Q2 2020 Earnings Call
Greetings and welcome to be axles financial second quarter 2020 earnings results Conference call.
At this time, a participant certainly listen only mode of question answer session will follow the formal presentation.
If I do want to acquire operator assistance during the conference. Please press Star Zero order telephone keypad.
And executive Vice President and Chief Financial Officer Handy Micheletti.
Greg an antiwar review and comment on our financial an operational results for the second quarter and there will be available to answer questions. After the prepare presentation.
Before we begin I would like to remind listeners that prepared remarks made on this call may contain forward looking statements that are subject to risks and uncertainties and that management may conditional statements for it in response to your questions.
Afford that company claims protection from the Safe Harbor for for looking statements that is contained in the private Securities Litigation Reform Act of 1995.
Forward looking statements related to the business of X., those financial Pink and it's subsidiaries can be identified by common use for looking terminology and those statements involve unknown risks and uncertainties, including all business related Rick risks that are more detailed and accompanies filings on form 10, K. 10-Q .
Eight k. what the S.C.C.
Call is being broadcast and there'll be an audio replay available for 30 days in the Investor Relations section of the company's website located at Saks those financial Dot com.
All the details and says call were provided on the conference call announcement and in today's press release.
At this time would like to turn the call overtures see over and give grants who are provide opening remarks, Greg place again.
Thank you John a good afternoon every one of them. Thank you for joining us I'd like to welcome everyone to access financials conference call for the second quarter of fiscal year 2020 ended December 31st 2019, I. Thank you for interest and access financial and access bank.
Those announced record quarterly second quarter net income of 41.3 million.
School second quarter ended December 31st 2019 up 6.3% from the 38.8 million earned it in the fiscal second quarter ended December 31st 2018.
1.2% compared to the 40.7 million earned of the prior quarter.
Things attributable to access as common stock holders for 41.2 million or 67 cents per diluted share for the quarter ended December 31st 2019, compared to 61 stands for deleted share for the quarter ended December 31st 2018.
Six cents per diluted share for the quarter ended December September 30th 2019.
Nonrecurring expenses non gap adjusted earnings and earnings per share with 42.9 million and 69 cents respectively for the quarter ended December 31st 2019.
Other highlights of the second quarter include.
<unk> increased by approximately 1.1 billion up 14.8% annualized from the first quarter of 2020 end up 12.5% you're over a year.
Strong originations and commercial real estate specialty lending small balance commercial real estate lending mortgage warehouse and equipment leasing or offset by lower production and job of single family and the higher pay offs and multi family uncertain see an island portfolios.
Total assets reads 12.3 billion at September 31st December 31st 2019 up by 1 billion compared to September 30th 2019 at up 2.5 billion from the second quarter of 2090.
That interest margin was 3.87% for the quarter ended December 31st 2019 up 10 basis points from the 3.7% and the first quarter of fiscal 2020 and unchanged from 3.87% and the second quarter of fiscal 2019 average loan yields that fell by a mere three basis points link quarter.
To 5.56%.
Finding costs declined 15 basis points to 1.8%.
Some improvement in funding costs was a function of higher average not interest bearing deposit balances and lower average costs on interest bearing deposits.
Excluding the unpack for making our block seasonal long products and excess liquidity and our subordinated debt.
Interest margin and a quarter of the December 31st 2019 would've been approximately 3.87% up for basis points from 3.83% and the comparable quarter you go.
That interests margin for the banking business segment was 3.94%.
More basis points year over year end up 10 basis points from the quarter ended September 30th 2019.
Are efficiency ratio for the three and six month period ended December 31st 2019, or 551.66% and 52.4% compared to 46.47, and 48.89 and respectively and the comparable period ended December 31st 2018.
Primary driver of the Euro for your increase in our efficiency was the addition of X. those clearing an access 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 are back only efficiency ratio remains solid at 43.87% for the six.
Sending December 31st 2019, compared to 42.65% of the six month and to December 31st 2018.
Capital levels remains strong whichever one leverage ratio of 9.16% of the bank compared to 9.03% of 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% on the corresponding period last year.
Excluding one time merger related expenses noncash depreciation and amortization expenses.
Gap and just return on equity would've been 14.92% of the second quarter 2020.
Our credit quality remains good excluding the 4.1 million charge off of a previously identified factoring receivable arnett charge off to average loan at Lisa's was less than one basis point those quarter nonperforming assets total laugh at ratio was 52 basis points for the quarter ended December 31st 2019.
<unk> already of our nonperforming assets are comprised of single family and multi family loans with low loan to evaluate shows we remain well reserve with our allows for low loss, representing 112.9% coverage of our nonperforming loans and leases December 31st 2019.
Loan balances increased by 12.5% year over year 10.1 billion due to strong originations and C.N. eyes small balance commercial real estate lending and lower prepayments in jumbo single family am underfinance compared to the corresponding period and the prior year.
How long production for the second quarter ended December 31st 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 other commercial real estate portfolio production, seven or 38 million those and I are production, resulting in 204 million of nets, and I loaned growth 412 million of our mother advance originations and 48 million of auto and consumers.
<unk> originations.
For the second quarter of fiscal 2020 originations are as follows.
If I go for single family Agency eligible production was 746.
Average lawn devalue ratios 70.3.
The average Psycho score from a single family Jumbo production was 728 with an average loan devalue issue a 59.8.
Average the undervalue ratio the originated multi family loves is 59.0 and the debt service coverage is 1.26 and the hours long devalue ratio. The originated small balance commercial real estate loans will 62.8, and the debt service coverage was 1.4 too.
The average Psycho of the auto production was 757.
I just number 31st 2019, the weighted average blonde evaluation of our entire portfolio of real estate was 66%.
Banks long devalue ratios use origination date appraisals overcurrent advertise balances, making these historic long devalue ratios more conservative in real estate market's with increasing values.
Of December 31st 2019 quarter, 62% of our single family mortgages have undervalue ratios at or below 60% 30 per cent have lunch devalue ratios between 61, and 70% two per cent have lunch devalue races between 71, and 75 per cent and approximately five per cent have learned evaluations between 75.
I have an 80% and less than 1% have alone to evaluate showed greater than 80%.
We have a well established track record was drawn credit performance and jumbo single family mortgage lending with lifetime credit losses in our originated single family loan portfolio, a three basis points of loans originated.
Approximately 2.2 billion of multi family loans outstanding at December 31st 2019, representing approximately 21% of our total loan book growth and our multifamily lawn production has been solid.
Weighted average lung devaluation of our multi family Lawn book, 52% based on the appraised value with a ton of origination approximately 65% of our multifamily loans are 60% loan to value, 29% or between 60, and 70% and former senator between 70, and 75% and less than 2% of our multi.
Loans have learned evaluations above 75% for.
The lifetime credit losses in our originated multifamily portfolio.
Less than one basis points of loans originated over the 18 years, we have originated multi family alone.
See and I lending business posted an outstanding quarter, which record quarterly originations to 738 million and ending balance is increasing by 204 million.
You just see good demand across or diversity, an island in categories, including commercial real estate specialty landing lender finance and equipment finance.
I've also expanded our relationships and of course, and I lending businesses and add a new experience team members to further expand or geographic cover and commercial loan times.
Don't demand remain 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 I'll run pipeline was 1.1 billion at December 31st 29 team, consisting of Florida 37 million or single family Jumbo loans.
23 million no single family isn't seem mortgages 190 million of income property loans and 389 million. The San Islands, we continue to transition our portfolio away from single family landing and to see and I landing and commercial real estate lending given the relative risk adjusted returns across each business.
Anticipate strong originations across most lending categories and the second half of our fiscal 2020, our average unending lawn balances little fluctuated from quarter to quarter based on the pay some pretty payments.
Switching to funding total deposits increased 1.8 billion or 21.3% of your over here and 900 million link quarter to 10.1 billion.
We had growth in deposits, primarily in small business treasury management's specialty deposits, including X. those for these shows services.
Continue to have success growing up on just burning deposits with average nods respond deposit bounces, increasing by over 300 million and December quarter.
At December 31st 2019, approximately 40% of our deposit downstairs or business and consumer checking accounts, 22% money market accounts for person IRA account.
Per cent savings accounts in three person prepaid accounts checking and savings deposits, representing 75 per cent of told a positive at December 31st 2019.
Breakfast, 65%.
31st 2018.
Proven reflects our success, replacing higher costs time deposits until lower cost checking savings and money market deposits.
We kicked off for 2019, 2020, taxis and by originating approximately 412 million of Emerald advance unsecured consumer loans <unk> customers. Some of the December quarter, we retain 10% of the animals advanced loans, resulting in approximately $40 million of incremental non bounces.
At December 31st 29 team.
On January 4th restarted originating refund advanced loans to qualified H. and R. block tax prop customers.
Program, which charges no winchester fees to the borrower, it's available to all H. and R. block tax drop customers to the end of February we look forward to another successful tax season, but h. and R. block. We ended the calendar year with 12.3 billion of assets crossing the 10 billion dollar threshold related to the Durbin debit interchange exemption.
As we stayed in our last earnings call, we expect a relatively diminimus impact on our banks direct interchange as a result of Durbin in our calendar year 2020, we continue to work with H. and R. block on a resolution to the interchange revenue loss to H. and R. block from the M.L. card products.
The impact of Durban does not impact our own or H. and r. blocks interchange rates until July 1st 2020.
Do not expect any impact on our economics arranged in our blocks economics from the remote card before July 1st 2020, when this ongoing tax season will be substantially complete.
Although we continue to to have active discussions with H. and R. block with respect to the future of our relationship we have no update to share with respect to whether we're resolution satisfactory to both parties will be reached and and what time frame.
Our security segment, which includes X. those clearing are securities clearing in custody business from Dusing broker dealers and independent <unk> started direct to consumer just little wealth management continues to make steady progress.
We have an half the functionalities streamlined operational systems and processes and add a new clients over the past several courts.
<unk> calendar 2019, with approximately 32000 funded accounts with over 200 million of assets under management, meaning leaf meaningfully from the 24000 accounts in 150 million of assets under management, we closed the acquisition in March 2019.
We updating the account opening work flow for accessing the mid December which result, because of the measurable improvement in our account conversion rate.
We are starting to see some really traction with respect to cross sell the checking accounts and mortgage referrals to digital wealth customers. The numbers are diminimus from a dollar perspective, we expect gradual improvements in cross L. as we complete single sign onto online backing tracks those invest and roll out self directed trading gamification. It's another personalization features later this year.
Yeah.
And ask those clearing broker dealer fee income was 5.6 million and 11.2 million for the three and six months and in December 31st 2019, respectively.
Bearing in custody fees were roughly flat linked quarter off he's earned on FDIC insured bank deposits were down securities lending revenue and marching let lending revenue both decline this quarter.
Declines decrease the risk tolerance and trading activity was lower as a result of reduce stock market volatility.
Ending costing customer margin balances were approximately 226 million on December 31st 2019, compared to 275 million on September 30th 29 chain.
The federal reserve lowering rates by 25 basis points in the summer quarter and by 75 basis points encountered 2019, non interest income for X., those Clara and was negatively impacted by a reduction in fees paid by a third party banks on the off balance sheet cast sweeps.
X. those glaring sign to new I.B.D. firms into custody firms with approximately 200 million and the U.M. in the summer quarter, we have a robust pipeline of clearing in custody clients typically take several quarters to transition their book of business to access we're building our sales in the services infrastructure to accelerate our capacity to serve independent.
<unk> with potential market disruption as a result of the pending Schwab T.D. and married trade merger and the two firms controlling over 50% of the existing custodial assets of independent <unk>, we see significant opportunity to provide a variety of clearing custody in banking services to small and medium size are <unk>.
Not compete with our eyes and wealth management waiver abroad technology and products, we to help independent <unk> grow their practices. We also have a number of technology and product initiatives that we will be introducing over the next to me to 12 months, including enhance our a custody capabilities.
Label banking services for high net worth clients of independent <unk>.
Private label digital wealth management, Fridays and other strategic partners.
We look forward to hosting existing prospective clients that are inaugural Oxos clearing client conference in San Diego April 17th to the 18.
We continue to grow and diversify or commercial specialty deposit businesses over the past 12 18 months, we have added senior commercial bankers and opened a commercial on a deposit office in downtown Los Angeles in Midtown Manhattan.
Focused on expanding into new deposit in lending verticals and the offices allow us to better serve existing and new clients in those two large metro's.
Pipeline of new commercial deposit in lending opportunities that we expect to close in the next few corridors.
<unk> services are commercial deposit business, serving chapter seven trustees and non seven <unk> continues to perform well.
We'll see close the acquisition in April 2018, we've successfully added new chapter seven and non seven trustees and fiduciaries and hundreds of existing trustees have voluntarily move their deposit down to the tax those bank.
We want a competitive mandate for a new fiduciary services client bring in a meaningful amount of non interest bearing deposits to our bank at the end of the December quarter.
Estimate to this service capabilities of our sales and relationship management teams and a significant opportunities we have to expand access fiduciary services.
Better and faster day last November we discussed in detail or strategies to position ourselves 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 personalizing integrated customer experience.
Universal digital banking platform now deployed across multiple consuming businesses with more integration and their future enables rapid deployment and ongoing improvements to the platform.
The integration of the axis invest client data inside or is universal digital bank.
Edition of more streamlined account opening and risk assessment tools from new accounts and the ability to Craig Cobranded banking instances for partners like nationwide I just a few examples of the capabilities. We did not have prior to buildings Universal Digital bank.
With the addition of single sign on <unk> subtracted trading inside the Universal Digital Bank and integration of banking services was an aren't clarinet custody platform on our development Road map.
Perpetual cycle of innovation will further enhance our ability serve customers effectively across or three businesses consumer banking commercial banking insecurities.
Pleased with the execution by our team members on our own 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 teams lawn growth and an annual consolidated return on equity at or above 15% or maintaining stable to growing that 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 executionally Paramount given the number initiatives. We have in our strategic plan aren't tend to focus on continuous improvement that Prudential capital management positions as well to execute on behalf of our clients and shareholders.
<unk>, who will provide additional details on our financial results [noise].
Thanks Grade first they wanted to note that in addition to our press release 13, Q. was filed with the S.U.C.D. day.
Available online through Edgar or through a website it actually it was financial Dot com.
I will highlight a few areas rather than go through every individual financial line item. Please refer to our press release or a 10- Q4 additional details.
That's great indicated earlier Exos net income for the second quarter ended December 31 2019.
41.3 million up 8.46 per se year over year, and 1.2% compared to our last quarter in September 30 2019.
<unk>, primarily low growth and the maintenance of our net interest market.
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.
Securities business had a net decline of 1.1 million and the corporate segment had a net benefit 0.4 million.
That net interest margin for the banking business grew to 3.94% of 11 basis points compared compared to 3.83 presented last quarter and up for basis points compared to the prior year.
The link quarter improvements in the banking net interest margin is primarily the result of.
First shifting more average deposit balances to non interest Barry.
Second reducing our interest bearing deposit rates.
Third, adding the seasonal each in our block Emerald advance load and and finally forth overall growth in our average interest earnings assets.
As a result interest in dividend income group 2.7 million, while the cost of funding decline 3.1 million auto linked quarter basis.
Average low balances increase 240 million, while average non interest bearing deposits group 302 million this quarter, providing the opportunity to redeploy existing higher cost savings accounts, primarily municipal savings into you know.
Cost or lower cost deposits, primarily <unk> business accounts as a result, the average rate on interest bearing demand in savings accounts decreased 25 pieces points and the total cost of funds for the banking business segment decreased 15 basis points.
Linked quarter basis.
Partially offsetting the net interest income growth at the banking business segment was a linked quarter decline in the net interesting come with 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.
<unk> lending interest income also declined by 0.5 million due to lower activity levels and the second quarter.
Interest income earned on customer reserve balances decreased 0.6 million, primarily due to market.
Rates are declining during the quarter.
Interest expense decreased 0.7 million you to lower levels of lending activities requiring less borrowing.
As great mentioned due to the variety of our funding sources. We continue to expect our consolidated and then interests margin for this fiscal year to be in line with last fiscal year and maintain or historical range of 3.80 per cent of 4%.
Turning to asset quality or basic metrics remains strong this quarter compared to last quarter with the ratio nonperforming loans to total loans declining five pieces points to 0.52% and the ratio of nonperforming assets to total assets.
Also declining five basis points to 0.49 per cent.
Total 90 days 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 receivable factory for one bank customer.
This was classified as doubtful that September 30, 2019, and fully reserved at the end of last quarter.
Given the circumstances of this lost in the very small size of the remaining receivables factoring book normal charge offs, excluding the 4.1 million receivables factoring charge off about were less than one basis points on average loans for the corridor.
With regards to the adoption of the new Cecil accounting standard.
It was bank is not required to implement the new standard until July 1st 2020.
We will give guidance on the estimating impact of the lowest allowance once we get closer to the adoption day.
Moving to operating expenses are linked quarter basis, non interest expenses increased a net of 1.5 million this quarter compared to the last quarter ended September 30 2019.
Banking business segment efficiency ratio improved slightly on a link quarter basis, the 43.81% down from 43.93% last quarter and overall consolidated efficiency improved 251.66%.
Down from 52.44% last quarter.
With that alternative call back over to <unk>.
<unk> operator, we're ready to see a question.
Thank you.
Hmm.
If you like to be please the question.
Please press start.
Oh.
For confirmation.
<unk>.
You mean.
Mm.
Hmm.
<unk>.
<unk>.
Our first question coming from the Bronx.
Yeah.
<unk>.
Yeah.
<unk>.
Oh.
Question regarding.
Mmm.
You guys get kinda walking through.
Mmm.
<unk>.
Okay.
Well, let me give you a 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.
Divide that into sort of sales and production oriented personnel and then infrastructure personnel I think that we are.
In a place with respect to our technology investments, where I feel relatively good that barring relatively small changes, we're going to be able to complete the objectives. We have with respect to those technological goals that we have without adding substantially to our expense base.
So that that I think is good news, there's been a 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 one so I think that's one piece of it the the next piece of it is that we continue expand sales team commercial bankers some of those backers perform well some of those bankers perform less well so that system 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 backing talent with respect to how much that costs.
I said before and I think it's important to reiterate that obviously as you continue to bland, let's say a more retail online banking business with a more traditional commercial business.
End up with is different levels of operating cost with respect to the business. So in other words, you know we have a higher level of non interest bearing deposits, but that comes with a commensurate increase in costa personnel and and more automated businesses, you'll have lower levels and personnel.
You 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 ethic growth isn't there the cost isn't there not only based on.
And 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 clams, right now from a real estate perspective for the remainder of your and we're going to let the offices we've opened their season.
With respect to the Securities segment.
The security segments side, given the relative maturity of that segment and the I would say the last the last automated and sophisticated its operations. There's a lot of opportunities that we have to bring automation and 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 the current book of business, but rather it's more to prepare for us scale old growth in those segments I've given their relatively small.
All sides without having to add commensurately personnel. So in other words by us putting in the the enhancements that we'll be able to put in we'll be able to grow that business without a commensurate increase in personnel, but we will not have.
Reduction in the cost of personnel and any significant way in the new year. So I ended up you have anything else yeah, I've I've I've just comment on probably three you just run rate items looking at this quarter's operating expense and thinking about operating expenses.
Forward the one area, where we have had a benefit has been FDIC insurance, where frankly, all banks generally a smaller banks have been getting a credit from the F.D.I.C. So is a net result, when you look at or your today numbers last year, we were 4.4 million.
It F.D.I.C. insurance this year on a six month basis, where at 1.1 I would expect us to approach the 4 million and run rate as the credit start to diminish which that program is starting to end. So you'll have a small up ticket in a in F.D.I.C. insurance.
In looking at linked quarter, depreciation and amortization increased about a million dollars that is exclusively for our software.
We deployed in the unity software that's being deployed in or so do you share every 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 a depreciation of four capitalize software as we continue to capitalize some of the software costs and they get deployed and they get amortized, but they don't expect the million to have growth larger than the million. We had this quarter looking at salary.
Using wages they were down on the 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 it completely depend.
Ends on what happens with with the the development team and how that looks so overall I think we're 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 I think overall, you know at expenses should increase but not but not large.
Okay. Thank you that that's very helpful and thank you for all the information it sounds like on a technology from.
At least hmm near term you guys are pretty well equipped yeah.
Oh, so we're thinking about.
How you guys are thinking on my mortgage balance is giving a lower rating iron and they kind of what you're seeing on on that.
Were we continue to be hopeful for some stabilization and not portfolio, we do have some slight optics and and the pipeline.
I, Unfortunately, I think that.
Oh really shooting for some stabilization there and not a lot of ongoing growth, but but you know we continue to have that as a focus and we continue to work on mechanisms of a of stabilizing that business and.
That.
We did see a little bit, we're we're seeing a little bit lower pre payment indications.
But I I don't think we can expect that business to be a significant grow or in the next.
Several quarter's.
But but it's it's an interesting business just given some increase competition in certain areas.
We're that we're paying attention to it in some cases, where we're simply letting business go.
That that we don't really think we want to participate in so that's that's going to be something we have to watch on an ongoing basis.
Okay. Thanks for that.
Q.
Thank you. My next question is coming from Andrew <unk> No alive.
Mmm guys.
And the Anders.
The non interest bearing the deposit grow if you're not you walk through some of it but $2.6 million at quarter.
What was the big driver telling me you move some interest bearing account anonymous bearing yet from epic deposits come over maybe you had another larger commercial balance is this a good level of non under Springer accounting, where they're going to be some output from here, what where do you see this morning going forward.
Yeah go ahead and yeah, I think you know we you've always got to look at seasonal differences. So you get on this next quarter of course, we have block, where we have seasonal increases in in non interest bearing but the bottom line majority that growth was due to do two fiduciary 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 in one settlements get paid.
So we we can't tell you how fast it with advertise off but there's a chance that it's gotta be come come down faster than our normal chapter seven balances.
Gotcha Okay.
And then Britain.
It does sound like you are having some pretty good success <unk> reclassifying of those I mean, the 3% to 4% margin range is.
Pretty wide, especially with some of the success you had this quarter.
And before I think you'd sound like towards the lower end of that I mean is there <unk> what the success you've had on the funding side I mean are creeping up closer to the middle part of the range for is a better place to be forecasting.
Yeah, 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 this more broadly you know with respect to our alone grow targets or maybe pressure on on they asked that side and.
Back to the ability if we're able to maintain a sustained some of these non interest bearing balances, but you know with respect to these just given.
Given the nature of of this 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.
<unk> and the outflows are are not always predictable enough to to make that conclusion right now.
You guys I think you're gonna have covered all my other on other questions that I had to say Oh for back.
Thank you. Thank you. My next question is coming from Michael Freedom from P.B.W. line is alive.
Hey, good afternoon, guys happy new year.
I've been there.
Six taking more questions I wanted to start on on or if you look at if I'm looking at the broker dealer feeds you know they they they did a pretty tight range last couple of course, but and I apologize to jump on the smoking that sounds like you guys ended a couple of the client there I think if I recall at the analysts. They you guys were talking about opera <unk> <unk>.
Specifically in that business. So I guess my question is is it mostly revenue.
<unk>.
<unk>.
Earlier question it sounds like it wasn't like material on the expense side is more kind of growing it's what you already gone and I guess, if that's the case <unk> you know what you up you know kind of.
Hi, blind for adding more clients, who growing that revenue stream going floor.
Yeah, I think you stated reasonably accurate lay there certainly is a lots of manual processing and opportunities to utilize a lot of the tools that we've utilized another businesses of ours to improve efficiency and.
To create you know I think a much better.
Resilient operation I, I think that the reality of the business, though as it's relative size I think it it's just a little bit rough to forecast that that's that you're going to cut your way to any.
Significant growth. So the way this is going to work several fall we ever we have a reasonable pipeline Ah right now if new clients and those clients I you know take multiple quarters to come on board and generate revenues. So that's there are there's that component of that immediate business. There then there's other clients.
That that we're talking with that are you know there's substantive there 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. Upon that's just one single broker dealer. The reality of that is that we have some technological ella.
Men's that will put us in a very good place to compete for those sorta 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 and then in the industry and and others will put us more.
<unk> so.
I think we we have a good proposition for a certain sighs broker dealer and we have a good good group of folks there who are interested in joining us.
You know where weeding out some of the ones that you know are not within our core our course strategy and bad for the long term future the business, we're investing and the capabilities.
Using some of that consolidated platforms that we have and other businesses to why to really create a 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 I use it for say that you know it'd be if if we're trying to think about what what kind of the base case expectation is for this business that we should see some revenue lip this year, but but there there should be kind of a much bigger pick up next year. When a lot of those items that you just discuss kind of our our full force in terms of your ability to yeah.
I think that's right I think I think that the reality of this business of both as businesses out there longer term businesses and I wouldn't expect.
In a way of of left throughout the rest of this year, they're much more strategic to the long term.
The long term needs to serve clients and a holistic way than they are you know and next couple quarters lift sort of items I basically forecast flatish with respect to them.
Got it how that's helpful. Great. Thank you and then I was wondering if you should you know the commercial special specialty real estate.
A segment has has seen some nice broke when I was wondering if you could just give us kind of of flavor <unk> like some of the typical opportunities that you could capitalizing on it <unk> and what you think kind of access value proposition is there that that's really made a difference and able to drive snack role for the last 12 80 Bucks.
Yeah sure I think it's we have a lot of institutional relationships with very strong partners have grown to trust us over time, and so our ability to to take risks positions that we feel comfortable and with partners that we've had long standing relationships with allow us to be there.
First call essentially and so you know those partnerships are many of the.
The largest funds and private equity shops in the world and you know we've cultivated those relationships over extended periods of time.
And now I think where reaping the benefit of of that.
Those of those relationships.
Mm.
Got it and then just lastly on on any updated thoughts squares on on kind of capital levels and and at what some of the the the priorities outside of organic growth might look like for for the school 2020.
[noise] well with respect to the capital side, obviously, I mean, we've continued to grow.
Your wine leverage ratios and as we as there's no sort of maxed moves and 50, 100% risk weighted I do think that you know thinking about the Max the capital given our relatively low double leverage ratio or much lower double leverage ratio than than the industry. I average will be something we continue to look at I don't have anything.
Definitive update you on there, but that will be something and then with respect to just more global outlook. I think you know the this the all the items that we outlined investor day stay on track.
And so we're we're continuing to to execute against the strategic plan that we have and don't really have any.
You know substantive updates there to share.
Okay. So it means it's perfect timing perspective is it fair to think that you know the capital probably build the next couple of quarters and as you reach the end of fiscal 2020 that that might be more to communicate.
Yeah, I think that my I think that might be a fair statement.
<unk>.
And a pretty good position now and obviously, we continue to accumulate capital on how hard you know leverage ratio grow and.
Obviously, you know I don't think 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 can appreciate.
Sure Yeah.
Thank you guys reminder, in star one to be placed into question.
The next question to these coming from D.V.D. from what Bush Securities Your line.
Hi, Thanks, a couple of questions for you. So first a follow up on clearing you mentioned you know the significant opportunity given the merger between 12 and T.D.M. or trade have you considered actually accelerating investment in declaring business to take advantage of this.
You know I think that there I think that it probably is the case that areas justification for doing that however, what.
Trying to do because there's there's a number of elements that are kind of running in in the on simultaneously through the items that we have to do so for example, a lot of the the retail platform elements that we're working on our very valuable at when they're saying by our.
Days are independent broker dealers. They truly are unique whether it's the account opening features or the are 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 <unk>.
That I think there is a case for that and if if if you can reincarnate my Investor base has a set of fintech investors or you know have softbank common invest in may.
Will really be able to to build a much more robust custody in clearing business more quickly, but I I do think I do think that.
That there's a lot of market opportunity here and that you know you get a sensitive from clients 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.
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.N.I. landing you know 556 years ago, and and you know and then I would get comments you hired some people and two two quarters later I don't know what's going on I don't see it like that.
Yeah, 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 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.
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 you know <unk>, maybe maybe given your where you're from you understand the opportunities.
That makes sense. Thanks, and then shifting gears on and jumbled lending you mentioned, how it won't be much of a contributor to loan grew up in the near term what is it. That's holding you back is is pricing getting too tight are competitors and offering underwriting terms 32, booze or is it simply not enough supply in your knees.
To generate growth.
I think that it's the emergence of a variety of conduit style opportunities that are creating an alternative outlook.
<unk> outlet for products that.
We are not necessarily inclined to balance sheet, we've always had a very conservative perspective with respect to what we balance you, which is why our credit performance has been so strong over such an extended period of time and we are doing some work to to engage in some of that conduit.
Business and you know working we're going to dip, our toe and 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.
You know there maybe some ability to participate in that but I don't.
That would that would result in some feet income.
You know that would be generated but it would it's just a fundamentally different business then.
What we have been a store they do and on the portfolio sign.
Great. Thanks very much.
Yeah.
<unk> question and answer session on it to turn on the floor back over pretty further or closing comments.
Thank you everyone for your attention and support animal talk with your next quarter.
Teleconferencing, we just did this time and have a wonderful day, we thank you for your participation today.
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