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Edited Transcript of CIT earnings conference call or presentation 24-Apr-18 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 CIT Group Inc Earnings Call

NEW YORK Apr 25, 2018 (Thomson StreetEvents) -- Edited Transcript of CIT Group Inc earnings conference call or presentation Tuesday, April 24, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara A. Callahan

CIT Group Inc. - Senior VP & Head of IR

* Ellen R. Alemany

CIT Group Inc. - Chairwoman & CEO

* John J. Fawcett

CIT Group Inc. - Executive VP & CFO

* Robert C. Rowe

CIT Group Inc. - Chief Risk Officer & Executive VP

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Conference Call Participants

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* Christoph M. Kotowski

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Eric Edmund Wasserstrom

UBS Investment Bank, Research Division - MD & Consumer Finance Analyst

* James Ulan

* Vincent Albert Caintic

Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to CIT's First Quarter 2018 Earnings Conference Call. My name is Denise, and I will be your operator today. (Operator Instructions) Please note that this call is being recorded. (Operator Instructions)

At this time, I would like to turn the call over to Barbara Callahan, Head of Investor Relations. Please proceed, ma'am.

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Barbara A. Callahan, CIT Group Inc. - Senior VP & Head of IR [2]

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Thank you, Denise. Good morning, and welcome to CIT's First Quarter 2018 Earnings Conference Call. Our call today will be hosted by Ellen Alemany, Chairwoman and CEO; and John Fawcett, our CFO. After Ellen and John's prepared remarks, we will have a question-and-answer session. Also joining us for the Q&A discussion is our Chief Risk Officer, Rob Rowe. (Operator Instructions)

Elements of this call are forward-looking in nature and may involve risks, uncertainties and contingencies that may cause actual results to differ materially from those anticipated. Any forward-looking statements relate only to the time and date of this call. We disclaim any duty to update these statements based on new information, future events or otherwise.

For information about risk factors relating to the business, please refer to our 2017 10-K. Any references to non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in our press release. Also, as part of the call this morning, we will be referencing a presentation that is available on the Investor Relations section of our website at www.cit.com.

I'll turn the call now over to Ellen Alemany.

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Ellen R. Alemany, CIT Group Inc. - Chairwoman & CEO [3]

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Thank you, Barbara. Good morning, everyone, and thank you for joining the call. The first quarter was another period of solid progress for CIT as we advanced our strategic plan. We posted strong growth in our core business, continued to expand the direct bank and further optimized capital.

Net income in the quarter was $97 million, or $0.74 per common share, and income from continuing operations was $104 million or $0.79 per share. While credit performance was generally stable, we did post an increase in provision that was primarily driven by a single commercial exposure, and that affected results. Credit reserves remained strong, and John will walk you through more details shortly.

On Slide 2, you can see an overview of our progress in the quarter. At the top of our list is to maximize the potential of our core businesses, and I'm pleased to say that in the first quarter, our average core portfolios grew 2% quarter-over-quarter. This marks the second consecutive quarter of strong growth.

As I have previously shared, last year, we took a number of steps to build on our core capabilities by expanding into additional market segments and in talent and investing in our franchises. We are now beginning to see some early results of those efforts. Our origination volume was up significantly from the first quarter of last year, and part of that growth is from our new initiatives. Let me spend a minute on each of our business areas.

Average loan and leases in the Commercial Finance business were up 4% compared to the prior quarter, fueled mainly by the C&I, energy and health care verticals as well as the newly formed Aviation Lending group. The marketplace remains competitive and we continue to be disciplined, but we also have some distinct competitive advantages, namely our deep industry expertise and relationships in the middle market. For example, when we decided to relaunch the aviation business, it was built on a 30-year presence in that industry. It allows us to hit the ground running and deliver results.

Average loans and leases were up approximately 3% in the equipment financing areas of Business Capital as customer sentiment in the economy remained positive and spending levels remained strong. Growth was led by the capital equipment, industrial, technology and lender finance areas as well as our small digital business lending division.

The Real Estate Finance operation posted modest growth in the core business and continued to take a prudent approach to a highly competitive market. We have a very experienced team and we are picking our spots in this area thoughtfully.

In the Rail business, we continue to manage through the cycle. We did see utilization rates tick up in the quarter to 97%, but lease renewal rates continue to be impacted by oversupply in certain industries. We have a young and diverse fleet and are focused on our strengths and portfolio management and customer service.

Overall, our Commercial businesses are well positioned in their respective segments of the marketplace and our plan is advancing.

In addition, the strategic transactions continue to progress. We expect the NACCO sales to close in the second half of this year, and this transaction supports our effort to exit overseas operations. And we are targeting the end of the second quarter for the Financial Freedom sale, pending regulatory approvals. This transaction supports our plans to simplify the company and focus on our core strengths.

We remain committed to achieving our operating expense target despite elevated annual benefit costs and higher legal expenses this quarter.

Our deposit strategy is seeing positive results despite the rising rate environment. On average, deposits grew more than $400 million and average deposit costs are up just 5 basis points from last quarter. We are thoughtfully managing deposit pricing and achieving a more balanced mix of products with a greater focus on non-maturity products.

The direct bank is an important driver of our deposit strategy, and this was a very strong quarter for the franchise with $1.5 billion in deposit growth and 28,000 new customers. The high-yield savings account continued to be successful, and we just launched the new money market account that is off to a strong start. The Southern California retail branch network provided additional balance to the deposit mix and posted modest growth quarter-over-quarter.

We took several positive steps to optimize the capital structure during the quarter. In February, we received the non-objection to our Amended Capital Plan, which will allow us to increase the capital return in the first half of the year by up to $900 million. Part of that plan was conditioned on the issuance of $400 million of sub-debt, and that has been completed.

In addition, we repurchased 3.7 million shares of common stock for $195 million in the first quarter. We are committed to returning the remaining capital in the plan as prudently and efficiently as possible by the end of the second quarter. Lastly, we remain focused on a disciplined approach to risk management.

With that, let me turn it to John for a more detailed account of results.

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John J. Fawcett, CIT Group Inc. - Executive VP & CFO [4]

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Thank you, Ellen, and good morning, everyone. Turning to our results on Page 3 of the presentation, we posted GAAP net income for the quarter of $97 million or $0.74 per common share, and income from continuing operations of $104 million or $0.79 per common share.

Operating performance this quarter reflected strong new business volume in all our core lending businesses and lower prepayments, which resulted in 1.7% total average loan and lease growth and 2.3% growth in our core portfolios compared to the prior quarter. Net income was negatively impacted this quarter from the charge-off of a single commercial exposure and a higher level of reserves, primarily within our Commercial Finance division.

As shown on Page 4 of the presentation, our financial results included a single noteworthy item, which was a $7 million after-tax benefit from suspended depreciation related to the pending NACCO disposition. With regard to the NACCO disposition, all remaining antitrust approvals were received by the buyer from European regulators this quarter, which includes a condition to sell approximately 30% of the NACCO cars to other parties. This additional requirement does not impact the overall economics to us, and we expect to close this sale in the second half of 2018.

Turning to Page 5. Income from continuing operations available to common shareholders, excluding noteworthy items, was $97 million or $0.74 per common share this quarter. This is down from $130 million or $0.99 per common share last quarter, and from $109 million or $0.54 per common share in the year-ago quarter.

I will now go into further detail on our financial results for the quarter. Please note that in this discussion, I will refer to our results from continuing operations, excluding noteworthy items, unless otherwise noted.

Turning to Page 6 of the presentation. Net finance revenue was down $9 million from the prior quarter, and net finance margin declined by 14 basis points. Compared to the year-ago quarter, net finance revenue was down $35 million and the margin was down 20 basis points.

Purchase accounting accretion, net of negative interest income on the indemnification asset or net PAA, declined from both the year-ago quarter and the prior quarter. We expect the purchase accounting accretion to continue to decline as the portfolio runs off. This quarter, we recognized about $32 million in purchase accounting accretion, down from $40 million last quarter and $56 million in the year-ago quarter.

The reduction is primarily in Commercial Banking, where assets have a shorter remaining life than in Consumer Banking. This quarter, Commercial Banking recognized $11 million of purchase accounting accretion compared to $16 million last quarter and $24 million in the year-ago quarter. We continue to see a reduction in PAA as the portfolios run off.

We now have approximately $700 million in total PAA remaining, of which almost $615 million relates to the Legacy Consumer Mortgage portfolio, which runs off at about 10% to 15% annually. The remaining $85 million relates to Commercial Finance and Real Estate Finance, and we are forecasting 40% to 50% of it to accrete over the next 4 quarters.

The negative interest income on the indemnification asset declined slightly to $14 million this quarter. We expect the negative interest income to continue to decline modestly each quarter until the loss share agreement expires in the first quarter of 2019.

Excluding the impact of net PAA, our core net finance revenue was down modestly reflecting higher yields on our loans and investments, which are -- which was more than offset by lower prepayment-related fees and higher interest expense. Net finance revenue also included approximately $2 million in negative carry from the senior unsecured debt issuance and the corresponding redemption activity that required 30 days' notice.

In early March, we issued $1 billion of senior unsecured debt in 2 $500 million tranches, including a 3-year tranche with 4.125% coupon and a 7-year tranche with 5.25% coupon for a weighted average net coupon of 4.69%.

On April 9, we used the proceeds to redeem almost $900 million of senior unsecured debt due in early 2019 that had an average coupon of 4.58%. While the refinancing modestly increased our overall senior unsecured debt cost to 4.83% from 4.81%, we extended our 2019 maturities into 2021 and 2025. We will continue to look for opportunities to further repay or refinance unsecured debt.

In March, we also issued $400 million of Tier 2 qualifying subordinated debt, with a 10-year maturity at 6.125% related to our Amended Capital Plan. We expect to deploy the proceeds over the course of this quarter as we return excess capital to shareholders.

Turning to Page 7. Net finance margin declined by 14 basis points this quarter to 3.37%. 9 basis points of the decline was from lower net purchase accounting accretion and lower net prepayments, which mostly impacted Commercial Banking. Higher borrowing costs reduced margin by 5 basis points, most of which was driven by the aforementioned unsecured debt issuance. Deposit rates increased across all of the channels this quarter, reducing margin by 3 basis points, while higher yields on loans, investments and mix increased margin by 6 basis points.

Lower net operating lease revenue from our Rail business continues to reduce our margin. Rail utilization in our North American business increased to almost 97% this quarter, while Rail renewal rates on average repriced down 32% reflecting the mix of cars renewing. We continue to expect leases to reprice down an average of 20% to 30% through 2018 and into 2019, reflecting continued pressure from tank car lease rates which are renewing at a faster pace.

The team is doing a good job finding new opportunities for our tank cars, and while lease rates will stabilize, they are coming off peak levels. Compared to the year-ago quarter, the decline in net finance margin was primarily due to the same trends I just described.

Turning to Page 8. Other non-interest income was down slightly from a seasonally strong fourth quarter as lower fees, factoring commissions and gains on investment securities were mostly offset by higher gains on sales of leasing equipment and other revenue. Compared to last year, other non-interest income is up significantly, reflecting higher gains on sales of leasing equipment, income from BOLI and gains on derivative activity.

Fee income was down from the prior and year-ago quarters resulting from prior capital markets fees which can be uneven throughout the year. While factoring volumes have increased year-over-year, commissions were down, reflecting the mix of services provided and lower pricing.

We are now presenting the gains on leasing equipment and investment securities lines, net of any impairments. The increase in gains on leasing equipment this quarter reflected modestly higher gains on Rail equipment and higher end-of-lease activity to our Capital Equipment Finance business. Gains on investment securities declined this quarter as we have worked through about 2/3 of the optimization of higher risk-weighted investment securities acquired with the OneWest acquisition.

Consistent with last quarter, we had $7 million in net gains in other revenue related to the reverse mortgage portfolio that is being sold with the Financial Freedom servicing operations. When the reverse mortgages were moved to held-for-sale in the third quarter of last year, we stopped accreting the related purchase discount in interest income. This reduction, however, was more than offset by gains from loan payoffs, liquidations and sales recognized in other revenue, which will continue until the portfolio is sold.

The buyer is continuing to work to obtain the required regulatory and investor approvals. We are still working to close the sale of Financial Freedom in the second quarter, but the timing is now targeted to be closer to the end of the second quarter. Also, as I had previously indicated, that we anticipated recognizing a pretax gain at closing of $25 million to $35 million, net of transaction costs and before any incremental indemnification obligation, but that amount may vary depending on the timing of the close and the performance of the portfolio.

Given that we are now targeting a close later in the second quarter, the projected gain may be reduced by the income recognized from the continued run-off of the portfolio.

Turning to Page 9. Operating expenses increased from the prior year quarter and reflect approximately $10 million from payroll and benefit restarts and the legal accrual. In addition, you may recall, I mentioned that last quarter benefited from a reversal of litigation provision as well as a true-up of FDIC insurance costs.

Compared to a year ago, operating expenses declined reflecting lower professional fees, while the reduction in occupancy costs, insurance costs and other expenses were mostly offset by higher advertising and marketing costs and compensation benefits. The increase in compensation and benefits was driven by a number of factors, including higher revenue-generating business costs and higher benefit costs.

While costs this quarter were higher than our target run rate, we remain on track to achieve our 2018 annual operating expense target of $1.050 billion. We expect the operating expenses to decline modestly next quarter and more significantly in the second half of the year, with most of the reduction resulting from lower professional fees and lower compensation and benefit costs.

Page 10 describes our consolidated average balance sheet. Average earning assets were up $700 million reflecting higher loans and leases. The increase in liabilities reflects deposit growth and our unsecured debt actions. The decline in equity reflects our stock repurchases and the impact of unrealized losses in our investment securities book that runs through OCI.

Page 11 provides more detail on average loans and leases by division. Excluding NACCO, Commercial Banking's average loans and leases increased about 1.5% from the prior quarter reflecting strong growth in Commercial Finance and a little over 1% from the year-ago quarter driven by Business Capital. In addition, while North American Rail assets remained flat, growth in Rail was driven from the NACCO portfolio as we continue to take delivery of cars from their order book.

The middle market where we focus continues to be challenging, and we remain disciplined in a highly competitive environment while finding opportunities where we can grow. In Commercial Finance, average loans and leases were up 4% this quarter, with strong volumes in health care, energy, C&I and aviation finance verticals as well as overall lower prepayments.

While origination volumes were down from a strong fourth quarter, they were up significantly from the year-ago quarter. In addition, asset-based originations remained over 50% of total new business volume, up from 40% last year, partially driven by our reentry into aviation finance and our repositioning efforts.

Real Estate Finance remained flat this quarter, and up 1% excluding the run-off from the legacy non-SFR portfolio. The market has become more competitive as CMBS and debt funds are more active. We are remaining disciplined in our due business originations.

North American Rail assets remained flat as modest new deliveries were offset by depreciation. We increased our order book slightly this quarter to over $100 million and continue to expect new deliveries to be offset by portfolio management activities and depreciation.

Business Capital is flat compared to the prior quarter, with 3% growth across the equipment lending businesses offset by a seasonal reduction in factored assets. In Consumer Banking, growth in our Other Consumer Banking businesses more than offset the run-off of the Legacy Consumer Mortgage portfolio. Average loans in the mortgage lending business increased due to strong originations in the retail and correspondent lending channels. Also, we experienced an increase in loans from our SBA lending platform.

Page 12 highlights our average funding mix. Compared to the prior quarter, total borrowed funds and deposits increased, while the overall mix remained the same. Funding cost as a percent of average earning assets increased this quarter by 8 basis points. Higher deposit costs contributed 3 basis points, while our debt actions in March and the higher FHLB costs added 5 basis points to our borrowing costs.

As I previously mentioned, we are taking a comprehensive approach to address the impact from the sale of the NACCO as well as other actions, including further reducing unsecured debt using excess liquidity and/or refinancing with lower-cost debt in order to improve our overall funding cost.

Page 13 illustrates the deposit mix by type and channel. Quarter-over-quarter, our average deposits increased approximately $400 million to $30.1 billion reflecting 6% growth in our online channel, offset by a reduction in broker and commercial deposits. We also increased the mix of non-maturity deposits in conjunction with our strategy to optimize deposit costs while working within our risk management discipline.

The cost of our deposits increased 5 basis points in the quarter. Cumulative deposit betas have remained low at approximately 10% since the Fed started rates -- raising rates at the end of 2015 and 20% over the last 12 months. We think deposit betas will continue to increase, and we are modeling 65% to 75% through the cycle for non-maturity deposits, which are currently a little over 50% of our deposit base and expected to grow over time.

Page 14 highlights our credit trends. The credit provision this quarter of $69 million was up from $30 million last quarter and $50 million compared to the year-ago quarter. The increase reflects a $22 million charge-off of a single commercial exposure, primarily within Commercial Finance that was episodic in nature. The provision also reflects a higher level of reserves also within Commercial Finance division.

I would also point out that we are not seeing any overall deterioration in the credit environment. The increase in reserves this quarter were not concentrated within any particular industry or geography, and we continue to originate new loans at a better risk rating than that of the overall performing portfolio.

As we have indicated in the past, given the low level of losses that we have been experiencing, a higher expected loss for a single credit can create significant volatility in our quarterly credit costs. Over the past 5 quarters, our provision has averaged approximately $35 million, and we believe $30 million to $40 million is more normalized level in the near term.

Net charge-offs were 68 basis points in the quarter, above our outlook range of 35 to 45 basis points. However, excluding the $22 million discrete charge-off mentioned, net charge-offs would have been 39 basis points, in line with our guidance. Nonaccrual loans of $236 million, or [80 points --] basis points of loans, remained low at the low end of the quarter and were slightly higher than prior quarter, but down from the year-ago quarter. Our reserves within Commercial Banking remained strong at 1.79% of finance receivables, which is about 4x our annualized net charge-offs over the past 5 quarters.

Turning to capital on Page 15. We received the nonobjection to our Amended Capital Plan in February, which enabled us to increase our capital return in the first half of this year by $800 million, of which $400 million was predicated on the issuance of Tier 2 qualifying subordinated debt. When added to the $100 million remaining at the end of 2017, we had up to $900 million of capital that can be returned to shareholders through June 2018.

In the first quarter, we bought back $195 million or 3.7 million shares at an average price of $53.16 per share. In the second quarter, through Friday, April 20, we've repurchased additional 1.4 million shares at an average price of $51.86 per share. We intend to return the remaining capital of up to $635 million, inclusive of $25 million originally to be repurchased associated with employee stock plans by the end of June, and we'll continue to review options to return the capital as efficiently and as prudently as possible.

Pro forma for the remaining capital we expect to return through June 2018, our common equity Tier 1 ratio would be around 12.5%, still above our target ratio of 10% to 11%, but much improved from our current common equity Tier 1 ratio of 14%.

We submitted our capital plan earlier this month. The results will become public by the end of June. We designed the plan to bring our common equity Tier 1 ratio closer to the targets we discussed last quarter, which were 11.5% to 12% by the end of 2018 and the upper end of our 10% to 11% target range by the end of 2019, while working within our risk management discipline.

Page 16 highlights our key performance metrics, both on a reported basis as well as excluding noteworthy items. Our effective tax rate excluding discrete items was 27% this quarter, slightly higher than the 25% to 26% we guided to last quarter. The increase was mostly driven by higher forecasted state and local taxes as a result of the impact of U.S. tax reform and state tax law changes during the quarter. As a result, we are now forecasting the effective tax rate to be in the 26% to 28% range for 2018.

Our return on tangible common equity, excluding noteworthy items of 6.4%, was negatively impacted by our higher credit costs. Normalizing for the higher credit provision, ROTCE would have been around 8%.

Before I turn it back to Ellen, I want to give you some thoughts on the second quarter outlook, which is on Page 17. We expect total average earning assets to be relatively flat with low single-digit quarterly growth in our core portfolios, mostly offset by run-off of the Legacy Consumer Mortgage portfolio and sale of the reverse mortgage portfolio.

We expect net finance margin to remain in the mid- to upper-end of the 2018 target range, depending upon the timing of the sale of the reverse mortgages. We expect operating expenses to be down as it is included -- as it included about $10 million of elevated costs this quarter. We continue to expect net charge-offs to be within the annual target of 35 to 45 basis points, excluding any discrete items. And as I mentioned, we expect the effective tax rate before the impact of discrete items to be 26% to 28%.

And with that, let me turn it back to Ellen.

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Ellen R. Alemany, CIT Group Inc. - Chairwoman & CEO [5]

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Thank you, John. In closing, I want to say that we remain committed to achieving an 11% return on tangible common equity at the end of 2019. We are encouraged by the performance of our core businesses and believe CIT has a distinct value proposition in the markets we service. We are focused on continued progress on our plan and have demonstrated that we can consistently deliver on our objectives.

Now let me turn it back to the operator for question-and-answer.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Moshe Orenbuch of Crédit Suisse.

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James Ulan, [2]

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This is James Ulan on for Moshe. I was wondering if you could go into greater detail on growth in the Commercial Finance segment as well as in Business Capital. Kind of see that Rail and Real Estate are roughly flat, and are curious what your strategy is to grow those other 2 verticals, Commercial Finance and Business Capital.

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Ellen R. Alemany, CIT Group Inc. - Chairwoman & CEO [3]

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Sure, James, this is Ellen. Business Capital, I would say, if you look at our year-over-year growth, has been very strong and it really is reflecting overall confidence in market conditions. I think, overall, we're seeing positive sentiment from small business customers, and that's really driving our growth. We also, just in Equipment Finance, which are all vendor programs, we doubled volume in the last 12 months mainly due to our investments in technology and industrial. We're also continuing to expand out front-end integration capabilities with major technology companies, and we think this is really unique proprietary technology. And so we are very optimistic and we believe that Business Capital should be one of our strongest growth areas this year. In Commercial Finance, we -- the fourth quarter of '17 was really the inflection point for the asset levels in this business. We have a solid pipeline, and we're making continued progress against our new business initiatives. Most of the asset growth we saw this quarter was in health care, real estate, aviation lending, energy and C&I. And -- but that being said, the competition for quality credits is very intense. There's a lot of nonbank lenders out there that are taking market share. And as we've mentioned in the past, leverage levels -- leverage lending levels have moved above the guidance for banks. So I think, overall in Commercial Finance, the asset growth is really going to depend on market conditions, especially prepayments. And I would also say that a lot of our volume comes from financial sponsors, and M&A was down in the first quarter but pipeline is strong. And then Real Estate Finance, we're just being really selective there. We recently had a reception where we had -- a lot of our real estate customers were there and the price of real estate just raw land is very, very high. High end in New York is -- we're not doing right now, but prepayments slowed in the first quarter for us. And I would say that we're really just focusing on the core Northeast and Southern California.

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James Ulan, [4]

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Okay. That's very helpful. And if I could just ask a follow-up on credit. Can you go into a little bit of a greater detail on, not the specific credit item, but just more of the increase in reserves for the broader portfolio? What's causing that and what are your expectations for those drivers going forward?

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Robert C. Rowe, CIT Group Inc. - Chief Risk Officer & Executive VP [5]

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So in terms of the increase beyond the discrete event, which I would like to mention to follow on to what John was saying, there were irregularities that were episodic in nature to that event. But in terms of the broader increase that we had, there's no one industry, no one product type, so there's no correlation that we're seeing across the portfolio. So it was just a number of names in our performing book that we decided to build reserves on during the first quarter. And that's why we decided to give guidance beyond just the charge-offs but to give it to the provision as well to make it clear from our perspective, and from what we're interpreting that we think credit quality remains stable and what we think the expectations are for the balance of the year.

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Operator [6]

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The next question will come from Chris Kotowski of Oppenheimer & Co.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [7]

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Yes. On the capital repurchase plans, I guess, I think the $675 million is a lot to do in the remaining time in a -- the remaining time in the quarter. And previously, when you had a large amount of authorization, obviously, you did this kind of structured solution. And I'm wondering, how -- if you can talk a bit more about how you plan to get this done by the end of the quarter?

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John J. Fawcett, CIT Group Inc. - Executive VP & CFO [8]

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Yes. So I think we're still working through the dynamics. I think there are 2 imperatives associated with the return of capital. The first is that we return the capital and the second is that we return the capital by June 30. And so both of those things have to happen. I think in terms of the tools, we're obviously looking at everything and have been looking at everything. We're looking obviously at the tender. We're looking at ASRs. We've been doing OMRs. I think the complication with OMRs on a go-forward basis is there's not enough average daily trading volume for us to actually get it out. If you look at where our stock is -- or the number of shares that are actually trading on a daily basis, we probably need, on a good day, probably 90 trading days to actually move it. So I think we'll manage around the edges with OMR. And then I would expect that at some point, there might be a cash cleanup to the extent that a tender and an ASR doesn't get everything out. But it's obviously something that we're looking at very closely. We understand that time is not on our side and we're going to have to make some decisions. I would say that also, just in the context of timing, our Amended Capital Plan was actually approved in February 1. I think we announced it on February 2. There were some challenges in the markets post February 2. And it wasn't until March 6 that we're actually able to get this sub-debt out the door, which was a large component of this. So we're -- and then we went right into blackout. So we're pretty mindful of what we have to do and how much time we have to do it.

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Operator [9]

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The next question will come from Eric Wasserstrom of UBS.

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Eric Edmund Wasserstrom, UBS Investment Bank, Research Division - MD & Consumer Finance Analyst [10]

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John, just a couple of follow-ups. What was your deposit beta in the period? Because my -- I was just doing some quick calculation on the change in average deposit balance, and it looks like on the incremental, it might have been about 35 basis points and Fed funds are moving about 34. So obviously, that would imply a much higher beta than the 20% that you cited. So could you just give some clarity on the beta in the period?

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John J. Fawcett, CIT Group Inc. - Executive VP & CFO [11]

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Yes. So it -- on an overall basis, it's probably around -- it's up, but it depends on product, it depends on channel, it depends on whether you're looking at brokered or commercial. I mean, clearly, the betas are much higher associated with the non-maturity deposits. And I think to the extent that a lot of the growth that you're seeing is in our non-maturity portfolio, you would expect higher -- elevated -- more elevated betas. Beyond that, I don't know that there's much more that I want to say.

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Eric Edmund Wasserstrom, UBS Investment Bank, Research Division - MD & Consumer Finance Analyst [12]

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Okay. So just so I understand that 65% to 75% beta that you've cited, that's on average over the course of the year? Or how do I interpret this here?

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John J. Fawcett, CIT Group Inc. - Executive VP & CFO [13]

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No, that's over the entire cycle. So that's from the start of the Fed timing through the entire cycle. I think on non-maturity deposits, you could imagine betas getting up to probably 75% in the non-maturity portfolio. And look, betas are going to move. It's going to be a function of competition in the marketplace. It's going to be a function of what happens on the left-hand side of the balance sheet and where we need the funding. So it really is a balancing act. And so, I'm not trying to be evasive, but we're living in real time and it's just kind of hard to project where this is all going to go. But I would say, I think we've been pretty effective thus far in terms of when you look at the overall change in deposits. I think -- clearly, I think last year, our overall deposit cost grew 5 basis points, and we saw 5 basis points just in the first quarter. So things are starting to move, there's no question about it. And we don't have our head in our sand -- in the sand about it, but it's very fluid in terms of the way we think about the mix of products. I think the other thing, too, that helped us a little bit is that to the extent that we've been aggressively winding down brokered. And to the extent that we're underweight commercial, where you typically find higher betas, it feels like we're in a good place in those spaces. On the brokered cost to deposits, that money is still at 2 50. And so when you think about rotating out 2 50 deposits into NMD, which I think our offer rate is now like 1 75, you're still thinking of 75 basis points. So there's still potentially opportunity for us to be doing things in the deposit space. So I hope that's a little bit more helpful.

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Eric Edmund Wasserstrom, UBS Investment Bank, Research Division - MD & Consumer Finance Analyst [14]

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Right. No, that's very helpful. And if I could just follow-on with one question with capital. Putting aside the capital actions for the near term, can you just help me understand how the -- how you achieved that longer-term target? And I guess what I'm really trying to understand is, how much capital you're anticipating being consumed by growth versus how much incremental capital you feel you need to return in order to achieve the secular target?

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John J. Fawcett, CIT Group Inc. - Executive VP & CFO [15]

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Well, I think it's always -- it's a constant tradeoff. I mean, I'm coming up on my first year here. I think the first 2 quarters I was here, there wasn't a lot of growth across. And in fact, when the rest of the market was growing quarter-on-quarter, 1.5%, 2%, we were kind of flattish. I think the fourth quarter was very strong. I think the first quarter was similarly very strong. And if you look at originations in the first quarter, they were better than just about -- they were better than every quarter almost across the board, except for the fourth quarter of last year. So actually, growing into our capital by building out the balance sheet would be a nice problem to have. I think we've been very clear in terms of the glide path down. I think about it in terms of at the end of last year, we're at 14.5% common equity Tier 1. We're going to get that -- at the end of the first quarter we're at 14%, we're targeting it down to 11.5% to 12% at the end of this year, and at the high end of the range, 10% to 11% into next year. Now a lot of things can happen between now and then. We've got to continue to operate within the regulatory framework. But being in on SIFI, relaxed supervisory expectations all weigh into these things. But until any of that stuff happens, I think we're still on our glide path to get to between 11.5% and 12% at the end of this year, and down to the high end of 10% to 11% at the end of '19. And that still feels right to me.

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Operator [16]

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(Operator Instructions) The next question will come from Vincent Caintic of Stephens.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst [17]

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I appreciate the color you've given so far on the growth on the specific segments. But I was wondering if you could broadly talk about the competitive environment you're seeing in commercial lending. I think we've heard from a couple of banks about the competitive space, and I'm kind wondering if you can maybe go through some of your product sets broadly and talk about where you might be seeing competition or you might have a particular edge. And in terms of competition, if you're maybe seeing it in -- on a yield pressure, people taking more credit risk or covenants might be loosening.

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Ellen R. Alemany, CIT Group Inc. - Chairwoman & CEO [18]

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Sure, Vincent. So I think we're seeing the most competition in really the Commercial Finance and the Real Estate segments of the market, and it's really from the nonbank space and Commercial Finance where there's just so much liquidity out in the marketplace. And as I mentioned before, we're at the leverage level -- lending levels and really covenant-light transactions are being done. But that being said, I think we're -- in particular, our strategy is really going after certain industry niches and we had most of our growth this quarter in health care, real estate, aviation lending, energy and from C&I. In Real Estate, same thing, where the nontraditional lenders and debt funds are really -- there's just a lot of liquidity out there. And the cap rates, we're seeing -- we haven't really seen a change in the cap rates. It's roughly about 5% on the high-quality properties, 4% to 7% on others. And we're also seeing spreads tightening there because there's just so much cash in the system that the spreads have tightened a little there. So I think in Business Capital, I think it's basically the same traditional lenders out there in the marketplace, and where we're really differentiating ourself is leading with industry expertise, proprietary technology. And then on the Small Business Direct Capital lending, we're one of the few FinTech companies that's regulated within a bank. There's a lot of small business confidence out there, and so we have good growth in that segment. Rob or John, I don't know if you have anything to add.

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Robert C. Rowe, CIT Group Inc. - Chief Risk Officer & Executive VP [19]

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No, I thought that covered it pretty well. I would just -- the only thing I'd add in terms of Commercial Real Estate, the banks, including ourselves, have been pretty disciplined around loan-to-cost and loan-to-value and having skin in the game. And so that's why you see slower growth rates for Commercial Real Estate across the board.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst [20]

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Okay. That's helpful. And actually, a related question there. So you talked about a lot of excess liquidity particularly in the nonbank space. In your experience, what changes that liquidity -- what causes that liquidity to maybe go away? And maybe, does the rising rates have a -- maybe have a positive benefit for you in that regard?

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Robert C. Rowe, CIT Group Inc. - Chief Risk Officer & Executive VP [21]

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It really would have to be kind of the cycle happening. So if you think about Commercial Finance and then you think about the nonbanks, whether it's the CLO money that's come onboard or the credit funds that actually have money as well, it would really have to be a deterioration in the credit cycle. Otherwise, they're going to be able to provide returns to their investor base that are reasonable and I would imagine that, that would continue on. I don't think it's as much interest rate-driven unless the Fed got really aggressive on tightening and then it was just really pulling liquidity out of the system. But overall, interest rates are still relatively low.

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Operator [22]

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And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to management for any closing remarks.

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Ellen R. Alemany, CIT Group Inc. - Chairwoman & CEO [23]

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Great. Thank you, everyone, for joining this morning. If you have any follow-up questions, please feel free to contact me or any member of the Investor Relations team. You can find our contact information, along with other information on CIT, in the Investor Relations section of our website at www.cit.com. Thanks again for your time and have a great day.

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Operator [24]

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Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. At this time, you may disconnect your lines.