Earnings Call Transcript - AX Q2 2020

Operator, Operator

Greetings, and welcome to the Axos Financial Second Quarter 2020 Earnings Results Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to introduce our host, Johnny Lai. Please go ahead.

Johnny Lai, Host

Thank you and good afternoon everyone. Joining us today for Axos Financial Inc's second quarter financial results conference call are the Company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on our financial and operational results 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 subsidiary can be identified by common usage of forward-looking terminology and those statements involve unknown risks and uncertainties, including all business-related risks. There are more detailed in the Company's filings on form 10-K, 10-Q, 8-K with the SEC. This call is being webcast and there will be an audio replay available within 30 days in the Investor Relations section of the Company's website located at axosfinancial.com. All the details of this call were provided on the conference call announcement and today's press release. At this time, I'd like to turn the call over to our CEO, Greg Garrabrants, who will provide opening remarks. Greg, please begin.

Greg Garrabrants, CEO

Thank you, Johnny. Good afternoon everyone, and thank you for joining us. I'd like to welcome everyone to the Axos Financials conference call for the second quarter of fiscal year 2020, end of December 31, 2019. I thank you for your interest in Axos Financial and Axos Bank. Axos announced record quarterly second quarter net income of $41.3 million for the fiscal second quarter ended December 31, 2019, up 6.3% from the $38.8 million earned in the fiscal second quarter ended December 31, 2018, and up 1.2% compared to the $40.7 million earned in the prior quarter. Earnings attributable to Axos' common stockholders were $41.2 million, or $0.67 per diluted share for the quarter ended December 31, 2019, compared to $0.61 per diluted share for the quarter ended December 31, 2018, and $0.66 per diluted share for the quarter ended 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 loans 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 in equipment leasing were offset by lower production in jumbo single-family and interest rate payoffs in multi-family uncertain commercial and industrial loan portfolios. Total assets reached $12.3 billion as of 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 nearly 3 basis points linked-quarter to 5.56%, while average funding cost declined 15 basis points to 1.88%. The sequential improvement in funding costs was a function of higher average non-interest bearing deposit balances and lower average costs on interest-bearing deposits, excluding the impact from H&R Block, seasonal loan products and excess liquidity in 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 3.4%, up basis points year-over-year and up 10 basis points for the quarter ended September 30, 2019. Our efficiency ratio for the three and six-month periods ended December 31, 2019 were 51.66% and 52.04% compared to 46.47 and 48.89 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 remained solid at 43.87% for the six months ended December 31, 2019 compared to 42.65% for the six months ended December 31, 2018. Capital levels remained strong with Tier 1 leverage ratio of 9.16% for the bank, compared to 9.03% in the year ago period, meeting all of our regulatory requirements for both periods. Return on equity was 14.35% for the second quarter of 2019 compared to 15.29% in the corresponding period last year. Excluding one-time merger-related expenses, non-cash depreciation and amortization expense, our non-GAAP adjusted return on equity would have been 14.19% in the second quarter of 2020. Our credit quality remains good, with a $12.1 million charge-off of a previously identified factoring receivable, by net charge-off to average loans 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 multi-family loans with low loan-to-value ratios. We remain well reserved with our allowance for loan loss representing 112.9% coverage of non-performing loans and leases at December 31, 2019. Ending loan balances increased by 12.5% year-over-year to $10.1 billion due to strong originations in commercial, industrial, 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 multi-family, and another commercial real estate portfolio production totaling $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 for the originated multi-family loan was 59.0 and the debt service coverage was 1.26, and the average loan-to-value ratio of the originated small balance commercial real estate loans was 62.8, and the debt service coverage was 1.42. The average FICO of the auto production was 757. As of 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%, with less than 1% having a loan-to-value ratio greater than 80%. We have a well-established track record of strong credit performance in jumbo single-family mortgage lending with lifetime credit losses in our originated single-family loan portfolio of 3 basis points of loans originated. We have approximately $2.2 billion of multi-family loans outstanding at December 31, 2019, representing approximately 21% of our total loan book. Growth in our multi-family loan production has been solid. The weighted average loan-to-value ratio of our multi-family loan book is 52% based on the appraised value at the time of origination. Approximately 65% of our multi-family loans are at 60% loan-to-value, 29% are between 60% and 70% and 4% are between 70% and 75%, with less than 2% of our multi-family loans having a loan-to-value ratio above 75%. For lifetime credit losses in our originated multi-family portfolio are less than 1 basis point of loans originated over the 18 years we have originated multi-family loans. Our C&I lending business posted an outstanding quarter with record quarterly originations of $738 million and ending balance of $2.4 million. We continue to see good demand across our diverse lending categories including commercial real estate, specialty lending, lender finance, and equipment finance. We have also expanded our relationships and core C&I lending businesses and added new experienced team members to further expand our geographic coverage and commercial loan types. Loan demand remains solid across most of our lending categories and markets supported by low unemployment, rising wages, stable to rising home prices, and corporate profitability and stock market values near record highs. Our loan pipeline was $1.1 billion at December 31, 2019, consisting of $437 million of single-family jumbo loans, $123 million of single-family agency mortgages, $190 million of income property loans, and $389 million of C&I loans. We continue to transition our portfolio away from single-family lending into C&I lending and commercial real estate lending given the relative risk-adjusted returns across these businesses, but we anticipate strong originations across most lending categories in the second half of our fiscal 2020. Our average lending loan balances will fluctuate from quarter to quarter based on the pace of prepayments. Switching to funding, total deposits increased $1.8 million or 21.3% year-over-year and $900 million linked quarters to $10.1 billion. We had growth in deposits primarily in small business treasury management, specialty deposits including Axos Fiduciary Services. We continue to have success growing our non-interest bearing deposits with average non-interest bearing deposit balances increasing by over $300 million in the December quarter. As of 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 represented 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 deposits. We kicked off our 2019-2020 tax season by originating approximately $412 million of Emerald Advance unsecured consumer loans for H&R Block 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 charges no interest or fees to the borrower and 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 in our last earnings call, we expect a relatively minimal impact on our bank's direct interchange as a result of Durbin in our calendar year 2020. We continue to work with H&R Block on the resolution of the interchange revenue loss to H&R Block from the MO card products. Because the impact of Durbin does not alter our or H&R Block's interchange rates until July 1, 2020, we do not expect any insights on our economics or H&R Block's economics from the MO card before July 1, 2020 when this ongoing tax season will be substantially complete. Although we continue to have active discussions with H&R Block regarding the future of our relationship, we have no updates to share regarding whether a resolution satisfactory to both parties will be reached and in what timeframe. Our security segment, which includes Axos Clearing, our securities clearing and custody business for introducing broker-dealers and independent registered investment advisors, 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, in calendar 2019, added approximately 32,000 funded accounts with over $200 million of assets under management, up significantly from the 24,000 accounts and $115 million of assets under management we had when we closed the acquisition in March of 2019. We updated the account opening workflow for Axos Invest in mid-December, which resulted in a measurable improvement in our account conversion rate. We're starting to see some early traction with respect to cross-selling checking accounts and mortgage referrals to digital wealth customers. The numbers are minimal from a dollar perspective, but we expect gradual improvements in cross-selling as we complete single sign-on through online banking for Axos Invest and rollout self-directed trading, gamification, and other personalization features later this year. In Axos Clearing, broker-dealer fee income was $5.6 million and $11.2 million for the three and six months ended December 31, 2019, respectively. Clearing and custody fees were roughly flat linked quarter, while fees earned on FDIC insured bank deposits were down. Securities lending revenue and margin lending revenue both declined this quarter as our introducing broker-dealer clients decreased their risk tolerance and trading activity was lower as a result of reduced stock market volatility. Ending customer margin balances were approximately $226 million on December 31, 2019, compared to $275 million on September 30, 2019, with the Federal Reserve lowering rates by 25 basis points in the December quarter and by 75 basis points in calendar 2019. Non-interest income for Axos Clearing was negatively impacted by a reduction in fees paid by third-party banks on the off-balance sheet cash sweeps. Axos Clearing signed two new introducing broker-dealer 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, which typically takes several quarters to transition their book of business to Axos. We are building our sales and services infrastructure to accelerate our capacity to serve independent RIAs. With potential market disruption as a result of the pending Schwab and 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 several technology and product initiatives that we will be introducing over the next 3 to 12 months, including enhanced RIA custody capabilities, white-labeled banking services for high-net-worth clients of independent RIAs and IBDs, and private label digital wealth management for RIAs and other strategic partners. We look forward to hosting existing and prospective clients at our inaugural Axos Clearing Client Conference in San Diego, April 17th to the 18th. We continue to grow and diversify our commercial and specialty deposit businesses. Over the past 12 to 18 months, we have added senior commercial bankers and opened a commercial loan and deposit office in downtown Los Angeles and Midtown Manhattan. The teams are focused on expanding into new deposit and lending verticals, and these 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 won a competitive mandate for a new fiduciary services client, bringing in a significant amount of non-interest bearing deposits to our bank at the end of the December quarter. This is 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. The core component of our strategy is to use technology and data to create a more convenient, personalized, and integrated customer experience. Our universal digital banking platform, now deployed across multiple consumer businesses, with more integration in the near future, enables rapid deployment and ongoing improvements to the platform. The integration of the Axos Invest client data inside our universal digital bank, the addition of more streamlined account opening and risk assessment tools 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 out our universal digital bank. With the addition of single sign-on for Axos Invest, self-directed trading inside the universal digital bank, and integration of banking services within our clearing and custody platform on our development roadmap, we see a perpetual cycle of innovation that will further enhance our ability to serve customers effectively across our three businesses: consumer banking, commercial banking, and securities. I'm pleased with the execution by our team members on our ambitious growth objectives. Against the backdrop of increased competition and volatile interest rates, we continued to deliver across each of our long-term financial targets, including low teens loan growth and an annual 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 plan. Our intense focus on continuous improvement in prudent capital management positions us well to execute on behalf of our clients and shareholders. Now, I'll turn the call over to Andy, who will provide additional details on our financial results.

Andrew Micheletti, CFO

Thanks, Greg. First, I wanted to note that in addition to our press release, our 10-Q was filed with the SEC today and is available online through EDGAR or through our website, axosfinancial.com. Second, I will highlight a few areas rather than go through every 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, primarily due to loan growth and the maintenance of our net interest margin. Net interest income grew by $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%, 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 the result of shifting more average deposit balances to non-interest bearing accounts, reducing our interest-bearing deposit rates, adding the seasonal H&R Block Emerald Advance loans, and overall growth in our average interest-earning assets. As a result, interest and dividend income grew by $2.7 million, while the cost of funding declined by $3.1 million on a linked quarter basis. Average loan balances increased by $240 million, while average non-interest bearing deposits grew by $302 million this quarter, providing the opportunity to redeploy existing higher cost savings accounts, primarily municipal savings, into no-cost or lower-cost deposits, primarily fiduciary assistance accounts. As a result, the average rate on interest-bearing demand and savings accounts decreased by 25 basis points, and the total cost of funds for the banking business segments 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 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, and 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 by $0.6 million primarily due to market rates declining during the quarter. Interest expense decreased by $0.7 million, reflecting lower levels of lending activities requiring less borrowing. As Greg mentioned, due to the variety of our funding sources, we continue to expect our consolidated net interest margin for this fiscal year to be in line with last fiscal year and maintain our historical range of 3.8% to 4%. Turning to asset quality, our basic metrics 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 to 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 previously disclosed receivables factoring for one bank customer. This was classified as helpful at September 30, 2019 and fully reserved at the end of last quarter. Given the circumstances of this loss 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 point 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 by 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, while 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, Host

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

Operator, Operator

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

Nick Dufala, Analyst

Good afternoon, guys. This is Nick Dufala, stepping in for Steve Moss. I have a question regarding expenses and if you could walk us through operating expenses for Q1, '20. How do they escalate to the remaining part of the year?

Greg Garrabrants, CEO

Let me give you a high-level overview, and then Andy can jump in with any 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 feel relatively good about our technology investments, and barring small changes, we should be able to complete our objectives with respect to those technological goals without adding significantly to our expense base. That's good news. There's been substantial investment over the last number of years, and we have a large staff now that has a strong pipeline of activities. They are accomplishing tasks and moving on to new ones. The next piece is that we continue to expand the sales team and commercial bankers. Some of those bankers perform well; some do not. That is a management issue. However, as we grow the bank and increase the asset and deposit base, there will be a commensurate increase in that banking talent. Regarding costs, I think it’s important to reiterate that as we blend a more retail online banking business with a more traditional commercial business, there will be different levels of operating costs concerning the business. We have higher levels of non-interest-bearing deposits, but that comes with a commensurate increase in personnel costs. In more automated businesses, you'll have lower levels of personnel with a higher cost of funds. These expenses are very much associated with growth; if the growth isn’t there, the cost isn’t there based on personnel management and commission structures. We do not have any significant new office plans from a real estate perspective for the remainder of the year, and we're going to let the offices we've opened season. With respect to the securities segment, given its relative maturity, we do not expect significant cost savings associated with the current book of business but rather it’s more to prepare for scalable growth without adding personnel.

Andrew Micheletti, CFO

Yes, I'll just comment on probably a few areas. Looking at this quarter's operating expense and thinking about operating expense going forward, one area where we've had a benefit has been in FDIC insurance, where banks have received a credit from the FDIC. Looking at our numbers, last year we were at $4.4 million in FDIC insurance. This year, on a six-month basis, we are at $1.1 million, but I would expect us to approach $4 million on a run rate as those credits start to diminish. So, you'll likely see a small uptick in FDIC insurance. Linked quarter depreciation and amortization increased by about $1 million, which is exclusively for our software deployed in the unity software in our fiduciary business. I don't expect the largest growth item to be larger than the million we have this quarter. Looking at salaries and wages, they were down on a linked quarter basis due in part to a little more capitalization of labor this quarter, providing a $1 million benefit. I don't think we can consistently count on that benefit every quarter. It entirely depends on the development team. Overall, we're pleased with the small increase this quarter, but we do expect expenses to rise, especially with normal seasonal increases next quarter.

Nick Dufala, Analyst

Thanks for all that information. It sounds like on the technology front, at least in the near term, you're pretty well equipped. I also was thinking about how you are approaching residential mortgage balances given the lower rate environment. What are you seeing there?

Greg Garrabrants, CEO

We continue to be hopeful for some stabilization in that portfolio. We have seen some slight upticks in the pipeline. Unfortunately, we are really shooting for stabilization there, so not a lot of ongoing growth, but we are continuing to work on mechanisms to stabilize that business. We're seeing lower prepayment indications, but we cannot expect that business to significantly grow in the next several quarters. The business has increased competition in certain areas, and we are letting some business go that we do not wish to participate in. So, we need to continue monitoring that on an ongoing basis.

Operator, Operator

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

Andrew Liesch, Analyst

The non-interest bearing deposit growth here. I know you walked through some of it, but $2.6 billion at that quarter end. What was the big driver? Did you move some interest bearing accounts to non-interest bearing? Have you had some large commercial balances come over? Is this a good level of non-interest bearing accounts? Or are there going to be some outflows from here? How do you see this moving forward?

Greg Garrabrants, CEO

Yes. I think we've always experienced seasonal differences. In the next quarter, we'll have a block where we see seasonal increases in non-interest bearing accounts. However, the majority of that growth was due to two fiduciary balances that came in. We do not expect that to remain at the same level since it depends on settlements and when settlements get paid. So, we cannot tell you exactly how fast those will advertise off, but they may decline faster than our normal Chapter 7 balances.

Andrew Liesch, Analyst

It does sound like you're having some positive success bringing in non-interest bearing accounts and reclassifying others. I understand the margin is fairly wide, especially with your success this quarter. Given these factors, are we creeping up closer to the middle part of that range for forecasting?

Greg Garrabrants, CEO

Yes, I think that might be a bit premature, but we always try to do that. You also have to keep in mind that concerning our loan growth target, there may be pressure on the asset side. If we can maintain some of these non-interest bearing balances, the nature of various elements can occur at different times. Thus, it would be premature to make conclusions about this right now.

Operator, Operator

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

Michael Perito, Analyst

Thanks for taking my questions. I want to start on core broker-dealer fees. They've been pretty stable over the last couple of quarters. It sounds like you added a couple of new clients there, but if I recall correctly, you mentioned at the Analyst Day, you discussed opportunities for efficiency improvements within that business. Is it mainly revenue-driven at this point? Also, what’s the timeline for adding more clients and growing that revenue stream?

Greg Garrabrants, CEO

I think you stated it reasonably accurately. There are certainly many manual processes and opportunities to utilize the tools we’ve implemented across other businesses to improve efficiency and create a better, more resilient operation. However, the reality of the business is its relative size. It’s challenging to forecast that we’ll significantly reduce our expenses. We have a reasonable pipeline right now of new clients, but they take multiple quarters to onboard before generating revenues. There are additional larger strategic clients we are talking with, but some technological items must be completed before we can compete for those types of clients. For example, one potential client has $700 million in reasonably low-cost deposits. We need to implement technological elements to compete effectively, which will take about a year to 15 months to deploy. While I cannot guarantee securing those clients, once it’s deployed, we’ll have best-in-class technology in some areas and we’ll be at the table stakes in others. We’re weeding out clients that do not fit our core strategy, and we’re investing in capabilities to create a robust product to serve our clients.

Michael Perito, Analyst

Is it fair to say that for base case expectations for this business, we should see a revenue lift this year, but there should be more significant growth next year as you sort out these capabilities?

Greg Garrabrants, CEO

Yes, that’s correct. The reality is these businesses are more long-term plays, and I wouldn’t expect significant growth this year. They are strategic to serve clients holistically for the long term rather than expecting short-term results in the next couple of quarters. I’d forecast flat outcomes concerning them.

Michael Perito, Analyst

Got it. That’s helpful. Can you provide some insight into the commercial and specialty real estate segment growth? What types of opportunities have you capitalized on, and what value propositions have driven this growth in the last 12 to 18 months?

Greg Garrabrants, CEO

We have many institutional relationships with strong partners who have grown to trust us over time. Our ability to undertake risk positions that we feel comfortable with and work with partners with whom we have longstanding relationships allows us to be the first call for those transactions. These partnerships include many of the largest funds and private equity firms in the world, and we believe we are reaping the benefits of those relationships.

Michael Perito, Analyst

Lastly, can you share updated thoughts on capital levels and what priorities beyond organic growth might look like for fiscal 2020?

Greg Garrabrants, CEO

Regarding capital levels, we continue to grow our Tier 1 leverage ratios. As the business next moves in 50%, 100% risk-weighted, we need to consider the maximum capital given our relatively low double leverage ratio compared to the industry average. I do not have any definitive updates, but we will keep looking at those aspects. Concerning our global outlook, items outlined at the investor day are on track, and we are continuing to execute the strategic plan without substantial updates to share. From a timing perspective, is it fair to think that capital will probably build over the next couple of quarters, and as you reach the end of fiscal 2020, there might be more to communicate?

Operator, Operator

Thank you. Our next question is coming from David Chiaverini from Wedbush Securities. Your line is now live.

David Chiaverini, Analyst

Hi, thanks. A couple of questions for you. First, on clearing, you mentioned the significant opportunity given the merger between Schwab and TD Ameritrade. Have you considered accelerating investments in the clearing business to take advantage of this?

Greg Garrabrants, CEO

I think there is probably justification for that. However, we're also working on several elements simultaneously. Many of the retail platform adjustments we’re making aren't very valuable until they’re seen by RIAs or independent broker-dealers, but once they are, they can prove unique and valuable—whether it is account opening features or the robustness of the banking platform. All these components need to work together. We are working hard on it. I think there is a lot of market opportunity here. In discussions with clients, we understand how frustrated they are with existing players, and we feel that frustration. We historically anticipate opportunities well before they show up, which is obviously why we are achieving results now.

David Chiaverini, Analyst

Shifting gears to jumbo lending. You mentioned it won't be much of a contributor to loan growth in the near term. What holds you back? Is it pricing becoming too tight? Are competitors offering underwriting terms that are too lenient? Or is it simply not enough supply in your niche to generate growth?

Greg Garrabrants, CEO

The emergence of various conduit style opportunities is creating alternative outlets for products we are not inclined to put on our balance sheet. We’ve always maintained a conservative perspective regarding what we balance. That’s why our credit performance has remained strong for an extended period. We're exploring options to engage in some of that conduit business and may dip our toe in that area to see how it goes. However, that is not going through the bank but through our securities subsidiary and its special subsidiary. We may participate in that, but that would primarily result in fee income, which is a fundamentally different business than what we've historically conducted on the portfolio side.

Operator, Operator

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.

Greg Garrabrants, CEO

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

Operator, Operator

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