CIT Group Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: CIT Group (CIT)

CIT Group (NYSE:CIT)

Q1 2014 Earnings Call

April 29, 2014 8:00 am ET

Executives

Barbara A. Callahan - Head of Investor Relations and Senior Vice President

John A. Thain - Chairman and Chief Executive Officer

Scott T. Parker - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Analysts

Mark C. DeVries - Barclays Capital, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

Bill Carcache - Nomura Securities Co. Ltd., Research Division

Eric Edmund Wasserstrom - SunTrust Robinson Humphrey, Inc., Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Eric Jansen Beardsley - Goldman Sachs Group Inc., Research Division

David S. Hochstim - The Buckingham Research Group Incorporated

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Cheryl M. Pate - Morgan Stanley, Research Division

Christopher C. Brendler - Stifel, Nicolaus & Company, Incorporated, Research Division

Daniel Furtado - Jefferies LLC, Research Division

Operator

Good morning, and welcome to CIT's First Quarter 2014 Earnings Conference Call. My name is Emily, and I will be your operator today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Barbara Callahan, Head of Investor Relations. Please proceed, ma'am.

Barbara A. Callahan

Thank you, Emily. Good morning, and welcome to CIT's First Quarter 2014 Earnings Conference Call. Our call today will be hosted by John Thain, our Chairman and CEO; and Scott Parker, our CFO. After their prepared remarks, we will have a question-and-answer session. [Operator Instructions] 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 2013 Form 10-K that was filed with the SEC in March. Any references to non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in our press release.

Before we get into the call, I want to remind everyone that as a result of our realignment, the first quarter results are being presented per the new segment structure. As you can see on Page 2 of our presentation, the 3 new segments are North American Commercial Finance, Transportation & International Finance, and Non-Strategic Portfolios. In addition, our data supplement includes the historical trends and profitabilities of these segments, which along with other information on CIT, can be found in the Investor Relations section of our website at www.cit.com.

I'll now turn the call over to John Thain.

John A. Thain

Thank you, Barbara. Good morning, everyone, and thank you, all for being on the call. This is a disappointing quarter from an earnings point of view with net income of $109 million. Our net finance margin was down both quarter-over-quarter and year-over-year, and our non-spread revenue was down quarter-over-quarter. But despite that, our core businesses remain strong. We generated $2.5 billion of funded volume in the quarter. Our finance and leasing assets grew 11% year-over-year, and the newly-originated volume continues to hit our economic capital return targets and we believe continues to produce an attractive return versus the risk that we're taking. Our commercial aircraft were 99% utilized and our railcars were 98% utilized. Our Corporate Finance business, our real estate finance and our maritime finance assets all grew quarter-over-quarter. And our Rail asset growth included the acquisition of Nacco in Europe and expanded our railcar business into the European marketplace. The credit quality of our portfolio remains stable and both our capital and liquidity remain strong. We returned capital to our shareholders through both dividends and share buybacks, and we announced an additional $300 million of repurchase authorization. CIT Bank continues to grow. It now finances over 40% of our commercial assets and now includes 2 aircraft. We continue to make progress selling our nonstrategic assets and we continue to focus on expenses. Our headcount is down 8% year-over-year.

As I look out over the remainder of 2014, we expect both the U.S. and European economies to improve barring some geopolitical shock, but we also expect to see continued margin pressure in certain sectors of our business.

And I'll now turn it over to Scott, to expand on these comments.

Scott T. Parker

Thank you, John, and good morning, everyone. As John just mentioned, we reported net income of $109 million or $0.55 a share. While we continue to make progress on our priorities and building our franchises, our financial results this quarter reflected yield compression across our business and higher credit costs. Here are some highlights for the quarter: Assets on our core segments grew 4% sequentially and 11% from a year ago. We expanded our Rail franchise into Europe with the acquisition of Nacco. We made good progress reducing the size of our Non-Strategic Portfolios, including the sale of our student loan business that was completed last week. And we repurchased 3 million shares in the first quarter and an additional 1.5 million shares in April, bringing our year-to-date repurchases to $200 million. John also mentioned that the board authorized a $300 million increase in our share repurchase program, bringing the total authorization to $607 million.

Turning to our operating segments, Transportation & International Finance reported $118 million of pretax income. Assets grew over $1 billion sequentially to almost $18 billion, including $650 million from the European rail acquisition and growth across the Transportation businesses. Our volume was $1.1 billion, which included aircraft purchases of $450 million, railcar purchases of $200 million and over $400 million of secured lending. Now we have more than $3 billion of our Transportation assets in CIT Bank, generating attractive margins. Our Maritime assets are up over $500 million, up from about $300 million a year ago, reflecting good progress building this business. And our ability to offer both loan and lease products gives us a competitive advantage to structure transactions to meet our customer needs. Equipment utilization remains solid in both air and rail. The air team has done a great job staying ahead of a relatively heavy lease exploration schedule in 2014, as about 75% of this year's explorations already have commitments. That said, remarketing and transition costs, which are recorded in maintenance and other operating lease expenses, will be slightly higher for the next few quarters. We have a combined $10 billion order book and all our scheduled deliveries over the next 12 months are placed. The Rail leasing platform we acquired this quarter provides a foundation to expand our franchise into Europe. The integration is moving along, and we are seeing early success as the new team recently won a large deal with a new customer. We expect this acquisition to be slightly accretive to earnings this year, inclusive of integration costs and infrastructure investments as we build this growth platform.

Moving to our North American Commercial Finance segment, we've reported $43 million of pretax income. Assets grew over 1% sequentially, and 6% from a year ago to over $15 billion, and over 70% of this portfolio is in CIT Bank. We originated about $1.4 billion of loans and leases this quarter, while maintaining our disciplined approach to underwriting transactions that provide the appropriate risk-adjusted margins. Middle-market loan volume decreased by over 10% from both a year ago and prior quarters, primarily due to lower middle-market M&A activity. While the competitive environment has put pressure on pricing and leverage for the past few quarters, we are seeing some signs that deal terms have stabilized. Despite these market trends, Corporate Finance assets grew 3% sequentially and 6% from a year ago. We continue to strengthen relationships with private equity sponsors and companies in our target industries, including energy and healthcare to drive lead agency positions. We have grown our commercial real estate portfolio to about $1.6 billion as we expand relationships with our existing developers and sponsors beyond the Northeast. An improving economy should also result in increased lending opportunities for new construction projects and redevelopment of existing properties. Overall, we see good opportunity to grow this segment by leveraging our product and industry knowledge to deliver integrated financial solutions to our customers. We continue to make progress reducing the Non-Strategic Portfolios and we have exited all our subscale countries in Asia and several in Latin America and Europe. Last week, we sold the remaining $3.3 billion student loan business, which triggers discontinued operations reporting in the second quarter, in which we expect to recognize a gain of over $50 million. In addition, we are on track to close the sale of the $0.5 billion SBL portfolio later in the second quarter subject to regulatory approval. With these transactions behind us, our focus is on exiting the remaining countries in Europe and Latin America. While it's taken longer than expected, our objective is to complete these exits by the end of 2014.

Now, I'd like to turn to the consolidated results. Net finance revenue declined $13 million sequentially, driven by $10 million related to the suspended FSA interest accretion on student loans, $13 million of higher maintenance and other operating lease expenses on transportation equipment and $4 million of higher interest expense. These items were partially offset by higher revenue on increased earning assets. In the second quarter, our recent debt actions will reduce interest expense by about $10 million. However, we expect overall net finance revenue to decline slightly due to the continued pricing pressures and higher operating lease expense.

Looking at other income, it decreased $54 million from the prior quarter. As you know, in the fourth quarter, we had net benefits from several items that totaled $43 million, which accounted for the majority of the decline. The remaining $11 million decline was driven by lower fee income, foreign currency losses due to the strengthening of the U.S. dollar and the recognition of CTA related to country exits. We expect other income to remain around this quarter's level.

Turning to operating expense. Excluding restructuring charges and the fourth quarter tax agreement settlement, operating expenses were up slightly, primarily due to the annual restart of employee benefits and the costs associated with the European rail acquisition. Over the past year, we have made progress on various expense initiatives and reduced our headcount by almost 300, which lowered our compensation cost this quarter. However, the annual restart of employee benefits and costs associated with curtailing some legacy pension plans more than offset the lower headcount. We remain focused on improving our expense ratios through a combination of cost reductions and operating leverage. The primary driver of our cost reductions will be the exit of our Non-Strategic Portfolios, which will eliminate about $15 million of quarterly expenses once completed. While our credit metrics remain at cyclical lows, the loss provision was higher relative to prior periods. The increase reflected higher nonspecific reserves on new business volume, a loss on a client account in our international portfolio and lower recoveries. Given our credit metrics, we expect the provision to return to levels more in line with the past few quarters. However, individual losses and recoveries could impact the quarterly trend.

Now, I'd like to turn to funding and liquidity. It's been our objective to repay 2.8 -- the $2.8 billion of debt maturities in 2014 and 2015 through a combination of cash generated the holding company, including proceeds from asset sales and new unsecured debt issuances. Over the last few quarters, we have issued $1.75 billion of unsecured debt. This includes the $1 billion 5-year bond we issued earlier this quarter, taking advantage of the strong market demand, resulting in a coupon of 3.78%.

On April 1, we repaid the $1.3 billion debt maturity that had a coupon of 5.25%. And our next maturity is February of 2015, which is a $1.5 billion bond with a coupon of 4.75%. Additionally, we grew deposits to over $13 billion, in line with our asset growth and maturity profile in CIT Bank. Although our earnings decline this quarter, we continue to make progress positioning our franchises for growth and improved profitability. With the sale of the student loan business in April, CIT Bank assets and deposits now are over 40% of our commercial assets and funding mix. We have made significant progress returning capital to shareholders this year and the sale of the student loan business provided us an opportunity to increase our share repurchase authorization. And as John mentioned, we continue to have strong capital liquidity and credit metrics. As I mentioned on the last earnings call, our leadership team will provide more details on our strategy at the Investor Day on June 25 in New York City. With that, I'll turn it back over to Emily, and we will take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Mark DeVries of Barclays.

Mark C. DeVries - Barclays Capital, Research Division

With the expansion of the repurchase authorization, it looks like the payout including the dividend for 2014, is now in excess of 85% maybe even higher we factor in this quarter's results. Should we expect that, that will be it for 2014 or is there a potential to push that even higher later in the year?

Scott T. Parker

As we've talked about, Mark, we -- this one that we just authorized was really kind of in conjunction with the transaction with the student loan business, but we continue to evaluate our capital planning and we'll continue to update you on progress around that.

Mark C. DeVries - Barclays Capital, Research Division

Okay. Got it. And then just a follow-up, why was the gain on sale of leasing equipment down so much both quarter-over-quarter and year-on-year?

Scott T. Parker

Well, as you know, in the fourth quarter, some of that was the leveraged lease in the fourth quarter that was kind of a historical transaction that was in there. Most of the activity that flows through that line would be our end of term income that we get on our Vendor business, the old vendor business, Equipment Finance and also on the -- on our aircraft and railcar business. And what I'd say is as we mentioned last year, we have kind of like the portfolio we have in the transportation side and we expect to have lower gain on sale and asset sales for that portfolio going forward, at least based on what we know today.

Operator

Our next version is from Moshe Orenbuch of Credit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Great. Both John and Scott, you kind of talked a bit about continued margin pressure, and yet you'd also talk about positive operating leverage. So I guess, those 2 sort of don't go together. So can you -- is there a point at which you think the margin stabilizes? And so how do we think about the kind of the revenue outlook? It sounds like into Q2, you probably still going to have -- you're not going to be achieving that positive operating leverage. So what is -- how does that -- can you kind of flesh that out a little bit?

Scott T. Parker

I think, Moshe, I think a lot of that relates to kind of the Non-Strategic Portfolio. As we broke that out, you see we have a significant amount of assets, the cost associated and the profitability of those are subpar. So that's why we've been focused on exiting those items. And if you look at the -- what we broke out on the operating lease expense, given the higher level of remarketing in the portfolio, that's something we have to work through over the next couple of quarters. It just happens to be an elevated level. But as you play through that, you see that the Commercial Air portfolio, the yields are fine and this is kind of the transition cost of having that many aircraft kind of being remarketed. So I do think we'll get the operating leverage as you look at kind of the core business after the Non-Strategic Portfolios.

John A. Thain

And the other place that we get the operating leverage is just being able to grow the assets and maintain the current expense structure. And so we do -- we continue, even in this quarter, we grew the assets significantly and we would expect that to continue.

Operator

Our next question is from Brad Ball of Evercore.

Bradley G. Ball - Evercore Partners Inc., Research Division

Hey, Scott. What were the moving parts, again, in the lower net finance margin guidance for the second quarter? I know you've got the debt actions that you've taken that will help, but what were the negatives that you highlighted?

Scott T. Parker

What I said is we expect the net finance margin to be slightly down. So the drivers there will get the benefit from the debt repayment that's partially offset by, we only had a partial quarter of $1 billion debt that we issued in the first quarter. And then it's really the continued higher operating lease cost that we have on the remarketing of the aircraft. And we continue, as John mentioned, the new business that's coming on the books versus the portfolio that is refinancing is lower, so you're going to get some of that compression.

John A. Thain

With the exception of the railcar business. In our railcar business, the new leases are going on -- are going on at higher yields.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And could you expand on the comment you made about competitive pressures on pricing, in terms in the stabilization that you're beginning to see? What is the dynamic there?

Scott T. Parker

I think it's -- I don't know if it's a trend, Brad. But I think we've seen in the last month or so, that there's been a little bit opportunity for flexing up versus what we've seen in the past. And just we hope that that's a positive trend going forward. That some of the pricing pressure and the leverage pressure that's been because of liquidity may be kind of stabilizing.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And so no pressure on the net finance margin or incremental pressure from more pricing yield declines?

Scott T. Parker

If this trend continues then that would only be, Brad, really, we're talking about kind of the core Corporate Finance business.

Operator

Our next question is from Bill Carcache of Nomura.

Bill Carcache - Nomura Securities Co. Ltd., Research Division

I was hoping you guys could touch on your normalized guidance for pretax -- normalized pretax income in that 2 to 2.5 range, given where we stand today, is that still intact?

Scott T. Parker

Bill, this is Scott. So I will answer it 2 ways: One, with the sale of the student loan business, I mentioned that, that will go to discontinued operations in the second quarter. So I think, when I -- when we get to the investor meeting, I need to kind of lay out the impact of that because you're going to move historically all the margin and the financials below the line. So the targets we have will kind of have to be modified for that. But in general, I would say, it's harder to do apples to apples, but we still are focused on getting our pretax ROA at the lower end of that range given the current market environment.

Bradley G. Ball - Evercore Partners Inc., Research Division

Right. But wouldn't student loan business be considered a lower margin business relative to your core middle-market commercial lending businesses and therefore, wouldn't -- shouldn't that have a favorable impact?

Scott T. Parker

It will have a favorable impact on the margin but I -- you asked me on the pretax ROA. So if you look at historically on the there was profitability in the student loan portfolio. So on margin, yes, it's up. But if you asked me on pretax, it will have an impact and I'm not saying it's going to be -- it depends on the historical nature of that, but we think that our focus is to be at the low end given the current market environment.

Bill Carcache - Nomura Securities Co. Ltd., Research Division

Okay. That's helpful. And then lastly, can you touch on the -- share your current thinking on the recapture of the DTA potentially by the end of the year, and to the extent that maybe you could give, quantify any potential book value impact. That would be helpful.

Scott T. Parker

Yes, Bill. There's not much change from the fourth quarter, in the sense that we still expect based on current trends that, that would be at the end of 2014. And I can't give you an amount of what that potential impact would be as in until we kind of get through the analysis that's required as part of meeting some of the triggers I pointed out in the fourth quarter. And I'll continue to give you updates as we learn more. But that's about the best I can do for you at this time.

Operator

Our next question is from Eric Wasswerstrom of SunTrust Robinson Humphrey.

Eric Edmund Wasserstrom - SunTrust Robinson Humphrey, Inc., Research Division

Just to clarify some of the other comments that have been made before. Did the long-term financial targets that you had laid out, 12 or 18 months ago, those were all inclusive of the profitability of the student or in the overall dynamics of the student loan portfolios? Is that -- did I understand that correctly?

Scott T. Parker

Yes.

Eric Edmund Wasserstrom - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And so just maybe just to follow-up and I understand that a lot of this will be addressed next month. But the NIM guidance for down slightly, does the bottom end of the range that you previously highlighted, does that still hold?

Scott T. Parker

Yes, so you're going to have some moving parts in that, Eric just because of the movement -- you're going to have the student loan and we expect the small business loan -- business to also that portfolio to exit. So, if you look, it will be in that range on the percentage basis. And the reason why I provided more on the dollar side is to make sure that it helps you in regards to looking out for the second quarter.

Eric Edmund Wasserstrom - SunTrust Robinson Humphrey, Inc., Research Division

Great. And then just finally very quickly, did I understand, Scott, that your expectation from the exit of the various non-quarter assets is a quarterly run rate improvement and operating expense of $15 million?

Scott T. Parker

Yes, it's an estimate that I kind of feel pretty good about. If you look at the quarter, the operating expense for that segment's a little bit higher. So there are some indirect allocations or overhead allocations that we have in the segment that won't go away. But if you look at the direct costs, we think that's roughly around $15 million a quarter, as we get out of the portfolios.

Operator

Our next question is from Sameer Gokhale of Janney Capital.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Just a question on credit. Scott, if I heard you correctly, I think you said provisioning was a little bit elevated and maybe comes down a bit going forward, but it can bounce around a little bit. But if I look at your charge-offs this quarter and if I kind of add them back to your non-accrual loans, it looks like nonaccruals on that basis would be flat to up slightly compared to the end of the year. So should we look at that and kind of say that this is really maybe a bit of an inflection point and then we see charge-offs rising from here. I mean, I guess another way of asking is what gives you comfort that charge-offs still stay relatively low because when you made that adjustment, it looks like charge-offs could rise. So is that the wrong way of looking at it or can you just talk of what you're thinking around credit quality, charge-offs and provisioning a little more.

Scott T. Parker

Yes, Sameer. I wouldn't link the charge-off, gross charge-up off because the non-accruals. The non-accrual trend is moving the right direction. I just need to call off on the charge-off line, we moved another portfolio into our Non-Strategic Portfolio in the quarter. And when we do that, you see -- you saw that in the fourth quarter also. So we had about 2/3 of the increase and the gross charge-offs was driven by that portfolio move. So what happened is you charge-offs the specific and nonspecific reserves. So net is not an impact on the provision, but it will show the elevated gross charge-offs.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. And then portfolio move into the charge-offs, that was at the SBA or something else?

Scott T. Parker

No, it's one of our international platforms that we moved into Non-Strategic Portfolios.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. And then, that's helpful. And then just kind of stepping back a little bit and thinking about total assets of $48.6 billion then you subtract from that the student loan, held for sale subsequently, sold in Q2. So that comes down a it but you then factor in some growth and then you talked about in the past, may be looking at acquiring a bank. I mean, how do you think about the fact that you could go above $50 billion and you could be subject to the CCAR at some point if you do that. I mean, is that something that you think you're prepared for now? Is that something that factors into your calculation, as you think about acquisitions and specifically that of the bank, how do you think about that?

Scott T. Parker

I think, the way to think about it is it's-- we're mindful of the $50 billion level, but we want to do the right thing to build franchise and shareholder value. So if that means, that's more the priority for us, Sameer. When you do get that, do we feel that we're ready, I would say, that we feel good about that. Would there be additional cost and activities as you see with some of the other regional banks that kind of are going through that process. Sure, there will be some additional costs that we wouldn't entail. From -- at least from a capital and a CCAR point of view, I think, we made a big investment in that couple of years ago. So we would say that we feel pretty good about that but there is a lot of increased reporting and data that is required as being part of over the $50 billion threshold.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. Maybe just lastly. Looking at the quarter's numbers, let's say, you adjust for that $0.05 roughly of nonrecurring charges that's a restructuring charges and we pegged the number at $0.60. And you talked about a number of different items, the margin dynamics, OpEx. It seems like the number could be higher than what you reported let's say, $0.60 number. But it still seems like it's a little bit of a stretch to get back to where I think the consensus was and where we were roughly around $0.87, $0.88 or so. So it's that the right way to think about it? I mean, do you think you can get back up to that level on a sustainable basis as you kind of parse out the moving parts and look out the next few quarters.

Scott T. Parker

Sameer. I guess, the way I'd answer that is we talked a little bit about where we are on the margin side. On the credit side we said that we feel we'll probably go back to kind of some of the prior quarter provision barring kind of any one -- kind of unusual items. So it really comes down to the other income line. So I think, that's really the big difference that in regards to the analyst expectations out there. And my sense would be is in the capital market side of our Corporate Finance business, the market, as you saw, fees were down quarter-on-quarter. They were up year-over-year. the marketplace, I mentioned some of the stability on the pricing and leverage. But there also is less underwrites and capital markets fees currently in the marketplace. So our hope would be is that with increased activity with the economic growth that John mentioned, that could be an upside going forward. And we will have aircraft sales as part of our normal portfolio management. And depending on the aircraft type and the market, there could be gains on sales for that. But I wouldn't think that it's going to get higher than kind of the ranges that we put. We kind of mentioned that we're kind of in around 100 basis points. We're at 84 basis points in the first quarter. But that's probably more the norm then it's going to be unless there's a change in the market environment.

Operator

Our next question is from Henry Coffey of Sterne Agee.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

I'm still trying to parse this out but in looking at the increase in net charge-offs and provision, a lot of it, correct me if I'm wrong. You had strong recoveries in the North American business and then you had losses again. Is that a pattern that we're likely to see quarter-to-quarter sort of a lumpiness there? Or should we begin to think of the current charge-off ratio is kind of the new normal?

Scott T. Parker

No, Henry. As I mentioned, I think on the gross charge-offs part of it was driven by -- 2/3 of that was driven just by a portfolio that we moved into held for sale. So that's something that is not doing that. We have seen lower recoveries. And as you know in our business, we will have a little bit of lumpiness in the Corporate Finance business, both on the recovery side as well as on charge-offs, if a individual company is impacted. But if you look at the trends that we've had for the last few quarters, we think that's probably more indicative of the current credit metrics we have in the credit environment.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

And sort of a similar question on margin. It -- well, first, on the portfolio held for sale, where was that impact seen, was that in the North American Commercial Finance business or did that show up -- when you do that, where does it get picked up?

Scott T. Parker

It's in the Non-Strategic Portfolio.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

So that was the increase?

Scott T. Parker

It's one of the platforms that we will be exiting.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

And then in very simple terms, margin somewhat under pressure. Credit will bounce around, but obviously, it's a pretty low measure. To make a meaningful 10% ROE, basically you have to earn something like $1.10 a share. And if you look at where you are to where you need to be, what are the items in the equation that you can tweak? And about how long do you think it takes us to get there?

Scott T. Parker

Henry, I'd say that the thesis is continuing to grow the business. So as we talk about the asset growth has -- was very good in the quarter and year-over-year, we did the railcar acquisition. We have a strong order book, both in the rail and the air that will put those earning assets on. And as those come on, you will see that it will help offset some of the current pricing pressure in the marketplace. I think the other pieces as we exit the Non-Strategic Portfolios, that will provide an opportunity to get our expenses more in line with where we want them to be. And I think, the last piece is we're -- as we've talked about in the debt maturity, we're holding the cash. So if you look at our cash balance at the bank holding company of about $3 billion at the bank holding company, $1.5 billion of that is waiting to pay down the debt kind of in February. So as you get through early next year, our cash levels will kind of decrease and we'll be able to pay off that debt item that will provide us some runway next year to offset some of the current pressure.

Operator

Our next question is from Eric Beardsley of Goldman Sachs.

Eric Jansen Beardsley - Goldman Sachs Group Inc., Research Division

As we look at your mix of business, roughly 50% today is in Transportation assets. As we think about the growth moving forward, do you think that ratio of transportation to the total book will stay similar? I mean, it seems like you guys are becoming more of a transportation business overall. And if you just comment on how you feel like that fits into a bank holding company strategically?

Scott T. Parker

Yes, so I would say that yes, the transportation business has grown well over the last kind of couple of years. As we've talked about, we'll break that down because there's multiple pieces of that. So if you look at the Commercial Air portfolio, the lending part of the Commercial Air is originated in the bank. And those assets outside the bank, we feel we have attractive financing, both in the unsecured market, the secured market in ECA and XM financing. On the railcar business, which has grown through some of the new orders that we put in on assets that are going into the energy sector and are very attractive. And what we've talked about is we have about 25% of that portfolio that's currently in the bank. So all the new assets are going in the bank and are very, very good margin business. The Maritime business that we kind of launched, relaunched about a year ago is doing very well. And all those assets, again, are also going into the bank and the last piece that's not in the bank would be the International portfolios within the Transportation business. So we feel that these are very good franchises. We have great expertise and the risk-adjusted margins even with the capital provide the target returns that we're looking for. Since those tend to be a little bit larger kind of per ticket item, they grow a little bit faster than some of the asset classes in the North America Commercial Finance segment.

Eric Jansen Beardsley - Goldman Sachs Group Inc., Research Division

Got it. And as we look out at M&A opportunities and loan portfolio growth, I mean, how's that shaping up or are you guys looking at more acquisitions now or are there more opportunities out there than there were over the past couple of quarters?

Scott T. Parker

I hope there's more. We continue to look. There are opportunities. On the portfolio side, less so. I think on the portfolios, I think, you'll see more like we've been doing portfolios are nonstrategic that one party may be something strategic to another party. So we continue to look for opportunities to grow through portfolios. That one, it's really a matter of price discipline. And then when it comes to M&A type activity, it's the same kind of dynamic right now. If there are activities -- if there are things out there that tends to be a lot of potential people looking at those transactions. So we're going to stay discipline and make sure that they meet our return hurdles for the long-term.

Eric Jansen Beardsley - Goldman Sachs Group Inc., Research Division

Where would you guys like to grow in terms of specific asset classes? Is it trying to where, where you feel like you're not large enough now and you up some scale?

Scott T. Parker

I think, we want to definitely given our net operating loss in the U.S. looking at the U.S. marketplace in regards to all the core franchises we have. We think there's opportunity to grow each one of our kind of businesses in the North America Commercial Finance business, and that's one of the things that we'll both be able to leverage the net operating loss, as well as grow the franchise.

Operator

Our next question is from David Hochstim of Buckingham Research.

David S. Hochstim - The Buckingham Research Group Incorporated

Could you just remind us what you have coming the remainder of this year in aircraft and railcar deliveries? And then, could you also comment on what's the impact might be on your railcar business if there are new regulations requiring, I guess, thicker and heavier tankers to protect against accidents? You have new deliveries coming kind of new safer cars or?

Scott T. Parker

Yes, David. So I'll start with that one and then work back to the other one. My sense would be is on the railcar side, we are definitely safety first and focused on what the industry changes might be. We'll be supportive and move along that path. All I'd say on that one is that, with those standards are not kind of out there, but we have most of our tank cars have been purchased recently from 2011 and on. And so that's kind of from our perspective what changes need to be made will be part of something we'll speak to you about. With respect to the railcar, the railcar has kind of been coming in on a stable basis kind of somewhere in the $150 million to $200 million a quarter. So that will kind of continue on. And on the aircraft side, we have a heavier placement in the next 2 quarters versus the end-of-the-year. So second quarter is going to be the from a dollar -- from a number point of view, we have more deliveries in the second quarter and then the third quarter decreases a little bit and fourth quarter, we don't have a lot of deliveries.

David S. Hochstim - The Buckingham Research Group Incorporated

And in terms of dollars?

Scott T. Parker

I don't have that off the top of my head, David. So I'll just -- we can follow that. Barb will follow-up with you.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then, could you just revisit again what you're saying about the credit costs and provisions. So I look at the sequential increase in North American Commercial Finance, just what was in the increase in charge-offs from Q4 again there?

Scott T. Parker

So charge-offs would be a combination on that one in North America was an account that was charged-off that had a previous reserve on it. So you would have saw that but in general the provision was for new business, new business volume and the mix of the portfolio. And as we mentioned, lower recoveries also is coming through on the North American Commercial Finance side.

Operator

And our next question comes from Chris Kotowski of Oppenheimer.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

You've been highlighting for the last couple of years about the growth in the banks, in the bank and that you're able to originate new assets in the bank and fund them with deposits and not long-term debt. And it just seems to me that given that the bank has gone from essentially nothing to $13 billion in deposits that there should have been room to lower your debt footprint more than it has been. And I thought a number of quarters ago, you'd said that, that was a goal. But I look at it on year-over-year basis year, your unsecured debt is up $1.7 billion. And if we think about the $1.3 billion debt maturity that you had in March, you did a $750 million offering in August and $1 billion in February. So you actually over the last 8 months, 9 months, you added $450 million to your debt footprint rather than decreasing it. So is that just not part of the game plan to decrease your debt footprint?

Scott T. Parker

I don't think so, Chris, I mean, I think part of it when you go to market, you kind of have to look at what the opportunities are for the long haul because last year, we issued a very long-term debt instrument and this recent one, we did a 5 year. So I think it is a matter of timing, right. So we've issued $1.75 billion. We have $2.8 billion. The debt maturity actually was in April 1, so it doesn't show up in kind of the quarterly numbers you have. It happened on the next day. And so where we are today is the cash liquidity we hold at the bank holding company is both for that debt maturity in February of 2015, as well as our normal liquidity planning to support the business growth. And then from that point of view, we also did purchase Nacco. So part we had to fund part of that Nacco acquisition at the parent company, not the complete amount. So our viewpoint is we're going keep building the business. If you look at it, you'll see a rotation and with regards to the overall where the debt and deposit growth. But it's not going to be a quarter-to-quarter thing. I think, we have to look at the longer-term horizon given kind of the size of those maturities that we're kind of addressing. And we're going to have a little bit of negative carry. But I'd rather do that than have to be kind of subject to the capital markets at the time that you'd want to do it to get a little bit closer to the maturity date.

John A. Thain

Let me just add though also, that we are growing our assets, our commercial assets. And although we're originating as much as we can in the bank, still the significant portion of our aircraft deliveries are not going in the bank and so those have to be funded at the parent level.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Okay. But I guess, I mean look -- if I look at the asset side of the balance sheet between the cash, the investment securities and assets held for sale, there's almost $13.5 billion there. It just seems to me that, that would have afforded you some liquidity to meet the debt maturities.

Scott T. Parker

Well, Chris. The largest one that we just talked about was the student loan portfolio. So as you know, that was mainly secured debt. So the cash that we freed up from that transaction was a -- was what we are returning in regards to the increase of the $300 million authorization. So that one is kind of how we're redeploying the cash from that transaction.

Operator

Our next question is from Cheryl Pate at Morgan Stanley.

Cheryl M. Pate - Morgan Stanley, Research Division

Maybe just a follow-up on Chris' question. I guess, when we sort of think about the deposit mix over time as more assets are funded through the bank and now with some aircraft funded there too. And working down some of the international portfolios that couldn't go through the bank. Is there any reason that the deposit mix, which I think has been targeted around 40%, couldn't go significantly higher over time? I mean, I understand that the securitization market remains a attractive way to fund some parts of the business. But sort of thinking forward more to having some other deposits perhaps replace some of the unsecured funding over the longer term?

Scott T. Parker

Definitely, Cheryl. I think you'll see that so we just call out just with the taking -- selling the student loan book and having that secured debt out of the overall mix. And then we have the debt maturity. It was paid down in April. And we get to the next debt maturity. The debt -- the secured debt or the unsecured debt is kind of out there already. So all the actions we do from now to then will show that the deposit percentage will continue to increase as a portion of our overall funding. But we are going to grow the deposits more in line with the asset growth. So we're not -- it's not something where we can have it -- the cash upstream from the bank is really predicated on the earnings of the bank, not based on kind of the cash at the bank. So yes, you will see that transition. We're not holding back the percentage of deposits. It just happens to be how the portfolio and the asset growth happens.

Cheryl M. Pate - Morgan Stanley, Research Division

Great. And then, can you maybe just update on your most current thoughts around buying or building a retail branch network?

Scott T. Parker

Yes, it's something that we continue to look at relative to other alternatives. We've been able to grow our deposits very nicely over the last couple of years. We continue to add new product offerings. But we do over the foreseeable future, we would like to have a portion of our funding mix in some kind of core retail deposits. So that's really based on market opportunity and the different capabilities that those branch or retail deposits could provide for us.

Operator

Our next question is from Chris Brendler of Stifel.

Christopher C. Brendler - Stifel, Nicolaus & Company, Incorporated, Research Division

I want to just circle back to the margin just for a second. As I understand it, you had the debt maturity on April 1. So that large cash balance helps pay down that debt. The student loan portfolio is now closed by rough math, I get like a 30 basis point NIM benefit just from selling that -- those student loans. So I'm a little confused why we won't see the margin in the second quarter, in particular, start to go back up just given those 2 dynamics and what's the offset?

Scott T. Parker

Well, as I mentioned on the piece, I did called out the fact that we will see an improvement in the interest expense. And that driver is really the elevated operating lease expense as we work through the remarketing of our aircraft portfolio. And we also will have the continued kind of new business is coming on at a lower rate then that is refinancing. So that margin compression, plus the operating lease will offset the benefit from the funding cost improvement.

Christopher C. Brendler - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, and on that margin compression, Scott, I think we've talked about in the past or at least on some of these conference calls, some just rough guidance on what the new business margins look like. I think, I have a pretty good handle on the Transportation side. But on the Corporate Finance side, if you're funding it in the bank, is it sub 3% now or is it gotten that bad? Or is it still north of 3% and sometimes 4%? And just competitively, with the new segments, which are actually quite helpful, can you just talk about the Commercial Finance business, I'm sorry, the Corporate Finance business and what kind of prepayment levels you're seeing? Has that accelerated? I wasn't quite able to sort it myself yet.

Scott T. Parker

Yes. So I'll start with the last of questions. So we did see a slowdown in prepayments in the first quarter. But as you know, that's every -- that depends on the particular assets that we're in. So in the fourth quarter, we actually had a higher level. So it has been up and down quarter-to-quarter. So that's one thing that if that trend continues, that will improve our asset growth within the business. I think, that's kind of the core thing. When you look at the margins of the business that we're doing in the bank, I still think we're kind of in that, that range that you mentioned relative to the overall yields of the North American Commercial Finance business. And a lot of the noise that you see and the trends that we provided in the supplement really has been things that we've called out on the earnings call before. Last year, we had some of the prepayment fees. We had some of the interest recoveries. And also, we had some loan, smaller amounts of loan FSA that was still remaining on the portfolio. So as we kind of go forward, it's really just a matter of the new business volume and the pricing on that relative to the assets that are refinancing and going away, running off the portfolio.

Christopher C. Brendler - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. That's helpful. So I guess more broader of a question. My last question. I think, you've -- it's clearly expressed in the past a desire to be conservative when it comes to capital and liquidity. I think, some of us was really hoping that we could refinance the first quarter debt maturity [ph] net of deposits in cash and not continue to access market but the pricing you got on that 5-year paper is certainly very attractive and makes a lot of sense. I'm just wondering just given the difficulty from a macro standpoint with all the liquidity and the refis, and the difficulty of getting spread and ultimately growing your business and your earnings. How much pressure do you feel or how much patience does your board have in taking a very conservative approach and continuing to hold lots of excess capital and liquidity and cash in their balance sheet rather than starting to really drive earnings growth and then ultimately, higher ROEs. I mean, do we -- is 2014 still only a year removed from the formal agreements, so we're going to continue to be very conservative or is there a way that you could sort of layout, maybe at the Investor Day, a plan to really to improve the returns here. Because I think, we've been waiting for the stocks to trade more on earnings for a while now and with these results it seems like it's going to be a lot longer away.

Scott T. Parker

On the question about laying out that framework, it will be something I will lay out in Investor Day, given some of these transactions behind us kind of try and I know it. We'd like to get to more not having these items flowing through the financial statements, especially the student loans will be something that on your side, as well as on our side. But it is something we have to kind of do. My sense would be is that we continue to focus on improving the profitability and the returns of our businesses. I think on the capital actions, I think, we have been -- we've made very good progress over the last year. If you look at the actions we've taken and I think that's a positive momentum. We start off with a 200 share repurchase. We implemented a dividend at the end of the year in the third -- in the fourth quarter. We had a 300 authorization in January and in April, we have another 300. So I think we're making progress on the capital side. The asset growth has been very good, so we continue and invest in the franchise and I think, the piece that we're working through is we had some assets we determined did not fit our business model and did not fit our return expectations, and so we're have to kind of have that headwind of those discontinued operations and the -- from the student loans, as well as the other Non-Strategic Portfolios. So it's not lost on us, it's kind of the focus that we have. And the question would be is, is it kind of fast enough? I think, we've made steady progress.

John A. Thain

Yes, let me just add. I think that we are less than 12 months from getting out of our written agreement and the idea is that we have $800 million of share repurchase authorized in that timeframe and then plus the dividend. I think, we are very aware of the need to return capital to our shareholders and to improve our ROEs and I would say, that we're doing that.

Christopher C. Brendler - Stifel, Nicolaus & Company, Incorporated, Research Division

I would agree. And I just think it's maybe 2014 clearing the decks, we hope we'll see better returns in 2015.

Operator

Our next question is from Dan Furtado of Jefferies.

Daniel Furtado - Jefferies LLC, Research Division

The first is just on this discontinued operations business and the student loans. How should we think about the impact to income and expenses in the next quarter or so because of this?

Scott T. Parker

Well, when they goes to discontinued operations, most of our metrics will be on the continuing business. So it was a large asset base, but the costs were fairly modest because we had outsourced and had servicing done by third parties. So it will be a little bit of an expense move on that one, but mainly it's going to be the asset balance is going to drop. So that will be the impact of the student loans. When you look at when we exit the small business loan portfolio, you will see more OpEx reductions on that, but there also be some loss revenue in both the finance margin, as well as well as in other income that we'll have to play through.

Daniel Furtado - Jefferies LLC, Research Division

Okay. So I guess, another way to think about that is that the pretax profitability or the loss before provision for income taxes would be lower this quarter without those 2 businesses than otherwise was printed?

Scott T. Parker

The dollar amounts would be down slightly. I think on the percentage basis since they're lower returning assets, I think, it's going to be the inverse.

Daniel Furtado - Jefferies LLC, Research Division

No, no, that's fine. I was just trying to get from an EPS perspective of the impact of these moves.

Scott T. Parker

As you say there is a minimal impact on pretax income. It's just more of then what we'll have is left in the Non-Strategic Portfolio would be over $500 million of assets that are losing money. So both the student loan and the small business loans are actually profitable. The other operations are not. So that would be the impact. You have slight impact on pretax, but it's not going to be material.

Daniel Furtado - Jefferies LLC, Research Division

Okay. Perfect. And then what about FSA accretion this quarter versus last?

Scott T. Parker

Most of the FSA was related to the student loans. And now with the sale, we will accelerate all the debt FSA that we used to have, as well as any of the loan FSA that we had on that portfolio will all be gone. And the net of all that was a $50 million gain. So that will all kind of take place and the only real remaining FSA that we'll have on the portfolio is what we've talked about on our operating lease business that is a reduction of depreciation that will decline over time. But it's something that will be out there for the next 10 years.

Daniel Furtado - Jefferies LLC, Research Division

Perfect. And then my last question, if I may. Is just where are the -- what is the net finance or about the finance margin that you're originating at today or your bogey for today?

Scott T. Parker

Well, it's different between the 2 segments based on the economic capital. So we're looking at trying to get new business on at kind of low double-digit ROE. So for each business, as you know, the transportation has a little bit higher capital. So you need a higher margin than you would on the North American Commercial Finance business. But we're focused on ROE kind of target for each one of our business segments.

Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Barbara A. Callahan

Thank you, this morning for joining us. And if you have any remaining questions, feel free to give the Investor Relations team a call. Thank you.

Operator

That concludes today's call. Thank you for participating.

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