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Axos Financial Inc (AX) Q2 2019 Earnings Conference Call Transcript

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Axos Financial Inc (NYSE: AX)
Q2 2019 Earnings Conference Call
January 29, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, greetings and welcome to the Axos Financial second quarter 2019 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the program, please push *0 on your telephone keypad. As a reminder, this program is being recorded.

It is now my pleasure to introduce your host, Johnny Lai, VP, Corporate Development and IR. Thank you. You may begin.

Johnny Lai -- Vice President of Corporate Development and Investor Relations

Thanks, Adam. Good afternoon, everyone. Thanks for your interest in Axos Financial and Axos Bank. Joining us today for Axos Financial Inc second quarter 2019 financial results conference call are the company's President and Chief Executive Officer Greg Garrabrants and Executive Vice President and Chief Financial Officer Any Micheletti. Greg and Andy will review and comment on the financial and operational results for the three and six months ended December 31st, 2018 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.

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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 a safe harbor protection pertaining to forward-looking statements contained in the Private Security 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 website located at Axos Financial for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release.

At this time, I would like to turn the call over to Greg for his opening remarks.

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 second quarter of Fiscal 2019 ended December 31st, 2018. I thank you for your interest in Axos Financial and Axos Bank.

Axos announced record net income of $38.8 million for the fiscal second quarter ended December 31st, 2018, up 22.7% from the $31.7 million earned in the fiscal second quarter ended December 31st, 2017 and up 5.4% when compared to the $36.8 million earned in the prior quarter.

Earnings attributable to Axos's common stockholders were $38.8 million or $0.62 per diluted share for the quarter ended December 31st, 2018, a 26.5% increase from the $0.49 per diluted share for the quarter ended December 31st, 2017 and $0.58 per diluted share for quarter ended September 30th, 2018.

Excluding non-recurring expenses, non-GAAP adjusted earnings and earnings per share were $39.6 million and $0.63 respectively for the quarter ended December 31st, 2018. Other highlights of the second quarter included ending loan and lease balances increasing by $363 million, up 4.2% on linked quarter basis or 17% annualized from the first quarter of 2019.

Total assets remained unchanged from $9.8 billion on September 30th, 2018 and up $0.9 billion in the second quarter of 2018. Net interest margin was 3.87% for the quarter ended December 31st, 2018, up 11 basis points from 3.76% in the first quarter of Fiscal 2019. Average loan yield increased by 9 basis points to 5.6% compared to 5.51% in the quarter ended December 30th, 2018.

Excluding the impact from H&R Block seasonal loan products and excess liquidity and our subordinated debt, net interest margin in the quarter ended December 31st, 2018 would have been approximately 3.83% compared to the 3.92% of the second quarter of 2018 and 3.76% in the first quarter of 2019.

Capital levels remain strong with tier one leverage ratio of 9.03% of the bank and 9.41% of the holding company, both well above our regulatory requirements. We took steps to redeploy some of our excess capital this quarter, buying back $48 million of common stock and an average price of $28.00 per share. Return on equity was 15.29% for the second quarter of 2018 compared to 14.37% in the corresponding period last year, reflecting the bank's year over year increase in earnings.

Our credit quality remains strong with 6 basis points of net charge-offs and a non-performing asset to total asset ratio of 53 basis points this quarter. We received approximately $1 million of payments in the quarter ended December 31st, 2018 for refund advance loans originated during the 2018 tax season, which offset the increase in our loan loss provision this quarter.

Our allowance for loan loss represents 124.9% coverage of our non-performing loans and leases. We have a small number of loans to borrowers secured by real estate properties located in areas affected by wildfires and mudslides in California. Our net exposure after insurance appears de minimis.

Our efficiency ratio is 46.47% for the second quarter of 2019 compared to 51.47% in the first quarter of Fiscal 2019 and 40.28% for the second quarter of Fiscal 2018. We incurred one-time expenses related to mergers and acquisitions this quarter. Excluding $1 million of deal-related expenses, the efficiency ratio would have been 45.5% of the second quarter of 2019.

We originated approximately 2.5 billion of gross loans in the second quarter, up 20% year over year. Originations for investment increased 35.6% year over year to $1.8 billion and originations for sale decreased 11.1% to $610.2 million. Ending loan balances increased by 14.5% year over year to $9 billion, led by strong growth in single-family jumbo, multi-family, other commercial real estate, and C&I lend to finance.

Our loan production for the second quarter ended December 31st, 2018 consisted of $81 million of single-family agency-eligible gain on sale production, $431 million of single-family jumbo portfolio production, $182 million of multi-family and other commercial real estate portfolio production, $1.043 billion of C&I production, $42 million of auto and consumer unsecured lending production, $401 million of Emerald Advance loan originations, and $30 million of seasonal H&R Block franchise loans.

The second quarter 2019 originations are as follows -- the average FICO for a single-family agency-eligible production was 744 with an average LTV of 69.3%. The average FICO for the single-family production was 730 with an average loan to value ratio of 64.1%. The average loan to value ratio of the originated multi-family loans was 51.5% and the debt service coverage was 1.27%.

The average loan to value ratio of the originated small balance commercial real estate loans was 49.2% and the debt service coverage was 1.31%. The average FICO score of our auto production was 763.

On December 31st, 2018, the weighted average loan to value ratio of our entire portfolio of real estate loans was 56%. We had approximately $4.3 billion of single-family loans representing approximately 48% of our loan portfolio. Lifetime credit losses in our originated single-family loan portfolio is 4 basis points of loans originated.

We had approximately $1.9 billion of multi-family loans outstanding on December 31st, 2018, representing 21% of our total loan book. The rated average loan to value ratio of our multi-family loan book was 53% based on the appraised value for time of origination. The lifetime credit losses in our originated multi-family portfolio is less than 1 basis point of loans originated.

We had no losses in our C&I business since inception other than our equipment finance group with approximately $160 million of outstanding balances on December 31st, 2018 and 27 basis points of cumulative net charge-off since we entered the business in March 2016 through acquisition. We had only 43 basis points of cumulative loss on our originated portfolio of auto loans since we entered the business approximately three and a half years ago.

Loan demand remains solid overall and across most of our lending segments with the exception of single-family agency mortgages, which are down from prior quarters as it is across the industry generally. Our loan pipeline was $1.12 billion at December 31st, 2018, consisting of $420 million of single-family jumbo loans, $58 million of single-family agency-eligible mortgages, $116 million of income property loans, and $527 million of C&I loans.

We continue to gradually rebalance our portfolio away from jumbo single-family lending into C&I and commercial real estate lending. While we anticipate strong originations across most lending categories, our average and ending loan balances will fluctuate from quarter to quarter based on the pace of pre-payments.

Switching to funding, total deposits increased by $2.3 billion quarter over quarter as we repositioned our balance sheet in anticipation of transfer deposits we acquired from Nationwide in late November. Total non-interest-bearing deposit balances were approximately $1 billion on December 31st, 2018, up by $139.5 million from September 30th, 2018. The increase in non-interest-bearing deposits was driven by the addition of Chapter 7 bankruptcy deposits and other commercial deposits.

On December 31st, 2018, approximately 30% of our deposit balances with business and consumer checking accounts, 24% money market accounts, 5% IRA accounts, 5% savings accounts, and 4% prepaid accounts. Checking and savings deposits represented 67% of total deposits on December 31st, 2018 compared to 77% on September 30th, 2018. December 31st, 2018 deposit max was impacted by the addition of approximately $1.7 billion of timed deposits from Nationwide.

We deployed some of our excess capital across a variety of businesses and initiatives in the past 12 months. We made significant progress in our ongoing efforts to diversify and grow our deposit franchise and seed-based businesses with four separate transactions.

First, we completed the acquisition of approximately $2.4 billion of deposits from Nationwide Bank in November, adding approximately 80,000 new accounts and over 40,000 new relationships to access. These deposits comprised of $1.7 billion of retail CDs and $700 million of checking, savings, and money market deposits when the transaction closed on November 16th of 2018 helped increase our core deposits and reduce our cost of funds.

With the successful Nationwide deposit conversion behind us, we were excited to start our strategic partnership with Nationwide to offer co-branded banking and insurance products and services to Nationwide's associates, policy holders, and general market customers. The agreement with an initial term of five years focuses primarily on a variety of consumer lending in deposit products.

We intend to leverage our flexible digital banking platform and our collective marketing expertise to make it easy and convenient for existing and new customers to purchase banking and insurance products from Axos and Nationwide. The collective teams are working through data and marketing strategies to prioritize products and channels. We see additional opportunities to offer banking products and services to Nationwide's over 600,000 small business customers that are included in the partnership scope.

While we incur incremental marketing expense related to our partnership with Nationwide, the costs will be well-controlled and largely success-based. We look forward to working with our partners at Nationwide to make this collaboration a success.

The second strategic action we took was the acquisition of COR Clearing, a leading independent clearing firm that serves approximately 60 correspondent broker dealers with over 90,000 underlying client accounts. The acquisition provides an experienced team, a profitable business, and an established technology platform from which we intend to build our securities business.

COR generated approximately $47 million in revenue in their fiscal year ended June 30, 2018, including $34.7 million of fee-based revenue. On a pro forma basis, the addition of COR would have increased our fiscal 2018 fee income from $70.9 million to $105.6 million, representing an increase of approximately 49%. They also earned about $12 million in margin lending and interest income from client deposits placed at other banks.

The $470 million of low-cost off-balance sheet deposits provide us with the flexibility to reduce our cost of funds by bringing some or all deposits to our bank or keeping them at partner banks and earning high-margin fee income streams that are tied to short-term interest rates.

After spending the last four years researching the clearing custody and asset servicing marketplace, we see opportunities to provide a more holistic service offering to small and medium-size independent broker-dealers that will help improve the efficiency of their back office and enable advisors and brokers to successfully transition from a commission-based to a fee-based model.

We also believe that we can expand COR's revenue and profitability by providing more capital, enhancing their sales and marketing capabilities, and growing existing high-margin services such as securities and margin lending. We are evaluating opportunities to add new banking and non-banking services to COR's existing clients and expanding into adjacent markets such as RIA custody, securities-based lending, and robo-advisory services.

Our projection that the COR acquisition will be accretive to earnings per share by approximately 6% in the 2020 fiscal year beginning July 1st of 2019 assumes no benefit from entering new markets and cost synergies or accelerated growth. The clearing business runs at a higher efficiency ratio than Axos Bank but is significantly more capital efficient.

For comparative purposes, COR generated approximately $47 million in revenue and $10.4 million of adjusted net income in the 12 months ended June 30th, 2018. COR had $22.5 million of operating expenses, excluding non-recurring legal and regulatory costs, which translated into an efficiency ratio of approximately 70%.

Given the capital-efficient nature of their clearing business, COR had a return on equity of approximately 40.5% for their Fiscal 2018. Starting in the quarter ended March 31st, 2019, we will provide consolidated and segment reporting for access and COR so that investors can better track the underlying financial metrics of Axos Financial's bank and securities segments.

We received all required regulatory and shareholder approval and closed the COR transaction yesterday. I'd like to welcome the 131 team members joining us from COR. We intend to rebrand the firm to Axos Clearing over the next three to six months.

The third strategic action we made this year from an M&A perspective was the addition of the trustee and fiduciary service business from Epiq in April 2018, adding a new source of low-cost COR deposits. We added an experienced team of established relationships with bankruptcy trustees and fiduciaries nationwide and a technology platform that will integrate and improve over time to serve not only Chapter 7 bankruptcy trustees, but also non-seven trustees and fiduciaries.

When the deal was announced, the acquired business had approximately $1 billion of Chapter 7 bankruptcy and non-seven deposit balances held at seven bank partners on behalf of clients serviced through approximately 400 trustees using Epiq software. Through the hard work of our team members, we have transitioned dozens of trustees with over $200 million of deposit balances to our bank with more slated to transition in the coming weeks and months.

Axos Fiduciary Services fits our strategic vision of providing banking services to a specialized industry vertical through a low-cost scalable software and service-enabled model. We're committed to serving trustees in this market and expanding our products and service offering over time.

Our most recent transaction announced in December 2018 is the acquisition of approximately $225 million in deposits from MWA Bank. Similar to our prior deposit acquisition from Principal, H&R Block, and Nationwide, the parent company of MWA Bank is looking to wind down their OCC charter and focus on their core business. We'll be adding approximately 25,000 new accounts with $225 million of low-cost deposits, including $194 million of checking, savings, and money market balances, and $31 million of time deposits from MWA bank.

We will not pay a premium on the deposits for acquiring and will not assume any assets, employees, or branches from MWA bank. The deposit balances are small relatively compared to our $8.3 billion of deposits. The national branchless nature of these accounts are a terrific fit for us and help us improve our funded cost. The OCC approved our acquisition of MWA's bank deposits last week. We are excited to offer our full suite of banking and cash management services, MWA Bank's retail and business customers, and fraternal chapters when the transaction closes in mid-March 2019.

Our net interest margins have held up well, improving by 11 basis points in September 2018 to December 2018 quarter, even though we've only realized partially from two of our four deposit related acquisitions. Deposit betas continue to increase across the industry and the flat yield curve is generally creating downward pressure on net interest margin from any banks.

We remain focused on closing the announced acquisitions, transitioning the acquired no or low-cost deposits to our bank, and growing non-interest-bearing deposits through our commercial, small business, and specialty deposit verticals. From an asset perspective, we continue to grow our asset-backed commercial loan portfolios, which have premium yields relative to our multi-family and jumbo single-family mortgages and look for opportunities to enhance the yield in our relatively modestly sized securities book.

Since the Fed began raising interest rates, we have been able to maintain our core net interest margin in a relatively tight band of 3.8% to 4%. If you include the H&R Block related businesses, our reported net interest margins have steadily increased since the Fed started raising rates, from 3.9% in Fiscal Year 2016 to 3.95% in Fiscal Year 2017 to 4.11% in Fiscal Year 2018. Our proactive actions to diversify both our funding and asset generation capabilities have held up well and should hold up well in the future irrespective of Fed actions.

The 2018 and 2019 tax season marks the fourth year of our seven-year partnership to provide various banking and payment services to H&R Block's clients. In the quarter ended December 31st, 2018, we originated approximately $401 million refund advance unsecured consumer loans and $30 million of H&R Block franchisee loans. Since January 2nd, we started offering refund advance loans to H&R Block customers for the second consecutive year as Block's exclusive provider of refund advance loans.

Refund advance loans are interest-free, no-fee advances secured by qualified taxpayers refunds. We received fees from H&R Block bank based on the principal amount of refund advance loans we originate. Similar to prior years, we expect the seasonal surge in refund advance loans, refund transfers and emerald cards to result in the significant quarter over quarter increase in our fee income and non-interest-bearing deposits in the quarter ended March 31st.

While still very early in the tax season, we have not experienced any disruption in the tax-related businesses as a result of the partial government shutdown. We look forward to completing another successful tax season helping H&R Block's customers.

Our capital ratio remains strong, despite recent action to deploy some of our excess capital into accretive M&A transactions and share repurchases. We spent $48 million of excess capital in the December quarter to repurchase approximately $1.7 million of common stock. Our tier one leverage ratio was 9.41 at the holding company and 9.03 at the bank at December 31st, 2018, more than sufficient to fund COR and the WiseBanyan acquisition without raising capital.

Our priorities for excess capital have not changed. We will continue to fund organic growth and investments in our business and consider opportunistic share repurchases, accretive M&A transactions, and potentially a dividend.

Last quarter, we announced a small but strategic acquisition of a digital advisor and personal financial management platform, WiseBanyan. WiseBanyan offers a comprehensive and user-friendly platform for individual investors to manage their finances and create custom investment portfolios tailored to meet their life goals. We diligenced dozens of robo-advisory firms, business models, and third-party technology providers through the course of our evaluation.

What we determined was the economic model that most fin-techs currently have, limited asset-based revenue streams with high customer acquisition costs and limited control over the technology stack, utilization of a third-party clearing firm, and a limited ability to monetize the deposit and lending relationship is an unsustainable one. The combination of WiseBanyan combined with COR's back office platform accelerates our time to market by one to two years and provides us with the essential components to add a profitable and scalable digital wealth management business to our consumer product offering.

Over time, we will integrate the wealth advisory services into the universal digital bank, providing an integrated banking and wealth management experience to our clients and to WiseBanyan's clients as well. We look forward to closing the WiseBanyan transaction in the next few months.

In closing, we are seeing the tangible benefits from investments we are making in technology personnel, infrastructure, and new businesses. The addition of low-cost deposits from Nationwide and Epiq help keep our deposit costs essentially flat quarter over quarter despite only a partial quarter's impact from nationwide. Investments in our small balanced commercial real estate and asset-based commercial lending groups resulted in $363 million of sequential growth in net loan balances this quarter.

The deployment of our universal digital banking platform with additional features such as personal financial management, biometric authentication, personalization, and gamification slated for rollout in the next 12 months will allow us to continue to improve our user experience and become more relevant to our customers and partners. With control of our platform, we will increase the value of our product offering through the additional of wealth management services to the universal digital bank to differentiate our consumer product offering.

The addition of Axos Fiduciary Services and COR and our multi-year partnership with Nationwide further expands our product capabilities, distribution channels, and revenue sources. The opportunities we have are abundant. We will continue to prudently prioritize and allocate capital and resources with a focus on ensuring that we're building a technologically forward customer-centric, consumer and commercial bank as well as developing our clearing business to better serve our existing customers and to expand beyond our current market.

Now, I'll turn the call over to Andy, who will provide additional detail on our financial results.

Andrew Micheletti -- Executive Vice President and Chief Financial Officer

Thanks, Greg. First, I wanted to note that in addition to our press release, our 10-Q was filed with the SEC today and is available online through Edgar or through our website, axosfinancial.com. Second, I will quickly highlight a few areas rather than go through every individual financial line item. Please refer to our press release or 10-Q for additional details.

As Greg noted earlier, for the quarter ended December 31, 2018, net interest margin was 3.87%, up 11 basis points from the 3.76% from our last quarter ended September 30, 2018. This quarter, the net interest margin was favorably impacted by higher loan and investment rates on earning assets as well as lower rates on interest-bearing deposits and timed deposits. Our average yield on earning assets was 5.48% for the second quarter of Fiscal 2019 compared to 5.35% for the first quarter of Fiscal 2019, up 13 basis points.

On the deposit side, our average cost of interest-bearing deposits and timed deposits decreased 9 basis points and 21 basis points respectively when compared to Q1, ended September 30, 2018. As noted earlier, we closed a Nationwide Bank deposit acquisition of $2.4 billion in deposits halfway through the second quarter. This included $1.7 billion of timed deposits at a weighted average rate of 2.26 and $0.7 billion of checking, savings, and money market accounts at a weighted average rate of 81 BIPS.

If you assume the benefit of Nationwide deposit acquisition for a full quarter and you remove the average loan balances and the interest income associated with the short-term H&R Block, Emerald advances, and franchisee loans, the net interest margin for the quarter ended December 31, 2018 would have been 3.83%, up 7 basis points from the 3.76% net interest margin for the quarter ended September 30, 2018.

Moving to operating expenses, as noted earlier, our efficiency ratio improved to 46.5% this quarter, compared to 51.5% for the quarter ended September 30, 2018. Total non-interest expense for the second quarter ended December 31, 2018 decreased $2 million to $50.9 million compared to $52.9 million for the linked quarter ended September 30, 2018.

The decrease is primarily attributable to a $1.4 million savings associated with normalizing FDIC insurance costs this quarter compared to the higher than average FDIC costs last quarter associated with the temporary broker deposits used to prepare for the Nationwide deposit acquisition.

In addition, advertising and promotional cost this quarter declined by $1.1 million compared to last quarter primarily due to lower deposit marketing costs, lower mortgage loan lead costs, and lower branding costs. Excluding the acquisition-related expenses and the aforementioned excess FDIC expense, our non-GAAP adjusted efficiency ratio would have been 45.5% in the second quarter ended December 31, 2018 compared to 49.42% in the first quarter ended September 30, 2018.

Our depreciation and amortization expense was approximately $3.6 million in the second quarter of Fiscal 2019 compared to $3 million in the first quarter of 2019 and compared to $1.9 million in the last year second quarter ended December 31, 2017. The primary drivers of the sequential and year over year increase in our depreciation and amortization expenses, our amortization and intangibles associated with the Epiq and the Nationwide deposit acquisitions which were $900,000.00, $700,000.00, and zero for this quarter, for last quarter, and for last year, respectively.

Also, software depreciation as a result of deploying the universal digital bank and the related system was $1.8 million, $1.5 million, and $1.1 million for this quarter, for last quarter, and for last year, respectively.

With the COR acquisition closing this month and the WiseBanyan acquisition expected to close some time in our fiscal third-quarter of 2019, we expect our depreciation and amortization expenses to increase over the next several quarters by an amount between $1.5 million and $2.2 million per quarter.

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

Johnny Lai -- Vice President of Corporate Development and Investor Relations

Thank you, Andy. Adam, we're ready to take questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now be conducting our Q&A session. If you would like to ask a question, please push *1 on your telephone keypad now. The confirmation tone will indicate your line is in the question queue. You may push *2 if you'd like to remove your question from the queue. For any participant using speaker equipment, it may be necessary to pick up your handset before pushing the * key. One moment while we poll for questions.

Our first question comes from the line of Brad Berning from Craig Hallum. You are now live.

Brad Berning -- Craig Hallum -- Analyst

Good afternoon, guys. I wanted to follow-up on the acquisition a little bit. Can you talk a little bit more about what you think about the ROE profile and the growth profile of the company after you get things all put together? How do you think about Axos in the out years as this gets put together?

Gregory Garrabrants -- President and Chief Executive Officer

Are you talking specifically about COR or the aggregation of all of it?

Brad Berning -- Craig Hallum -- Analyst

I'm talking the aggregation of all of it. You've got a lot of good moving parts here and I'm trying to think about how you're putting this picture together in your head.

Gregory Garrabrants -- President and Chief Executive Officer

Well, I think right now from a standpoint of intermediate term modeling, I think we've given enough information to allow you to see these parts separately and make reasonable estimates with respect to how they would come together. Over time, we expect to grow COR organically. The value of that growth will be partially dependent upon interest rates. Higher interest rates are better for this business. Lower interest rates are not as good. We have other parts of the business that may operate differently, such as agency mortgage banking. There are a lot of assumptions that have to be embedded into this.

The question of how much growth or how much enablement of growth that the overall and eventual integration of digital wealth management through the universal digital banking platform to our customers will have is very difficult to ascertain because we obviously have growth projected in the out years that is fairly robust. So, part of this and these acquisitions is to ensure that we're able to meet those objectives as they currently are. It's also difficult to know how pricing will be impacted and how retention will be impacted by the addition of these services.

We believe that clearly from the research that we've done, that it will lower the cost of acquisition, increase retention, reduce the sensitivity of the checking accounts within our deposit base. I think it's very difficult and I don't think you should be building those numbers into the out years of your model because we have to prove we're going to be able to do that effectively.

Brad Berning -- Craig Hallum -- Analyst

All fair points and appreciate the thought process. We'll continue to monitor things as we go. One other follow-up is as you think about the IT investments to bring the new acquisitions on board and you think about the opportunities to not just integrate but expand the investments and opportunities with those acquisitions, how are you thinking about efficiency ratios as we progress through the intermediate term here? I just want to make sure we understand how much of that to perpetuate in the model but also think about the opportunity set you might want to invest in.

Gregory Garrabrants -- President and Chief Executive Officer

I think from a bank perspective, thinking about modeling the banking efficiency ratio where it is for the next year is the right approach. With respect to COR, we have the numbers with respect to that specific efficiency ratio for the purpose of being able to look at those segments separately. We will be breaking those out on a separate basis. If COR ends up growing well, it will grow in a way that will increase our ROE but would decrease the overall holding company or increase the overall holding company's efficiency ratio.

That's a good thing given that efficiency ratio is utilizable for banks and it's much less utilizable for essentially selling software as a service to clients in a very capital-efficient business. So, it really depends on the mix of growth. I think right now, just for the next year, assuming that COR essentially is at stasis, although we hope to do better than that is the right approach. Thinking about the bank in its normal growth trajectory with the efficiency ratio we have currently is the correct approach.

If you're asking how are we going to do a lot of the things we're doing -- we've invested a lot on the technology side. We have a pretty big team now. That team has delivered a lot of product, although they have a pretty aggressive schedule this year. I think that we can work within the existing structure that we have reasonably well with $1 million here, $1 million there in order to deliver on the strategic vision we have.

Brad Berning -- Craig Hallum -- Analyst

Appreciate it. I'll get back in the queue.

Operator

Thank you. Our next question comes from the line of Austin Nicholas from Stephens. You are now live.

Austin Nicholas -- Stephens -- Analyst

Good afternoon. On the margin outlook, could you remind us of what that is heading into '19 as you layer on these different deposit businesses off that 3.83% number?

Gregory Garrabrants -- President and Chief Executive Officer

I think that looking forward for the next 12 months, you should use the guidance we've historically given. The 3.80% to 4% range excluding Block impact -- I think that's the reasonable level to look for in the next calendar year.

Austin Nicholas -- Stephens -- Analyst

Got it. Maybe just on the Epiq business, can you give us an update of how many deposits have come over and think about the trajectory of the full opportunity of deposits coming over in '19?

Gregory Garrabrants -- President and Chief Executive Officer

Yes. It's about $200 million that's come over now. We're continuing to make those transitions. Ultimately, it depends on several factors. There is roughly $800 million. Some deposits are higher cost than some of the others. Remember, we also do lose some component of fee-based income as those deposits move from a third-party bank to our bank. However, they are a net benefit to us because we are receiving less from the partner bank than the cost of the deposit that we are replacing on a marginal basis.

Operator

Thank you. Our next question comes from the line of Michael Perito from KBW. You are now live.

Michael Perito -- KBW -- Managing Director

I wanted to start on the loan growth side. It seemed like the C&I book had some really strong growth in the quarter. I was looking at the Q filing. It looks like most of that was in the -- I believe you guys incorporated within your C&I portfolio the warehouse and other line -- I don't know if that's wrong or right, but I believe you were including that in your prepared remarks when you mentioned the C&I growth. Do you have the breakdown of what drove the big year to date growth in that line item?

Gregory Garrabrants -- President and Chief Executive Officer

So, the year to date growth was about -- if we go back from the second quarter of 2018 and then the second quarter of 2019 fiscal, there's about 24% loan growth. That was really broken up across a variety of categories. We had growth in the lender finance side, the real estate specialty lending group as well. So, I think that it was reasonably balanced a little bit on the side of the real estate specialty lending business.

Andrew Micheletti -- Executive Vice President and Chief Financial Officer

I can give you the components that make up that line item.

Michael Perito -- KBW -- Managing Director

That would be helpful, Andy.

Andrew Micheletti -- Executive Vice President and Chief Financial Officer

Included in single-family lender finance is $172.8 billion. Single-family secured branch specialty is $120.2 billion. Then when we look at warehouse number -- it's $220 million.

Michael Perito -- KBW -- Managing Director

That's helpful color. As it relates to the loan yields, they've done fairly well over the last few years, but the mix of the portfolio has changed a little bit in that time. I'm curious if you could give us a sense of where you think some of the stronger loan yield performance has been coming from. Has it been being able to get increased incremental yields on new single-family production? Has it been the addition of some of the C&I stuff? Any color would be helpful.

Gregory Garrabrants -- President and Chief Executive Officer

For single-family, we've been able to maintain originations and grow that book. For every rate increase the Federal Reserve has made, we raised our rates 12.5 basis points. Call that a 50% loan beta, but that's loan beta on incremental production, not on the actual static loan book. For multi-family, I think it was the same thing, 12.5 basis points except one we did not raise rates.

The vast majority of the C&I production other than the equipment leasing is variable and floating rate that would float 100% with an index, usually LIBOR. The equipment finance loans and the warehouse lines and the specialty real estate generally have higher loan yields than the single and multi-family. So, any next shift benefits in two ways, not only the loan beta, but also from a remax of the product.

Michael Perito -- KBW -- Managing Director

That's helpful. Thanks. Go ahead, Andy.

Andrew Micheletti -- Executive Vice President and Chief Financial Officer

I can give you an example of the largest driver. C&I and lender finance -- June, the point in time yield was about 7.13%. At the end of this quarter, it was 7.69%. It's a good rate plus it's living with rate hikes.

Michael Perito -- KBW -- Managing Director

Got it. That's a helpful example. On the expense side, obviously, you guys have layered a few different businesses here, but given that they were in some cases newer partnerships or business, not a lot of cost savings. As you guys looked at these businesses you're bringing on, is there a point over the next couple of years where there could be some synergy opportunities once you get a better handle on what's required to operate these platforms and any redundancies you can automate or stuff like that? Do you think they're fairly efficiency run as they stand today and growing the revenues longer-term is the best opportunity?

Gregory Garrabrants -- President and Chief Executive Officer

I think there are opportunities to get efficiencies from an operational perspective out of both Epiq and COR which are the largest investments in personnel. However, those efficiencies will essentially be put back into doing things a lot better and quicker associated with these businesses. So, for example, on Epiq, we're going to spend a lot of time making sure we're the best in class in that business so we can win more trustees.

We've got to go and make sure the platforms are efficient, customer service is best in class, then the growth will come from the trustees. COR will be the same thing. We'll be looking to go up market and in the process, the folks that are doing things manual will be spending time on GAAP analysis with respect to how to go up market and win bigger business. I don't think it would be a good idea to put in your model some sort of, "Hey, we're going to be able to cut COR's cost in year two," or something. That's not what it looks like.

Michael Perito -- KBW -- Managing Director

That makes a lot of sense. I appreciate the color and taking my questions. Thank you.

Operator

Our next question comes from the line of Gary Tenner from D.A. Davidson & Co. You are now live.

Gary Tenner -- D.A. Davidson & Co. -- Managing Director

Thanks. A question regarding WiseBanyan, I wonder if you could walk through your thoughts on how it comes to monetizing that platform rather than offering it as a value-add, as a way of customer acquisition, etc.

Gregory Garrabrants -- President and Chief Executive Officer

That's a great question. There are several ways of monetizing the platform. The first is the customer acquisition side. Their cost of acquisition has historically been lower than our cost of acquisition with respect to gaining a new customer for the platform.

Now, they've been very attractive on the pricing side with respect to the platform, which has assisted them in that customer acquisition cost. Thinking about how to tie in the requirements for the checking account with direct deposit with the pricing strategy of that customer acquisition is an area that we've done a lot of modeling in and looking at.

Next, there are opportunities to provide basic levels of services and then to have add-on services associated with that that you can charge a fee for. So, there's a base level service being offered at a value proposition and then incremental services being offered that allow the customer to choose where they'd like to play. That would be a fee income generator.

I do think that there's also the ability to monetize customer from a pricing perspective with respect to the checking side. The whole goal of the long play here is to be able to control the platform so that the services of the platform are sufficient enough from a value proposition that the checking customer becomes less rate-sensitive. Clearly, there are some competitors that have done an amazing job of this. Charles Schwab has done an amazing job. As digital banking competition increases, it's increasing in this -- call it the first wave way, which is what we helped pioneer, but the second wave way is the path forward.

So, that path forward is about integration of services, customer experience, personalization of the recommendations and sufficient services such that the overall value proposition is more valuable than picking it apart. I think we've got those pieces in place. We've been eyeing the robo-advisor business for a long time, but part of the problem is the value we wanted to provide was hampered by our discussions with third-party clearing companies, who said, "We'll meet your pricing demands but we want all the deposits." That doesn't work for us.

Now, those pieces are in place, that vertical integration, so we can make that happen. It's not straightforward and it's not a next quarter exercise, but it's all in place to be able to make that happen over the next couple years.

Gary Tenner -- D.A. Davidson & Co. -- Managing Director

Thanks for that detail. I always wanted to ask to make sure I heard correctly, the modest increase in the single-family portfolio -- did you say those were in areas that were impacted by some of the wildfires and lost content looks pretty minimal?

Andrew Micheletti -- Executive Vice President and Chief Financial Officer

There was primarily one loan for $7.5 million that went into non-performing software, 55% LTV, no real long-term issues with it. There were no issues in non-performing associated with the fires of any significant nature.

Operator

Our next question comes from the line of Andrew Liesch from Sandler O'Neill. You are now live.

Andrew Liesch -- Sandler O'Neill -- Analyst

Hey, guys. A follow-up question on the expenses -- it sounds like the amortization or depreciation might step up here in the first quarter with COR closing a little bit earlier than you expected. What's the right expense run rate to build off of in the third-quarter and going into the rest of the calendar year?

Gregory Garrabrants -- President and Chief Executive Officer

With respect to COR depreciation, that is included in the number that we provided with respect to the net income. That net income and that benefit associated with the accretion, we're including the expected increase in the depreciation cost. That's an element that you have but that is included, so it's not incremental with respect to what's happening. With COR, you'll still have that 6% annual accretion associated with that business. The closing of it early midway through a quarter, that has to be prorated. The other pieces of the increased depreciation, those are just increased costs that will flow through the P&Ls.

Andrew Micheletti -- Executive Vice President and Chief Financial Officer

Guidance on general overall efficiency for the year -- as you know, this quarter's efficiency will be significantly better because of the Block income. Of the $1.5 million increase, about half of that will be COR intangibles that we're estimating. That's part of the reason I gave a range from $1.5 million to $2.2 million. We haven't done a valuation analysis to come up with the exact intangibles, but about $1 million of that is COR.

It's not a huge number, but the broader point was that depreciation has increased a little bit each quarter because of the amortization of the software. So, we are expecting that to continue to increase, we just wanted to be clear on that. I think the overall guidance of looking at a full year on the banking side in the 40s range is the rigth way to think about it. Take COR separately, which will be more like a 70% number in efficiency.

Operator

Ladies and gentlemen, as a reminder, if you'd like to ask any questions, please push *1 on your telephone keypad now. Our next question comes from the line of Edward Hemmelgarn from Shaker Investments. You are now live.

Edward Hemmelgarn -- Shaker Investments -- Analyst

I have an additional question regarding COR Clearing. Congratulations on your acquisitions and the opportunistic share repurchase. With COR, you're going to get a benefit from having greater equity. What other opportunities or how much do you think that may help COR in getting new business versus other opportunities you may have within the pickup business for COR? If you could, elaborate on that a little bit more.

Gregory Garrabrants -- President and Chief Executive Officer

I think that's an important point. At a certain point, having the backing of Axos Financial with respect to its capital base will certainly increase the conversation. There are also opportunities to optimize the business. There are a number of different ways clearing companies make money. We've been digging into the optimization of the existing customer base. We think there's some upside there.

There's upside from we have capital. There's upside with some of the cross-pollination with banking services without having to do much infrastructure work. I will say there is an absolutely felt need within the middle market of the broker dealer segment that clearing companies are not particularly responsive or attuned to the needs of what they would consider to be smaller customers but would be good customers for us.

I think there's opportunity there, absolutely. We'll be working on it. I know it's not an overnight set of opportunities, but I was out at one conference ahead of the game and the excitement was palatable. People are very interested in having a company that has the technology that we have. Think about an introducing broker dealer and the way they're opening accounts is paper-based and all of a sudden, they have an account-opening system where they can take a driver's license and a picture of their face and open it and that could be pushed through that network.

There was a lot of interest in that. Getting all those things done and getting them implemented and people using them is a different story, but there's a ton of opportunity here.

Operator

Our final question comes from the line of Steve Moss of B. Riley FBR. You are now live.

Zach Weiss -- B. Riley FBR -- Analyst

This is Zach Weiss filling in for Steve today. On the upcoming tax season, is there any outlook or expectations for the refund advance product relative to last year?

Gregory Garrabrants -- President and Chief Executive Officer

We have an understanding of that, but that wouldn't be something that we would comment on. We historically in any year never comment on the volumes associated with those elements, just because they impact what people would be able to drive about H&R Block and any kind of variance we don't think is material for us.

Zach Weiss -- B. Riley FBR -- Analyst

Fair enough. In terms of credit, is there anything you all are seeing from the trenches that's worth noting, if there are certain areas that might be getting too frothy, if there's anything notable you guys are seeing on that end?

Gregory Garrabrants -- President and Chief Executive Officer

In general, there have been some non-bank competitors that have entered certain mortgage spaces. I think they're doing things that are well outside our credit box. They're doing them generally at significantly higher rates but also higher loan to value ratios. So, that's one area where we see a little push on the credit side there. I don't think we spend a lot of time -- if we do what we do well, then I think we can continue to have reasonable growth and continue to increase our assets and not have to follow that. We haven't done anything differently and I'm not seeing anything that raises any major panic.

Zach Weiss -- B. Riley FBR -- Analyst

Got it. Thanks for taking the questions.

Operator

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing comments.

Gregory Garrabrants -- President and Chief Executive Officer

Thank you, everyone. We'll talk to you next question.

Operator

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day.

Duration: 68 minutes

Call participants:

Johnny Lai -- Vice President of Corporate Development and Investor Relations

Gregory Garrabrants -- President and Chief Executive Officer

Andrew Micheletti -- Executive Vice President and Chief Financial Officer

Brad Berning -- Craig Hallum -- Analyst

Austin Nicholas -- Stephens -- Analyst

Michael Perito -- KBW -- Managing Director

Gary Tenner -- D.A. Davidson & Co. -- Managing Director

Andrew Liesch -- Sandler O'Neill -- Analyst

Edward Hemmelgarn -- Shaker Investments -- Analyst

Zach Weiss -- B. Riley FBR -- Analyst

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