CIT Group Q2 2010 Earnings Call Transcript

Jul.27.10 | About: CIT Group (CIT)

CIT Group (NYSE:CIT)

Q2 2010 Earnings Call

July 27, 2010 8:00 am ET

Executives

Kenneth Brause - Executive Vice President of Investor Relations

Scott Parker - Chief Financial Officer and Executive Vice President

John Thain - Chairman and Chief Executive Officer

Analysts

Matthew Schultheis - Boenning and Scattergood, Inc.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

Moshe Orenbuch - Crédit Suisse AG

Patrick Duff

David Hochstim - Bear Stearns

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Christoph Kotowski - Oppenheimer & Co. Inc.

Mike Turner

Henry Coffey - Sterne Agee & Leach Inc.

Jordon Hymowitz

Operator

Good morning, ladies and gentlemen, and welcome to CIT's Second Quarter 2010 Earnings Conference Call. My name is Chanel, and I'll be your operator today. Participating in today's call are John Thain, Chairman and Chief Executive Officer; Scott Parker, Chief Financial Officer; and Ken Brause, Head of Investor Relations. [Operator Instructions] I would now like to turn the call over to Ken Brause. Please proceed, sir.

Kenneth Brause

Thank you, Chanel, and good morning, everyone. Welcome to CIT's Second Quarter 2010 Earnings Conference Call. Our call today will be hosted by John Thain, our Chairman and CEO; and Scott Parker, our CFO. Following our formal remarks, we will have a Q&A session. We ask that you please limit yourself to one question and a follow-up and then return to the queue if you do have additional questions. We'll do our best to answer as many questions as possible in the time we have this morning.

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 2009 Form 10-K that was filed with the SEC in March. Any references to certain non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in our press release. For more information on CIT, please visit the Investor Relations section of our website, at www.cit.com.

I'd like to now turn the call over to John Thain.

John Thain

Thank you, Ken. Good morning, everyone. Thanks for getting on the call. I'm going to make a few introductory comments and then turn the call over to Scott Parker, our new Chief Financial Officer. Scott joins us from Cerberus but he spent most of his career at GE Capital in many of the same lines of businesses that CIT is in.

As we said in our press release, we are continuing to deliver on the priorities that we discussed in the first quarter. First, we are substantially completed in building out our senior management team, many of which are in the room with me today, this morning. But just to go through, Carol Hayles, our new Controller, is here. Lisa Polsky, our Chief Risk Officer; Rob Rowe, our Chief Credit Officer; Mike Roemer, our Chief Auditor; Nelson Chai Head of Strategy and Chief Administrative Officer; Lisa Zonino, our new HR Head; and Jeff Barloes [ph] (06:49.9), our new Chief Regulatory Officer. And then we have four hires that are in the set approval process. And when those two get done, we will have completed filling out our senior management team.

In addition, later this morning, we're going to put out a press release announcing that David Moffett is joining our Board of Directors. David has extensive banking experience, and so that will be a very positive addition to our Board, and we'll put out a press release later this morning.

Second, in terms of priorities, is we are continuing to pay down our high cost debt, and we're also continuing to access the capital markets for lower-cost funding. In the second quarter, we raised about $800 million in the capital markets. And continuing on this trend, we will begin discussions this week to refinance and repay the remaining $4 billion of first lien debt. I would expect us subject to, of course, to market conditions, to pay down about $1 billion of the first lien debt and then to begin the process of refinancing with a new secured term loan, the other $3 billion.

We are also continuing the process, and you saw this in the second quarter, of both reviewing and optimizing our portfolio. We did close the sale of our Australia and New Zealand vendor business. We also sold our half of our CIBC joint venture in Canada. And then we continued the process of selling loans. We've sold an excess of $500 million of Corporate Finance loans, and we also sold about $600 million of Student Loans.

We are making progress on our written agreement with the Fed. It helps a lot to have all of our people in place now, so we can deal with a lot of the issues that the Fed has raised, particularly on the risk management front, and so that it is progressing. We are also focused very much on expenses. As our assets are shrinking, our ratio of expenses to net earning assets is going up. We are focused on that, although because of our need to invest in risk management, in compliance and in systems, that ratio will be an issue for us, at least for a little while. But we are focused on managing expenses.

And then I think most importantly, we're originating new profitable business. We originated over $1 billion of the new loans in the quarter. We're also originating in CIT Bank. And so we're beginning the process of rebuilding our pipeline for new lending.

So with that, I will turn the call over to Scott to get into more details. But I am very comfortable that we're making progress in our priorities in the quarter. Scott?

Scott Parker

Thank you, John, and good morning, everyone. I'm excited to join the team and by the opportunity we have to further our position as a leading provider of capital to small and medium-size companies. I worked for a competitor for many years, as John mentioned, and CIT's reputation among clients is well-earned.

This morning, I'm going to spend some time providing additional insight into our revenue and credit trends, which were the primary earnings drivers this quarter, and are the metrics most impacted by fresh-start accounting. I will also elaborate on our funding and liquidity progress since reducing our cost to capital remains a top priority.

On the revenue front, net finance revenues, which include net interest income and rent net of depreciation was down 8% sequentially, as we continue to shrink the balance sheet. Finance and leasing assets declined $3.9 billion or about 9% as the $1 billion of new volumes that John just mentioned was more than offset by asset sales and portfolio collections. Reported net finance margin was 4.03%, down a few basis points from the first quarter. Exclusive of fresh-start accounting benefits and the prepayment fee on the first lien debt, which was about $45 million in the quarter, margin was about 68 basis points versus 65 basis points in the first quarter. We made progress but not as much as expected as our average earning asset base contracted more than our high cost of debt and our cash balance increased.

Specifically, average earning assets fell $3.9 billion sequentially, which lowered our finance revenue by about $60 million. That was offset by the pickup of about $37 million of incremental interest expense savings on the first lien debt we paid down in February and April and about $20 million in lower interest on lower deposits and secured balances. The benefit of our recent $1.25 billion first lien repayment will materialize beginning in the third quarter, as we pay debt down at the end of the second quarter.

On new originations, yields were strong and the marginal cost of funds on our new secured financing enabled us to be competitive. Vendor and aircraft lease yields are still above 10%. Corporate Finance yields were down slightly from the first quarter, reflecting a higher proportion of new business being asset based lending. This new business is profitable when funded out of CIT Bank. Overall, we signed $180 million of new commitment in CIT Bank and funded about half of that amount. While this is relatively small, it is still nearly five times more than the business that we did in the first quarter.

Other income was particularly strong due primarily by gains in asset sales and increased recoveries in pre-FSA charges. As John mentioned, we sold the vendor Australia business, which was about $400 million in assets, 130 employees and the assumption about $20 million in liabilities. We sold our interest including $200 million of receivables in the CIBC joint venture in Canada.

On the portfolio side, the $500 million of corporate loans we sold were predominantly cash flow and almost equally split between U.S. and international. These sales also included some non-accrual loans and several large exposures that we reduced. The $580 million of government guaranteed students loans we sold out of the bank, also we sold a few aircraft and other leased equipment. With roughly $2 billion in second quarter asset sales, we have sold nearly $3 billion of non-strategic assets through June.

Fee and other income was down slightly, and factoring commissions were essentially flat as volume and rates were largely unchanged. On the FX side, we hedged most of our open positions by early second quarter, mitigating the volatility we saw in the first quarter.

Turning to credit, as John mentioned, we have a new senior risk leadership and finance leadership team that continue to review the portfolio and the effects of fresh-start accounting. We remain committed to transparency and giving you the metrics you need to understand our performance. On a reported or post-FSA basis, nonperforming loans increased sequentially to $2.1 billion, primarily in Corporate Finance and net charge-offs were up $64 million. However, as a result of FSA, net charge-offs are only net of recoveries on loans charged off this year, which have been minimal so far. Recoveries on loans charge-off pre-emergence are recorded in other income. This quarter, we had $98 million of such recoveries, up $54 million from the first quarter. On a pre-FSA basis, nonperforming loans were down slightly from the first quarter as the amount of loans migrating to non-accrual status was offset by charge-offs, asset sales and loan repayments.

Pre-FSA gross charge-offs were up $16 million sequentially, principally commercial real estate and energy-related. We added $157 million to our loan-loss reserves in the period. The increase was driven by four items: first, higher reserves on performing loans; second, expectations for lower recoveries on a liquidating consumer program and Vendor Finance; third, the deterioration of certain real estate and energy accounts in Corporate Finance; and finally, reserves on new origination.

At $338 million the reserve is 1.2% of reported loans. Combining this reserve with the remaining non-accretable discount, we have over $1.5 billion or roughly 5% coverage against pre-FSA loans. Overall, our aggregate portfolio and metrics were similar to the first quarter.

Now I'd like to move on to liquidity. Cash, as you see, increased $700 million to $10.7 billion. The primary cash sources in the quarter were $2 billion from the asset sales I just talked about, another $2 billion were from net portfolio collections and also the $800-plus million that we got from secured financing with the trade-in vendor programs.

Primary cash uses were the $2.3 billion to pay down first lien debt, $1.5 billion in April and $800 million in June. The following amounts were paid in early third quarter, $1.8 billion for other debt repayments, largely unsecured financings with a minimal runoff in the deposits in CIT Bank. On the funding side, we have executed over $2.5 billion of securitized financings against vendor, trade and aerospace assets this year. And our funding eligible U.S. corporate loans out of CIT Bank. Our average all-in cost of these facilities is around 4%, and we are working on additional secured facilities. On the first lien debt, we have cut the balance nearly in half, and as John said, we are beginning discussions on refinancing alternatives later this week.

So in summary, we continue to execute on the plan that John has laid out. The balance sheet is strong, assets and liabilities were fair valued at year end 2009, we have over $10 billion of liquidity, and we are increasing book value. The management team is largely in place, and we are building the functions important to CIT, operating as a bank holding company. And finally, we are funding new volume at attractive rates and focusing on paying down debt and refinancing high-cost debt.

With that, I'll turn it back to Chanel, and we'll take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Kotowski of Oppenheimer and Company.

Christoph Kotowski - Oppenheimer & Co. Inc.

I wonder if you can kind of flesh out how much of your funding you think you will be able to move into the bank over the course of the next, call it next 12 months. I mean, I would just think from a political standpoint, it would be who the regulators to see that you’re e a supplier of credit to small businesses and that the regulators would be sympathetic to helping you fund that at an attractive rate. But on the other hand, you have the MoUs in place. And I'm just curious what is your sense about that calculus and how quickly you can resolve some of these issues and start funding regularly out of the bank?

John Thain

Let me start with that. First of all, we are funding most of our new Corporate Finance originations in the bank. The bank has substantial amounts of cash. It is unlikely we would use all that cash up in the next 12 months. And so I expect most of our new Corporate Finance loans, which are in fact loans to small and middle market companies, to be originated in the bank, and there's nothing that prevents us from doing that. We're also in the process of seeking permission to move more of our businesses into the bank. The one we're working on right now is our small-business lending unit that of course does just fit quite nicely with what you said in terms of good policy. I would hope that we can get approval to move that into the bank soon. Because the majority of those loans are government guaranteed, it doesn't use up that much cash in the bank, but it’s just one more place that we can in fact originate loans to small businesses. But we are actively using the bank to originate the loans now.

Christoph Kotowski - Oppenheimer & Co. Inc.

And I guess, a follow-up is, how can you get this to be a direct benefit in terms of repaying your high-cost debt?

Scott Parker

I think those are really separate issues. We are in the process, and we'll continue to repay the high-cost debt to the extent that we fund loans in the bank. It doesn't use up funding capability or cash at the parent company. We are not permitted to upstream cash from the bank to the parent. But it's our ability to actually originate loans in the bank is helpful to the process of paying off the high-cost debt.

Operator

Your next question comes from the line of David Hochstim with Buckingham Research.

David Hochstim - Bear Stearns

I wonder, could you talk a little bit more about the, I guess, the rates you're getting on the new loans originating in the bank? What kind of spread is there on the marginal growth? And I guess, also, if you could talk about competitive environment where you see opportunities to get good rates on new loans?

Scott Parker

Specifically in the bank?

David Hochstim - Bear Stearns

In the bank, and I guess what you have the capacity to fund outside the bank too?

Scott Parker

As I mentioned in my prepared remarks, the Vendor business and the Aircraft Leasing business, we're still getting yields over 10% and on the Corporate Finance business, depending on which segment. On the bank, we're doing more on the asset-based lending, which is kind of in the 400 basis points range. And so I think again, based on the conduits that we're using for the Vendor business, those are good spreads.

David Hochstim - Bear Stearns

Are you ordering new aircraft now, I wasn’t clear from . . . Have you made any new orders?

Scott Parker

We have in place any new orders. We have substantial orders that we're taking delivery of, and all of our deliveries through 2011, all of our new deliveries are already placed. But we did not place any new orders, for instance, at the most recent air show. So we have 20 deliveries in 2010.

David Hochstim - Bear Stearns

And then it looked like in the release, you were referencing higher rates slightly in Rail, is that the case? Are you seeing some uptick there besides utilization?

John Thain

On the utilization side, Rail as you kind of saw from some of the Railroad press releases, some of the commodities with coal and other elements, the utilization on our kind of per diem, as well as other fleet, picked up in the second quarter, the 93%.

David Hochstim - Bear Stearns

And leasing rates there?

John Thain

Leasing rates are still kind of tough in the cycle. Rates are a little bit above 2009 but not where they were historically.

Operator

Your next question comes from the line of Henry Coffey with Sterne Agee.

Henry Coffey - Sterne Agee & Leach Inc.

Just to clarify a couple of things. You said you were lending in the Corporate Finance business instead of L 400. Are there floors in that? And what sort of the effective yield on the paper you're putting on right now? The lease business was what, at around 10? I was wondering if you could comment on what you're doing in the rest of your business lines, in terms? And also maybe give us some sense of what the future would look like in terms of what sorts of commitments in originations you're going to be looking at?

John Thain

Well, the question on the asset-based lending that we're putting into the bank, those did not have floors on them. The other part of your conversation was?

Henry Coffey - Sterne Agee & Leach Inc.

I was just wondering what you're doing in Vendor in terms of new product there?

John Thain

The volume in Vendor was flat with first quarter. A lot of that's being driven by the current economic environment. And so the thing we still feel strong with the yields and the business that we're doing in the Vendor business. As Scott mentioned before, the yields on new business are in excess of 10%.

Henry Coffey - Sterne Agee & Leach Inc.

And the Vendor Finance portfolio in liquidation, is that a European portfolio or a U.S. portfolio?

John Thain

The U.S. portfolio is consumer. It's a book of business that we're in the process of winding down.

Operator

Your next question comes from the line of Chris Brendler of Stifel Nicolaus.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Can you give us any additional granularity on the Corporate Finance portfolio and the trends you're seeing there on the credit side? Still looking for some signs of stabilization there? I think we're seeing little bit but still the rate, at least, up to the high teens in terms of nonperformers and it's nice to see the dollars at least stabilize. Any color you could give on the components of that portfolio? Are you seeing weakness outside of the areas you've highlighted in the past as being underperforming, parts of that portfolio? Is the weakness broadening or are we seeing any light at the end of the tunnel?

Scott Parker

I'll try to answer that. I think the weakness is kind of the similar areas that we've been working through over the last several quarters. The commercial real estate portfolio is definitely decreasing, and we had a few charge-offs in the second quarter related to that. In the energy sector, we also had a few charge-offs in the second quarter as we work through that. And then outside of that, it’s kind of just a matter of specific credits that is difficult, I think, to forecast what the next area is going to be. But I think Lisa and Rob and others are working with the team with respect to looking through that portfolio in the last couple of months.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Do you think by the end of the year, NPAs should be down or is it too hard to tell at this point?

John Thain

Yes, I think it's a little bit hard to tell right now. As you see, we're still increasing but is up slightly in the second quarter. I think a lot of that, answer to that question, is kind of expectations for where the economy's going to be. So there's a mixed message in regards to where that's going. So as you know, a lot of our portfolio will be dependent on future economic growth. So I don't think it's appropriate to answer that forward thought right now. But it will depend a lot on what happens with the economy.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

On separate topic, I'm just a little bit surprised to see you looking to refinance the high-cost first lien facility now. As you mentioned, it will probably be down in the $3 billion range, after you make this next prepayment. And given your quarter-by-quarter success in financing opportunities, as well as natural pay-down of the portfolio, I would think you would be able to pay that down naturally over the next two, at most three quarters. What are sort of the benefits of paying it off early? I imagine it going to cost you quite a bit of fees up front to pay it off and structure a new one. Is there any rationale besides just accelerating the pay-down and getting a lower-cost facility in place or is there something else going on? One thing I've thought up in the past is in the encumbrance of that facility places on your balance sheet. Maybe that would unlock additional secured financing opportunities. Just help me out a little bit there.

Scott Parker

It's a very good question, and it's one we also discuss a lot internally. And you're right, we could pay down the first lien debt over the next couple of quarters, given the pace at which we're generating cash. But the thought process is as follows. First of all, we want to keep some first lien capacity because if we paid it all down, then in essence, the second lien becomes the first lien and there's no ability for us to create any more first lien debt. So we're maintaining some of that debt capacity really just as a protective measure to us. Second of all, when we refinance it, besides a much lower cost, we'll also strip out a lot of the more difficult covenants. And so I expect that the refinancing will result in more reasonable covenants and lower costs, and then we can start the process of focusing on the second lien debt. But we really are just taking advantage of a market opportunity right now to bring down the cost faster.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Lastly, any guidance or thoughts you can give us on the taxes you're paying right now? I am not exactly sure how we should we looking at it. I know it’s mostly driven by the international operations. But is there anything you can give us that would help us think about and look at taxes going forward, that would be helpful.

John Thain

Chris, as you know, our year-to-date tax rate is about 32%. So that's our best estimate for the year based on the factors we have. And as you said, I think the other item we're completing our analysis on the situation with respect to our election as part of our 2009 filing, which will be done in the third quarter.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

So you're not getting any NOL benefit at this point, it’s all about waiting for that election?

John Thain

Well, I think the NOL is based on having U.S. taxable income, which based on our current situation, debt situation, the interest costs, we're not profitable in the U.S. So I think the NOL election really more has to do with future use of the NOL.

Operator

Your next question comes from the line of Sameer Gokhale with KBW.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

Firstly, I just want to clarify something. In terms of your pre-FSA net charge-offs, if I do my math correctly, it seems like on a pre-FSA basis, those net charge-offs, net of recoveries declined to $154 million from $192 million last quarter. And it seems like based on the commentary that the decline was due to, at least partly due to an improvement in Vendor Finance net charge-offs. And I was trying to just, if I recall your comments about the provisioning for Vendor Finance, and there might be some apple-to-oranges comparisons going on here. But it seems like you were referencing in the increased provision rather of the last quarter, lower recoveries on Vendor Finance assets. So I was just trying to figure out, is it lower recoveries or higher gross charge-offs in Vendor Finance? And that seems to be a little bit at odds with the commentary in the press release. So if you just provide some more color on that that would be helpful.

John Thain

Well, on the first part of your math, I need to get a little bit more insight on that. But on the Vendor side, there was an additional provision that we put up, Sameer, on that one. And that was, what we’re saying is, in regards to the reserve that we put up on that was for lower expectations of our recoveries, right, on that book as it’s liquidating. So as it continues to decline, the expected losses we're seeing on that portfolio were provided for in the second quarter.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

So you're seeing charge-offs come down, but you're just relative to your previous expectations for net charge-offs because of lower recoveries, you've increased the reserve there, essentially?

John Thain

Correct. But remember, that reserve is against a liquidating consumer portfolio, which is not part of the core Vendor business.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

When you're referencing the core customer business of a vendor, what businesses are you referring to, like retail sales? I think you used to have a Dell arrangement in the U.S., which was basically financing PC’s to many of whom [ph] (33:46)were to consumers. Is it similar types of assets or could you give us more specifics around that?

John Thain

You're correct as to the characterization of the assets.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

Okay, that’s helpful. And then as far as the asset sales, I know you referenced several of them. Some of them I think occurred after the quarter end. So during the second quarter, itself, were the asset sales basically the $580 million of Student Loans, $485 million of the Australia-New Zealand business and then $890 million of the corporate loans? Or were there any other asset sales during the second quarter as well?

John Thain

You had the $580 million. That's for the Student Loans. We had over $500 million in the Corporate Finance area. That doesn't include the CIBC joint venture that we sold in Canada, the Australia business. And then we also had some aircraft and other leased equipment that we sold that we didn't provide the dollar amount of that. So in the quarter, we did do $2 billion.

Operator

Your next question comes the line of Edwin Groshans [ph](34:55) of Height.

Unidentified Analyst

I guess, just on a broader picture, and I know you kind of adjusted earlier with trying to move the small business program into the bank. And I guess could you kind of give us an update on the discussions with the FDIC with the movement of, really, commercial lending business lines that are permissible into the bank? And then, have you looked at the new $30 billion small business and TARP program as maybe not that CIT needs capital, but maybe as a step in the goodwill direction to try to achieve CIT's goals.

John Thain

I'll try to answer that. The FDIC has no objections to our originating corporate finance loans in the banks. So that is the process that we're using. So there's no issue with that. And I expect us to continue to originate higher volumes of Corporate Finance loans in the bank. In terms of the $30 billion legislation, it's not clear to us right now how that might be applicable to us. So we're actually looking at that. But that, as of right now, I can't tell you whether there will be any particular benefit to us or not.

Unidentified Analyst

Okay. I guess I was just under the impression that CIT was trying to push its business lines from the holdco into the bank and that there was some discussions going on about that, not that you couldn't do commercial lending out of the bank but most of the business lines are at the holding company. And to your point, vendors are much more profitable at the bank, and can you push the whole thing into the bank?

John Thain

Well, over time, one of our goals is to move more of our businesses into the bank. Right now, we do Corporate Finance there. The next step is the small business lending, which we're working on right now. And then the next step after that would be to move the U.S. Vendor business into the bank. So yes, we do intend to do that. We're just doing it in stages. But we're still utilizing the bank even today.

Unidentified Analyst

Okay. Have you submitted a plan with the FDIC that they're kind of monitoring as you go through it or anything along those lines? I buess my real question, John, is the FDIC prior to the fresh start was hesitant to allow CIT to do a lot of things back over a year ago. And I'm just wondering, are they more warm to what CIT's doing? Are they still a little standoffish, and will they put hurdles in your way to accomplishing the goals that you're looking to accomplish?

John Thain

I can't really answer the part about the past because I wasn't here then. And really, Scott wasn't either. So neither of us can really say about what the relationship was in the past. I would say that there are constant dialogues all the time with the FDIC. And so they are aware of our business and our business plans, and we're working with them.

Operator

Your next question comes from the line of Matt Schultheis of Boenning and Scattergood.

Matthew Schultheis - Boenning and Scattergood, Inc.

Quick question for you. With regard to the Frank-Dodd bill, there was I guess an unintended consequence related to rating agencies and ABS issuance that cost Ford some issues. Are you aware of any issues in that bill that may cause you some challenges going forward, some things that you might have to take care of a little differently than you had originally planned?

John Thain

Well, a lot of our transactions are kind of 144A kind of private transactions that would not be impacted by that. But again, I think, given the legislation, we will need to look at that on future products that we may be going to market with but I would say not immediately. But it could impact depending on how that gets resolved.

Scott Parker

It's thousands of pages. But at least as what we’ve gone through so far, it doesn't appear to have any particular impact on us.

Matthew Schultheis - Boenning and Scattergood, Inc.

Okay. And actually, a follow-up to the preceding questions that you were getting from the previous caller there, when you're talking to the FDIC, do you feel like you're making progress, or do you feel like you're running into a stone wall? Do you think you're getting a real response or just blanket,” We’re not really interested in hearing from you.”?

John Thain

The best answer to that is we have a constructive dialogue with all of our regulators, and in particular, a constructive dialogue with the FDIC.

Operator

Your next question comes from the line of Moshe Orenbuch of Credit Suisse.

Moshe Orenbuch - Crédit Suisse AG

I guess I'm not sure if you mentioned this or not, but could you just say how much of the $1 billion of originations was actually done at the bank?

Scott Parker

The committed amount was about $180 million. $180 million was committed. We funded about half of that in the bank in the second quarter.

Moshe Orenbuch - Crédit Suisse AG

Secondly, when we look at the Vendor business, it continues to lose money. Could you separate out in some way, maybe I don’t know if there was a gain or loss on sale of the piece that you sold or any kind of a run-off portfolio. How do we think about the ongoing profitability of that business?

John Thain

Again, the second quarter, there's kind of three key drivers to the Vendor profitability. One was the fact that the assets were down another 10% from the first quarter, which had an impact on the revenue line. It also had higher interest allocations. As you know, we allocate all that cost across our P&Ls. And because of the prepayment penalty, as well as the negative carry we have on the cash, they get impacted by that. And then the last piece is what we talked about is that we did have increased provisioning with respect to this liquidating consumer business. So in regards to what's happening in the second quarter, and I think maybe as you do look at year-to-date, I think as that business stabilizes in regards to the asset side, as well as we attack the interest costs, that's probably a better kind of approximation of kind of how we see the Vendor business.

Scott Parker

We know that new Vendor business is profitable, and we do expect the Vendor business to be profitable.

Moshe Orenbuch - Crédit Suisse AG

Okay. And then could you kind of reconcile the change in comp expense second to first quarter? What are the differences there for that increase?

Scott Parker

Well, as I think we talked about in the press release, it was adjustment for expenses related to retention payments for our employees. As we continue to move forward on kind of the restructuring of the business, we thought it was very beneficial in order to keep our employees motivated in regards to the strategic framework that John played out.

Moshe Orenbuch - Crédit Suisse AG

So that was the entire increase?

Scott Parker

That was the majority of it.

Moshe Orenbuch - Crédit Suisse AG

And just lastly, could you address maybe what the cash buffer that you kind of intend to maintain as you kind of go through and are continuing to advance your pay-down in refinancing of the original debt?

John Thain

That's also an ongoing discussion here about exactly how much of a cushion do we need to maintain. But we run a whole series of stress type scenarios to see what kind of cash drains we can experience under a stress environment. We also have undrawn credit facilities, which we have to be able to fund. And then we are definitely maintaining a significant cushion to our liquidity right now. And part of that is just getting comfortable with the data and the systems that feed our risk management systems. So we will probably carry what will look like relatively high amounts of cash for the foreseeable future until we get more comfortable that we have very good management information systems.

Operator

Your next question comes from the line of Mike Turner of Compass Point.

Mike Turner

I just wanted to find out on your billion dollars in originations, how much of that was funded versus committed on a consolidated basis in the second quarter and also versus the first quarter?

Scott Parker

In the second quarter, the majority of the volume that we do would have been funded, right? The small pieces, the Corporate Finance portfolio are deals that we did in the bank, the asset-based ones. So back to the first quarter, I don't have that information. We can follow up with IR. But in the second quarter, I think it's just really funded.

Mike Turner

Okay. And also, I think previously you'd said you're going to look into more securitizations than what you’ve mentioned, Rail in the past. What is the asset base that you could conceivably -- that's really available to securitize as far as like the Rail portfolio would be that's unencumbered?

John Thain

The exact number, we're not really going to quantify. But we certainly have the ability to do multiple billions of dollars of securitized financings. And the number also changes because when we add new aircraft to our fleet, which we're doing, those become available for financings as well. So I guess one way to think about it, which doesn't quantify it for you, but it's multiple billions of dollars.

Mike Turner

Okay. And then also, remind me what the size of your NOL is and then what your valuation allowance is against it?

Scott Parker

The NOL is about $2.5 billion. I'll have to get back to you on the specific valuation allowance against that.

Mike Turner

Okay, but the DTA on the balance sheet is significantly less, correct?

Scott Parker

Yes. If you look in the 10-K, it kind of gives you details of the netting of the deferred tax asset and the deferred tax liability.

Mike Turner

And then I guess lastly, when you talk to your portfolio of companies now and then you said you're getting kind of mixed messages in the economy, I mean what are they telling you? And what are you seeing right now in terms of what line utilization from Corporate Finance borrowers in terms of credit? I guess what are you hearing and seeing from them right now? I mean do they plan to hire? And what are some of those thoughts?

John Thain

We've actually been spending a lot of time looking at that. Remember, our customer base is small- and middle-market companies, not the large and particularly not the large global companies. And I would say that the small and middle market companies are still not very confident about their prospects, not very confident about the outlook for the economy. And so they're being very cautious. They're not drawing on the lines. They're not hiring people. They're not spending money on plant property and equipment.

Operator

Your next question comes from the line of Chris Brendler, Stifel Nicolaus.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

I just had a follow-up question on I guess one that was already asked, but I'm just trying to get a better sense of as you head into the second half of the year, do you expect to have the same level of success in balance sheet opportunities in your secured financings, securitizations, asset sales? I think the first half has been better than I had expected. I just wanted to know, as you lay out the second half of the year, do you see additional opportunities? And also if you could comment, any update on your thoughts on the Student Loan portfolio?

John Thain

I guess, on the first part, the financing again is all subject to the market conditions and kind of what goes on over the remaining of the year, but we do have several additional secured financings that we're working on. We feel good about that as of now. But it's, again, subject to when we get those out there and receptivity to the market. So I think we'll continue to work on that. And Glenn and the Treasury team have done a great job as you said, putting the secured financing together for the first half of the year and will continue to, hopefully, have that same type of progress in the second half.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Okay. And then one follow-up question for me is on those credit reserves, I guess should we expect you to continue to build up on balance sheet reserves to the extent that the non-accretable discount comes down and you're basically just plowing that back into reserves? So at some point next year, you'll probably look like you have a more normal level of reserves. Or is it going to slow down a little bit?

John Thain

And our reserving process, we evaluate the adequacy of our reserves every quarter. And there's a lot of components that go into kind of estimating the reserve with respect to kind of changes in loss expectations in the portfolio, what's going on with market conditions, our collection efforts and other factors like that. So when you say when you try to forecast that out, it's really dependent on a lot of those factors that we're seeing in regards to the portfolio and our experiences that kind of get us to the point of what we reserve in the provision line.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

So I think the confusion I have with this is that fresh-start accounting creates an additional level of uncertainty and noise around this. I mean I think, in general, I would obviously think that with a portfolio that's shrinking, your reserves would be going down unless credit was getting worse. So maybe you could just give me a little color commentary on how you feel about the credit trends in the quarter. Is the fact that you’re adding to reserves I don't necessarily think means that things have gotten worse. I think it's more of an accounting issue. Any thoughts on that?

Scott Parker

I think the piece I think you're bringing up in regards to FSA is that normally, you have recoveries are netted against your charge-offs within the provision line. That maybe is what you're talking about. With fresh-start accounting, there is a geography difference between those two. So I think as you get further out and the FSA book kind of runs off and you’re looking at new originations and the new assets coming on, those two will be more in line. I think in regards to the portfolio, itself, again, I think as you look at that, as we're getting through past the year-end point, we’re six months after that, so a lot of things, as we talked about could change in our portfolio, and that's what we continue to look at on a quarterly basis and update our reserve estimates based on that information that we're seeing.

Operator

Your next question comes from the line of Henry Coffey with Sterne Agee.

Henry Coffey - Sterne Agee & Leach Inc.

I know you probably can't offer full detail on this. But the current plan is to pay, if I understand it correctly, you're going to pay down “$1 billion of the first lien,” and I'm assuming that's either being done with cash flow or from existing lines. And then the refinance of the rest, is there any way you can give a sense of what that deal would be structured like or maybe you make some reference to other market rates or something that can help us with our modeling?

John Thain

Well, the $1 billion would come from cash. And we can't really give you any more color on the refinancing because we haven't even started it, but we will start it this week. So we'll start that process this week. And over the course of the next couple of weeks, through Ken, you can probably get some better color. But we can't give you any right at the moment.

Operator

Your next question comes from the line of Patrick Duff [ph] (53:43) of Filler, Gangan and Howe. [ph] (53:45)

Patrick Duff

You answered part of this question earlier, but I'll just ask it in its entirety for the full response. In the prepared comments, you talked about the needed investment in new systems, risk management and what have you. And so what I was curious about is first of all, how long do you think it will take to put those investments in place? How much of an impediment is it on your current business not having those systems in risk management in place at the moment and whether or not making those investments have any impact on your discussions with the Federal Reserve and the overall MoU?

John Thain

The answer is, I'll kind of go backwards. Yes, our investments in risk management and systems have a lot to do with our discussions with the Fed and with our written agreement with the Fed. Many of the Fed issues with us have to do with risk management and risk management systems and information systems. The best answer I can give you in terms of the nature of your question is in terms of people, we have the people in place now to deal with the risk management structure and with the issues that the Fed has been raising. In terms of systems, we still have a lot of work to do, and we will need to invest in systems. And as you probably know, fixing systems takes a long time. So I think that the timeframe to get the systems in order is going to be at least 12 months.

Patrick Duff

Okay. And is it too much too say that I guess before those systems are in place, a kind of relaxation or return to complete normalcy with regulators and what have you would probably be presumptuous on our part?

John Thain

Well, I guess I've actually answered this question a little bit before. Although we are making substantial progress with the regulators, I wouldn't expect that we will return to whatever “normal” means. “Normal” these days, I'm not sure what that means anymore. But I don’t think we will eliminate all of the issues that we have with the regulators until we solve the system issues.

Operator

Your next question comes from the line of Ryan Stevens of Philadelphia Financial.

Jordon Hymowitz

This is Jordon Hymowitz. On the Rail, can you talk about how much the repricing of similar assets was down on a rollover basis? In other words, GMT-organics [ph] (57:00) said it was down about 18% year-over-year on a repricing basis. Can you comment on what yours was down?

John Thain

You're talking about on renewals?

Jordon Hymowitz

Right, how much the pricing was down on renewals on a comparable basis in the quarter?

John Thain

I don't have that data right now. We’ll see if I can get it before the call is over. What was the other question?

Jordon Hymowitz

As well as the term – in other words, if they went out at 61 terms before they sell at 60 or are they 40 or something like that? One more thing, on your Student Lending portfolio, your Fel portfolio, which is no longer being originated, are you going to keep that portfolio and run it off? Or would you be looking to sell it?

John Thain

I'll answer the second one as we're getting you the answer on the first one. As you saw, we sold a piece of the portfolio. And we are constantly evaluating what is the best thing to do with that portfolio. So other than us looking to see what makes the most sense for us, that's really the only answer on that.

Jordon Hymowitz

Could you say what price you sold it for as a percent of par?

John Thain

Well, no, actually, I won't do that. But what I will is I’ll say that we sold it at slightly above where we were carrying it at.

Scott Parker

These things, you can get market prices for these things. It's a little bit unfair because block prices are not the same as where small amounts trade. But we did sell the block that we sold at slightly above where we were carrying it at. [indiscernible] (58:46) your question on the Rail, in regards to our kind of renewal rates, we kind of track versus the previous rates of those cars rolling off. So it's probably not going to be apples to apples with I think what you mentioned. But it's probably down about 15% on our renewal rates. So that's a blend between when the cars came on. But I would say, in general, pricing is down kind of 10% plus in regards to the peak. And then on the term side, the terms are kind of in the 40 month kind of range right now from the last couple of quarters that we've seen.

John Thain

But we are trying to keep them shorter just because the rates are lower.

Operator

Your next question comes from the line of Joseph [indiscernible] (59:42) of Bennett Management.

Unidentified Analyst

Can you give us the interest expense associated with your first lien loans here in the second quarter?

John Thain

If you want the actual dollar amount of interest expense on the first lien debt, just call Ken afterwards, he can get it for you. Probably you should just tell us whether you want it before the prepayment penalties or after because the prepayment penalties impact that number.

Unidentified Analyst

So the interest expense that's recorded alongside of interest income includes prepayment penalties?

John Thain

Yes.

Unidentified Analyst

I know that you discussed this earlier, but you mentioned the need to keep some of the first lien loans outstanding to keep that first lien basket open. Could you expand on that?

John Thain

Yes, we don't have to do that. We're choosing to do that. And the reason is that if we extinguish all the first-lien debt, the provisions in the second-lien debt would not allow us to ever to create any new first-lien debt on top of it.

Unidentified Analyst

So does the entire roughly $7.5 million or $8 million basket remain open as long as there's some first-lien debt outstanding?

John Thain

No, only the amount that's outstanding remains open.

Unidentified Analyst

And so how do you anticipate refinancing this? I mean will you refinance it where you step into the existing first-lien basket? I didn’t really understand your comments regarding the refinancing?

John Thain

Again, this is all subject to market conditions, and we're just starting this discussion. But the intent would be to keep the $3 billion basket of first-lien debt in place.

Scott Parker

With a new facility basically refinanced out.

Unidentified Analyst

It doesn't make sense to do that before the call provision collapses on the expansion loan?

John Thain

It's a very good question, but you tell me what the market's going to be like when those provisions fall off, and then we could decide that. We’re really saying we think there's an opportunity today to do it on attractive terms. And there's obviously risk to waiting.

Operator

That concludes the Q&A session. I'll now like to turn the call back over to Ken Brause for any closing remarks.

Kenneth Brause

I will respond to any follow-ups. Please give us a call at Investor Relations. We appreciate your participation today, and we'll talk to you next quarter.

Operator

Thank you for participating in today's call. You may now disconnect.

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