Axos Financial Inc

NYSE:AX

Earnings Call Transcript 2020-Q2

[Operator]

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

It's now my pleasure to introduce our host, Johnny Lai. Please go ahead.

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

Thank you and good afternoon everyone. Joining us today for Axos Financial Inc's second quarter financial results conference call are the Company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on our financial and operational results with the second quarter, and they will be available to answer questions after the prepare presentation.

Before we 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 statements in response to your questions. Therefore, the Company claims the protection from the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements related to the business of Axos Financial Inc and its subsidiary can be identified by common use forward-looking terminology and those statements involve unknown risks and uncertainties, including all business related risks. There are more detailed in the Company's filings on form 10-K, 10-Q, 8-K with the SEC.

This call is being webcast and there'll be an audio replay available with 30 days in the Investor Relations section of the Company's website located at axosfinancial.com. All the details of this call were provided on the conference call announcement and today's press release.

At the time, I'd like to turn the call over to our CEO, Greg Garrabrants, who will provide opening remarks. Greg, please begin.

[Greg Garrabrants, President & CEO]

Thank you, Johnny. Good afternoon everyone, and thank you for joining us. I'd like to welcome everyone to the Axos Financials conference call for the second quarter of fiscal year 2020, end of December 31, 2019. I thank you for your interest in Axos Financial and Axos Bank.

Axos announced record quarterly second quarter net income of $41.3 million for the fiscal second quarter ended December 31, 2019, up 6.3% from the $38.8 million earned in the fiscal second quarter ended December 31, 2018, and up 1.2% compared to the $40.7 million earned in the prior quarter.

Earnings attributable to Axos' common stockholders were $41.2 million, or $0. 67 per diluted share for the quarter ended December 31, 2019, compared to $0.61 per diluted share for the quarter ended December 31, 2018, and $0.66 per diluted share for the quarter ended December -- September 30, 2019.

Excluding non-recurring expenses, non-GAAP adjusted earnings and earnings per share were $42.9 million and $0.69 respectively for the quarter ended December 31, 2019. Other highlights of the second quarter include ending loan and leases increased by approximately $1.1 billion, up 14.8% annualized from the first quarter of 2020, and up 12.5% year-over-year.

Strong originations in commercial real estate specialty lending, small bowels commercial real estate lending, mortgage warehouse in equipment leasing or offset by lower production in jumbo single-family and IR payoffs in multi-family uncertain C&I loan portfolios.

Total assets reached $12.3 billion at September 31st -- December 31, 2019 up by $1 billion compared to September 30, 2019, and up $2.5 billion from the second quarter of 2019. Net interest margin was 3.87% for the quarter ended December 31, 2019, up 10 basis points from the 3.7% in the first quarter of fiscal 2020, and unchanged from 3.87% in the second quarter of fiscal 2019.

Average loan yields fell by a near 3 basis points linked-quarter to 5.56 %, while average funding cost declined 15 basis points to 1.88%. The sequential improvement in funding costs was a function of higher average non-interest bearing deposit balances and lower average costs on interest bearing deposits, excluding the impact from H&R Block, seasonal loan products and excess liquidity and our subordinated debt.

Net interest margin in the quarter at December 31, 2019 would have been approximately 3.87%, up 4 basis points from 3.83% in the comparable quarter a year ago. Net interest margin for the banking business segment was 3.4%, up basis points year-over-year and up 10 basis points for the quarter ended September 30, 2019.

Our efficiency ratio for the three and six-month periods ended December 31, 2019 were 51.66% and 52.04% compared to 46.47 and 48.89 respectably in the comparable period ended December 31, 2018. The primary driver of the year-over-year increase in our efficacy was the addition of Axos Clearing and Axos Invest, which operates at a relatively higher efficiency ratio compared to the banking business, which is more mature than the securities business, but also more capital intensive.

Our bank only efficiency ratio remained solid at 43.87% for the six months ended December 31, 2019 compared to 42.65% for the six months ended December 31, 2018. Capital level remained strong with Tier 1 leverage ratio of 9.16% of the bank, compared to 9.03% in the year ago period all of our regulatory requirements for both periods.

Return on equity was 14.35% for the second quarter of 2019 compared to 15.29% in the corresponding period last year, excluding one-time merger-related expenses non-cash depreciation and amortization expense, our non-GAAP adjusted return on equity would have been 14.19% in the second quarter of 2020.

Our credit quality remains good excluding a 12.1 million charge-off of a previously identified factoring receivable by net charge-off to average loan and leases was less than 1 basis points this quarter. Non-performing assets and total asset ratio was 52 basis points for the quarter ended December 31, 2019. The majority of our non-performing assets are comprised of single-family and multi-family loans with low loan-to-value ratios.

We remain well reserved with our allowance for loan loss representing 112.9% coverage of non-performing loans and leases at December 31, 2019. Ending loan balances increased by 12.5% year-over-year to 10.1 billion due to strong originations in C&I small balanced commercial real estate lending and lower prepayments in jumbo single-family and lender finance compared to the corresponding period in the prior year.

Our loan production for the second quarter ended December 31, 2019 consisted of 164 million of single-family agency eligible gain on sale production, 310 million of single-family jumbo portfolio production, 202 million of multi-family another commercial real estate portfolio production. 738 million of C&I production resulting in 204 million of net C&I loan growth, 412 million of Emerald Advance originations and 48 million of auto and consumer unsecured loan originations. For the second quarter of fiscal 2020 originations are as follows.

The average FICO for single-family agency eligible production was $746 with average loan-to-value ratio of 70.3. The average FICO score for the single-family jumbo production was 728 with an average loan-to-value ratio of 59.8. The average loan-to-value ratio, the originated multi-family loan was 59.0 and the debt service coverage was 1.26, and the average loan-to-value ratio of the originated small balance commercial real estate loans was 62.8, and the debt service coverage was 1.42. The average FICO of the auto production was 757.

At December 31, 2019, the weighted average loan-to-value of our entire portfolio of real estate was 56%. The bank's loan-to-value ratios use origination date appraisals over current amortized balances, making these historic loan-to-value ratios, more conservative in real estate markets with increasing values.

As of December 31, 2019 quarter, 62% of our single-family mortgages have loan-to-value ratios at or below 60%, 30% have loan-to-value ratios between 61% and 70%, 2% have loan-to-value ratios between 71% and 75%, and approximately 5% have loan-to-value ratio between 75% and 80%, and less than 1% have a loan-to-value ratio greater than 80%.

We have a well established track record of strong credit performance in jumbo single-family mortgage lending with lifetime credit losses in our originated single-family loan portfolio of 3 basis points of loans originated. We have approximately 2.2 billion of multi-family loans outstanding at December 31, 2019, representing approximately 21% of our total loan book.

Growth in our multi-family loan production has been solid. The weighted average loan-to-value ratio of our multi-family loan book is 52% based on the appraised value at the time of origination. Approximately 65% of our multi-family loans are 60% loan-to-value, 29% are between 60% and 70% and 4% are between 70% and 75% and less than 2% of our multi-family loans have loan-to-value ratio above 75%.

For lifetime credit losses in our originated multi-family portfolio are less than 1 basis points of loans originated over the 18 years we have originated multi-family loans. Our C&I lending business posted an outstanding quarter with record quarterly originations of 738 million and ending balance of increasing by 2.4 million.

We continue to see good demand across our diversity and islanding categories including commercial real estate, specialty lending, lender finance and equipment finance. We have also expanded our relationships in course C&I lending businesses and added new experience team members to further expanded our geographic cover and commercial loan types.

Loan demand remains solid across most of our lending categories and markets supported by low unemployment, rising wages, stable to rising home prices and corporate profitability and stock market values near record highs. Our loan pipeline was 1.1 billion at December 31, 2019 consisting of 437 million of single-family jumbo loans, 123 million of single-family agency mortgages, 190 million of income property loans and 389 million of C&I loans.

We continue to transition our portfolio away from single-family lending into C&I lending and commercial real estate lending given the relative risk adjusted returns across these business, but we anticipate strong originations across most lending categories in the second half of our fiscal 2020. Our average lending loan balances will fluctuate from quarter-to-quarter based on the pace of prepayments.

Switching to funding, total deposits increased 1.8 million or 21.3% year-over-year and 900 million linked quarters to 10.1 billion. We had growth in deposits primarily in small business treasury management, specialty deposits including Axos Fiduciary Services. We continue to have success growing our non-interest bearing deposits with average non-interest bearing deposit balances increasing by over 300 million in December quarter.

At December 31, 2019, approximately 40% of our deposit balances are business and consumer checking accounts, 22% money market accounts, 4% IRA accounts, 5% savings accounts, and 3% prepaid accounts. Checking and savings deposits represent 75% of total deposits at December 31, 2019, compared to 65% at December 31, 2018. The improvement reflects our success replacing higher costs, time deposits into lower costs, checking, savings and money deposits.

We kicked off our 2019-2020 tax season by originating approximately $412 million of Emerald Advance unsecured consumer loans, H&R Block tax prep customers from the December quarter. We retained 10% of the Emerald Advance loans, resulting in approximately $40 million of incremental loan balances at December 31, 2019.

On January 4, we started originating Refund Advance loans to qualified H&R block tax prep customers. This program charges no interest or fees to the borrower as available to all H&R block tax prep customers to the end of February. We look forward to another successful tax season with H&R block.

We ended the calendar here with the $12.3 billion of assets crossing the $10 billion threshold related to the Durbin debit interchange exemption. As we stated in our last earnings call, we expect a relatively de minimis impact on our bank's direct interchange as a result of Durbin in our calendar year 2020.

We continue to work with H&R Block on the resolution of the interchange revenue loss to H&R Block from the MO card products. Because the impact of Durbin does not impact our own or H&R block interchange rates until July 1 2020, we do not expect any insights on our economics or H&R Block's economics from the MO card before July 1 2020, when this ongoing tax season will be substantially complete.

Although, we continue to have active discussions with H&R Block with respect to the future of our relationship, we have no updates to share with respect to whether a resolution satisfactory to both parties will be reached and in what timeframe. Our security segment which includes Axos Clearing, our securities clearing in-custody business for introducing broker dealers and independent RIAs and Axos Invest are direct-to-consumer digital wealth management continues to make steady progress.

We have enhanced functionalities, streamlined operational systems and processes and added new clients over the past several quarter. Axos Invest in calendar 2019 was approximately 32,000 funded accounts with over 200 million of assets under management up meaningfully from the 24,000 accounts and $115 million of assets under management we closed the acquisition in March of 2019.

We updated the account opening workflow for Axos Invest in mid-December, which resulted in a measurable improvement in our account conversion rate. We're starting to see some early traction with respect to cross-sell it checking accounts and mortgage referrals to digital wealth customers. The numbers are de minimus from dollar perspective, but we expect gradual improvements in cross-sell as we complete single sign-on through online banking for Axos Invest and rollout self-directed trading, gamification and other personalization features later this year.

In Axos Clearing, broker dealer fee income was $5.6 million and $11.2 million for the three and six months ended December 31, 2019 respectively. Clearing and custody fees were roughly flat linked quarter, while fees earned on FDIC insured bank deposits were down. Securities lending revenue and margin lending revenue both declined this quarter as our IBD clients decreased their risk tolerance and trading activity was lower as a result of reduced stock market volatility.

Ending customer margin balances were approximately $226 million on December 31 2019, compared to $275 million on September 30, 2019 with the Federal Reserve lowering rates by 25 basis points in the December quarter and by 75 basis points in calendar 2019. Non-interest income for Axos Clearing was negatively impacted by a reduction in fees paid by third-party banks on the off balance sheet cash sweeps.

Axos Clearing signed two new IBD firms and two RIA custody firms with approximately $200 million in AUM in the December quarter. We have a robust pipeline of clearing and custody client typically takes several quarters to transition their book of business to Axos. We are building our sales and services infrastructure to accelerate our capacity to serve independent RIAs.

With potential market disruption as a result of pending Schwab, TD Ameritrade merger, and the two firms controlling over 50% of the existing custodial assets of independent RIAs, we see significant opportunity to provide a variety of clearing custody and banking services to small and medium sized RIAs. We do not compete with RIAs and wealth management. We have a broad technology and product suite to help independent RIAs to grow their practices.

We also have a number of technology and product initiatives that we will be introducing over the next 3 to 12 months, including enhanced RIA custody capabilities, white labeled banking services for high net worth clients of independent RIAs and IBDs, and private label digital wealth management for RIAs and other strategic partners.

We look forward to hosting existing and prospective clients at our inaugural Axos Clearing Client Conference in San Diego, April 17th to the 18th. We continue to grow and diversify our commercial and specialty deposit businesses. Over the past 12 to 18 months, we have added senior commercial bankers and opened a commercial loan and deposit office in downtown Los Angeles and Midtown Manhattan.

The teams are focused on expanding into new deposit and lending verticals and the officer's allow us to better serve existing and new clients in those two large metros. We have a solid pipeline of new commercial deposit in lending opportunities that we expect to close in the next few quarters. Axos Fiduciary Services, our commercial deposit business, serving Chapter 7 trustees and non-7 fiduciaries continues to perform well. Since we close the acquisition in April 2018, we have successfully added new Chapter 7 and non-7 trustees and fiduciaries and hundreds of existing trustees have voluntarily moved their deposit balances to Axos Bank.

We want a competitive mandate for a new fiduciary services client bring in a meaningful amount of non-interest bearing deposits to our bank at the end of the December quarter. And testament to the service capabilities of our sales and relationship management teams and the significant opportunities, we have to expand Axos Fiduciary Services.

At our Investor Day last November, we discussed in detailed our strategies to position ourselves for the future and become a more diversified and profitable institution. The core component of our strategy is to use technology and data to create a more convenient personalized and integrated customer experience.

Our universal digital banking platform now deployed across multiple consumer businesses with more integration in the near future, enables rapid deployment and ongoing improvements to the platform. The integration of the Axos Invest client data inside our universal digital bank, the addition of more streamlined account opening and risk assessment tools from new accounts and the ability to create co-branded banking instances for partners like nationwide are just a few examples of the capabilities, we did not have prior to building into universal digital bank.

With the addition of single sign-on for Axos Invest, self-directed trading inside the universal digital bank and integration of banking services within our clearing and custody platform on our development roadmap, we see a perpetual cycle of innovation that will further enhance our ability to serve customers effectively across our three businesses, consumer banking, commercial banking and securities.

I'm pleased with the execution by our team members on our ambitious growth objectives. Against the backdrop of increased competition and volatile interest rates, we continued to deliver across each of our long term financial targets, including low teens loan growth and an annual consolidate return on equity at or above 15%, while maintaining stable to growing net interest margins.

We've receive significant opportunities. We have significant opportunities ahead of us and have the core assets and people to achieve our goal. Execution will be paramount given the number of initiatives we have in our strategic plan. Our intense focus on continuous improvement in prudential capital management positions us well to execute on behalf of our clients and shareholders.

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

[Andrew Micheletti, EVP & CFO]

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 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 indicated earlier, Axos' net income for the second quarter ended December 31, 2019, goes 41.3 million, up 8.46% year-over-year and up 1.2% compared to our last quarter ended September 30, 2019, both due to primarily loan growth and the maintenance of our net interest margin.

Net interest income grew 5.1 million or 5% for the second quarter ended December 31, 2019, compared to our first quarter ended September 30, 2019. Breaking down the linked quarter growth of net interest income by segment, the banking business had net growth of 5.8 million, the securities business had a net decline of 1.1 million, and the corporate segment had a net benefit of 0.4 million.

That net interest margin for the banking business grew to 3.94% of 11 basis points compared to 3.83% last quarter and up 4 basis points compared to the prior year. The linked quarter improvement in the banking net interest margin is primarily the result of first shifting more average deposit balances to non-interest bearing.

Second, reducing our interest bearing deposit rates; third, adding the seasonal H&R Block Emerald Advance loans; and finally fourth, overall growth in our average interest earning assets. As a result, interest in dividend income grew 2.7 million, while the cost of funding declined 3.1 million on a linked quarter basis.

Average loan balances increased 240 million, while average non-interest bearing deposit grew 302 million this quarter, providing the opportunity to redeploy existing higher cost savings accounts, primarily municipal savings into no cost or lower cost deposits, primarily fiduciary assistance accounts.

As a result, the average rate on interest bearing demand in savings accounts decreased at 25 basis points and the total cost of funds for the banking business segments decreased 15 basis points on a linked quarter basis. Partially offset the net interest income growth of the banking business segment was a linked quarter decline in the net interest income of the securities business of 1.1 million.

Interest income earned on margin lending to broker dealer customers decreased 0.5 million due primarily to a declining customer margin lending volumes, stock lending interest income also declined by 0.5 million due to lower activity levels in the second quarter. Interest income earned on customer reserve balances decreased 0.6 million primarily due to market rates declining during the quarter.

Interest expense decreased 0.7 million, near lower levels of lending activities requiring less borrowing. As Greg mentioned, due to the variety of our funding sources, we continue to expect our consolidated net interest margin for this fiscal year to be in line with last fiscal year and maintain our historical range of 3.8% to 4%.

Turning to asset quality, our basic metrics remains strong this quarter compared to last quarter with the ratio of non-performing loans to total loans declining five basis points to 0.52% and the ratio of non-performing assets to total assets also declining 5 basis points to 0.49%. Total 90-day plus loan delinquencies as a percentage of total loans remain unchanged at 37 basis points at December 31, 2019 compared to September 30, 2019.

During this quarter, the bank charged off 4.1 million for a previously disclosed receivables factoring for one bank customer. This was classified as helpful at September 30, 2019 and fully reserved at the end of last quarter. Given the circumstances of this loss in the very small size of the remaining receivables factoring book, normal charge offs excluding the 4.1 million receivables factoring charge off amount were less than one basis points on average loans for the quarter.

With regards to the adoption of the new CECL accounting standard, Axos Bank is not required to implement the new standard until July 1, 2020. We will give guidance on the estimated impact of the loan loss allowance once we get closer to the adoption date.

Moving to operating expenses on a linked quarter basis, non-interest expenses increased a net of 1.5 million this quarter compared to the last quarter ended September 30, 2019. The banking business segment efficiency ratio improved slightly on a linked quarter basis to 43.81% down from 43.93% last quarter and overall consolidated efficiency improved to 51.66% down from 52.44% last quarter.

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

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

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

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Steve Moss from B. Riley FBR. Your line is now live.

[Nick Dufala, B. Riley FBR]

Good afternoon guys. This is Nick Dufala, stepping in for Steve Moss. I have a question regarding expenses and if you guys could kind of walk us through operating expenses for 1Q, '20. How they escalate to the remaining part of the year?

[Greg Garrabrants, President & CEO]

Let me give you a high level overview and then Andy can jump in with any particular specifics you might have. So, let's talk about the banking segment first. I'll divide that into sort of sales and production oriented personnel and then infrastructure personnel. I think that we are in a place with respect to our technology investments where I feel relatively good that barring relatively small changes. We're going to be able to complete the objectives we have with respect to those technological goals that we have without adding substantially to our expense base.

So, that I think is good news. There's been an incredible amount of investment over the last number of years. And we have a large staff now that has a good pipeline of activities, and they're accomplishing items and checking them off the list and moving on to new ones. So I think that's one piece of it. The next piece of it is that we continue to expand sales team, commercial bankers. Some of those bankers perform well. Some of those bankers perform less well. So that is a management issue there, but as we grow the bank and we increase the asset deposit base then there would be a commensurate increase in that banking talent.

With respect to how much that costs? I said before and I think it's important to reiterate that, obviously as you continue to blend, let's say a more retail online banking business with a more traditional commercial business, what you end up with is different levels of operating costs with respect to the business. So in other words, we have a higher level of non-interest bearing deposits, but that comes with a commensurate increase in cost of personnel. And in more automated businesses, you'll have lower levels of personnel. And you'll have a higher cost of funds.

So I think conceptually it's important to understand that. But I do think that those are expenses that are very much associated with growth. And if the growth isn't there, the cost isn't there, not only based on the personnel management that we have, but also based on the commission structures that exist for the team. We don't have any big new office plans right now from a real estate perspective for the remainder of the year and we're going to let the offices we've opened their season.

With respect to the security segment, on the security segment side, given the relative maturity of that segment and the -- I would say the less the less automated and sophisticated operations, there's a lot of opportunities that we have to bring automation and improvements to that segment. That being said, given the size of that segment we don't expect that segment to have significant cost savings associated with this current book of business.

But rather, it's more to prepare for scalable growth in those segments given the relatively small size without having to add commensurately personnel. So in other words, by us putting in the -- the enhancements that we'll be able to put in, we'll be able to grow that business without a commensurate increase in personnel. But we will not have a reduction in the cost of personnel in any significant way in the New Year. Andy, do you have anything else?

[Andrew Micheletti, EVP & CFO]

Yes, I'll just comment on probably three or just one grade items. Looking at this quarter's operating expense and thinking about operating expense going forward, the one area where we have had a benefit has been FDIC insurance, where frankly all banks, generally a smaller banks have been getting a credit from the FDIC. So, it's a net result when you look at our year-to-date numbers. Last year, we were at $4.4 million in FDIC insurance. This year on a six month basis, where 1.1, I would expect us to approach the $4 million on a run rate, as the credit start to diminish, which that program is starting to end.

So, you'll have a small uptick in FDIC insurance. And looking at linked quarter depreciation and amortization increased about $1 million. That is exclusively for our software that we deployed in the unity software that's being deployed in our fiduciary business. That's an accounting, purchase amortization entry. I don't expect, best the largest of the incremental growth items there. We will continue to have some increase in a depreciation of for capitalized software as we continue to capitalize some of the software costs, and they get deployed and they get amortized. But I don't expect of the million, tap growth larger than the million we have this quarter.

Looking at salaries and wages, they were down on a linked quarter basis. Part of that reason is this quarter we happen to have a little more capitalization of labor. So that was $1 million benefit on a linked quarter. I don't think we can count on having that benefit, frankly, every quarter. It completely depends on what happens with the development team and how that looks.

So overall, I think we're happy with the small increase this quarter, but we do expect expenses to increase. We will have seasonal increases, the normal seasonal increases next quarter, meaning the March quarter for block. So, we think overall, expenses should increase but not large.

[Nick Dufala, B. Riley FBR]

Okay. And thanks for all that information. It sounds like on a technology front at least in near term you guys are pretty well equipped there. I also was thinking about how you guys are thinking on resi mortgage balances given the lower rate environment that kind of what you're seeing on that side of the business?

[Greg Garrabrants, President & CEO]

We continue to be hopeful for some stabilization in that portfolio. We do have some slight upticks in the pipeline. Unfortunately, I think that we're really, really shooting for some stabilization there, not a lot of ongoing growth, but we continue to have that as a focus and we continue to work on mechanisms of stabilizing that business. And I think that we did see a little bit -- we're seeing a little bit lower prepayment indications, but I don't think we can expect that business to be a significant grower in the next several quarters. But it's interesting businesses just given some increased competition in certain areas that we're paying attention to it, and in some cases where we're simply letting business go, that we don't really think we want to participate in. So, that's going to be something we have to watch on an ongoing basis.

[Operator]

Our next question is coming from Andrew Liesch from Piper Sandler.

[Andrew Liesch, Piper Sandler]

The non-interest bearing deposit growth here. I know you walk through some of it, but $2.6 billion at that quarter end. What was the big driver -- suddenly you move some interest bearing accounts and non-interest bearing. You had some epic departments come over in maybe you had another larger commercial balance. Is this a good level of non-interest bearing accounting? Or is there going to be some outflows from here? What where do you see this moving going forward?

[Greg Garrabrants, President & CEO]

Yes. I think we've always had a look at seasonal differences. So this next quarter, of course, we have block where we have seasonal increases in non-interest bearing, but the bottom-line majority that growth was due to two fiduciary balances that came in. And we don't necessarily expect that to stay at that same level, because it does depend upon, basically settlements and when settlements get paid. So we can't tell you how fast you would advertise off. But there's a chance that it's going to be come down faster than our normal Chapter 7 balances.

[Andrew Liesch, Piper Sandler]

And then, but it does sound like you're having some pretty good success bringing in non-interest bearing account reclassifying others. I mean, the 3% to 4% margin range is, it's pretty wide, especially with some of the success you have this quarter. And before I think you'd said like towards the lower end of that. I mean, is there -- what the success you've had on the funding side? I mean, are we creeping up closer to the middle part of the range is a better place to be forecasting?

[Greg Garrabrants, President & CEO]

Yes, I think that might be a bit premature, but obviously, we always tried to do that. I think also, you have to bear in mind that there is just more broadly, with respect to our loan growth target, there may be pressure on the asset side. And with respect to the ability, if we're able to maintain sustain some of these non-interest bearing balances, but with respect to these just given the nature of different various elements they can occur at different times and things like that. I just think it's a little premature to do that, given the steadiness of the inflows and the outflows are not always predictable enough to make that conclusion right now.

[Operator]

Our next question is coming from Michael Perito from KBW. Your line is now live.

[Michael Perito, KBW]

Thanks for taking my questions. I want to just start on core. If I'm looking at the broker dealer fees, they've been a pretty tight range last couple quarters. But -- and I apologize I did jump on the call seamlessly, but it sounds like you guys added a couple of new clients there. And I think if I recall at the Analyst Day, you guys were talking about opportunity for efficiency improvements specifically in that business. So I guess my question, is it mostly revenue driven at this point? I mean, I know you're answering an earlier question, it sounded like there wasn't anything material on the expense side. There is more kind of growing into what you've already done. And I guess if that's the case, what's the update on kind of time line for adding more clients and growing that revenue stream going forward?

[Greg Garrabrants, President & CEO]

I think you stated it reasonably accurately. There certainly is lots of manual processing and opportunities to utilize a lot of the tools that we've utilized in other businesses of ours to improve efficiency and to create I think a much better and resilient operation. I think that the reality of the business though is its relative size. I think it's just a little bit rough to forecast that you're going to cut your way to any significant growth. So, the way this is going to work is severalfold. We have a reasonable pipeline right now of new clients, and those clients take multiple quarters to come on board and generate revenues. So, there's that component of that immediate business there.

Then there are other clients that, that we're talking with that are, they're substantive, they're large, but some of the strategic items that we have to do need to get done before we're actually a viable player. So for example, there's one player that has $700 million of reasonably low cost deposits, just one single broker dealer. The reality of that is that we have some technological, elements that will put us in a very good place to compete for those sort of clients. Not guaranteeing we can get them. And that's probably about a year to 15 months off before all that technology will be deployed. But once it does get deployed, some of it will truly be best in class in the industry and others will put us more at table stakes.

So I think when we have a good proposition for a certain size broker dealer and we have a good group of folks there who are interested in joining us. We're weeding out some of the ones that are not within our core strategy. And then for the long-term future of the business, we're investing in the capabilities, using some of the consolidated platforms that we have in other businesses to really create a great product. And I don't think there are a lot of companies including the largest providers that have a great product for their clients here.

[Michael Perito, KBW]

So, is it fair to say that, if we're trying to think about what kind of the base case expectation is for this business that we should see some revenue lift this year, but there should be kind of a much bigger pickup next year when a lot of those items that you just discussed kind of are full force in terms of your abilities to...

[Greg Garrabrants, President & CEO]

Yes, I think that's right. I think the reality of both these businesses is that they are longer term businesses and I wouldn't expect much in the way of lift throughout the rest of this year. They're much more strategic to the long-term as a long term needs to serve clients in a holistic way than they are in next couple quarters lift sort of items, I basically forecast flattish with respect to them.

[Michael Perito, KBW]

Got it. That's helpful. Thank you. And then I was wondering, if you could -- the commercial specialty real estate segment has seen some nice growth. And I was wondering, if you could just give us kind of a flavor of what like some of the typical opportunities that you've been capitalizing on, in that businesses within? And what you think kind of the actual value proposition is there, that's really made a difference been able to drive growth some of that growth over the last 12 to 18 months?

[Greg Garrabrants, President & CEO]

I think we have a lot of institutional relationships with very strong partners who have grown to trust us over time. And so, our ability to take risk positions that we feel comfortable and with partners that we've have longstanding relationships with allow us to be the first call, essentially. And so, those partnerships are many of the largest funds and private equity shops in the world. And we've cultivated those relationships over extended periods of time. And now, I think we're reaping the benefits of those of those relationships.

[Michael Perito, KBW]

Got it. And then just lastly on, any updated thoughts Greg on kind of capital levels? And what some of the priorities outside of organic growth might look like for fiscal 2020?

[Greg Garrabrants, President & CEO]

Well, with respect to the capital side, obviously, I mean, we continue to grow our Tier 1 leverage ratios. And as the business sort of next moves in 50%, 100% risk weighted, I do think that thinking about the max capital given are relatively low double leverage ratio or are much lower double leverage ratio than the industry average will be something we continue to look at.

I don't have anything definitive to update you on there, but that will be something. And then with respect to just more global outlook, I think only items that we outlined an investor day stay on track. And so, we're continuing to execute against the strategic plan that we have and don't really have any substantive update there to share.

[Michael Perito, KBW]

Okay. So, from a timing perspective, is it fair to think that the capital will probably build the next couple quarters, and as you reach the end of fiscal 2020, that there might be more to communicate?

[Greg Garrabrants, President & CEO]

Yes, I think that might be a fair statement. We certainly are in a pretty good position now and obviously we continue to accumulate capital and have our leverage ratio grow. And obviously, I don't think -- clearly, we don't need equity sort of common equity, so the fee options are obviously other than that.

[Operator]

Thank you [Operator Instructions] Our next question today's coming from David Chiaverini from Wedbush Securities. Your line is now live.

[David Chiaverini, Wedbush Securities]

Hi thanks, a couple of questions for you. So first, a follow-up on clearing, you mentioned the significant opportunity given the merger between Schwab and TD Ameritrade. Have you considered actually accelerating investment in the clearing business take advantage of this?

[Greg Garrabrants, President & CEO]

I think that it probably is the case that there is a justification for doing that. However, what we're trying to do because there's a number of elements that are kind of running on a simultaneously through the items that we have to do. So for example, a lot of the retail platform elements that we're working on aren't very valuable. And when they're seen by RIAs or independent broker dealers, they truly are unique whether it's the account opening features or the robustness of the banking platform. And those banks kind of all have to move together.

So, we're working hard on it. And I think that there is a case for that, and if you can reincarnate my investor base as a set of fintech investors or have softbank come in and invest in me, then we'll really be able to build a much more robust custody and clearing business more quickly. But I do think that, there's a lot of market opportunity here. And then, you get a sense of from client discussions how frustrated they are with existing players, how unhappy they are.

A lot of those kinds of things and you can kind of feel that and that's the sort of thing we've always had around here before, often years before opportunities show up, right. So I remember, when I first started talking to people about the C&I lending 5 to 6 years ago, and then I would get comments. You hired some people and two quarters later, I don't know what's going on. I don't see it like tick, tick, tick, tick, right? And then years later, obviously, you see the tremendous results from it.

So, I mean, I think that's sort of my job to be long term. And I think it's an industry job these days to be short term. And so, that kind of yin and yang sort of ends up in a place that you've got a balance, so, yes, I do think that there is a lot of opportunity. I think that's a really insightful question because I think, maybe any given your, where you're from, you understand the opportunities.

[David Chiaverini, Wedbush Securities]

And then shifting gears on, in jumbo lending, you mentioned how it won't be much of a contributor to loan growth in the near term. What is it that's holding you back? Is it pricing getting too tight? Or competitors offering underwriting terms they're too loose? Or is it simply not enough supply in your niche to generate growth?

[Greg Garrabrants, President & CEO]

I think that it's the emergence of a variety of conduit style opportunities, they're creating an alternative outlook for outlet for products that we're not necessarily inclined a balance sheet. We've always had a very conservative perspective with respect to what we balance, which is why our credit performance has been so strong over such an extended period of time. And we are doing some work to engage in some of that conduit business, and we're going to dip our toe in that and see how it goes.

But that's not going to be through the bank, that's going to be through the securities, subsidiary and through actually a special subsidiary of the securities subsidiary. So, there may be some ability to participate in that, but I don't -- that would then result in some fee income. That would be generated, but it would -- it's just a fundamentally different business than what we have been historically doing on the portfolio sign.

[Operator]

We've reached end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

[Greg Garrabrants, President & CEO]

Thank you everyone for your attention and support and we'll talk to you next quarter.

[Operator]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.