CIT Group's (CIT) CEO John Thain on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: CIT Group (CIT)

CIT Group Inc. (NYSE:CIT)

Q2 2014 Earnings Conference Call

July 22, 2014 08:00 AM ET

Executives

Barbara Callahan - Head of IR and SVP

John Thain - Chairman and CEO

Scott Parker - CFO, CAO and EVP

Analysts

Sameer Gokhale - Janney Capital

Eric Edmund Wasserstrom - SunTrust Robinson Humphrey

Moshe Orenbuch - Credit Suisse

Eric Beardsley - Goldman Sachs

Mark DeVries - Barclays Capital

Chris Kotowski - Oppenheimer

Brad Ball - Evercore Partners

Bill Carcache - Nomura Securities

Henry Coffey - Sterne Agee

David Hochstim - Buckingham Research

John Parker - Neuberger Berman

Chris Brendler - Stifel Nicolaus

Ken Bruce - Bank of America-Merrill Lynch

Cheryl Pate - Morgan Stanley

Louise Pitt - Goldman Sachs

Justin Mower - Lord Abbott

Henry Coffey - Sterne Agee

Brian Schinderle - BAM

Vincent Caintic - Macquarie

Operator

Good morning, and welcome to CIT's Second Quarter 2014 Earnings Conference Call. My name is Drew, and I will be your operator today. At this time all participants are in a listen only mode. There will be a question-and-answer session later in the call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Barbara Callahan, Head of Investor Relations. Please proceed, ma'am.

Barbara Callahan

Thank you, and good morning, and welcome to our CIT's conference call. Our call today will be hosted by John Thain, our Chairman and Chief Executive Officer; and Scott Parker, our CFO, who will first review the quarter’s result and then discuss the OneWest acquisition. The supporting slide presentations for both the earnings and the acquisition are available in the Investor Relations section of the CIT website. After their prepared remarks, we will have a question-and-answer session. As a courtesy to others on the call, we ask that you limit yourself to one question and a follow-up, and then return to the call queue if you have any additional question. 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 the 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.

For more information on CIT, please visit the Investor Relations section of our website at www.cit.com.

And at this time I would like to turn the call over to John Thain, our Chairman and Chief Executive Officer.

John Thain

Thank you, Barbara. Good morning, everyone, and thank you, all for being on the call. We have three good things to report on this morning. First, a good second quarter; second, a good strategic transaction; and third a further share buyback and return of capital to shareholders. We are going to be a little briefer this morning than we normally are, to leave more time for questions. We’re going to talk about the second quarter first; then we’ll discuss the merger, and then we’ll leave time for questions.

So, as you saw we reported net income of $247 million for the second quarter, that’s a $195 million after tax from continuing operations. We have good funded volume, $3 billion in our core segments, our credit quality and our portfolio remains stable. And while the economic activity in the U.S. improved in the second quarter, low interest rates and slow economic growth still are restraining our middle market lending and leasing businesses.

We had solid utilization in our transportation businesses, our commercial aircraft were 99% utilized, our railcars were 98% utilized; and the Nacco integration -- Nacco is our European railcar business, the integration process is proceeding nicely. We are making progress on bringing down our expenses into our cargo range and our capital and liquidity positions remain strong.

I'll turn it to Scott to give you more details.

Scott Parker

Thank you, John, and good morning, everyone. So we can spend more time discussing the announced acquisition. I am only going to cover a few highlights for the quarter. And we have provided a more detailed earnings presentation on our website for your reference. We had a solid operating result in the quarter as we continue to execute on our priorities. Our underlying performance has been fairly steady in the first half of the year, and reflects the strength of our franchises. However quarterly financial results have been impacted by discrete items that caused some variability.

If you look at page 3 of the presentation, it provides the highlights to the quarter some of which John just mentioned. In addition, our commercial franchises had strong asset growth of 4% sequentially and 15% from a year ago. We improved our capital efficiency as we sold our SBL portfolio and announced the acquisition of direct capital, a business with much higher returns.

We also significantly advanced our return of capital. We bought back over 550 million worth of shares so far this year and increased the quarterly dividend to $0.15 a share. And this morning the Board authorized an additional $500 million share repurchase authorization.

Turning to Slide 5 of the presentation, adjusted net finance margin for the quarter was at the high end of the near term outlook at 426 basis points. Our funding cost improved by about 15 basis points primarily from the recent debt actions we did in April probably offset by continued portfolio reprising.

In addition, the margin benefited by about 10 basis points from lower operating lease expense from the first quarter and about 5 basis points of higher prepayment benefits in our corporate finance unit.

We expect the adjusted net finance margin to be closer to the midpoint of our near term outlook. On Slide 6 you can see other income increased sequentially to about $94 million mainly driven due to gains from railcars sales as part of our on-going portfolio management and about $20 million of benefits related to the TRS.

In the current environment we expect other income to remain at levels similar to the first quarter around 75 to 100 basis points of average earning assets.

If you turn to Slide 7, operating expenses excluding restructuring charges improved to about $290 million representing about 264 basis points of average earnings assets.

Our expenses benefited primarily from lower employee cost, as the annual restart of benefits normalized this quarter. We continue to take actions to improve the efficiency of our business and the expense ratio will improve as we exit the remaining non-strategic portfolios.

As I mentioned at Investor Day, I shared a path to achieve sustain 2% profitability on our (pre-patch) [ph] ROE basis in the near-term.

On Slide 9, we show how our profitability improves in the second quarter from lower funding and operating cost and also benefits from lower than expected loss provision in several discrete items.

As you’ll see on Slide 10, our year-to-date profitability is more reflective of our near term outlook.

So in summary, we have made good progress this quarter on our strategic priorities to improve our profitability and deploy capital. We are now going to move on the discussion about the OneWest acquisition. And I’ll it turn it back to John.

John Thain

Thank you, Scott. So first I encourage you all to refer to the slides that we posted on the transaction. I am not going to refer to each slide specifically but my comments will generally track the slides.

At our Investor Day, we told you a number of things, we said that we needed to make our bank bigger. We told you we needed core retail deposits, both to diversify the funding of our bank and to lower the cost of funding in our bank. We also said that we were prepared to go over $50 billion of assets and therefore become technically a $50 billion although we prefer not to be $52 billion. And we also said in any transaction we would propose would be attractive to our shareholders.

I believe that the acquisition of OneWest which we announced this morning satisfies all of those criteria. Our bank more than doubles in size to 41 billion in assets with $28 billion in deposits, we add $15 billion of deposits of which over $2 billion are commercial deposits. And we reduce the cost of our deposit funding by about 40 basis points. And we reduced our overall cost of funding by almost a 100 basis points.

Our combined companies will have assets of $67 billion, the transaction is financially compelling. It is 20% accretive to estimated 2016 earnings per share. It significantly improves our return on tangible, common equity and Scott will talk more about that. The IRR in the transaction which is a way of thinking about how we’re investing this capital, is a 15% IRR so attractive return on the investment to capital.

OneWest earnings which are almost all U.S. earnings will accelerate our ability to use our NOL. And as you can see from the deck, the price that we’re paying 1.2 times book, is an attractive price and that’s before giving any benefit to the accelerated use of the NOLs.

Now OneWest has been growing a west coast focused middle market and specialty lending business, it’s complementary to our businesses. OneWest also has commercial deposit and payment solution capabilities that we will be able to offer to our existing client base. As you can see from the deck, the transaction consists of $2 billion of cash and 31.3 million shares of CIT stock, so it’s a 59% cash, 41% stock deal, agree consideration of $3.4 billion.

Now CIT Bank which is our Utah bank will merge into OneWest bank which will remain an OCC regulated national bank and will be renamed CIT Bank. Steven Mnuchin who is the Chairman of OneWest will become a Vice Chairman of our Company. He will also become a Director of CIT. Joseph Otting who is currently the CEO of OneWest, will become Co-President of CIT and President and CEO of what will now become CIT Bank. And Alan Frank who is a OneWest Independent Director will also become an Independent Director of CIT. We expect the transaction to close sometime in the first or second quarter of 2015 and it’s subject to the customary regulatory approval.

Just a little bit of background on OneWest which is also in the slides. OneWest was founded in 2009. It has 73 branches in California. It earns $243 million net income in 2013. And I just want to comment I think Stephen and Joseph have built out a management team that have a proven track record in growing commercial loan volume and in growing deposits, and you can see that in one of the slides very attractive, very successfully growing both loans and deposits, and there are also an attractive market. The L.A. area is an attractive market from both lending and core deposit growth.

Our combined company will be majority funded with deposits. More than half of our combined assets will be funded in the bank. And if you look at our businesses our commercial lending businesses fit well together and we have a similar credit philosophy, we spend a lot of time talking about how they make loans and how we make loans and our credit philosophy is very similar. And as I mentioned before, OneWest cash management services will be an attractive offering to our client base.

OneWest legacy portfolio is relatively low risk and generates U.S. taxable income as I said. And the run off of that legacy portfolio over time will be replaced by newly originated commercial loans. The combined management team has deep experience and there is very little overlap in the management. This will make the integration process less risky, and the transaction does not rely on significant expense savings.

As I said earlier, this transaction does put us over $50 billion, but, we’ve been planning for that for the last several years and we believe that we’re well positioned to satisfy all of the criteria of being a 50 institution.

With that I’ll turn it over to Scott.

Scott Parker

Thank you, John. And I am going to pick up somewhere around slide 15. This transaction, as John mentioned, provides an attractive opportunity. If you look at the price multiples on the slide it compares favourably to recent transactions and in particular California banks. The purchase price of $3.4 billion is roughly 1.2 times tangible book value, which has an implied premium around $625 million. In addition, this transaction unlocks the value we talked about at Investor Day around our NOL utilization because of the U.S. earning income.

On page 16, we believe the combination offers compelling returns with very modest synergy assumptions. We’ve assumed about $20 million of annual cost savings beginning in 2016, and that also includes our estimates for 50 readiness. In addition, we’ve assumed about $20 million of savings from funding synergies, which will be a combination of improved liquidity management and the ability to invest in short term security and also the growth of a lower cost core commercial deposits.

We have an estimate for restructuring charges about $75 million. The cash portion of the transaction we plan on issuing unsecured debt between 1.5 billion and 2 billion depending on closing and other cash actions we might be able to generate before that. And the coupon for kind of long duration seven to 10 years somewhere around 4.5%, as well as is the as we mentioned that we repurchased or had authorization repurchase another $500 million shares on top of the $800 million that’s been authorized since May of 2013.

If you go to page 17, this is a very accretive transaction in the first full year. In the back we provide a new appendix a little bit of information around that. We took the consensus analyst expectations for 2016 on a pretax basis. It’s our belief that with this transaction, in addition that what we’ve already been considering on the valuation allowance that our effective tax rate in 2016 will be closer to 30%. So we did tax affected at that 30% that is subject to change as we go through the next period of time but is a good estimate. And then we use OneWest earnings from 2013 as a basis for our 2016 estimates. And when you do that math you come up to the 20% accretion that John mentioned.

As laid out on page 18 at the Investor Meeting, we were focused on improving our return on equity. We had actions that we said we were doing to improve the profitability of our core business. And then we had a bucket that we said would be based on an acquisition as well as additional capital returns. While this morning we did both, so we did both the capital return as well as, as an acquisition, and the only difference between the slide presented a month ago in Investor Meeting that assumed no reversal of valuation allowance given the assumptions we had. If you look at this slide at the bottom, this gets us to the 12%-13% return on tangible common equity and that includes the reversal of the valuation allowance, so we think that’s very attractive for us from an overall target for our return on equity as well as this transaction close will get us to our target, kind of capital ratios we’ve talked about over the last couple of years.

So in conclusion if you look at the transaction, it advances our bank's strategy with the addition of core deposits and the bank franchise, it complements our current commercial franchise both on the middle market as well as being able to offer cash management services to our customers. It accelerates embedded value in our portfolio which is the use of excess capital and the NOL. And the deal itself is very financially compelling.

So with that we’ll turn it over to Drew, when we take your questions.

Question-and-Answer Session

Operator

We will now being the question-and-answer session. (Operator Instructions). The first question comes from Sameer Gokhale of Janney Capital. Please go ahead.

Sameer Gokhale - Janney Capital

I have a few questions here, firstly I know you have given the accretion estimate for 2016 and you mentioned that you didn’t have any revenue synergies baked in there. But as we look at the numbers and as you think about them, I mean what can we reasonably estimate as a potential range of accretion that could be possible from revenue synergies, as you think about that, because that would be additional gravy on top if you will. So how should we think about that? And can you give us a rough range of what that could be?

John Thain

Yes Sameer I would say that on the revenue synergies I think their core commercial lending platform as we said will kind of replace them as a legacy run-off. But I think on the cash management services I think part of that will kind of be the part of the integration process. We think there is opportunities that build out a good infrastructure for that. So I think that would be the main area on the revenue synergies that we have opportunities for. But I am not prepared I think this morning to kind of give you exact precision but that would be most of thing on a fee income related to that.

Scott Parker

Sameer we do think that there are significant revenue synergies, in transactions like this I think a lot of times it’s more conservative not to build those in but we definitely think they exist.

Sameer Gokhale - Janney Capital

And then you did mention that you're planning to run-off OneWest residential mortgage portfolio. What is the duration of that portfolio so we can get a sense for how long it may take to run that off?

John Thain

We put a slide in the deck Sameer as you kind of see that this portfolio naturally kind of runs off. But the prepayment fees is definitely going to be kind of over the next five years, you’re going to see significant reduction.

Scott Parker

I think the slide actually shows the run-off.

John Thain

Transformation of that.

Scott Parker

That’s the natural run-off of the portfolio. It’s not that we’re really doing anything to it, it’s just the legacy portfolio as it naturally runs off.

Sameer Gokhale - Janney Capital

But you could take steps to accelerate that possibility, right? Is that something you’ll contemplate or would you just expect it to just run-off over time?

John Thain

I think our expectation will just run-off over time and create U.S. taxable income for us.

Sameer Gokhale - Janney Capital

And then just my last question, you did mention that you were prepared for the -- to go over the $50 billion mark and stress testing and investments in BSA/AML compliance. But as you think about OneWest and you look at their financials and presumably in your additional kind of -- in your EPS sales or expanse sales you baked in between now and then do you feel that they are going to incur a lot of costs in terms of getting compliant and they would be fully compliant by the time you complete the acquisition. Or how should we think about any expenses or shortcomings in their infrastructure as they kind of integrate with your operations as it relates to all these compliance issues?

John Thain

Well I would say that the bank OneWest is a large bank that’s regulated by the OCC. So some of the processes that they have built are in line with the size of the banks they are. And as we mentioned, we did build in cost for additional build out on the SIFI side, we said we had areas that we had to make improvement. So as part of the integration process we would just integrate them into our capital planning process, our stress testing process they do as the size of bank they have, do (some FD fast) [ph] as given the size they are. And so we will work through their processes and we, as we did the due-diligence process we feel they built good infrastructure but of course as we mentioned at investor meeting, we will have to have some incremental improvements on that side.

Scott Parker

And in particular on our BSA/AML which is a big focus right now, we believe that their BSA/AML systems are state-of-the-art as are ours.

Operator

The next question comes from Eric Edmund Wasserstrom of SunTrust Robinson Humphrey. Please go ahead.

Eric Edmund Wasserstrom - SunTrust Robinson Humphrey

Just to follow up a little bit on Sameer’s line of questioning. As I look at slide 11 Scott which I think is the slide that you referenced with respect to the portfolio growth. On a go forward basis sort of a pro forma go forward, will the assets of CIT Bank be net growing or net shrinking?

John Thain

They would be net growing but they won’t be, they will be muted by the run-off of the legacy portfolio.

Eric Edmund Wasserstrom - SunTrust Robinson Humphrey

Okay. And then can you just kind of walk me through what the different capital actions are and the timing and what the resulting CIT Bank tier 1 common ratio will be as a result of the actions?

John Thain

So, the capital actions, so you know that we already previously announced, so we have about $55 million left on the authorizations that have been announced previously. This morning we had an additional $500 million authorization, so that is through to the next year. And then from a perspective of the capital ratios, our expectation through this process that we get the target capital ratios that bank the both -- both at the bank and the bank holding company.

Eric Edmund Wasserstrom - SunTrust Robinson Humphrey

I mean I guess what I am trying to sort of see through is why accelerate repurchase and order to issue shares?

John Thain

Well so that the share component of the transaction, so as we said the transactions 59% cash, 41% stock. There was a desire on the part of the OneWest shareholders who are very sophisticated investors, they wanted to get CIT stock. So part of the transaction, part of negotiating the deal was their view that there was significant upside in the stock and so we could not have constructed this transaction as an all cash transaction.

Eric Edmund Wasserstrom - SunTrust Robinson Humphrey

I see, so in other words the share repurchases in between [indiscernible] sort of optimized the ratio heading into that event.

Scott Parker

Correct.

John Thain

You're exactly right. To get the capital ratio at close.

Scott Parker

Yes, so, we are targeting the capital ratio at close and that’s what we are doing.

Operator

The next question comes from Moshe Orenbuch of Credit Suisse. Please go ahead.

Moshe Orenbuch - Credit Suisse

Great. Could you talk a little bit about the underlying assumptions, the pre-tax, the pre or after tax earnings for CIT in 2016, because that’s based upon consensus number same for OneWest? And then consistent with the last question about the capital and share count, I mean you are assuming 20 million, essentially 30 million shares repurchased between now and closing, right?

John Thain

I don’t think so, if you look at the -- if we go to the consensus nodules, we took the approximately $900 million that was out there and the change that we made, there was different assumptions for the tax rate, so we normalized that for the 30% that we think we're going to be at. And then you see that in that share estimate, there was some assumptions for capital actions but we've already taken a lot of those actions and you look at our share count as is of second quarter. And then from a OneWest point of view, we kind of used the baseline 2013 earnings and since it’s a private company, we used that as a proxy to kind of get to the accretion, dilution calculation.

Scott Parker

Yes and as you know we have a little bit of repurchase left from our last program but we used most of that. We talked about that at Investor Day, the $500 million incremental authorization, if you want to use kind of an estimate obviously depends where the stock is but that’s more like 10 million shares.

Moshe Orenbuch - Credit Suisse

Right but the number you used is 172, there is 186 million shares now and then you took another 10 million off, so that’s 14 and 10 it’s actually, right. So, I guess my question is, will you be able to buy back stock in 2015 after while this deal is in process in addition to the current authorization?

John Thain

It depends on the timing of the transaction and as we mentioned the basis is to achieve target capital at the time of closing, so that’s kind of what the assumptions that we're working under.

Moshe Orenbuch - Credit Suisse

So the share count before the -- I guess my question is what is the share count you're assuming before you issue the 31 million shares to OneWest?

John Thain

I think -- why don’t we circle back with you?

Moshe Orenbuch - Credit Suisse

Okay, thanks.

Operator

The next question comes from Eric Beardsley of Goldman Sachs. Please go ahead.

Eric Beardsley - Goldman Sachs

Hi, thank you. Just curious in terms of how you are going to manage lending franchise of OneWest already or are you going to look to keep that in place as it is or are you going to look to run that down and just keep your national lending platform that you have with CIT?

John Thain

The lending platforms are actually complementary to each other. Actually, we intend to really combine them. Their lending franchises really are primarily West Coast base. They do overlapping us in a few of our verticals but we believe they are additive and so we would continue them.

Eric Beardsley - Goldman Sachs

Okay. And then from a branch and online bank strategy, (I assume then) [ph] that you are not going to be rebranding OneWest to CIT at the branch level or are you and how does this impact the growth of the online bank?

Scott Parker

I think the branches will be rebranded CIT Bank and the online franchise we have will complement the branch network. So we'll continue to have both offerings.

Eric Beardsley - Goldman Sachs

I guess, as you look at growing (out term) [ph] deposits moving forward, and try to optimize that base, would you look to run off what you have at the online bank now, in terms of some of the higher cost CDs?

Scott Parker

We will look as part of the transaction, if we can optimize our kind of deposit offerings and lower the cost that will be something we'll look at. I won’t say we'll run anything up. We may emphasize and re-emphasize different products as we integrate the branch deposits.

Operator

The next question comes from Mark DeVries of Barclays; please go ahead.

Mark DeVries - Barclays Capital

Presumably, at the Investor Day, this is already pretty far along, then I think John, when you talked about acquisitions you were clear to point out that very few were getting approved. Could you give us a sense of what if any conversations you may have had with the Fed at this point on how receptive that they be to this deal?

John Thain

So, we are not really going to comment on conversation we have with any of the regulators. However, I would say that first of all, one of the main comments that we heard back from the regulators on an ongoing basis is the fact that we didn’t have core retail deposits. And so this transaction really satisfies one of the deficiencies that the regulators, including the Fed as well as the FDIC felt we had when they looked at how we were capitalizing and how we were funded. So, from that perspective this transaction should be attractive to them.

Second of all, if you look at the size of the resulting company we are still significantly below $100 billion. And there have been comments from the Fed about transactions that stay below $100 billion.

And then thirdly, and we talked about this, we have been doing a lot of work to become a SIFI even through organic growth. And so, I think our ability to convince the regulators and particularly the Fed that we have the infrastructure to become a SIFI I think is important to that approval process. So we are confident that this transaction can in fact get approved.

Mark DeVries - Barclays Capital

Okay, great. And just one other question; do you have any sense on how much excess capital you think you will have post this transaction relative to what your economic capital needs are or what your regulatory capital needs are?

John Thain

I can’t give you an exact number. I think, as we integrate the portfolios and their risk rating assets versus ours; my sense as we get through the regulatory process and we kind of come out on the other side, we'll have a better feel for that, but I think it’s a little bit too early to that other than -- we want to get our enterprise in position near close to be at our target. And then if there is additional opportunities post that, that would be part of our expectations.

Scott Parker

I just want to go back one second on the question on the share account, because it is detailed on slide 23 in the deck. And basically the simple math is, we are issuing 31 million shares, the buyback assumes 10 million shares, so the net addition is 21 million shares.

Operator

The next question comes from Chris Kotowski of Oppenheimer; please go ahead.

Chris Kotowski - Oppenheimer

First of all I was wondering, do you need any other approvals to actually execute the $500 million buyback?

John Thain

No.

Chris Kotowski - Oppenheimer

And then I guess more broadly, what is the strategic vision for CIT going forward? Meaning that you are bringing together -- CIT historically is a national and/or even global commercial wholesale lender and this is a kind of narrow regional franchise. Is the vision for CIT to be a regional bank or to continue to be a national wholesale lender?

John Thain

We are a national -- I would have said middle market lender. So that is our business to be a national middle market lender. The strategic vision is we will continue to do that. But before, we were funding 90 plus percent of our U.S. lending and leasing businesses in our Utah bank. Now we have a much bigger and better capitalized and better funded California bank. So I don’t think that the strategic direction is different at all. We’re just much-much better funded now. And we do have a core set of branches that diversifies our business base, but basically what we're doing is we were moving from a Utah bank to a California bank that’s twice as big and has lower cost of funds, and has a more diversified funding base.

Chris Kotowski - Oppenheimer

And does that diversified funding base -- you still have a, I guess a large footprint of debt funding. Do you anticipate being able to shrink that down over time?

John Thain

Yes I think that’s a component Chris of the assets that we have at the holding company so some of the non-strategic portfolios we said we'd use that to kind of recapitalize the bank holding company. So, as we grow out the bank franchise if there is opportunities you see our debt maturities we do have opportunities to prune at that and it really depends on the growth of the aircraft leasing business which is predominantly what’s funded at the holding company.

Operator

The next question comes from Brad Ball of Evercore. Please go ahead.

Brad Ball - Evercore Partners

Thanks. Do you have the ability to transfer assets from the holding company to the bank as part of the transaction? And are there any implications for the transportation finance business as a result of this? Will you end up using the bank to fund more of your aircraft and rail leasing and lending assets?

John Thain

Well, the answer is no different than the previous one, I mean the transfer of assets from the holding company and the majority of what’s left at the holding company are our aircrafts leasing business predominant of those are in Ireland. And then the legacy railcars, but we’re taking on due deliveries of the railcar in our bank and we will continue to do that going forward. We’ve talked about we do have some leases on the aircraft side in the bank and all of our U.S. lending is already going in the bank. So I think it’s just some of the aircraft leasing that’s outside the U.S. as well as the legacy railcars at the holding company.

Scott Parker

Right, and there is no ability to move assets from the holding company to the bank in this transaction but the other thing that does happen so there are limitations on high residual leases for banks and so one of the things that we do get here is because the bank is much bigger that limitation is also much bigger, so it does allow more room for a greater number of in particular aircraft because they trigger the high residual test.

Brad Ball - Evercore Partners

Great. And then follow up, Scott, could you talk in more detail about how you expect to unlock the value of the NOLs? I guess so you talk about a $300 million revaluation. So does it go from 5.2 billion to 5.5 billion, the total NOL? And did you say that you expect to realize the full DTA in your 12% to 13% return on tangible common forecast?

Scott Parker

Yes, so the answer to your first question that the -- it's an MPD it’s not a rebalancing of that. So, if you look at the kind of pre-tax earnings of OneWest and you discount that back at our kind of cost of equity that’s how you get the MPD of the pretax earnings streams that they were acquiring.

The second piece as you would expect with more U.S. income that will free up regulatory capital faster because when the DTAs reverse you’ll have a mismatch between book equity and regulatory capital because there are limitations on the DTA based on your U.S. earnings profile. So that’s kind of the concept Brad that we’re trying to do that.

And then the third piece is on the ROE walk, yes, the ROEs that we put out there did have the assumption that the valuation allowance was reversed. And so that’s all still subject to our analysis process that this transaction would be additional evidence that we would have to factor into the work we’ve already been doing prior to the transaction.

Brad Ball - Evercore Partners

And I’m sorry just a quick follow up that DA was like 1.2 billion, 1.3 billion at the end of…

Scott Parker

1.3 billion.

Brad Ball - Evercore Partners

Okay. And you weren’t we assuming that a lot of that might have been reversed anyways?

Scott Parker

I think that’s why there is two concepts, one is at the Investor Meeting we try to keep everything on a pre-DA reversal to reduce complexity. So that’s the reason why we did that. This transaction we were already going down the path and we mentioned that just based on our normal analysis that we would have that. So the delta or the difference on this Brad would be because it’s more U.S. income than we’re currently generating that will be beneficial to us both from a regulatory capital perspective as well as the cash flow generated from the cash savings from the NOL.

Operator

The next question comes from Bill Carcache of Nomura. Please go ahead.

Bill Carcache - Nomura Securities

Thank you. Good morning guys. You mentioned in the slides that the transaction is going to be dilutive to tangible book value with the four year earn back. What will the pro forma tangible book value be?

Scott Parker

It’s in the appendix. It’s 40 to 53, it’s on page 23.

John Thain

If you look at page 23 is the pro forma.

Bill Carcache - Nomura Securities

And so this captures the effect of the reversal of the valuation allowance and kind of other than moving parts with the issuance of shares and all that effectively this is a pro forma 42-53?

Scott Parker

That’s correct.

Bill Carcache - Nomura Securities

Okay, thank you. Separately, to go back to your comments about the economics of the deferred tax of the NOL carry forwards, does this transaction in anyway change that $230 million annual limitation on your pre-emergence NOLs or is that still in place?

Scott Parker

Yes, the 230 doesn’t change and again remember that’s only on pre-emergence NOLs and its not related to the NOLs that were created post the emergence.

Bill Carcache - Nomura Securities

And finally I wasn’t really -- I am sorry if I missed this but I didn’t really follow the adjustment process that you guys went through. I look at facts that I only see four estimates for 2016 and it’s $4.06. I am trying to understand kind of the adjustments that you guys made to get to that 3.73 standalone EPS. If you could just talk about that in a high level and I could follow up with you guys.

John Thain

Yes, Bill you can kind of circle back with Barbara but we took the analyst consensus which have more than what’s in Ibis as the basis for those estimates.

Operator

The next question comes from Henry Coffey of Sterne Agee. Please go ahead.

Henry Coffey - Sterne Agee

The $6 billion of mortgage loans at OneWest, it's a very hot and heavy market out there for distressed assets. What would be the dynamic of selling those assumably a carrying value? Would that eliminate a meaningful earning asset for you and complicate the utilization of the NOL. Or could you sell those assets and then do something more meaningful with the cash?

John Thain

As you see on page -- if you look at the investor deck on Page 11, they are a pretty good yielding asset that we feel are kind of low risk. So from that perspective Henry, anything is possible and we have to valuate that. But the earnings stream on that is productive for the NOL and because the yields on the portfolio it's a good yielding portfolio that we would have to see how would that compare to other uses of that cash if you could sell at book value.

Scott Parker

I think from a practical point of view it would be difficult for us to rephrase that portfolio with that kind of yield in this environment. So the fact that it is an attractive portfolio and the fact that it’s earning U.S. income and that we can shelter that income and use our NOL. I mean that’s one of the drivers of the value of this transaction. That portfolio to us with our NOL is very valuable. And I think it’s not very likely that we could replace those assets. So I would not anticipate that we would sell this.

Henry Coffey - Sterne Agee

Now is OneWest servicing these loans or did the servicing of these loans transfer when they sold the rest of the servicing assets?

John Thain

OneWest sold a big slug of their servicing, but there is still lots of interactions between OneWest and the servicing but they did sell their service rights.

Henry Coffey - Sterne Agee

And then when we look at this business, is this and I don’t want to say just because they are obviously a lot of benefits on the side, but is this just primarily the acquisition of a depository and a cash management product? Or do you look at this business and see potential commercial loan products that could be developed inside OneWest that may fit a bank franchise better than what you’re doing at CIT.

John Thain

I wouldn’t say better I think it does complement. Because I think Henry if you look at what Joseph and Stephen have done around growing the franchise, they have a very good front end production and the loans that they are originating are kind of complementary to what we are originating in the middle market, so we do think that their franchise is value that can build on and leverage some of the capabilities that they have.

Scott Parker

And the other thing that we’ve talked about before, we’re lending and leasing into the middle market space but we’re not capturing any of the commercial deposits, we’re not capturing any of the cash management. And a lot of people who we compete with basically cross sell those products and basically cross subsidize them. And so OneWest takes commercial deposits. As we said they have over $2 billion of commercial deposits today. They have the cash management and money transfer capabilities that will allow us to offer those services, that will generate fee income and that’s a big plus. We need to be able to do that and that will help us competitively really across all of our middle market lending and leasing businesses.

Henry Coffey - Sterne Agee

And then the last question and again thank you I think the detail in the slide deck really worked through a lot for all of us. The thought process about being a bigger institution, does this increase your hold size on future commercial deals?

Scott Parker

So our Chief Credit Officer is sitting here. I think the answer is theoretically yes, because of course we’re a bigger institution and we’re more profitable. And so yes we can have bigger hold sizes. I think how much will be a question of our risk appetite and the environment we’re in. I think we’ll have to wait and see on that.

Operator

The next question comes from David Hochstim of Buckingham Research; please go ahead.

David Hochstim - Buckingham Research

I wonder, could you just clarify how much your capacity to hold -- aircraft and (rail) [ph] leases would be increased with the acquisition, in the banks?

John Thain

It’s generally -- it’s a 10% test. So it’s to the extent -- this is not exactly right, because we haven’t done this exactly, but basically we’re doubling the size of the bank. So a way to think about it is, it’s kind of doubling the capacity to hold high residual leases.

David Hochstim - Buckingham Research

And then just to clarify in terms of getting over the $50 billion threshold, if there are no changes to the Federals, would you become subjective to CCAR in 2017 or before?

Scott Parker

It depends on when the deal front transaction closes, and based on the averaging it could be, it depends on all those. So if it was ’15, it’s four quarters. So it could be ‘16 or could be ’17.

David Hochstim - Buckingham Research

I guess I am wondering is do you have to submit at the beginning of the year, and if you have four quarters and you don’t close till the first and second quarter next year, it might not be ’16, wouldn’t that?

Scott Parker

Correct.

John Thain

That’s correct.

Scott Parker

So it's all a matter of timing and where you are in that timing.

David Hochstim - Buckingham Research

And then, could you just talk about your assumption of OneWest earnings, I’m not that familiar with what they have been doing lately. But is it conceivable that their earnings in 2016 would be higher or lower for some reason than what they earned in 2013? Are you are just being conservative? Is there --

John Thain

We are using 2013 as just a proxy. As you mentioned we have the run-off as a legacy portfolio, and that being replaced with commercial loan. So I wouldn’t say that kind of transformation, current run rate is consistent with 2013. And so that would be, I guess a good proxy to start with. Is there some potential upside? I think we would call that more of the synergies as we kind of looked at that through the full innovation process. That’s how we kind of got there. I will just mention one thing is that they -- some of the portfolio is fair valued. So when we did the closing we would move that cost basis, so that would reduce some of the volatility. So if you go back and look at some of the call reports, there is some volatility driven by the fair value in their portfolio. And so what we tried to use on the 243 is more of a normalized run rate based on the accounting that we would have the portfolio on.

David Hochstim - Buckingham Research

And then is there anything more -- anything that you could say about just I guess affecting the deal in terms of negotiating with them, that Bank [indiscernible] has been for sale for some time. Nobody else has been able to do a deal. What was different, you think with you guys?

John Thain

Well first of all, we believe in -- if you look at how we priced this and we believe that on a price to book basis in particular, if you look at where transactions are getting done and particularly look at where transactions getting done for California banks, this is a very attractive price. That being said, their owners are very sophisticated and the fact is they are taking a significant amount of stock in this transaction and they -- I know this from having talking to them as their rationale for them doing this; they believe there is significant upside in the stock. So the way this transaction is structured, the deal is structured so they get a fixed number of shares basically as of today so all of the appreciation in the stock they get on their shares and so that makes this deal very attractive to them because they believe there is in fact a lot of appreciation and that’s from some very smart people.

Operator

The next question comes from John Parker of Neuberger Berman; please go ahead.

John Parker - Neuberger Berman

John, that was my question actually, but maybe you could follow on and talk about the role of the OneWest management team as you go forward and how are you going to integrate them in the process?

John Thain

Sure. It is a very basically additive set of management team because we don’t have branches, we don’t have much of a West Coast presence. And so there will not be a lot of overlap in terms of the management, especially at the leadership level. So that’s one of the reasons why Stephen is staying in his role as Vice Chairman of our company, Joseph Otting is staying as the President and CEO of the bank. We believe that the management teams actually are quiet additive. It’s one of the reasons why there is a relatively low number in terms of expense savings, and that’s because we think that we do represent a good combination here.

And even on the business lines where they are originating in terms of -- I’ll just give you an example, so they have a commercial real estate business, we have a commercial real estate business. But our business is mostly East Coast and their business is mostly West Coast. So we believe its additive even in places where we do have some overlap. So there will be some expense savings in some of the corporate infrastructure, but for the most part this is additive.

Operator

The next question comes from Chris Brendler of Stifel Nicolaus.

Chris Brendler - Stifel Nicolaus

I wanted to ask a quick follow up before I started on slide 23 about tangible books. I believe the previous question was about the deferred tax asset coming back on balance sheet and coming in the book value. It doesn’t look like that slide includes the benefit of the DTAs. I just wanted to make sure that.

John Thain

Chris, you’re correct. So I think what we did on the ROE was we put that assumption in there because from a deal economic point of view we're already going down the path of evaluating the valuation so we think that kind of an independent. I just put it in the ROE walk to kind of demonstrate that that with that happening is very strong for us to get to our target ROEs. So it is not in this tangible book details.

Chris Brendler - Stifel Nicolaus

Great, thanks. And then just a little bit of following last question just trying to think about 1.2 times tangible book very attractive valuations for OneWest. What are the risks associated with the transaction? Why is the price so attractive other than the fact that they’re getting very attractive CIT paper? I think it's in primary reason, but I am just trying to -- I am just wrestling with what are the concerns around other acquisitions of OneWest that was able to give CIT confidence that it's going to be a great combination?

John Thain

So we’ve been talking to them for over a year. This we’ve had a very long period of time to do due diligence. This is I think a very good fit from a business point of view. The alternative for OneWest is really an IPO which they certainly were considering. In this transaction basically monetizes their stock faster they’ll have a stock that’s -- it has some reception on it but it will be tradable relatively quickly. And they believe that this is -- when they look at the appreciation potential of stock they think this is -- they believe it’s a very attractive valuation for their company. So this is really one of the situations where really both parties view the transaction attractively.

The other thing I would say is that we are sort of unique in that their U.S. taxable income is particularly valuable to us because it unlocks the DTA and the ability to use the NOL. So, other people I think would not have value that stream of U.S. income, which doesn’t have a lot of growth in it but to us has the ability to unlock a lot of value.

Chris Brendler - Stifel Nicolaus

Okay, great. And gentlemen, [indiscernible] question as well. Would you prefer to pay more cash?

John Thain

Well, so the simple answer to that is because part of the value of this transaction is it also restructures that capitals of the company, the more cash we use the more the capital gets restructured and the more we bring ourselves down to our target capitalization level, you have to balance that with the having what I would say clearly sufficient capital from a regulatory approval process. And so this was a balance of the desires of the OneWest shareholders to get stock, the desire to us to get our capital into the kind of 12% to 13% range, and also the need to get it approved for regulatory purposes which means that it has to be clearly very well capitalized.

Chris Brendler - Stifel Nicolaus

But I mean [indiscernible] buyback it’s also playing and I think it's pretty impressive. I want to ask one more question which is back to the quarter for a second. I just trying to sort the numbers asking a lot of questions on the results this quarter, they look obviously much better than last quarter. Can you just talk at all about prepayment speeds and how they maybe moderate a little bit and the other factor sort of driving the strength in the top line yield? Is there -- may be touch I think for years about yield related fees that gets new business line actually generate yields and gets put into your net interest margin. It seems like a pretty strong quarter from a yield perspective. I am just trying to figure out how sustainable that is.

John Thain

Yes, so Chris I guess it is the first question on the quarter. I would tell you that the deck that we put out on the investor website is pretty detailed. We give you a lot of walks to go through that. The answer to your question is prepayments fees in our corporate banks have kind of slowed down little bit given the longevity of one customers and how many customers have the ability to refinance. So I think that has been positive in regards to the asset growth and maintain some of the yields that we had on the portfolio.

We did have some noise in the quarter which I tried to pull out related to what I called at Investor Day when we restructured the aircraft securitization that did pull some income into the margin line as well as other income that we detailed out in the presentation. We did have one large recovery in our corporate finance business that I mentioned but outside of that if you look at the year-to-date numbers are very much in line with what I laid out for you at Investor Meeting. And so I think the margin is kind of in that 4% range, credit, I mean if you look at the charge-offs outside of the portfolio we'll move to held for sale was really kind of back to the levels that we had mentioned before. And so, we're making progress on OpEx. So I think that all the key metrics are kind of moving in the right direction but there is not something where we will still have some unusual each quarter that will create variability.

Scott Parker

The other thing which we did talk about at investor day as well is we have been seeing stabilization in the pricing on our middle market lending. So whereas in earlier quarters we talked about pricing pressure there we really have seen that stabilize.

Chris Brendler - Stifel Nicolaus

One quick follow up there. Generally new business we’re putting on, is it at or better yields than existing book or is it still largely dilutive?

Scott Parker

No I wouldn’t say, I think in general the new business is below the portfolio average.

John Thain

Yes, so it obviously depends on which of our businesses but our corporate finance business the new businesses is on a lower yield than the portfolio as a whole. The one place that’s not true is really on the rail car business where the new rail car leases are being put on at rates higher than the portfolio.

Chris Brendler - Stifel Nicolaus

Good to have a nice bounce down in funding cost.

Operator

The next question comes from Ken Bruce Bank of America. Please go ahead.

Ken Bruce - Bank of America-Merrill Lynch

Couple of question though that haven’t been addressed. You have pointed out that the deal is contingent upon the law sharing agreements being extended, maybe you can give us some sense as to what some of the sensitivities around that would be, I understand you can’t really discuss any discussions with the regulator. But how should you be thinking about that or what risks would we expect in terms of extending that law share agreement?

John Thain

So there are a number of loss share, it’s a little bit complicated but there are a number of different loss sharing agreements and a number of different things that have to get transferred. But the single largest loss share which really came out of the IndyMac transaction. This is single largest and the most valuable we are comfortable that FDIC approval or consent is in fact not required on that largest one.

And the merger agreement has provisions in it that allows that will basically provide for us to be able to get those approvals. And so I think we’re confident that we will be able to get the approvals we need.

Ken Bruce - Bank of America-Merrill Lynch

And then you’ve shown the numbers just with respect to the 2013 actual performance. I am not as familiar with OneWest maybe as I hope to be. But is this a business that’s going to be rate sensitive? Do you envision there being any interest rate sensitivities between now and the deal closed? Do you need to establish any hedges for those any related costs?

John Thain

No they are very sophisticated, so they hedge their portfolios. As I mentioned it is a mark-to-market portfolio and the majority or the largest portfolio they have that we would move to cost accounting post-closing. But they manage that very, very tightly and so we’re comfortable with that.

Ken Bruce - Bank of America-Merrill Lynch

And do you anticipate this transaction having any impact on the debt rating?

John Thain

We will meet with the rating agencies as part of that but we think given what this deal brings to us and what we've talked about in the past that the rating agencies have been looking for. It significantly increases our funding from deposits specially core retail deposits. It provides strong capital and the post transaction gives us diversification of earnings and we think the asset classes that they are originating and consistent with ours. So I think the acceleration around the portfolio is also very positive. So we think that all these elements are items that we’ve been talking about. So we think it’s positive for us but we’ll wait to kind of have the reviews and discussions with the rating agencies.

Ken Bruce - Bank of America-Merrill Lynch

And just lastly I am just trying to -- this goes back to an earlier question relating to the accretion. I think you've pointed out that on Slide 23, the share count kind of roll forward. There seems to be a little bit of a reconciliation difference between what’s used for book value and the actual EPS accretion, because it’s using a starting point of 2016 -- share count of 2016 estimates was like 172 million considerably below where it is today, I don’t know if that was intentional or how to I guess square that box?

John Thain

Yes, I think the view point is the consensus did have some estimates in there regards the capital returns and so our expectation on putting the slide together was really around getting to our target capital ratio as part of the closing process. And given the timing sensitivity that will impact some of the analyst expectations in there versus the kind of the role forward we put out there.

Operator

The next question comes from Cheryl Pate of Morgan Stanley. Please go ahead.

Cheryl Pate - Morgan Stanley

Good morning and congratulations on the transaction. Just a question first of all on the deposit side. Obviously on a pro forma basis this nicely increases your deposit as percent of funding. Can you maybe help us think about I guess number one; outside of the aircraft leasing business, how much of the business could move to deposit funded over time? And then secondly, how do you think about the broker to CD component given sort of the lower cost of retail deposits and opportunities for growth there?

John Thain

Well, I think Cheryl the assets that we have been originating in the bank will continue to originate in the bank. And as we mentioned the things at the holding company really will not be transferred into the bank. So I think going forward it’s the growth of our commercial lending operations in the bank. We still think that the broker CDs is as we’ve talked about before, we still believe those are a good source of long term duration to match fund in our longer duration railcar and also loans that are greater than five years. So that will still become -- will still stay a proportion of our funding. But it may moderate depending on the asset mix within the bank.

Cheryl Pate - Morgan Stanley

Okay. And then second question, can you speak to any potential litigation risk that maybe attached to legacy RMBS assets or any field legacy real estate assets sort of similar to what we’ve been seeing for example at JPMorgan and [indiscernible] is that a potential risk to consider here?

Scott Parker

So OneWest has done a very good job managing that litigation risk. When they sold their mortgage servicing rights they capped their liability on that sale. And also as part of the transactions where they acquired these FISC protected assets, they -- when OneWest was formed, they bought assets out of the whatever the remainder of IndyMac was, so they bought assets and did not pick up the liabilities that save there. So they’ve done a very good job obviously that’s a risk for anyone who has mortgages and mortgage servicings and they done a very good job at minimizing their exposure to that type of risk. They do also have significant reserves for other types of issues but they’ve been very conscious about that and done a very good job at managing that.

Operator

The next question comes from David Hilder from Drexel Hamilton. Please go ahead.

David Hilder - Drexel Hamilton

In your response to the earlier question on the prospects for regulatory approval, the one thing you didn’t mentioned was the BSA AML issues that obviously be kind of (cooked) [ph] up M&T. What’s your view on how the regulators will view both your capabilities and OneWest’s capabilities in that regard?

Scott Parker

Yes, so you’re absolutely right. The BSA AML is very-very important to the regulatory approval process as we’ve seen from one of the other transactions. So one of the reasons why you haven’t really seen us doing anything on the MA front for the last year which is since we got the written agreement is we’ve been spending that period of time bringing our BSA AML systems and processes and procedures up to what I would call state of the art. And so we are very confident that our BSA AML systems and procedures and infrastructure will in fact be acceptable and we’ve also spent time talking to OneWest about theirs. So we’re comfortable that we’re well positioned in that front. But that is absolutely one of the critical elements to getting any transaction approved.

Operator

The next question comes from Louise Pitt of Goldman Sachs. Please go ahead.

Louise Pitt - Goldman Sachs

Most of my questions have been answered but I just didn’t hear any potential comments on the timing of the debt transactions. Would you look to do those as soon as possible? Are you targeting them around the close?

John Thain

I think we would most likely target those around the close or as we get to the regulatory process slightly in advance of closing.

Operator

The next question comes from Justin Mower of Lord Abbott. Please go ahead.

Justin Mower - Lord Abbott

Good morning guys. Scott, just relative to the run off you talked about just curious the earnings in ’13 that are 243 million, 9 billion of assets currently. How should we think about the 5 billion of single family in the billing and reverse mortgage? Just have you guys are been very good at managing through kind of the shrinking ice cube phenomena of exiting businesses and such just wondering how you guys are modelling that out for the next few years?

Scott Parker

Well as we mentioned the portfolios kind of have the natural kind of run off as it matures. And so I think there were some questions about would we look to the accelerating some of that and it really would be a matter of what’s the economics of doing that. So we think that that will just continue to run off and then Joseph and Steven really have been building the commercial franchise such that the overall asset and earnings power of the enterprise continued to offset that run-off. And depending on the growth of the U.S. economy and things like that, if the commercial lending and services that they provide, that could be positive to the 243? Or depending on what that is it might be a little bit below that. So I thought we just use it as a good proxy for where we are at.

Justin Mower - Lord Abbott

But at least in the next two to three years with the [indiscernible] at least at a minimum tier point offset the loan run-off with growth and then depending on the yield, I mean tier to John's point, it’s a fairly healthy yield that’s coming off, so provided rates don't anything in the intervening time, there is probably a little bit of a decline in the NII or earnings in that time period.

John Thain

What we have kind of looked at what they’re building, the franchise that they've built is really kind of has good momentum, but you are right. It’s depending on the environment, the new assets they're putting on. But they’ve been demonstrating great growth and traction on the commercial side. So we think it’s fair. There could be a plus or minus of course on the 2013 earnings.

Operator

The next question comes from Henry Coffey of Sterne Agee; please go ahead.

Henry Coffey - Sterne Agee

Yes, just to clarify something, the $42 tangible book value that you put in the slide deck, that excludes the NOL capture which would be -- but the ROE analysis does, is that correct?

John Thain

Correct. What we try to do, Henry, I mentioned that to Chris is, there are two different concepts. For the deal, the reversal of the valuation allowance is an independent discussion, and was going to happen. So when we looked at the tangible book dilution page we didn’t include that. But if you -- when we did the ROE, what I was trying to do is, take us back to the investor meeting that with this transaction actually we get at a 12% to 13%, even with the DA reversal. So we think that’s even more positive than we kind of laid out a month ago. That was the only point I apologize [indiscernible].

Henry Coffey - Sterne Agee

Yes. So not to state the obvious, so you are going to be earning a quarter -- we'll call it a 12% ROE on what theoretically will be a book value that’s about 8 -- call it $6 or $8 higher. Obviously my number is not yours. It maybe a $48 or $50 book value. Another question, I know I just missed this, the closing date on the transaction, I thought I heard it, but I wanted to double check it.

John Thain

We're saying -- the deck says first half of ’15. We're hopeful we can do it in the first quarter but that’s obviously totally depends on the regulatory approval process.

Operator

The next question comes from Michael Rogers of Conning & Company; please go ahead.

Okay, we will go to the next question that comes from Brian Schinderle of BAM; please go ahead.

Brian Schinderle - BAM

My questions have been asked and answered. Thank you very much.

Operator

The next question comes from Vincent Caintic of Macquarie; please go ahead.

Vincent Caintic - Macquarie

First one, a quick clarifying question and another broader question. The cost of kind of exceeding a $50 billion total asset, is that contemplated in the restructuring charges, 75 million or would that potentially be above that, and if you could quantify?

John Thain

I’m not going to quantify for you, but we did factor it in as I mentioned into the operating synergy. So it's a dis-synergy of the cost that we think that we need to comply with the new level of going over 50 billion. It’s not in the restructuring charge.

Vincent Caintic - Macquarie

Okay, and then back to the business, and particularly the aircraft and railcar portfolio. It appears to have kind of pointed to, kind of strong market valuations for those and I was wondering if you could compare kind of where your portfolio is in terms of kind of the book carrying value. And then another question, one of your peers in the railcar business has said that there is a significant opportunity from the safety retrofits of tank cars. I was wondering if you could speak to that. Thanks.

John Thain

Well I'll just clarify what we said in investor meeting, that we said in general, I’m not going to go through the specifics or a portfolio, we said that the transportation operating lease book is -- the market value exceeds the carrying value that we have on our books. So I think that answers that question. I am not so sure I understood the question on the railcar.

Scott Parker

On the tank cars, I mean the first -- we have about 20% of our portfolio are tank cars. And then a significant amount of those are actually newer tank cars. It’s not clear to us, yes, because the regulations really haven’t come out yet to what extent that they are going to have to be retrofitted. So it’s not clear to us exactly how much that’s going to cost. We do have provisions in our leases that allow us to cash through some of those cost. And of course we will comply with whatever the regulations are. So we will have fully compliant tank cars. But I wouldn’t have called it an opportunity.

Vincent Caintic - Macquarie

It actually, I think the peer said that, it’s kind of refinancing of tank cars that could be replaced or retrofitted that maybe that’s an additional couple of billion dollar opportunity for refinancing those guys?

Scott Parker

I don’t think that would be true in our case.

Operator

I would now like to turn the call back over to Barbara Callahan, Head of Investor Relations for any closing remarks.

Barbara Callahan

Okay, well thank you Drew and thank you everyone for joining us this morning. And if you have any follow-up questions, please feel free to give me a call or any of my colleagues in Investor Relations. Thank you.

Operator

That concludes today’s call. Thank you for participating. You may now disconnect.

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CIT (NYSE:CIT): Q2 EPS of $1.02 beats by $0.31. Revenue of $454.6M (+1.9% Y/Y) beats by $17.56M.