Axos Financial, Inc.

Greetings and welcome to the Axos Financial's 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Johnny Lai. Please go ahead.

Thank you, and good afternoon, everyone.

Joining us today for AXO's Financial Links second quarter financial results conference call are the company's President and Chief Executive Officer, Greg Gerbrandt, and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on our financial and operational results for the second quarter, and they will be available to answer questions after the prepared presentation. Before we begin, I would like to remind listeners that a pair of 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 Axios Financial Inc. and its subsidiaries can be identified by common use forward-looking terminology, and those statements involve unknown risks and uncertainties, including all business-related risks that are more detailed in a company's filings on Form 10-K, 10-Q, and 8-K with the SEC. This call is being webcast, and there will be an audio replay available for 30 days in the Invest Relations section of the company's website located at accessfinancial.com. All the details of this call were provided on the conference call announcement and in today's press release. At this time, we'd like to turn the call over to our CEO, Greg Garagrantz, who will provide opening remarks. Greg, please begin.

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 year 2020, end of December 31, 2019. I thank you for your interest in Axos Financial and Axos Bank. Axios announced record 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 Axios' common stockholders were $41.2 million, or $0.67 for diluted share for the quarter ended December 31, 2019, compared to $0.61 for diluted share for the quarter ended December 31, 2018, and $0.66 for diluted share for the quarter ended 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-balance commercial real estate lending, mortgage warehouse and equipment leasing were offset by lower production in jumbo single-family and higher payoffs in multifamily uncertainty and iLoan portfolios. Total assets reached $12.3 billion at September 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 three Average loan yields fell by a mere three basis points linked quarter to 5.56%, while average funding costs 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's seasonal loan products and excess liquidity in our subordinated debt, Net interest margin in the quarter ended December 31, 2019 would have been approximately 3.87%, up four basis points from 3.83% in the comparable quarter a year ago. Net interest margin for the banking business segment was 3.94%, up four basis points year over year, and up 10 basis points from the quarter ended 2019. Our efficiency ratio for the three- and six-month period ended December 31, 2019, were 51.66% and 52.04%, compared to 46.47% and 48.89%, respectively, in the comparable period ended December 31, 2018. The primary driver of the year-over-year increase in our efficiency was the addition of Axios Clearing and Axios 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 remains 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 levels remain strong with Tier 1 leverage ratio of 9.16% at the bank, compared to 9.03% in the year-ago period, well above 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-cast appreciation, and amortization expenses, our non-GAAP-adjusted return on equity would have been 14.92% in the second quarter of 2020. Our credit quality remains good. Excluding the $4.1 million charge-off of the previously identified factoring receivable, our net charge-off to average loan and leases was less than one basis point this quarter. Non-performing assets, the 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 multifamily loans with low loan-to-value ratios. We remain well-reserved with our allowance for loan loss representing 112.9% coverage of our non-performing loans and leases of December 31, 2019. Ending loan balances increased by 12.5% year-over-year to $10.1 billion due to strong originations in CNIs, small-balance 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 multifamily and other commercial real estate portfolio production, $738 million of CNI production, resulting in $204 million of net CNI 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 an 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 of the originated multifamily loans 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 ratios 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 on three basis points of loans originated. We had approximately $2.2 billion of multifamily loans outstanding at December 31, 2019, representing approximately 21% of our total loan book. Growth in our multifamily loan production has been solid. The weighted average loan-to-value ratio of our multifamily loan book is 52% based on the appraised value at the time of origination. Approximately 65% of our multifamily 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 multifamily loans have loan-to-value ratios above 75%. The lifetime credit losses in our originated multifamily portfolio are less than one basis points of loans originated over the 18 years we have originated multifamily loans. Our C&I lending business posted an outstanding quarter, with record quarterly originations of $738 million and ending balances increasing by $204 million. We continue to see good demand across our diverse C&I lending categories, including commercial real estate specialty lending, lender finance, and equipment finance. We have also expanded our relationships in core C&I lending businesses and added new experienced team members to further expand 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 CNI loans. We continue to transition our portfolio away from single-family lending into CNI lending and commercial real estate lending, given the relative risk-adjusted returns across each business. While we anticipate strong originations across most lending categories in the second half of our fiscal 2020, our average and ending loan balances will fluctuate from quarter to quarter based on the pace of prepayments. Switching to funding, total deposits increased 1.8 billion, or 21.3% year-over-year, and 900 million linked quarter 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-sparing deposits, with average non-sparing deposit balances increasing by over 300 million in the December quarter. At December 31st, 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 representing 75% of total deposits at December 31, 2019. The improvement reflects our success replacing higher-cost time deposits into lower-cost checking, savings, and money market deposits. We kicked off the 2019-2020 tax season by originating approximately $412 million of Emerald Advance on secured consumer loans to H&R Block's tax prep customers in the December quarter. We retained 10% of the Emerald Advance loans, resulting in approximately $40 million of incremental loan balances at December 31st On January 4th, we started originating refund advance loans to qualified H&R Block tax prep customers. This program, which charges no interest or fees to the borrower, is 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 year with $12.3 billion of assets, crossing the $10 billion threshold related to the Durban Debit Interchange exemption. As we stated on our last earnings call, we expect a relatively de minimis impact on our bank's direct interchange as a result of Durban in our calendar year 2020. We continue to work with H&R Block on a resolution of the interchange revenue loss to H&R Block from the Emerald Card products. Because the impact of Durban does not impact our own or H&R Block's interchange rates until July 1, 2020, We do not expect any impact on our economics or H&R Block's economics from the Emerald 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 update to share with respect to whether a resolution satisfactory to both parties will be reached and in what time frame. Our security segment... which includes Axos Clearing, our securities clearing and custody business for introducing broker-dealers, and independent RIAs and Axos Invest, our direct-to-consumer digital wealth management, continues to make steady progress. We have enhanced functionalities, streamlined operational systems and processes, and added new clients over the past several quarters. Axos Invest ended calendar 2019 with approximately 32,000 funded accounts with over 200 million of assets under management, meaningfully from the 24,000 accounts and $150 million of assets under management, we closed the acquisition in March of 2019. We updated the account opening workflow for Access Invest in mid-December, which resulted in a measurable improvement in our account conversion rate. We are starting to see some early traction with respect to cross-seller checking accounts and mortgage referrals to digital wealth customers. The numbers are de minimis from a dollar perspective, We expect gradual improvements in cross-sell as we complete single sign-on through online banking for Axos Invest and roll out 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, a 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 Exos Clearing was negatively impacted by a reduction in fees paid by third-party banks on the off-balance sheet cash sweeps. Exos Clearing signed two new IBD firms and two RA custody firms with approximately $200 million in AUM in the December quarter. We have a robust pipeline of clearing and custody clients and typically take several quarters to transition their book of business to access. We are building our sales and services infrastructure to accelerate our capacity to serve independent RIAs. With potential market disruption as a result of the 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 in wealth management. We have a broad technology and product suite to help independent RIAs grow their practices. We also have a number of technology and product initiatives that we will be introducing over the next three to 12 months, including enhanced RIA custody capabilities, white-label 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 through 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 offices allow us to better serve existing and new clients in those two large metros. We have a solid pipeline of new commercial deposit and 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 closed 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, bringing in a meaningful amount of non-interest-bearing deposits to our bank at the end of the December quarter. In 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 detail our strategies to position ourselves for the future and become a more diversified and profitable institution. A 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 for 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 the 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 continue to deliver across each of our long-term financial targets, including low teens loan growth and an annual consolidated return on equity at or above 15%, while maintaining stable to growing net interest margins. 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 plans. Our intense focus on continuous improvement in credential 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. 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 at accessfinancial.com. Second, I will highlight a few areas rather than go through every individual financial line item. Please refer to our press release or attend queue for additional details. As Greg indicated earlier, AXA's net income for the second quarter ended December 31, 2019, was $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. The net interest margin for the banking business grew to 3.94% of 11 basis points compared to 3.83% last quarter and up four basis points compared to the prior year. The late 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 deposits 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 and business accounts. As a result, the average rate on interest-bearing demand and savings accounts decreased 25 basis points, and the total cost of funds for the banking business segment decreased 15 basis points on a linked quarter basis. Partially offsetting 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 decline in 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 due to 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 3.80% to 4%. Turning to asset quality, our basic metrics remain 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, the total assets, also declining five 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 doubtful at September 30, 2019, and fully reserved at the end of last quarter. Given the circumstances of this loss and 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 1st 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 Lott. Thanks, Andy.

Operator, we're ready to take questions.

Thank you. An opportunity to ask you a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Steve Moss from B. Riley FBR. Your line is now live.

Good afternoon, guys. This is Nick Dufala stepping in for Steve Moss. Hi, how are you doing? Good. So I have a question regarding expenses and if you guys could kind of walk us through operating expenses for 1-2-20 and and how they escalate through the remaining part of the year.

Well, 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, and I'll divide that into sort of sales and production-oriented personnel and then infrastructure personnel. Okay. 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. 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's just a management issue there. But as we grow the bank and we increase the asset and deposit base, then there would be a commensurate increase in that banking talent. With respect to how much that costs, as 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 costs. 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 just 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 automated and sophisticated its 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 its current book of business, but rather it's more to prepare for scalable growth in those segments, given their relatively small size, without having to add commensurately personnel. So, in other words, by us putting in 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 reductions way in the new year. So, Andy, I don't know if you have anything else to add.

Yeah, I'll just comment on probably three just run rate 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 smaller banks, have been getting a credit from the FDIC and So as a net result, when we 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, we're at 1.1. I would expect us to approach the 4 million on a run rate as the credits start to diminish, which that program is starting to end. So you'll have a small uptick in FDIC insurance. In looking at linked quarter, Depreciation and amortization increased about a million dollars. 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 that's the largest of the incremental growth items there. we will continue to have some increase in depreciation 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 the million to have growth larger than the million we have this quarter. In 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 a million-dollar 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, you know, expenses should increase, but not large.

Okay, thank you. That was very helpful, and Thank you for all that information. It sounds like on a technology front, at least near term, you guys are pretty well equipped there. I also was thinking about how you guys are thinking on ready mortgage balances given the lower rate environment and kind of what you're seeing on that side of the business.

It works.

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 and not a lot of ongoing growth. But we continue to have that as a focus and we continue to work on mechanisms of uh of stabilizing that business and uh you know i think that um that we did see a little bit uh we're seeing a little bit lower prepayment indications um but i i don't think we can expect that business to be a significant grower in the next uh several quarters um But it's an interesting business just given some increased competition in certain areas that we're paying attention to. And in some cases, we're simply letting business go that we don't really think we want to participate in. So that's just going to be something we have to watch on an ongoing basis.

Okay. Thanks for that. I'll step back in the queue.

Thank you. Our next question is coming from Andrew Leisch from Piper Sandler. Your line is now live.

Good afternoon, guys.

Hey, Andrew.

Hi. So just the non-interest-bearing deposit growth here, I know you walked through some of it, but $2.6 billion at quarter end, what was the big driver? It sounds like you moved some interest-bearing accounts and non-interest-bearing, you had some epic deposits come over, and maybe you had another larger commercial share. Is this a good level of non-interest bearing accounts here, or is there going to be some outflows from here? Where do you see this moving going forward?

Go ahead, Andy.

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

Okay. And then it does sound like you are having some pretty good success bringing in non-underspring accounts and reclassifying others. I mean, the 380 to 4% margin range is pretty wide, especially with some of the success you had this quarter. And before, I think you had said, like, towards the lower end of that. I mean, is there – with 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?

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

Okay. You guys, thanks. You guys covered all my other questions that I had today. I'll step back. Thank you.

Thank you.

Thank you.

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

Hey, good afternoon, guys. Happy New Year. Happy New Year, Michael. Thanks for taking my questions. I wanted to start on core. If I'm looking at the broker-dealer fees, they've been in a pretty tight range the last couple quarters, but And I apologize, I did jump on the call a few minutes late, but it sounds like you had added a couple new clients there. And I think if I recall at the analyst day, you guys were talking about opportunities for efficiency improvements specifically in that business. So I guess my question is, is it mostly revenue driven at this point? I mean, I know you're answering an earlier question. It sounds like there wasn't anything material on the expense side. It 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 the timeline for adding more clients and growing that revenue stream going forward?

Yeah, 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, you know, 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 several-fold. We have a reasonable pipeline right now of new clients, and those clients, you know, multiple quarters to come on board and generate revenue. So there's that component of that immediate business there. Then there's other clients that we're talking with that are 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... and others will put us more at table stakes. So I think 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's a lot of companies, including the largest providers, that have a great product for their clients here.

So is it fair to say that, you know, I mean, 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 ability.

Yeah, I think that's right. I think that the reality of both those businesses is that they're 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 needs to serve clients in a holistic way than they are, you know, a next couple quarters lift sort of items. I basically forecast Flattish with respect to them.

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

Yeah, sure. 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 in with partners that we've had 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 an extended period of time, and now I think we're reaping the benefit of those relationships.

Got it. And then just lastly, 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?

Well, with respect to the capital side, obviously, I mean, we've continued to grow our Tier 1 leverage ratios, and as there's no sort of max moves and 50%, 100% risk-weighted, I do think that, you know, thinking about the max of capital given our relatively low double leverage ratio or our 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 all the items that we outlined in 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 updates there to share.

Okay. So, I mean, is it from a timing perspective, is it fair to think that, you know, 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?

Yeah, 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, you know, leverage ratio grow, and obviously we're You know, I don't think – clearly, we don't need equity, sort of common equity. So, you know, the options are obviously other than that.

Got it. Helpful. Thank you for taking my questions, guys. Appreciate it.

Sure. Thank you.

Thank you. As a reminder, it's star 1 to be placed into question queue. Our next question today is coming from David Cimarini from Wedbush Securities. Your line is now live.

Hi, thanks. A couple 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 to take advantage of this?

You know, I think that it probably is the case that there is justification for doing that. However, what... What we're trying to do, because there's a number of elements that are kind of running simultaneously through the items that we have to do. So, for example, a lot of the retail platform elements that we're working on are very valuable, and when they're seen by RIAs or independent broker-dealers, they truly are unique items. whether it's the account opening features or the robustness of the banking platform. And those things kind of all have to move together. So, you know, we're working hard on it. And, you know, I think there is a case for that. And if you can reincarnate – my investor base as a set of fintech investors or, you know, 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, you know, you get a sense from client discussions how frustrated they are with existing players, how unhappy they are. a lot of those kind of things, and you can kind of feel that. And that's the sort of thing we've always had around here before, you know, often years before opportunities show up, right? So I remember when I first started talking to people about C&I lending, you know, five, six years ago, and, you know, and then I would get comments, you hired somebody. And two quarters later, 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 investors' job these days to be short-term. And so, you know, that kind of yin and yang sort of ends up in a place – that you've got to balance. So yeah, I do think that there's a lot of opportunity. I think that's a really insightful question because I think maybe given where you're from, you understand the opportunities.

That makes sense. Thanks. And then shifting gears on 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? Are competitors offering underwriting terms that are too loose? Or is it simply not enough supply in your niche to generate growth?

I think that it's the emergence of a variety of conduit-style opportunities that are creating an alternative outlook or outlet for products that we're not necessarily inclined to balance sheet. We've always had a very conservative perspective with respect to what we balance sheet, 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, you know, 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 industry. and through actually a special subsidiary of the securities subsidiary. So, you know, there may be some ability to participate in that, but I don't, that would then result in some fee income, you know, that would be generated, but it's just a fundamentally different business than what we have been historically doing on the portfolio side.

Great. Thanks very much.

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

All right. Thank you, everyone, for your attention and support, and we'll talk with you next quarter.

Thank you. That does conclude today's teleconference. Let me just connect your line at this time and have a wonderful day. We thank you for your participation today.