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Axos Financial, Inc. (NYSE:AX)
Q1 2020 Earnings Call
Oct 29, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Axos Financial Inc. First Quarter 2020 Earnings Results. [Operator Instructions]

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

Johnny Lai -- Vice President Corporate Development and Investor Relations

Thank you, and good afternoon everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc.'s first quarter fiscal 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 the financial, and operating results for the three months ended September 30 2019 and they will be available to answer questions after the prepared remarks. Before I begin I would like to remind listeners that prepared remarks, made on this call may contain forward-looking statements, that are subject to risks and uncertainties and that management, may make additional forward-looking statements in response to your questions.

These forward-looking statements are made on the basis of current views, and assumptions of management regarding future events and performance. Actual results could differ materially, from those expressed or implied in such forward-looking statements, as a result of risks and uncertainties. Therefore the company claims the safe harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast and there will be an audio replay available in 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 and Chief Executive Officer

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 30 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 30 2019 up 10.7% from the $36.8 million earned in the fiscal first quarter ended September 30 2018. Earnings attributable to Axos' common stockholders, were $40.7 million or 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. Excluding nonrecurring expenses non-GAAP adjusted earnings and earnings per share were $42 million and $0.68 respectively for the quarter ended September 30 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 restructured 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 in 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 the corresponding period a year ago. Noninterest 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 remained 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 first quarter of 2020 compared to 14.98% in the corresponding period last year reflecting the bank's, year-over-year increase in capital levels.

credit quality remains strong with two basis points in that charge, and a non performing assets a total asset ratio of 54 basis points this quarter. Our allowance for low loss represents 105.9% coverage of our non performing loans and leases. Our efficiency ratio was 52.44% for the first quarter of 2020 compared to 53% in the fourth quarter of fiscal 2019 and 51.47% for the first quarter. fiscal 2019 our banking business segment efficiency ratio was 43.93%, down slightly from 44.46% in the first quarter of fiscal 2019. The primary driver growth year over year increase in our reported efficiency ratio was the inclusion of the clearing a digital wealth management business and hire depreciation and amortization expenses related to software development and deposit acquisitions. Security segment develops, we believe, we will attain operating leverage in the security segment. We have made significant investments across our businesses and personnel technology marketing and infrastructure that will strengthen our organization as well as increase the Mexico City income business. And we expect that over the next several years, we should be in a harvesting phase, getting new synergies and growth from these initiatives. We originated approximately 1.8 billion of gross lawns in the first quarter, up 8.3% year-over-year.

Originations for investments increased 8.3% year-over-year to $1.46 billion and originations 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 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 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 C&I production resulting in $420 million of net C&I 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 746 with an average loan-to-value of 70%; the average FICO to single-family jumbo production was 728 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 in the auto production was 757. 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% 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 security subsidiary access securities investments LLC. In order to expand a type of jumbo single family lending products. We can originate and sell to generate the 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 for Representing approximately 22% of our total long book growth and 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 for time origination, approximately 65% of our multifamily loans are under 60% 29% in 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 about 75%. So lifetime credit losses and originated multifamily loan portfolio are less than one basis points of loan origination over the 18 years we've originated multifamily loans.

Our C&I leading 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 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&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 on 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 CRISIL loans remain in the 45% to 55% range. Loan demand remains solid with a loan pipeline of $1.1 billion at 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 C&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&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 $3.1 billion or 51.6% 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 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 at September 30 2019 compared to 77% at September 30 2018.

Our securities 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 and 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 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 12 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 L.A. and Midtown Manhattan office markets where we already had a significant custom 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 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 30 2019. The Board approved 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 we announced our agreement with H&R Block -- I'm sorry 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 and 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 1-year renewal is separate from the 7-year program management agreement entered into on August 31 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 through H&R Block's retail and digital channels. The current terms of the program management agreement end on June 30 2022 and may be 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 1 of the following year in which the institution exceeds such size as of the December 31 2019 measurement date. If the total assets of Axos exceed $10 billion on December 31 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 31 the reduced direct and indirect interchange revenue will begin on July 1 2020.

Although there 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 or expected program mitigation related to non-H&R Block prepaid BIN sponsors and our own checking accounts is approximately $4 million pre-tax 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'll not be able to discuss additional detail regarding our H&R Block program management agreement until our negotiations conclude. We were 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.

Andrew J. Micheletti -- Executive Vice President and Chief Financial Officer

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 share 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 noninterest-bearing 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 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&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 -- from 41 basis points at June 30 2019 to 37 basis points at September 30 2019. Nonperforming 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 nonperforming loans which primarily consisted of $4.4 million in single-family loans that remain 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. Their repayments have stopped in September 2019 and on September 30 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 yet from when such refunds will become available. Stockholders' equity increased by $43.2 million to $1116000000 at September 30 2019 up from $1073000000 at June 30 2019. The increase was primarily the result of net income for the three months ended September 30 2019 of $40.8 million. As Greg noted our Tier one capital 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.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Scott Valentin with Compass Point. Please proceed.

Scott Valentin -- Compass Point -- Analyst

All right, good evening. Thanks. Taking my question, Just 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 nonbank activity in commercial real estate seeing loans refinanced away.

Gregory Garrabrants -- President and Chief Executive Officer

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 has declined in average balances to prior quarter. 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.

Scott Valentin -- Compass Point -- Analyst

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.

Gregory Garrabrants -- President and Chief Executive Officer

Sure. So 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 a 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 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 -- we'll be adding some commercial banking talents 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 cost.

Okay. All right. Thanks very much.

Operator

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

Andrew Liesch -- Sandler O'Neill -- Analyst

Afternoon everyone. Can you just provide the dollar amount of deposits that have moved over from Epiq so far?

Andrew J. Micheletti -- Executive Vice President and Chief Financial Officer

Yes. That's approximately $580 million roughly.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. So, you probably only have...

Gregory Garrabrants -- President and Chief Executive Officer

So it's the grand total.

Andrew Liesch -- Sandler O'Neill -- Analyst

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

Andrew J. Micheletti -- Executive Vice President and Chief Financial Officer

Correct.

Andrew Liesch -- Sandler O'Neill -- Analyst

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

Gregory Garrabrants -- President and Chief Executive Officer

Well, 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. 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 a NIM. And the max of those we reaffirmed our guidance in the 3.80% 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 they've been 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's impacts both ways with respect to the rate declines.

Andrew Liesch -- Sandler O'Neill -- Analyst

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

Gregory Garrabrants -- President and Chief Executive Officer

Yes. Correct. I mean 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&R Block last year and what we're going to do with them this year. So it should -- we're -- 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 a 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.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. Thank you. I'll step back.

Gregory Garrabrants -- President and Chief Executive Officer

Thank you.

Operator

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

Steve Moss -- B. Riley FBR -- Analyst

Good afternoon. I wanted to start off on low origination yields. Just wondering what were the origination yields for the quarter? And then if you just go through the CRISIL loans and what are you seeing per yields there and the average life and so forth?

Gregory Garrabrants -- President and Chief Executive Officer

Sure. So obviously 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 CRISIL loans were more mid 5s a little higher with lender finance. The terms and durations of the CRISIL loans generally 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 your financing pools of assets they'll have some term wind-down otherwise they may have a 5-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 are a 5.1 arms as you know.

Steve Moss -- B. Riley FBR -- Analyst

Okay. That's helpful. And then just in terms of -- in terms of just the -- on capital here total capital a little bit tighter close to 12%. Just wondering any thoughts around capital levels there?

Gregory Garrabrants -- President and Chief Executive Officer

Yes -- no I 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's shifting to 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 a 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, the slow rate environment for some sorts of Tier two capital probably. And that 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.

Steve Moss -- B. Riley FBR -- Analyst

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

Gregory Garrabrants -- President and Chief Executive Officer

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

Steve Moss -- B. Riley FBR -- Analyst

Okay. All right. That's helpful. And a last question for me just on expenses here. I guess the FDIC expense clearly benefit total expenses. Just wondering if you could give some color around expense run rate in the second quarter? It sounds like reasonably stable going forward here with some modest stability...

Gregory Garrabrants -- President and Chief Executive Officer

Yes I think 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 as slated in June 2020 period. Obviously it takes a while to get those things going. But, we're getting benefits from these products on a stand-alone 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.

Steve Moss -- B. Riley FBR -- Analyst

All right, thank you very much.

Gregory Garrabrants -- President and Chief Executive Officer

Thank you.

Operator

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

Gary Tenner -- D.A. Davidson & Co -- Analyst

Thanks. Guys I had two questions. One on fees. I think in the press release you had 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 the fee stream from those third-party banks correct?

Gregory Garrabrants -- President and Chief Executive Officer

That's correct. And you're sort of, I'm sorry. Go ahead.

Gary Tenner -- D.A. Davidson & Co -- Analyst

No. Go ahead. I 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?

Andrew J. Micheletti -- Executive Vice President and Chief Financial Officer

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 advisory deposits during that period you come up with a number in the neighborhood of $400 million, $500 million roughly in that period. So 1.3 1.4 x four divided by that amount gives you the rough rate. So north of 100 basis points roughly.

Gary Tenner -- D.A. Davidson & Co -- Analyst

Okay. And then the comments regarding the Axos Securities 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?

Gregory Garrabrants -- President and Chief Executive Officer

I think, there's 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 just not the most efficient place to do it, and it's also the isolation that we've created with respect to the securities subsidiaries also beneficial for many 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.

Gary Tenner -- D.A. Davidson & Co -- Analyst

Great, thank you.

Operator

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

Gregory Garrabrants -- President and Chief Executive Officer

Hi, Michael.

Andrew J. Micheletti -- Executive Vice President and Chief Financial Officer

Hey, Mike.

Michael Perito -- KBW -- Analyst

Hey, good afternoon, guys. I have, just two questions, I wanted to address and I apologize I had to jump off the call for a second so if I missed something I'm sorry. But just on the -- your comments earlier Greg, and this 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 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 that will be good indicators of kind of the success you guys are having as you move forward in some of those areas?

Gregory Garrabrants -- President and Chief Executive Officer

Yes. I think that with respect to the securities subsidiaries really looking at, starting in the fiscal year 2020 improvements in earnings, 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 the 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 in fiscal 2020.

Michael Perito -- KBW -- Analyst

Helpful. And then, just wanted to confirm a couple of things on the Durbin disclosure. So it was $25 million of pre-tax revenue at risk just related to H&R Block and then an additional $4 million that relative to the rest of the business pre-tax. So $29 million total is that correct?

Gregory Garrabrants -- President and Chief Executive Officer

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

Michael Perito -- KBW -- Analyst

And I guess just trying to reconcile then the $0.18 EPS average number just I went through some quick back-of-the-envelope math here and I was getting something a little higher there. Are there any other offsets or future rates that you're using to calculate that per share impact?

Gregory Garrabrants -- President and Chief Executive Officer

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

Michael Perito -- KBW -- Analyst

Okay, thank you.

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.

Gregory Garrabrants -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Johnny Lai -- Vice President Corporate Development and Investor Relations

Gregory Garrabrants -- President and Chief Executive Officer

Andrew J. Micheletti -- Executive Vice President and Chief Financial Officer

Scott Valentin -- Compass Point -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

Steve Moss -- B. Riley FBR -- Analyst

Gary Tenner -- D.A. Davidson & Co -- Analyst

Michael Perito -- KBW -- Analyst

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