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Axos Financial, Inc. (AX) Q2 2020 Earnings Call Transcript

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Axos Financial, Inc. (NYSE: AX)
Q2 2020 Earnings Call
Jan 29, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Axos Financial Second Quarter 2020 Earnings Results Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions]

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

Johnny Lai -- Vice President, Corporate Development & Investor Relations

Thank you, and good afternoon everyone. Joining us today for Axos Financial, Inc. 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 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 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 subsidiaries can be identified by common used forward-looking terminology, and those statements involve unknown risks and uncertainties, including all business-related risks that are more detailed in the 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 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 in today's press release.

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

Gregory Garrabrants -- President & 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 year 2020 ended 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's 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 for 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 and certain C&I loan portfolios. Total assets reached $12.3 billion at September 31 -- 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 mere 3 basis points linked quarter to 5.56%, while average funding cost declined 15 basis points to 1.88%. The sequential improvement in funding cost was a function of higher average non-interest bearing deposit balances and lower average cost 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 ended 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 3.94%, up 4 basis points year-over-year and up 10 basis points from the quarter ended September 30, 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 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 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-cash depreciation 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 a previously identified factoring receivable, our net charge-off to average loan and leases was less than 1 basis point this quarter. Non-performing assets to 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 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 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 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 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% 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%; an 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 of 3 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 of 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 1 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 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 each business. While we anticipate strong originations across most lending categories in the second half of our fiscal 2020, our average 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 on 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 were 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, compared to 65% at December 31, 2018. The improvement reflects our success replacing higher cost time deposits into lower cost checking, savings and money market deposits.

We kicked off for 2019-2020 tax season by originating approximately $412 million of Emerald Advance unsecured 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 31, 2019. On January 4, 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 through 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 Durbin 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 turbine 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 Durbin 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 timeframe.

Our Securities segment, which includes Axos Clearing, our securities clearing and custody business for introducing broker dealers and independent RIAs and Axos Invest, our direct-to-consumer digital wealth management, continues to make 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, up meaningfully from the 24,000 accounts and $150 million of assets under management we closed the acquisition in March 2019. We updated account opening workflow for Axos 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-sell the checking accounts in mortgage referrals to digital wealth customers. The numbers are de minimis from a dollar perspective, but 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 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 decrease 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 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 size RIAs. We do not compete with RIAs in wealth management, and we have a broad technology and product suite to help independent 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 17 through 18.

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 that 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 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, a 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 their 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 in 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 business 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 achieved 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 and 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 J. Micheletti -- Executive Vice President & 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 it's available online through EDGAR or through our website at 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 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%, up 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 and 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 the 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 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, 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 4.00%.

Turning to asset quality. Our basic metrics remained strong this quarter compared to last quarter, with the ratio of non-performing loans to total loans declining 5 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, remained 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 receivable 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 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 1 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 -- Vice President, Corporate Development & Investor Relations

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

Questions and Answers:

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.

Nicholas Duafala -- B. Riley FBR, Inc. -- Analyst

Good afternoon, guys. This is Nick Duafala stepping in for Steve Moss.

Gregory Garrabrants -- President & Chief Executive Officer

Hi, how are you doing?

Nicholas Duafala -- B. Riley FBR, Inc. -- Analyst

So I have a question regarding expenses and if you guys could kind of walk us through -- operating expenses for 1Q20, how they escalate through the remaining part of the year?

Gregory Garrabrants -- President & Chief Executive Officer

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 borrowing 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 has 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 are 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 performed 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, I've 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 cost 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 all 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 securities segment, on the securities segment side given the relative maturity of that segment and the -- I would say the less automated and sophisticated operations, there is 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 the relatively small size without having to add commensurately personnel. So in other words, by us putting 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 in the cost of personnel in any significant way in the New Year.

So Andy, I don't know, do you have anything else?

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

Yeah. I'll just comment on probably three, you've 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. 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 billion. 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.

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 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.

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 $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 works. 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.

Nicholas Duafala -- B. Riley FBR, Inc. -- Analyst

Okay, thank you. That was very helpful 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 kind of what you're seeing on that side of the business.

Gregory Garrabrants -- President & Chief Executive Officer

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 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 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 is going to be something we have to watch on an ongoing basis.

Nicholas Duafala -- B. Riley FBR, Inc. -- Analyst

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

Operator

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

Andrew Liesch -- Piper Sandler -- Analyst

Good afternoon, guys.

Gregory Garrabrants -- President & Chief Executive Officer

Hey, Andrew.

Andrew Liesch -- Piper Sandler -- Analyst

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's something you move some interest bearing accounts into non-interest-bearing. You had some Epiq deposits come over and maybe you had another larger commercial balance. 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?

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

Yeah, I think we've always kind of look at seasonal differences. So yes, this next quarter, of course, we have Block where we have seasonal increases in non-interest bearing. But the bottom line, majority of 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 one settlement's get paid. So, we can't tell you how fast we would amortize off, but there is a chance that it's going to be -- come down faster than our normal Chapter 7 balances.

Andrew Liesch -- Piper Sandler -- Analyst

Got you. Okay. And then -- but it does sound like you're having some pretty good success bringing in non-interest bearing accounts and reclassifying others. I mean the 3.80% to 4.00% margin range is, it's pretty wide especially with some of the success you had this quarter. And before I think you had said like toward the lower end of that, I mean is there with the success you've had on the funding side, I mean we creeping up closer to the middle part of the range is a better place to be forecasting?

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

I think it might be a bit premature, but obviously, we always try to do that. I think also you have to bear in mind that there is just more broadly with respect to our loan growth targets and maybe pressure on the asset side and with respect to the ability, if we're able to maintain and sustain some of these non-interest-bearing balances, but 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 -- the inflows and the outflows are not always predictable enough to make that conclusion right now.

Andrew Liesch -- Piper Sandler -- Analyst

Okay. You guys -- I think you guys have covered all my other questions that I had today. I'll step back.

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

Thank you.

Operator

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

Michael Perito -- Keefe Bruyette & Woods -- Analyst

Hey, good afternoon guys. Happy New Year.

Gregory Garrabrants -- President & Chief Executive Officer

Happy New Year, Michael.

Michael Perito -- Keefe Bruyette & Woods -- Analyst

Thanks for taking my questions. I wanted to start on core. If you look at -- if I'm looking at the broker-dealer fees, they are in a pretty tight range last couple of quarters. But -- and I apologize to jump on the call a few minutes late. 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 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 answered an earlier question. It sounds like there wasn't anything material on the expense side, 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?

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

Yeah, I think you stated it reasonably accurately. There certainly is lots of manual processing and opportunity is 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's -- 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 take multiple quarters to come on board and generate revenues, so that there are -- there is that component of that immediate business there. Then there is other clients that, that we're talking with that are -- they are substantive, they are 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 is 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 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 and other businesses to really create a great product, and I don't think there is a lot of companies, including the largest providers that have a great product for their clients there.

Michael Perito -- Keefe Bruyette & Woods -- Analyst

So is it fair to say that 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 discuss kind of are full force in terms of your ability to [Speech Overlap].

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

Yeah, I think that's right. I think that the reality of this business -- of both those 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 the long-term needs to serve clients in a holistic way than they are next couple of quarters lift sort of items. I basically forecast flattish with respect to them.

Michael Perito -- Keefe Bruyette & Woods -- Analyst

Got it. That's helpful. Great. Thank you. And then I was wondering if you could just 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 business has been and what you think kind of the Axos value proposition is there, that's really made a difference, has been able to drive that growth over the last 12 to 18 months.

Gregory Garrabrants -- President & Chief Executive Officer

Yeah, sure. I think it's -- 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 long-standing relationships, which 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 benefit of that -- of those relationships.

Michael Perito -- Keefe Bruyette & Woods -- Analyst

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?

Gregory Garrabrants -- President & Chief Executive Officer

Well, with respect to the capital side, obviously, I mean we've continued to grow our Tier 1 leverage ratios. And as we -- as the business sort of next moves in 50%, 100% risk-weighted, I do think that thinking about the [Indecipherable] capital given our relatively low double leverage ratio or a much lower double leverage ratio than the industry average will be something we continue to look at. I don't know 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 at 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.

Michael Perito -- Keefe Bruyette & Woods -- Analyst

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

Gregory Garrabrants -- President & Chief Executive Officer

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 leverage ratio grow and obviously, I don't think -- clearly, we don't need equity, sort of common equity. So, the options are obviously other than that.

Michael Perito -- Keefe Bruyette & Woods -- Analyst

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

Gregory Garrabrants -- President & Chief Executive Officer

Sure. Thank you.

Operator

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

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. 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 to take advantage of this?

Gregory Garrabrants -- President & Chief Executive Officer

I think that there -- I think that it probably is the case that there is justification for doing that. However, what we're trying to do, because there is 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 are 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 things kind of all have to move together. So we're working hard on it and I think that -- I think 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 is a lot of market opportunity here. And you get a sense of it 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 a 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 C&I lending five, six 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 like that 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, that kind of yin and yang sort of ends up in a place that that you've got a balance. So yeah, I do think that there is a lot of opportunity. I think that's a really insightful question because I think maybe given you're -- where you're -- from you understand the opportunities.

David Chiaverini -- Wedbush Securities -- Analyst

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 or competitors offering underwriting terms that are too loose or is it simply not enough supply in your niche to generate growth?

Gregory Garrabrants -- President & Chief Executive Officer

I think it's the emergence of a variety of conduit style opportunities that are creating an alternative outlook for prior outlet for products that we are not necessarily inclined at 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 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 security 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 side.

David Chiaverini -- Wedbush Securities -- Analyst

Great, thanks very much.

Gregory Garrabrants -- President & Chief Executive Officer

Thank you.

Operator

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

Gregory Garrabrants -- President & Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Johnny Lai -- Vice President, Corporate Development & Investor Relations

Gregory Garrabrants -- President & Chief Executive Officer

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

Nicholas Duafala -- B. Riley FBR, Inc. -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

Michael Perito -- Keefe Bruyette & Woods -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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