And so we're helping them with that confusion. And so I think it will be okay. But obviously, the longer the economy grinds on the more folks are going to have to adjust and not everybody is going to be able to, we tend to lend to folks who have fairly nice homes, significant assets. And yes, there'll be a few of those folks who will probably have to adjust how they live and their lifestyle and things like that. But I think they have equity, and they can do that and the market's pretty good. So to the extent they have issues, we're encouraging them to list their home and get the equity from it.

Next question comes from Michael Perito with KBW. Please state your question.

I had a few things I wanted to touch on. I guess, one on helpful color kind of on the jumbo mortgage side. But I think I was curious, have you started to see, as we look out here, though, I mean, I know, for example, in the New York area by me, and I imagine in some other areas, too, there's been big moves out to the city and the suburban real estate markets have picked up tremendously in some of these kind of wealthy, more densely populated areas. Are you starting to see kind of an increase in accelerated demand? I know California and New York, those are some of your bigger markets in that product. Just curious what you guys are seeing as you look forward today?

Yes. I think that's right. We have exposure in the urban core in New York, and we have exposure in the Hamptons, and if you had asked me what I was more worried about six months ago, I would have told you the Hamptons and that's now it's reversed. I think that we don't try to be to be perfect with respect to these sort of trends, we try to build in enough cushion that we are able to deal with these trends. And I think we're in reasonably good shape with respect to that. But I definitely think you're seeing a movement towards a little bit greater space and certain markets that were less attractive, I think, have currently become quite attractive, including certain areas, for example, in Florida, which we were always we were always we were there, but we were more cautious on, and we're seeing things appreciate there quite well.

So I guess the next piece of that is, I mean, over the last few years now, I think kind of the seasoning of that portfolio and the size of it is kind of put a limit a little bit on net growth on an annual basis. I mean, has do you think those dynamics still kind of hold as we think about the next fiscal year and kind of net growth opportunities on the mortgage side? Or do some of these forces have enough power to kind of pull the tide up, so to speak, a little bit in that portfolio?

I certainly think we're expecting growth in our single-family jumbo business, and that really would be, as you intimate the first growth in a while there. That being said, we've also tightened LTVs, credit standards, reserve requirements and those sorts of things. So we do think that there's a demand benefit, a secular demand benefit there is reduced competition. And then we've tightened credit standards, and that brew, we hope, will turn up some growth. I don't think it's going to be absolutely what it was in our heyday, but it's going to still be growth. And I think it will be decent. And certainly, that will be an improvement from the last, let's say, prior six quarters, which had experienced, I think, competitors getting way ahead of themselves and people doing 90% LTV jumbo mortgages, for example, which is always an error, as always in any market.

And on the expense side, I think you were starting to see a lot of things in the industry announced, branch closures and things of that nature. And obviously, you guys are years ahead of that trend. But as I think about kind of your acquisitive nature over the last few years, I do think you guys picked up some office space, like if I recall, I think nationwide, there were some office space you guys occupied and with the pandemic and stay-at-home orders, I think a lot of workforces have moved remotely. I mean are you guys seeing any opportunities in kind of this a little bit more challenging revenue environment on the cost side that you think you might be able to take advantage of over the near-term here?

Not really. I think that our big focus over the next 18 months is going to be really on continuing to take advantage of the accelerant that this pandemic and change in consumer behavior is brought to banking. So we have, for example, not fully incorporated all our small business clients in our universal digital banking architecture, and we only have the account opening system, the best our newest and best account opening system available to small businesses for sole proprietors. That product has just gone gangbusters, and we can't keep up with the demand, and we have a lot of opportunity there. So the short answer is we're going to invest in technology take advantage of the dislocations in the industry there. And we believe that to be competitive over the longer-term that the banking and securities products need to be seamlessly integrated and delivered. So obviously, you see a small drag from the security side of the business. That drag may actually increase a little bit in as we hire some folks with respect to that business, although we are also continuing to bring our management framework and operational effectiveness programs into that organization, and that's resulted in very strong cost reductions and an ability to improve the operations. So in short, I think it's the right way to see it for us is that we are we're going to make targeted investments in continuing to make ourselves a digital leader. And we've just done so much and it just paid off so incredibly well with the seamless nature of everything that we've been able to go through in our business and the investments that we've made in each one of them, if we hadn't made them, whether it's in telephony or IVR and Chat Bots and robotic process automation and all these things. Those will continue to benefit us. And you're seeing that in a little bit of operating leverage, but we're also going to really do some really neat stuff on the security side. And that's going to take a while, and it's going to take some investment. And so I just I wouldn't take that into the models.

I'd to also add that from a compensation and people growth perspective, we do continue to look at mortgage banking as additional possible growth. That does require additional bodies. So these are all good things that we would scale with the revenue and the business. But I think the big picture is we're not looking for operating expenses to come down in the next quarter.

Yes. I think what we really have is we really have two items operating. We have a lot of really great operating efficiencies that are coming into play through the RPAs and all the straight-through processing type of activities. We're doing the interactions, the increase in interactions that we're going through in ruthlessly, pushing those interactions into more controlled and better environments for the customer and also more efficient for us because we have the UDB platform. So we can add every type of interaction that's required through that. But then within that, we're also looking to dramatically improve the service, the personalization and to make ourselves a much better place for a consumer in a small business to be than a branch-based bank because we're anticipating the customers' needs we're personalizing the experience and all those things. So there's really a massive amount of technology investment going on here, and it's going to place us in good stead for the next decade, but we're this is not going to be a I think that for us, focusing on one quarter of expense reductions, this is not how we see things. Unfortunately, we're not getting quite the valuation we should deserve for the investment we're making, but that will become clear not only as we get through, I think, with flying colors this credit concern the credit concerns that people have, but also as we emerge on the other side with incredibly strong consumer, small business and commercial products.

And then just lastly for me and I'll step back. Just on capital. On that kind of just as a follow-up to that last point you made there, Greg. I mean, obviously, it seems like your deferral numbers are very low, and you guys feel pretty good about the portfolio. And I know the answer is probably not today just because you have the CECL adjustment coming, and you probably want to work through that. But at some point, does it make sense to maybe get a little bit more offensive again with the capital deployment, maybe whether it's later this calendar year or early next calendar year? Just any updated thoughts on how you guys are thinking about that?

You mean with respect to share buybacks or dividends or something, yes. I guess we're even in a more aggressive scenario, maybe an acquisition opportunity or something like that? I know today, that's kind of hard to found them. But just but yes, I guess, I'm sure.

Yes. No, I don't think it's hard to fathom them. I think we tend to try to buy capabilities. We like to build our own businesses because then culturally, they fit well in their built into our framework and our systems. But we are always looking around at for the right opportunities. And I don't think that we're out of the acquisition game. There's nothing currently out there that's significant. But we're not out of that game, and we'll continue to look at it. We have ambitious strategic plans, and we're going to execute on those plans. And nothing in this environment is impacting those plans. I think everybody's motivated and on task, and we'll look at our capital levels and see if there's something. I think, obviously, we've been very conservative here with respect to the CECL adjustment. And frankly, if we took Moody's worst-case model, it resulted in a reduction of our loan loss reserves. So we obviously are planning for very severe housing downturns. And if those housing downturns happen, we'll be well reserved. And if we won't be, then we'll be over reserved, but that's not a horrible problem either.

Next question comes from Steve Moss with B. Riley FBR. Please state your question.

Just wanted to start with the Greg, you mentioned the new institutional loan products here. Just kind of wondering how large your envisage is getting over the next 12 months? And kind of what's the clientele you're caring to if you get a little more color there?

And when you talk about I'm sorry, which ones I'm sorry, we talk about institutional loan products, are you talking about CRESL Institutional loan products? Or which ones are you kind of referring specifically to? Yes. No. It's the same exact type of products. It's just that as you work with more institutional sponsors, that have just enhanced financial wherewithal, you're lowering advance rates ensuring sequences of funding are different, essentially, all these tightening credit characteristics, loan rates can go down. That was money point. I think the broader point was that and Andrew kind of hit on it. Of course, he's looking at he's saying, gee, your deposit costs are going down, your loan rates are pretty much fixed. So of course, I'm going to put in my model that you should have a much higher NIM. And what I'm trying to say is, to do that yet, we are because we're tightening credit standards, and there may be additional competition for the best loans, we may have lower loan rates. That's really the broader point there to just be very direct about it.

And then just in terms of loan growth, I just want to clarify. I think you mentioned stability in loan demand. So still thinking more or less low double digits, high single digits in terms of loan growth. Kind of how to think about that?

Yes.

And then third question, just on the equipment finance fees. I know it's small. You had the one $5.6 million more challenging fees than we've seen a few other banks with challenges there. Just kind of wondering how you're thinking about that portfolio? If you any thoughts about exiting it or anything along those lines?

No. The biggest industry there is the insurance industry, actually. So the actual exposure to industries that are sensitive are clearly, we have a small lease on equipment in our restaurant business. For example, we kind of highlighted what that is. We probably won't be doing a lot of those on a going-forward basis. But those leases are hell or high water. They're often inside. And I mean what I say inside, what I mean is there's often a term loan that has the typical 1% more that goes on for an extended period of time. And our lease is short term, highly amortizing and on essential use equipment in a basket inside that term loan. So there's a lot of structure around that that can make it very painful for and I think in a lot of cases, not all cases, but a lot of cases, there'd be the senior lenders often these bigger banks would end up coming in and saying, okay, this small little lease is more problematic than it's worth. And if you come out and rip out this piece of equipment, my whole cash flow alone dies. So look, I think I think that clearly, we scaled back on originations there, waiting to see impacts of what happens. That's a viable business. There are industries that are doing well and those industries or industries will concentrate on. And then the industries that are subject to stress in the new environment, we'll simply not do.

Next question comes from Gary Tenner with D.A. Davidson. Please state your question.

I was just curious, in terms of commercial real estate lender finance business. I know one of the features there is that the underlying assets are held in a bankruptcy remote SPE. And I'm just wondering if over the course of the last quarter, have you seen a lot of movement of the underlying assets securing those loans. In other words, have customers had to replace any of those assets.

Yes. There's been there's definitely been some of that. There's been instances where the junior participants have taken us out or paid us down or things like that. So you definitely see that there's clearly some stress in certain types of assets. And but the structures are taking care of that. And we don't see anything particularly concerning there right now given the loan-to-value ratios and the structures. Basically, the partners or the borrowers that we have are stepping up and making sure that either they're paying us down or doing the things we want them to do and being very cooperative. And I think it's cordially making sure that everybody is, particularly us, are safe and secure. And it's working pretty well for us.

Our next question comes from Edward Hemmelgarn with Shaker Investments. Please state your question.

I just have one question, Greg. You've left your bank deposit balances grow rather significantly along with your customer deposits. Can you talk a little bit about what your plans are for that over the next year?

Yes, we probably overshot a little bit with respect to that. It's always a little bit difficult to know each stress that you see in an economic concern is a little bit different. This one appears to not have history onyx around banking failures and stress, which is always interesting to think about. And so having a little bit of extra liquidity running in to this time frame wasn't bad. We probably ended up being a little heavier than we would have liked and we had people bringing more money to us. And so we probably could have been a little more aggressive about cost of funds reduction. And we definitely don't need to run at this level. This was an overshooting and not particularly intentional. But so it's not doesn't represent a new norm with respect to our loan-to-deposit ratio. I mean, I think that where we were historically is probably more of the target given the nature of our assets, and particularly given the FHLB borrowing capacity that we have. We usually like to have a little bit of a mix of FHLB borrowings out there that are longer term, the rates are very good. That's important from an asset liability perspective. And so we don't have a lot of that now, but there's a lot of opportunities to borrow longer-term and lock in funding. There at really attractive rates. So we have to think about that as well. So

I mean, we're also while growth is uncertain, as the comments today have indicated, we have some view toward growth. So we're we would be set for that as well.

That concludes the question-and-answer session. I'll turn it back to management for closing remarks.

Thank you, everyone, for joining us this afternoon, and that concludes this session. Thank you.

Thank you. All parties may disconnect. Have a great evening.