Axos Financial - Earnings Call - Q1 2020

Transcript

Speaker 0

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

It is now my pleasure to introduce Johnny Lyon, Vice President, Corporate Development and IR. Thank you. Please begin.

Speaker 1

Thank you, and good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc. First quarter fiscal twenty twenty financial results conference call are the company's President and Chief Executive Officer, Greg Perebrands and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operating results for the three months ended September 3039,

Speaker 2

and they will be available

Speaker 1

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

Speaker 3

that are

Speaker 1

subject to risks and uncertainties and that management may make additional forward looking statements in response to your questions. These forward looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward looking statements as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor protection pertaining to forward looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available on the Investor Relations section of the company's holding company website located at axosfinancial.com for thirty 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.

Speaker 3

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 2020 ended September 3039. I thank you for your interest in Axos Financial, Axos Securities and Axos Bank. Axos announced record net income of $40,800,000 for the fiscal first quarter ended September 3039, up 10.7% from the $36,800,000 earned in the fiscal first quarter ended September 3038.

Earnings attributable to Axos' common stockholders were $40,700,000 or 66% per diluted share for the quarter ended September 3039, compared to $0.58 per diluted share for the quarter ended September 3038. Excluding nonrecurring expenses, non GAAP adjusted earnings and earnings per share were $42,000,000 and $0.68 respectively, for the quarter ended September 3039. Other highlights for the first quarter include ending loans and leases increased by $4.00 $2,000,000 up 4.3% on a linked quarter basis or 17.1% annualized for the 2019 and thirteen point one percent year over year. Excluding our mortgage warehouse, which fluctuates quarter to quarter and 57,900,000 of structured settlement sales this quarter, ending loan balances increased $369,700,000 or 16.3% annualized from June 30 to September 30. Total assets reached $11,800,000,000 at September 3039, up 600,000,000 compared to June 3039, and up $2,000,000,000 from the first quarter in twenty nineteen.

Net interest margin was 3.77% for the quarter ended September 3039, 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 twenty twenty, up four basis points from the corresponding period a year ago. Noninterest income increased 30.2% year over year to $21,500,000 due to the addition of fees from Axos Clearing and higher gain on sale construction settlement sales this quarter. Capital levels remain strong with Tier one 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 2020 compared to 14.98% in the corresponding period last year, reflecting the bank's year over year increase in capital levels.

Our credit quality remains strong with two basis points of net charge offs and a nonperforming asset 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 was 52.44% for the 2020 compared to 53% in the 2019 and fifty one point four seven percent for the first quarter of fiscal twenty nineteen. Our banking business segment efficiency ratio was 43.93%, down slightly from 44.46% in the first quarter of fiscal twenty nineteen. 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.

As the securities segment develops, we believe we will obtain operating leverage in the securities segment. We have made significant investments across our businesses personnel, technology, marketing and infrastructure that will help strengthen our organization as well as increase the mix of fee income business, and we expect that over the next several years, we should be in a harvesting phase of getting these synergies and growth from these initiatives. We originated approximately $1,800,000,000 of gross loans in the first quarter, up 8.3% year over year. Originations for investments increased 8.3 year over year to $1,460,000,000 and originations for sale increased by 8.2% to $327,800,000 Ending loan balances increased by 3.1% year over year to $9,800,000,000 Strong originations by our commercial specialty real estate, commercial and multifamily 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 3039 consisted of 164,000,000 of single family agency eligible gain on sale production, dollars $245,000,000 of single family jumbo portfolio production, dollars 174,000,000 of multifamily and other commercial real estate portfolio production, $858,000,000 of C and I production resulting in $420,000,000 of net C and I loan growth and $50,000,000 of auto and consumer unsecured loan production.

For the first quarter twenty twenty, originations statistics are as follows: The average for single family agency eligible production was $7.46 with an average loan to value of 70%. The average FICO to single family jumbo production was seven twenty eight 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 balance commercial real estate loans was 62.8% and the average debt service coverage was 1.42. The average FICO of the auto production was seven fifty seven.

At September 3039, 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 3039, 62% of our single family mortgages have loan to value ratios at or below 60%, 30% have loan to value ratios between 6170%, 2% have loan to value ratios between 7175%, approximately 5% between seventy five percent and eighty percent and 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 of loans originated. Given increased competition from private securitization of jumbo single family mortgages, we've created a new legal entity within our securities 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 $2,200,000,000 of multifamily loans outstanding at September 3039, 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. Approximately 65% of our multifamily loans are under 60%, 29% are between 60704% are between 7075%, 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 eighteen years we've originated multifamily loans.

Our C and I lending business posted a strong quarter with record quarterly loan originations of $858,000,000 and ending balances increasing by approximately $420,000,000 We're continuing to see good demand from creditworthy borrowers for high quality projects in attractive markets in our lender finance and commercial specialty real estate business. While the average size of our C and I loans are larger than our single family and multifamily 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 in our lender finance or commercial specialty real estate loan books. Our leverage and loan to value ratios or cost ratios in our lender finance, commercial specialty real estate and Cressl loans remain in the 45% to 55% range. Loan demand remains solid with a loan pipeline of $1,100,000,000 at September 3039, consisting of $437,000,000 of single family jumbo loans, dollars 123,000,000 of single family agency mortgages, dollars 190,000,000 of multifamily income property loans and $389,000,000 of C and I loans.

With our diverse mix of lending products, as we grow, we expect our portfolio mix to move slightly away from single family lending into C and I lending and commercial real estate lending, although single family lending will remain an important part of the portfolio. While we anticipate strong originations across most lending categories, our average lending loan balances will fluctuate from quarter to quarter based on the pace of prepayments. Switching to funding. Total deposits increased $3,100,000,000 or 51.6 percent year over year as we repositioned our balance sheet in anticipation of the transfer of 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 Finuciary Services.

At September 3039, 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 at September 3039, compared to 77 at September 3038. Our Security segment, which includes Axos Clearing, our securities clearing and custody business for introducing broker dealers and independent RIAs and Axos Invest, our 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 twenty nineteen. We recently rebranded WiseBandian 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 our independent broker dealer clients increased their risk tolerance and as rates for free cash balances declined. We signed multiyear clearing contracts with a few new corresponding firms, and our sales pipeline remains strong. We also have a number of technology and product initiatives that will be introduced over the next three to twelve months, including integration of Axos Invest inside of our universal digital banking platform, enhanced RIA custodial capabilities and additional premium features for our digital wealth management product 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 where 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 $20,000,000,000 and larger institution, having a local presence in these two large metropolitan centers will help us expand our client 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 seven and non Chapter seven 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 this 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 one leverage ratio was 9.12% at the bank, down from 9.21% at June 3039. The Board approved a new 100,000,000 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 and A or share buybacks. Earlier this month, we announced our agreement with H and R Block I'm

Speaker 4

sorry, earlier this month, we

Speaker 3

renewed our agreement with H and R Block to be the exclusive provider of interest free refund advance loans to H and R Block's customers during the program year ending 06/30/2020. Axos will originate and fund all of H and R Block's interest free refund advance loans to its tax preparation clients for the 2020 tax season.

Speaker 4

This will be the third year

Speaker 3

that Axos will be the exclusive provider of H and R Block's refund advance loans. This one year renewal is separate from the seven year program management agreement entered into on August 3135, and filed with the Securities and Exchange Commission between Axos and affiliates of H and R Block, which provides that Axos will provide H and R Block branded financial services products, known as Emerald prepaid cards, refund transfers and Emerald Advance lines of credit through H and R Block's retail and digital channels. The current terms of the program management agreement end on 06/30/2022, and may be terminated earlier by H and 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 $10,000,000,000 in total assets beginning July 1 of the following year in which the institution exceeds such size as of the December 3139 measurement date. If the total assets of Axos exceed $10,000,000,000 on December 3139, the Durbin Amendment would apply to us starting in July.

If our asset size remains greater than $10,000,000,000 as of December 31, the reduced direct and indirect interchange revenue would begin on 07/01/2020. Although there are a number of options to reduce this loss of interchange revenue or potentially avoid it 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 and 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 and R Block for the loss of its actual interchange income. We estimate that such compensation would be approximately $25,000,000 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 or expected program mitigation related to non H and R Block prepaid BIN sponsors and our own checking accounts is approximately $4,000,000 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 twenty twenty to come up with and execute a solution if one to be mutually agreed to, to mitigate the majority of the compensation we would have to pay H and R Block after the 2020 tax season. We have an established infrastructure and an experienced team that has worked alongside H and R Block to deliver valuable financial services to millions of H and R Block customers over the past four years. We will continue to work with H and 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 and R Block regarding this matter, we'll not be able to discuss additional details regarding our H and 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 to 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.

Speaker 2

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 $40,700,000 or $0.66 per diluted share for the quarter ended September 3039, compared to $0.58 per diluted share for the quarter ended September 3038, and compared to $0.66 per diluted share for the quarter ended June 3039. This quarter, Access 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 3038. Since September 3038, 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 3039, 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 noninterest earning deposits, which increased $6.00 $8,000,000 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 has 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 loan 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 and R Block tax products. Our provision for loan loss for this quarter ended September 3039, was 2,700,000 compared to $600,000 for the three months ended September 3038, and down from $2,800,000 for the quarter ended June 3039. 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 $1,100,000 higher in the prior year's first quarter ended September 3038. Overall, loan quality remained strong. Total delinquent loans were 60 basis points at September 3039, down from 73 basis points at June 3039.

The ninety day delinquent category also declined on a linked quarter basis to 41 basis points from 41 basis points at June 3039 to 37 basis points at September 3039. Nonperforming assets as a percent of total assets were 54 basis points at September 3039, up from 50 basis points at June 3039. The four basis point increase is primarily due to $7,500,000 net increase in nonperforming loans, which primarily consisted of $4,400,000 in single family loans that remain well secured with low LTVs and a $4,100,000 factoring loan. The $4,100,000 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 stopped in September 2019.

And on September 30, we provided a specific loan loss allowance for the entire amount. We have 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 3039, down from the 53% for the quarter ended June 3039.

The banking business segment efficiency ratio declined to 43.93 for the quarter ended June 3039, down from 44.46 for the quarter ended June 3039. Favorably impacting the efficiency ratio this quarter was a $1,400,000 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 $43,200,000 to $1,116,000,000 at September 3039, up from $1,073,000,000 at June 3039. The increase was primarily the result of net income for the three months ended September 3039 of 40,800,000.0 As Greg noted, our Tier one capital ratio was 8.76 for the holding company and 9.12% for the bank at September 3039.

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

Speaker 1

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

Speaker 0

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Scott Valentin with Compass Point. Just

Speaker 3

with regard to prepayments, Greg, I think you mentioned the single family portfolio saw 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. 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's a lot of movement 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 had 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 that cycles through the portfolio a little bit. But yes, that's what we're seeing on those two areas right now. Okay. And then just on the operating expense outlook, you mentioned you're making investments now, the Universal Bank. And you mentioned harvesting those, I guess, benefits of investment later on.

Is there a time frame for that? I think you mentioned a couple of years. I was just wondering if you can provide any more color or detail around the operating expense outlook. Sure. So what we're attempting to do, and I think it is working, is 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 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 Access Invest in both ways, adding the free trading component through the Access 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.

And I believe we can roughly do that with essentially the existing teams on the IT side 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 will be adding some commercial banking talent in different areas. But there's also as we've grown that business, 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. Okay. All right.

Thanks very much.

Speaker 0

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

Speaker 4

Can you just provide the dollar amount of deposits that have moved over from EPIC so far?

Speaker 2

Yes. That's approximately $580,000,000 roughly.

Speaker 4

So you probably only have Yes. So you probably only have, like, 200 to 300 more left to come over. Is that right?

Speaker 3

Correct.

Speaker 4

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

Speaker 3

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 a NIM level. We've done the work. There's a lot of moving pieces with respect to those areas. Clearly, there is some opportunity on the savings side.

Our checking account rates are on average relatively low. Don't know how much opportunity there is there. A lot of the commercial banking relationships have earnings credits associated with them, there's some automatic linkage. But we I think the best way to look at it from our perspective is to target a NIM. And the max of those, we reaffirmed our guidance in the 3.8 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 I think we've done a very good job over the rate cycle maintaining our net interest margin, something that maybe not everybody or even 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 actual 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's impacts both ways with respect to the rate declines.

Speaker 4

Right. Okay. That's helpful. And then just here in your second quarter, the so margin should benefit from the Emerald Advance, the line of credit product. Is that correct?

Speaker 3

Yes, correct. I I think you should if you 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 and R Block last year and what we're going to do with them this year. So it should we're there obviously, H and 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.

Speaker 4

Thank you. I'll step back.

Speaker 3

Thank you.

Speaker 0

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

Speaker 3

Good afternoon.

Speaker 2

Want to

Speaker 3

start off on loan origination yields. Just wondering what were the origination yields for the quarter? And then if you just go through the Cressle loans and what are you seeing for yields there and average life of surplus? Sure. So I'll just I'm not going go through every product, but I think generally around the single family loans are in the 5.1% range.

The Cressle loans were more mid-5s, a little higher with lender finance. The terms and durations of the Cressle 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 five-one arms, as you know. Okay. That's helpful. And then just in terms of just the on capital here, total capital looks a little bit tighter, close to 12%. Just wondering any thoughts around capital levels there?

Speaker 2

Yes. No, I

Speaker 3

think that 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 book shifts into more 100% capital, those ratios will converge on each other. So we have to pay attention to those. And there's a 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 two capital probably. And that likely would end up replacing some Tier one capital, although we have no absolute definitive plans on that. But it is something we're keeping an eye on and we're aware of. Okay. That's helpful.

And then on the factoring credit that went nonperforming this quarter, just wondering what type of factoring client that was? It was a staffing company that engaged in a fairly interesting set of activities that impacted a number of institutions. Okay. All right. That's helpful.

And last question for me, just on expenses here. I

Speaker 4

guess

Speaker 3

the FDIC expense clearly benefited total expenses. Just wondering if I could get some color around expense run rate in the second quarter. It sounds like reasonably stable going forward here with some modest Yes. I there'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're 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.

Our

Speaker 0

next question comes from the line of Gary Tenner with D. A. Davidson and Co.

Speaker 3

Guys, had two questions. One on fees. I think in the press release, you've 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, correct?

Speaker 2

That's correct. And you're sort

Speaker 3

of I'm sorry, go ahead. No, go ahead. Was just going to say if you could give us a sense of kind of where that number is and what the delta is as more of those deposits move over.

Speaker 2

Sure. So the year over year delta was about $1,400,000 year over year. So when you look at the overall growth in our advisory deposits during that period, you come up with a number in the neighborhood of $400,000,000 400,000,000 $500,000,000 roughly in that period. So 1.3, 1.4 times four divided by that amount gives you the rough rate, so north of 100 basis points, roughly.

Speaker 3

Okay. And then the comments regarding Gasior's Security Investments LLC. Greg, I think you were talking about that with regard to single family 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 securitizations? I think there's several purposes for it.

It's 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 just not the most efficient place to do it or and it's also the isolation that we've created with respect to the securities subsidiary is 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. Great. Thank you.

Speaker 0

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

Speaker 3

Hi, Michael. Hey, Mike.

Speaker 4

Hey, good afternoon, guys. Have just two questions I wanted to address, I apologize. I had to jump off call for a second, so if I missed something, I'm sorry. But just on the your comments earlier, Greg, and it kind of seems like fiscal twenty nineteen was a year where you guys were adding lots of products and services, and then fiscal twenty twenty now is going to be a year where you hope to kind of integrate it all and rip out some of synergies and revenue opportunities. 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 will be good indicators of kind of the success you guys are having as you move forward in some of those areas?

Speaker 3

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, it's a nice complement more broadly to the banking business in the sense that it can have a 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 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 continued deposit growth there as well. So we think all of those areas should be items that you can look for fiscal twenty twenty.

Speaker 4

Helpful. Thanks. Chris, wanted to confirm a couple of things on the Durbin disclosure. So it was $25,000,000 of pretax revenue at risk just related to H and R Block and then an additional $4,000,000 that's relative to the rest of the business pretax, so 29,000,000 total. Is that correct?

Speaker 3

Yes. It's as we described it with the contingencies previously discussed.

Speaker 4

And I guess just trying to reconcile then the $0.18 EPS at risk number, just I was doing some quick back to the envelope math here, I was getting something a little higher. For consideration side, could you just calculate that per share impact?

Speaker 3

That $0.18 was stated and related to the 25,000,000 Thank

Speaker 0

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.

Speaker 3

Thank you, everyone. I appreciate you following us, we'll talk to you next quarter.

Speaker 0

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