Axos Financial Inc

NYSE:AX

Earnings Call Transcript 2020-Q1

[Operator]

Greetings and welcome to the Axos Financial Inc First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now pleasure to introduce your host Johnny Lai, Vice President, Corporate Development and IR. Thank you. Please begin.

[Johnny Lai, CFA VP, Corporate Development & IR]

Thank you. And good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc first quarter fiscal 2020 financial results conference call are the company's President and Chief Executive Officer, Gregory Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy review and comment on the financial and operating results of this --for the three months ended September 30th, 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 for looking statements. They are subject to risks and uncertainties and that management may make additional for 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 on the Investor Relations section of the company's holding company 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'd like to turn the call over to Greg for his opening remarks.

[Gregory Garrabrants, President & CEO]

Thank you, Johnny. Good afternoon, everyone. And thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the first quarter of fiscal 2020 ended September 30th, 2019. I thank you for your interest in Axos Financial, Axos Securities and Axos Bank. Axos announced record net income of $40.8 million for the fiscal first quarter ended September 30th, 2019, up 10.7% from the $36.8 million earned in the fiscal first quarter ended September 30th, 2018.

Earnings attributable to Axos' common stockholders were $40.7 million, or 66% per diluted share for the quarter ended September 30th, 2019, compared to $0.58 per diluted share for the quarter ended September 30th, 2018. Excluding non-recurring expenses non-GAAP adjusted earnings and earnings per share were $42 million and $0.68 respectively for the quarter ended September 30th, 2019.

Other highlights for the first quarter include ending loans and leases increased by $402 million, up 4.3 % on a linked quarter basis or 17.1% annualized for the fourth quarter of 2019 and 13.1% year-over-year. Excluding our mortgage warehouse which fluctuates quarter-to-quarter and $57.9 million of structured settlement sales this quarter, ending loan balances increased $369.7 million or 16.3% annualized from June 30 to September 30.

Total assets reached $11.8 billion at September 30, 2019, up $600 million compared to June 30, 2019 and up $2 billion from the first quarter and 2019. Net interest margin was 3.77% for the quarter ended September 30, 2019, up one basis point compared to 3.76% in last year's first quarter our bank only net interest margin was 3.83% in the first quarter of fiscal 2020, up four basis points from a corresponding period a year ago. Non- interest income increased 30.2% year-over-year to $21.5 million due to the addition of fees from Axos Clearing and higher gain on sale from structured settlement sales this quarter.

Capital levels remain strong with Tier-1 leverage of 9.12 at the bank and 8.8% at the holding company, both well above our regulatory requirements. Return on equity was 14.85% for the first quarter of 2020, compared to 14.98% in the corresponding period last year, reflecting the bank's year-over-year increasing capital levels. Our credit quality remains strong with two basis points at net charge-offs and a non-performing assets to total asset ratio of 54 basis points this quarter. Our allowance for loan loss represents 105.9% coverage of our non-performing loans and leases.

Our efficiency ratio is 52.44% for the first quarter of 2020, compared to 53.0% in the fourth quarter of fiscal 2019 and 51.47% for the first quarter of fiscal 2019. Our banking business segment efficiency ratio is 43.93%, down slightly from 44.46% in the first quarter of fiscal 2019. The primary driver of the year-over-year increase in our reported efficiency ratio was the inclusion of the clearing and digital wealth management business and higher depreciation and amortization expenses related to software development and deposit acquisitions. And security segment develops; we believe we will retain operating leverage in the security segment.

We have made significant investments across our businesses in personnel, technology, marketing and infrastructure that will help strengthen our organization, as well as increase the maximum income business and we expected over the next several years we should be in a harvesting phase getting these synergies and growth from these initiatives. We originated approximately $1.8 billion of gross loans in the first quarter, up 8.3% year-over-year. Origination for investments increased 8.3% year-over-year to $1.46 billion and origination for sale increased by 8.2 to $327.8 million.

Ending loan balances increased by 3.1% year-over-year to $9.8 billion. Strong origination by our commercial specialty real estate, commercial and multi-family lender finance and warehouse were partially offset by higher than average payoffs in our single-family jumbo mortgage and lender finance portfolios. Our loan production for the first quarter ended September 30, 2019 consisted of $164 million of single-family agency eligible gain on sale production; $245 million of single-family jumbo portfolio production, $174 million of multifamily and other commercial real estate portfolio production; $858 million of CNI production resulting in $420 million of net CNI loan growth and $50 million of auto and consumer unsecured loan production.

For the first quarter 2020 origination statistics are as follows. The average FICO for single-family agency eligible production was 7.46 with an average loan-to-value of 70%. The average FICO to single filming jumbo production was 7.28 with an average loan-to-value ratio of 59.8%. The average loan-to-value ratio of the originated multifamily loans was 59% and the average debt service cover was 1.26. The average loan-to-value ratio of the originated small balanced commercial real estate loans was 62.8% and the average debt service coverage was 1.42. The average FICO of the auto production was 157.

At September 30, 2019, the weighted average loan- to-value ratio of our entire portfolio of real estate loans was 56%. These loan- to-value ratios use origination date appraisals over current amortized balances. As of September 30, 2019, 62% of our single-family mortgages have loan-to-value ratios at or below 60%; 30% of loan-to-value ratios between 61% and 70%; 2% of loan-to-value ratios between 71% and 75%, approximately 5% between 75% and 80% at less than 1% have a greater than 80% loan-to-value ratio.

We have a well-established track record of strong credit performance in our jumbo single-family mortgage lending business, with lifetime credit losses in our originated single-family portfolio of three basis points to loan originated, given increased competition from private securitization of jumbo single-family mortgages, we've created a new legal entity within our security subsidiary, Axos Securities Investments LLC in order to expand the type of jumbo single-family lending products, we can originate and sell to generate fee income without compromising the credit standards we have maintained in our jumbo single-family mortgage portfolio.

We had approximately $2.2 billion of multifamily loans outstanding at September 30, 2019 representing approximately 22% of our total loan book. Growth in our multifamily loan production has been solid. The weighted average loan-to-value ratio of our multifamily loan book is 52% based on appraised value at the time of origination. Apart from a 65% of our multifamily loans are under 60%, 29% are between 60% and 70% and 4% are between 70% and 75% and less than 2% of our multifamily loans have a loan-to-value ratio above 75%. The lifetime credit losses in our originated multifamily loan portfolio are less than one basis points of loan originations over the 18 years, we have originated multifamily loans. Our CNI lending business posted a strong quarter with record quarterly loan originations of $858 million and ending balances increasing by approximately $420 million.

We're continuing to see good demands from credit worthy bars for high-quality projects and attractive markets and our lender finance and commercial specialty real estate business. While the average sizes of our CNI loans are larger than our single-family and multi-family loans, we maintain the same rigorous underwriting standards and low loan-to-value principles that have served us well through prior credit cycles. We have no credit losses on lender finance or commercial specialty real estate loan books. Our leveraged and loan-to-value ratios or cost ratios and our lender financed commercial specialty real estate and CRISL loans remain in the 45% to 55% range.

Loan demand remains solid with a loan pipeline of $1.1 billion in September 30, 2019 consisting of $437 million of single-family jumbo loans. $123 million of single-family agency mortgages; $190 million of multifamily income property loans and $389 million of CNI loans. With our diverse mix of lending products as we grow, we expect our portfolio max to move slightly away from single-family lending into CNI lending and commercial real estate lending, although single-family lending will remain an important part of the portfolio. While we anticipate strong origination across most lending categories, our average lending loan balances will fluctuate from quarter-to-quarter based on the pace of pre payments.

Switching to funding. Total deposits increased $3.1 billion or 51.6% year-over-year as we repositioned our balance sheet in anticipation of the transfer deposits we acquired from nationwide in the year ago period. We had deposit growth across small business, cash and treasury management, specialty deposits including Axos Fiduciary Services.

At September 30, 2019 approximately 40% of our deposit balances were business and consumer checking; 22% money market accounts, 4% IRA accounts; 5% savings accounts and 3% prepaid accounts. Checking and savings deposits represent 74% of total deposits in September, compared to 77% in September 30, 2019. Our security segment which includes Axos Clearing, our securities clearing in-custody, business for introducing broker dealers and independent RIAs and Axos Invest are direct-to-consumer digital wealth management continues to make good progress.

We have added talented team members across sales and marketing, risk management and operations in Axos Clearing and Axos Invest since we closed the acquisitions in the first calendar quarter of 2019. We recently rebranded WiseBanyan to Axos Invest and reinitiated low-cost marketing of our premium digital wealth management service offering. Securities lending revenue and margin lending revenue both increased this quarter, while average client cash balances declined as their independent broker-dealer clients increased their risk tolerance and as rates for free cash balances declined.

We signed multi-year clearing contracts with a few new correspondent firms and our sales pipeline remains strong. We also have a number of technology and product initiatives that will be introduced over the next 3 to 12- months including integration of Axos Invest inside of our a universal digital banking platform, enhanced IRA custodial capabilities and additional premium features for our digital wealth management products suites. We made further progress growing and diversifying our commercial and specialty deposit businesses. We selectively added talented commercial bankers in our downtown LA and Midtown Manhattan office markets. We already had a significant customer base and personnel presence.

These strategic office locations will serve to attract new customers in these markets, serve our existing significant client base and commercial customers and allow us to acquire talent that was not otherwise available in San Diego. As we scale the bank to a $20 billion and larger institution having a local presence in these two large metropolitan centers will help us expand our climb and talent base. The integration of Axos Fiduciary Services with the bank is complete and we are now moving forward to grow this business. We have successfully added new Chapter 7 and non-Chapter 7 Trustees and Fiduciaries and hundreds of existing trustees have voluntarily moved their deposit balances to Axos bank.

We plan to integrate various banking functionality with our bankruptcy software in the medium term in order to reduce the time, cost and friction for our trustees' case management and reporting requirements, and expand the utilization of the software to other verticals. Our capital ratios remain strong despite recent action to deploy some of our excess capital into organic investments and share buybacks over the past few quarters. Our Tier-1 leverage ratio is 9.12% at the bank, down from 9.21% at June 30, 2019. The Board approves a new $100 million share repurchase program in August.

We will continue to opportunistically deploy excess capital where we see the best risk adjusted returns, whether it's for organic investment, accretive M&A or share buybacks. Earlier this month, earlier this month we renewed our agreement with H&R Block to be the exclusive provider of interest-free refund advance loans to H&R Block's customers during the program year ending June 30, 2020. Axos will originate in fund all of H&R Block's interest free refund advance loans to its tax preparation clients for the 2020 tax season.

This will be the third year that Axos will be the exclusive provider of H&R Block's refund advance loans. This one-year renewal is separate from the seven-year program management agreement entered into on August 31st, 2015 and filed with the Securities and Exchange Commission between Axos and affiliates of H&R Block which provides that Axos will provide H&R Block branded financial services products known as Emerald prepaid cards, refund transfers and Emerald advance lines of credit during through H&R Block's retail and digital channels.

The current terms of the program management agreement end on June 30, 2022. And they are terminated earlier by H&R Block in the event that Axos no longer qualifies as exempt from the provisions of the Dodd-Frank Act known as the Durbin Amendment as fully described in the filed agreement. Such provisions limit the level of interchange fees that may be charged by institutions with greater than $10 billion in total assets beginning July 1st of the following year in which the institution exceeds such size as of the December 31st, 2019 measurement date.

If the total assets of Axos exceed $10 billion on December 31st, 2019, the Durbin Amendment would apply to us starting in July of 2020. If our asset size remains greater than $10 billion as of December 31st, the reduced direct and indirect interchange revenue would begin on July 1st, 2020. Although there are a number of options to reduce this loss of interchange revenue or potentially avoided for a period of time, each option has a cost or other trade-off associated with it. So it is not possible to predict whether we will be able to mitigate this potential interchange loss.

If we are unable to agree to a solution with H&R Block that would alleviate the loss of interchange from the Emerald card program that is acceptable to both parties, Axos has the right to avoid early termination of the program management agreement by compensating H&R Block for the loss of its actual interchange income. We estimate that such compensation would be approximately $25 million per year or approximately $0.18 on earnings per share based on current transaction volumes, if no mitigating actions or program restructuring is taken.

The impact from reduced interchange fees are expected program mitigation related to non H&R Block prepaid been sponsors and our own checking accounts is approximately $4 million pretax per year. From a timing standpoint, since the majority of the interchange fees from the Emerald card are generated during the tax season, we have most of calendar 2020 to come up with an executed solution, if one can be mutually agreed to, to mitigate the majority of the compensation we would have to pay H&R Block after the 2020 tax season.

We have an established infrastructure and experienced team that has worked alongside H&R Block to deliver valuable financial services to millions of H&R Block customers over the past four years. We will continue to work with H&R Block to determine if a solution exists that is mutually agreeable and announce an agreement if one is executed. In the meantime, given our ongoing discussions with H&R Block regarding this matter, we will not be able to discuss additional detail regarding our H&R Block program management agreement until our negotiations conclude.

We are pleased with the progress we have made integrating our acquisitions and expanding our core consumer, commercial and securities businesses. We're excited about the abundant opportunities we have to provide a broader set of services for new and existing clients by providing them with a more robust set of tools and a better user experience. You will hear more about our cross marketing, personalization, operational efficiencies and new product development initiatives at our Investor Day later this week.

I hope to see many of you in San Diego this Thursday. Now I'll turn the call over to Andy who will provide additional details on our financial results.

[Andrew Micheletti, EVP & CFO]

Thanks, Greg. We have issued our press release; the SEC EDGAR portal is currently down. We will continue to monitor EDGAR to file our 10-Q as soon as possible. In my comments, I will highlight a few areas rather than go through every individual financial line item. As Greg indicated earlier, earnings attributable to Axos common stockholders were $40.7 million or $0.66 per diluted share for the quarter ended September 30, 2019, compared to $0.58 per diluted share for the quarter ended September 30, 2018 and compared to $0.66 per diluted chair for the quarter ended June 30, 2019.

This quarter, Axos net interest margin increased year-over-year when comparing both the consolidated net interest margins and the banking business segment net interest margin. The banking business segment net interest margin was 3.83%, up four basis points from the quarter ended June 30, 2018. Since September 30, 2018, the Federal Reserve has begun to lower rates. Our average loan and lease yield for the banking business segment was 5.59% for the first quarter ended September 30, 2019, up eight basis points year-over-year and our average earning asset yield was 5.39%, up four basis points year-over-year.

The strong loan yields this quarter as well as the growth in our non -interest earnings deposits which increased $608 million on average balance basis year-over-year are the primary reasons for the four basis point increase in the banking business segment net interest margin. As discussed last quarter, there are two primary reasons we believe we can maintain our net interest margin. First, our loan originations and the resulting net loan growth have moved to the commercial loan book which on average has higher loan rates than our consumer loan portfolio.

Second, both our consumer loan book and our commercial loan book have relatively high low rate floors for those loans that have adjustable rates. We also believe we have the flexibility to reduce deposit rates and borrowing rates in the future quarters. For these reasons, we remain positive about our banking business net interest margin, which we expect to maintain in a 3.8% to 4% range on an annual basis, excluding the impact of H&R Block tax products. Our provision for loan loss for this quarter ended September 30, 2019 was $2.7 million compared to $0.6 million for the three months ended September 30, 2018 and down from $2.8 million for the quarter ended June 30, 2019.

The increase in the provision year-over-year is primarily the result of changes in loan growth, changes in loan mix and loan loss recoveries which were $1.1 million higher in the prior year's first quarter ended September 30, 2018. Overall, loan quality remains strong. Total delinquent loans were 60 basis points at September 30, 2019, down from 73 basis points at June 30, 2019. The 90-day delinquent category also declined on a linked quarter basis to 41 basis points at June 30, 2019 to 37 basis points at September 30, 2019.

Non-performing assets as a percent of total assets were 54 basis points at September 30, 2019, up from 50 basis points at June 30, 2019. The four basis point increase is primarily due to $7.5 million net increase in non-performing loans, which primarily consisted of $4.4 million in single-family loans that remains well secured with low LTVs, and a $ 4.1 million factoring loan. The $4.1 million represents the entire balance due from one of our seasoned factoring customers that we were advancing funds based on invoices from a Fortune 500 company. The repayments have stopped in September 2019 and on September 30th; we provided a specific loan loss allowance for the entire amount.

We had classified the full receivable as doubtful based on our belief that the invoices are not valid. We have not yet completed our investigation of sources of repayment. Moving to operating expenses, our efficiency ratio was 52.44% for the quarter ended September 30, 2019, down from the 53% for the quarter ended June 30, 2019. The banking business segment efficiency ratio declined to 43.93% for the quarter ended June 30, 2019, down from 44.46% for the quarter ended June 30, 2019. Favorably impacting the efficiency ratio this quarter was a $1.4 million refund of FDIC insurance premiums based upon a standard program where the FDIC periodically measures certain Deposit Insurance Fund levels.

We may receive future refunds but we cannot determine if or when such refunds will become available. Stockholders equity increased by $43.2 million to $1, 116 million at September 30, 2019, up from $1,073 million at June 30, 2019. The increase was primarily the result of net income for the three months ended September 30, 2019, up $40.8 million. As Greg noted our Tier -1 ratio was 8.76% for the holding company and 9.12% for the bank at September 30, 2019.

With that, I'll turn the call back over to Johnny Lai.

[Johnny Lai, CFA VP, Corporate Development & IR]

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

[Operator]

[Operator Instructions]

Our first question comes from line of Scott Valentine with Compass Points. Please proceed.

[ScottValentine]

Good evening. Thanks for taking my questions. Just with regards to prepayments, Greg, I think you mentioned the single families' portfolio, so a pretty high prepayments just wondering what you're seeing in the commercial real estate portfolio. We've seen other banks kind of call out the high level of non-bank activity in commercial real estate seeing loans refinanced away.

[GregoryGarrabrants]

Well, we certainly have not seen an increase over the already high level. But we do have a lot of prepayments in our portfolio. A lot of those loans do tend to be relatively short-term. So there are a lot of movements there. We just haven't seen that pick up beyond what the level that it has been in prior quarters. Single-family has stabilized this quarter. It's not -- it has a decline in average balances the prior quarter, and it's stabilized this quarter.

So that may be mitigating a little bit. I think sometimes when we have rate changes those cycles through the portfolio a little bit, but yes that's what we're seeing on those two areas right now.

[ScottValentine]

Okay, thanks. And then just on the operating expense outlook, you mentioned making investments now the universal, the Universal Bank, you mentioned harvesting others those I guess benefits of investment later on. Is there a timeframe for that? I think you mentioned a couple years, I was just wondering if you could provide any more color or detail around the operating expense outlook.

[GregoryGarrabrants]

Sure. What we're attempting to do and I think it is working as we had a very significant ramp up in investment with respect to the IT side, specifically on the coding and development teams to build our platforms. We've been generally trying and I think instead of cutting those teams when we launched our initial platform, we moved on to other strategic objectives. However, that team cost is not substantially increasing in the way that it did when we went to develop all these different software systems. So what I do see is that at the expense base we have relatively, I mean within reason there'll be some movement at a margin of error level.

I believe we can deliver the strategic opportunities that we intend to deliver over this next year. And those include the following. Integrating the Axos Invest platform so that it's accessible to the customers of both the bank and Axos Invest in both ways adding the free trading component through the Axos trading business and launching the banking software through to the clients of the independent broker dealers that we service through Axos Clearing.

And so our goal is to try to get all that done by June of 2020. And I believe we can roughly do that with essentially the existing teams on the IT sides that exist. There may be a few adds here and there but in general they won't be material or substantive. So that's what I mean by the harvesting of those. And there's been a lot of effort put into that. I also think we've spent resources on developing our commercial banking teams. Those commercial banking teams, we'll be adding some commercial banking talent in different areas, but there's also as we've grown that business and some of those teams are still ramping up and although they're being productive, I believe they have an opportunity to reach a full level of productivity without having a disproportionate level of increase in personnel costs.

[Operator]

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

[AndrewLiesch]

Good afternoon, everyone. Can you just provide the dollar amount of deposits that have moved over from EPIC so far?

[AndrewMicheletti]

Yes. That's approximately $580 million roughly.

[AndrewLiesch]

Okay. So you probably --

[AndrewMicheletti]

It's grand total.

[AndrewLiesch]

Yes. You have probably about $200 million to $300 million more left to come over, is that right?

[AndrewMicheletti]

Correct.

[AndrewLiesch]

Okay, got you. And then just in general just more thoughts on the rates you guys are currently paying for deposits. If you can provide more clarity and what you can lower may be on money market and savings accounts and what you have maturing on CDs and what the rates are on those? And what's a repricing benefit you might have as the Fed continues to lower rates?

[GregoryGarrabrants]

We've been talking about the guidance that we're going to be able to provide on those. We really wanted to focus it on an NIM level. We've done work. There's a lot of moving pieces with respect to those areas. Clearly, there is some opportunity on the saving side. Our checking account rates are on average relatively low, don't know how much opportunities there is there. There's -- a lot of the commercial banking relationships have earnings credits associated with them. So there's some automatic linkage, but we -- I think the best way to look at it from our perspective is to target NIM and the next to those we've reaffirmed our guidance in the 3 to 4 range which means clearly we're going to be having some repricing of deposits in that area.

And then it is important to remember too that as we've done it, I think we've done a very good job over the rate cycle maintaining our net interest margin something that maybe not everybody or growing it, maybe not everybody expected. We also now with what we've done we have some -- we have sensitivity on the other side as well because we -- our Axos Clearing deposits aren't all at the institution and they often reprice and they're a source of fee income to the bank as well. So there are impacts both ways with respect to the rate declines.

[AndrewLiesch]

Great, okay, that's helpful. And then just here in your second quarter, so the margin should benefit from the Emerald Advance, as of line of credit product, is that correct?

[GregoryGarrabrants]

Yes. Correct. I think you should go back and look at historic quarters with respect to those products. I think they'll be essentially unchanged. There's no difference whatsoever with respect to what we did with H&R Block last year and what we're going to do with them this year. So it should -- they're --obviously H&R Block will have whatever tax season it has and volumes will flow through, but with respect to the products and the relative stability of what they do, it should have similar impact on us. And there's not been a change of any of the underlying economics with respect to what we're doing this year with them than the prior year.

[Operator]

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

[SteveMoss]

Good afternoon. One sort of on loan origination yields, just wondering what was the origination yield for the quarter? And then if you just go through the CRISL loans and what are you seeing for yields there and average life and so forth?

[GregoryGarrabrants]

Sure. So obvious I'm not going to go through every product, but I think generally around the single-family loans are in a 5.1 range. The CRISL loans were more mid 5, a little higher with lender finance. The terms and durations of the CRISL loans generally are around several years extending sometimes to three years and then the lender finance facilities tend to be a little bit longer, as those are operating businesses. And so they may have different structures sometimes if you're financing pools of assets they'll have some term wind down otherwise they may have a five-year average duration. And have some sort of bullet maturity at the end with respect to those or some sort of automated wind down based on the asset base. And the single-family or 5/1 arms as you know.

[SteveMoss]

It's helpful. And then just in terms of just on capital, your total capital a little bit tighter close to 12% just wondering any thoughts around capital levels there?

[GregoryGarrabrants]

Yes. I think that's something we continue to look at. Obviously, we have to look at both of those ratios and to the extent that the loan books just in to more 100% capital those ratios will converge on each other. So we have to pay attention to those. And there's number of ways to work through and deal with that. With respect to the type of capital that we raise and push down. So I think what you'll probably end up seeing over time is that there's more opportunity. Obviously, particularly in this low rate environment for some sorts of Tier-2 capital probably. And that likely would end up replacing some Tier-1 capital. Although, we have no absolute definitive plans on that, but it is something where we're keeping an eye on and we're aware of.

[SteveMoss]

Okay, that's helpful. And then on the factoring credit that went nonperforming this quarter, just wondering what type of backend client that was?

[GregoryGarrabrants]

It was a staffing company that engaged in a fairly interesting set of activities that impacted a number of institutions.

[SteveMoss]

Okay, all right, that's helpful. And last question for me just on expenses here. Even I guess the FDIC expense clearly benefit total expenses, just wondering I guess get some color around expense run rates in the second quarter. It sounds like reasonably stable going forward here with some modest [Indiscernible]

[GregoryGarrabrants]

Yes. I think that's reasonable stability. I think that looking, we may have some small operating leverage on the efficiency ratio basis, but I think that the real benefits from all the investments we're making are, they're going to take a little time to develop. A lot of the software that we are launching is slated in the June 2020 period. Obviously, it takes a while to get those things going. We're getting benefits from these products on a standalone basis. But I don't think there's really much change we're expecting associated with that. Maybe a little more software expense we're putting in some new risk systems things like that, but they're not particularly material from a top-line perspective.

[Operator]

Our next question comes from the line of Gary Tenner with D.A. Davidson & Co. Please proceed.

[GaryTenner]

Thanks. Guys I had two questions. One on fees, I think in the press release you commented on a bit of a decline in the fee income from the third party banks related to Axos fiduciary services. What -- can you tell me as you get more of those deposits in there should be less of a fee stream from those third party banks for us?

[GregoryGarrabrants]

That's correct and you're -- I'm sorry, go ahead.

[GaryTenner]

No, Greg. I was going to say if you give us a sense of kind of where that number is and what the Delta is as more of those deposits move over?

[AndrewMicheletti]

Sure. So the year-over-year delta was about $1.4 million year-over-year. So when you look at the overall growth in our power or advisory deposits during that period, you come up with a number in the neighborhood of $400 million, $500 million roughly in that period. So 1.3x, 1.4x divided by that amount gets you the rough rate, so north of a 100 basis points roughly.

[GaryTenner]

Okay, thank you. And then the comments regarding the Axos Security Investments LLC, Greg, I think you were talking about that with regard to single families' securitizations. So it sounds like is this a vehicle to allow you to put more through your pipeline and or get a better rate or fee on the authorizations?

[GregoryGarrabrants]

I think there are several purposes for it is that with the single-family market changing a bit and securitization market frankly accepting credits that we really wouldn't accept on the balance sheet. We have an opportunity to originate some of those credits. We neither wish to securitize them through the bank, it's not the most efficient place to do it or and it's also the isolation that we've created with respect to this and securities subsidiaries also beneficial from any residual liability perspective.

So we have a very broad network. We have lots of relationships. There are products that fall outside our portfolio guidelines that can be originated. And there are people who are very eager to buy those.

[Operator]

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

[MichaelPerito]

Hey, good afternoon, guys. I have just two questions I wanted to address and I apologize, I had jump-off call for a second so if I miss something, I'm sorry about. Just on your comments earlier right and then it's kind of seems like fiscal 2019 was a year where you guys were adding lots of products and services and then fiscal 2020 now is going to be a year where you hope to kind of integrate it all and rip out some of the synergies and revenue opportunity. But from our perspective kind of analyzing the company, are there any things you think we should kind of look for whether in the financial statements or other that that will be good indicators of kind of success you guys are having as you move forward in some of those areas?

[GregoryGarrabrants]

Yes. I think that with respect to the securities subsidiaries really looking at starting in the fiscal year 2020 improvements in earnings will be, they'll be gradual but they should be occurring. We have good pipelines on the clearing side. There's lots of operating efficiencies to be gained there. The trading business on the retail side will start to go through the same operational framework and the same operations team that services all the independent broker dealers.

So I think those are things to look for. The interesting thing about the clearing business is it's a nice complement more broadly to the banking business in the sense that it can have it -- it has a positive effect obviously when interest rates go up with respect to the deposits that it has, so it reduces interest rate risk. It also has -- it also has an income decline as a result of lower rates as well. We're able we think to be able to compensate for that with the growth of business. There's good pipelines and then also we think that the invest side and the trading side will be a nice complement for us to develop sustained, long-term relationships on the checking side. So look for a continued deposit growth there as well. So we think all of those areas should be items that you can look for in fiscal 2020.

[MichaelPerito]

Helpful, thanks. And then just wanted to confirm a couple things on the Durbin disclosure. So it was $45 million of pretax revenue at risk just related to H&R Block and then an additional $4 million that relative to the rest of the business pretax. So $29 million total, is that correct?

[GregoryGarrabrants]

Yes. As we described it with the contingencies previous discussed.

[MichaelPerito]

And I guess just trying to reconcile then the $0.18 EPS at risk number, just I was doing some quick back to envelope math there, and I was getting something a little higher, offset for future rates usually that per share impact?

[GregoryGarrabrants]

That was -- that $0.18 was stated and related to the $25 million.

[Operator]

Thank you. We have reached the end of our question-and-answer session. Allow me to hand the floor back over to management for closing remarks.

End of Q&A

[Gregory Garrabrants, President & CEO]

Thank you everyone. Appreciate you following us and we'll talk to you next quarter.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.