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CIT Group (NYSE:CIT)

Q2 2012 Earnings Call

July 30, 2012 8:00 am ET

Executives

Kenneth A. Brause - Executive Vice President of Investor Relations

John A. Thain - Chairman and Chief Executive Officer

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

Analysts

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

Donald Fandetti - Citigroup Inc, Research Division

Mark C. DeVries - Barclays Capital, Research Division

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

Moshe Orenbuch - Crédit Suisse AG, Research Division

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

David S. Hochstim - The Buckingham Research Group Incorporated

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

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

Kenneth Bruce - BofA Merrill Lynch, Research Division

Operator

Good morning, and welcome to CIT's Second Quarter 2012 Earnings Conference Call. My name is Frances, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Ken Brause, Director of Investor Relations. Please proceed, sir.

Kenneth A. Brause

Thank you, Frances, and good morning, everybody, and welcome to CIT's Second Quarter 2012 Earnings Conference Call. Our call 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 will 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 2011 Form 10-K that was filed with the SEC in February.

Any references to non-GAAP measures are meant to provide meaningful insight and are reconciled with GAAP in the press release. For more information on CIT, please visit the Investor Relations section of our website www.cit.com.

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

John A. Thain

Thank you, Ken. Good morning, everyone, and thank you for being on the call. We reported a solid second quarter, with $245 million of pretax income before the debt repayment expenses. Our Commercial assets grew $600 million, which is the third consecutive quarterly growth. And we originated $2.4 billion of new funded volume, which was up 19% sequentially. All 4 of our core businesses were profitable on a pretax, pre-debt repayment basis. And we saw a significant improvement in our economic finance margin, which Scott will talk about in more detail later.

We continued our balance sheet liability restructuring, lowering our overall funding costs. We repaid $4.2 billion of higher cost debt, and we issued $2.8 billion of new debt, including $2 billion of unsecured debt.

We continue to expand CIT Bank. Over 90% of our U.S. volume is now being originated by CIT Bank. CIT Bank's assets crossed over the $10 billion mark, and our Internet deposit gathering exceeded $2 billion in total.

Our credit metrics were strong and stable, with charge-offs at or near cyclical lows. On the written agreement with the Fed, we continue to wait for a response from the Fed. We have not heard anything back from them yet.

In terms of the economic environment that we're operating in, it's okay, not great. We see slow growth in the U.S. consistent with the most recent GDP number. We do see a slowdown in Brazil, and we continue to see growth in China.

Going through our different businesses, Corporate Finance. Corporate Finance had the fourth consecutive quarter of over $1 billion of committed volume. We closed over 60 transactions, with 10 lead agency roles. Our Equipment Finance business and our Commercial Real Estate businesses, which are newer businesses for us, continued to see good growth.

On the Transportation side, our commercial aircraft were 99% utilized, and our railcars were 98% utilized. And we grew our order book both in air, where we ordered some new A330s, which were reported in the press. And we will report later today an incremental order of 3,000 tank cars in the Rail sector.

In the Vendor business. Our Vendor business, our volume was up 13% sequentially. And our Trade business, the factored volume was just down slightly. We did continue to sell off our student loans. We sold $1.1 billion of student loans. Our balance sheet is very strong. Our capital ratios, our total capital ratio was about 19%. Our Tier 1 Capital ratio was 18%. We continue to be very liquid, with $7 billion of cash and short-term investments. And our tangible book was right around $39.87.

So with that, I'll turn it over to Scott to give you some more details.

Scott T. Parker

Thank you, John, and good morning, everyone. We continue to make progress towards achieving our profitability targets. Funded volume and Commercial assets grew. Margin has improved as funding costs declined, and we are moving closer to our target funding mix. And portfolio quality remains stable, with credit metrics close to cyclical lows.

As John mentioned, we reported $71 million net loss or $0.35 per share. Consistent with last quarter, this was driven by accelerated FSA and other debt-related charges as we continue to execute on our liability management initiatives.

Excluding these charges, pretax earnings was $245 million, up from $214 million in the first quarter. The increase came as lower funding and credit costs and higher net FSA accretion benefit more than offset lower gain on asset sales and increased operating expenses.

Now let's talk about the key drivers, and I will focus my comments on sequential trends. Total finance and leasing assets were down slightly, as the Commercial portfolio grew just over $0.5 billion, and the consumer book contracted due to the sale of $1.1 billion of student loans. Finance and leasing assets grew in 3 of our 4 Commercial segments, as $2.4 billion of funded volume, which included about $300 million of scheduled aircraft deliveries, grew 19% from the first quarter.

Net finance margin excluding FSA was 302 basis points, up 105 basis points from last quarter. As I noted at Investor Day, our net finance margin continues to improve with some quarterly variability around the trendline, as we execute on the restructuring of our balance sheet.

As with prior quarters, the margin included some discrete items that totaled about 50 basis points, specifically, interest recoveries and other yield-related fees and suspended depreciation. Interest recoveries and other yield-related fees contributed about 30 basis points to the margin this quarter and are running higher than historical norms. While these are event-driven, we expect this benefit to decline significantly in the second quarter of 2012.

Suspended depreciation on assets held for sale will continue to benefit finance margin by about 20 basis points until the Vendor Finance European portfolio sales close next year. Excluding these items, our margin was about 250 basis points, with the continued improvement reflecting our progress in refinancing high-cost debt, raising deposits and improving our portfolio mix.

Deposits grew as a percent of total funding, and new deposit rates have declined, positively impacting margin. And our portfolio has shifted towards a greater proportion of higher-yielding Commercial assets, as we have sold student loans and reduced the level of both parent company cash and non-accrual loans.

Our liability management actions continue to benefit margin, and we expect an additional 10 basis points of improvement in the third quarter from actions we took last quarter. In addition, we recently announced that we'll redeem another $600 million in August, which will provide some modest additional benefit in the second half of the year. So overall, we are making good progress towards our finance margin target.

Other income was $144 million, down from the first quarter and was primarily driven by some non-core items. At Investor Day, we defined our core non-spread revenue as fee and other income, factoring commissions and gain on sale of leasing equipment. These totaled $83 million, and were down modestly from last quarter. All other non-spread revenue items totaled $61 million, down $100 million, primarily due to lower gain on asset sales.

As John mentioned, our credit metrics remained stable with continued low level of charge-offs and non-accruals. This quarter's provision for credit losses reflected the lower charge-offs and a modest reduction in the allowance, primarily due to asset mix. As a percentage of finance receivables, the reserve is essentially flat at 2.06%.

Operating expenses were $240 million, up $17 million from last quarter. We had higher employee costs, largely related to the full quarter of expense from the February equity grant.

Expenses related to our Internet deposit platform are also increasing as we grow the deposit base. And finally, there were additional costs related to operational as well as new business initiatives this quarter, where we expect some continued short-term pressure.

Finally, our first quarter income tax provision was $28 million, was primarily driven by international earnings. And we are seeing -- or we're starting to see some benefits from our subsidiary recapitalization efforts.

Now I'd like to turn to the segment results. Consistent with last quarter, we included a table in the press release, which adjusts for the accelerated FSA interest expense and other debt-related costs that are allocated to each segment. Remember that these costs are driven by our debt repayment activities. My remarks will again focus on the sequential trends, excluding this impact.

Corporate Finance's adjusted pretax income fell to $94 million. Lower gain on loan sales were partially offset by higher yield-related fees, FSA accretion from the TRS counterparty receivable and lower credit costs. The portfolio increased over 3%, primarily driven by our U.S. middle market business. Funded and committed volumes were down 7% and 13%, respectively, primarily from lower volumes in our International business. Real estate volume was also little lighter this quarter, but we view that as a trend -- as a matter of timing, as the pipeline looks good and we continue to make progress.

New business was evenly split between cash flow and asset-based or other secured lending, of which over 90% was originated by CIT Bank. Nearly 60% of the U.S. Corporate Finance portfolio is now in CIT Bank.

Pricing remains relatively stable in the core middle market, and deal flow continues to be strong in our Energy, Healthcare and Entertainment groups. And as John mentioned, we are gaining traction on lead agency roles.

Credit metrics improved slightly, with declines in charge-offs and non-accruals. Trade Finance's adjusted pretax income grew to $12 million, benefiting from lower credit costs. Factoring volume was down 2%, primarily due to a couple of large non-apparel clients where we are actively managing our exposures. Factoring commissions were in line with the lower volumes and portfolio mix. And overall portfolio quality remains solid. Vendor Finance's adjusted pretax income was $27 million versus a loss in the prior quarter, reflecting improved funding cost, higher non-spread revenue and lower credit cost. The first quarter was negatively impacted by the adjustments to interest revenue in the Mexico portfolio we discussed last quarter.

New business volume increased 13% sequentially, with growth both in the U.S. and internationally. We continue to grow with existing partners and increase the number of relationships with new manufacturers and dealers.

New business margins continue to benefit as virtually all new U.S. business is originated by CIT Bank. And we have made progress on our international funding initiatives. We renewed our U.K. conduit and recently completed a term equipment securitization in Canada, both with very good terms. And finally, credit metrics remained stable and near cyclical lows.

Transportation Finance adjusted pretax income increased to $129 million, reflecting lower funding costs, higher net rental revenues and lower credit costs. Finance and leasing assets grew 2%, with growth both in the leased equipment and loan portfolios. New volume was strong and included scheduled deliveries, as well as loans, with almost $300 million funded by CIT Bank.

We sold about $200 million of assets and moved about a dozen aircraft into assets held for sale as part of our continued fleet management activity. As John mentioned, air utilization remains strong at over 99%. And in our Rail business, overall trends are good. Fleet utilization increased to 98%, and rental rates remain attractive.

We noted some softness in the coal market last quarter due to the mild winter and lower natural gas prices but are starting to see evidence of increased demand driven by the hot summer.

Now turning to funding. We further improved the economics and composition of our debt structure this quarter. We continue to access the capital markets at attractive rates. We issued another $2 billion of senior unsecured debt, with a weighted average coupon just over 5% and a weighted average life of around 6 years. We also obtained attractive financing from the $750 million U.S. Vendor equipment securitization, which had an average weighted average coupon of 1.5% and the $500 million Canadian term securitization recently issued just below 2.3%.

We renewed our Vendor U.K. conduit at more attractive terms and continued to fund new Airbus aircraft under our existing ECA facility. John mentioned, with respect to the bank, we exceeded $2 billion in Internet deposits, and we established a $1 billion Vendor conduit facility that will provide additional committed liquidity.

During the second quarter, we redeemed or repurchased $4.2 billion of 7% Series debt, and we recently announced that we'll redeem another $600 million in August. That leaves us at about $4 billion of the 7% debt remaining, with about $450 million of FSA discount. We will continue to evaluate all opportunities to address this remaining balance.

Our liquidity and capital ratios at the bank and bank holding company remain strong. And we are progressing towards our target funding mix, with deposits now representing 23% of total funding, unsecured debt at 44% and secured debt appropriately sized at 33%. With that, I'll turn the call back over to Frances, and we'll take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Chris Brendler from Stifel, Nicolaus.

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

Can you talk about the margin? And I noticed you had some one-time benefit I think you quantified at about 30 basis points. But how high do you think you could continue to move that margin and where do you expect it to settle out by the end of the year?

Scott T. Parker

Yes, so I think there was 2 items I mentioned. One was the interest recoveries in yield-related is about 30 basis points and then the benefit from suspended depreciation is about 20 basis points. So it's about 50 basis points in total. As I mentioned, some of the actions we've taken in the second quarter, we'll see some benefit rolling into the third quarter of about 10 basis points. The $600 million redemption will also provide a modest benefit. But I think the continued progression of all our different funding activities, as we've mentioned at Investor Day, will continue to move the margin towards our long-term targets. So what we'll be at, at the end of the year, I don't have that off hand. But I think the trend continues to be positive and upward.

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

Okay, fair enough. On the fee income side, if I look at the fee income, excluding sort of the lumpier stuff, like the gains and the amortizations and impairment with that, what about this core fee income is not really moving much? I would expect that the new business volume and improving originations stream to start to help your fee income. I look back historically pre-crisis, you guys generated a lot more fee income. Is there something changed in the business? Obviously, the syndication market is not there. But what else has changed that's not driving as much non-spread revenue?

Scott T. Parker

I think it's mainly the syndications, Chris. I mean, right now, the amount -- most of the deal market and the middle market is club, and so people are holding and not selling down. I think what will happen over time, we might get back to the point where there’s the same type of syndication income. But it's really more market-driven, not CIT-specific.

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

Okay, and last one for me and then I'll hop off. Any indications at all from the Fed on timing? The 3-year anniversary is coming up. I mean, is there exam cycle that we should be aware of? Is there anything we can point to on the Feds given the fact that as you get closer to year end? My understanding is if you don't get the agreement lifted before early 2013, you may not be able to do any return capital to shareholders in 2014.

Scott T. Parker

There's no exam cycle. We continue to wait for a response from the Fed. I certainly expect to get one before the end of the year and, hopefully, much sooner than that. I think we will continue, as we've said before, to include some form of capital return in our 2013 filings with the Fed. As you know, we're not a CCAR bank, but we do have to file a capital plan. So our 2000 capital -- 2013 capital plan that we filed, we anticipate to include some form of capital return.

Operator

Your next question is from the line of Don Fandetti from Citigroup.

Donald Fandetti - Citigroup Inc, Research Division

Just a couple of quick questions, Scott. Can you talk about what was the indemnification reserve in the quarter?

Scott T. Parker

Yes, it was a charge that we took related to a sale of the small portfolio of consumer assets that happened pre-2005. And we feel we're fully reserved now.

Donald Fandetti - Citigroup Inc, Research Division

Now was that related to the mortgage sales to loan stock?

Scott T. Parker

No, it was not.

Donald Fandetti - Citigroup Inc, Research Division

Okay, great. And then, Scott, you mentioned that you're making some progress on the tax or capitalizing some foreign subs. Can you talk a little bit more about that and what you think the best way to think about taxes going forward should be? We've been using a sort of $1 approach.

Scott T. Parker

Yes, I think for the remaining of the year, I would continue to use a dollar approach. There's the nuances of FSA, which is not a tax concept, it's a book concept. We continue to make progress, as I stated, on some of the subsidiary recapitalization but, Don, it takes time for some of that to kind of flow through. So I think we're making progress, but we still -- at least for the next couple quarters, I wouldn't expect any significant change in the tax rate -- tax dollars, sorry.

Operator

Your next question is from the line of Mark DeVries from Barclays.

Mark C. DeVries - Barclays Capital, Research Division

Could you talk a little bit about liquidity available to pay off remaining 7% debt? How much of that you may be able to pay with existing cash or cash flow from the business versus issuing new debt?

Scott T. Parker

Well, if you look at the numbers we have in the press release, the cash at the parent company has come down over each subsequent quarter. We are a little bit under $2 billion at the parent company. A lot of the cash right now is in the bank as we've kind of sold student loans, so the expectation is that liquidity cannot be used for the debt. That will be used to fund originations in the bank. The one area we have restricted cash, which is about $1 billion. So the one area that we've been focusing on is some of our other international cash. So I think there's some room there as we did with the Canadian securitization. We talked about that we are looking at additional international funding opportunities for our Vendor business, which will generate some cash. And then we also will look at the capital markets opportunistically to also help with the reduction of the further $4 billion of 7% debt.

Mark C. DeVries - Barclays Capital, Research Division

Okay. And any color you can give on timing on how quick you expect to repay the remainder?

Scott T. Parker

I think John mentioned, we have a strong desire to remove it as fast as possible. But it's really kind of dependent. We do need some -- a capital markets transaction for the size of what we're talking about, and so that's really dependent on market conditions. But if we can get it done in 2012, that would be a great achievement. If it slips a little bit, then it's really going to be more dependent on market versus our desire.

Operator

Your next question comes from the line of Bill Carcache from Nomura.

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

I was hoping you could give a little bit more color on the Trade Finance segment. We saw some improvement there. If you strip out some of the FSA noise that were really driven by credit and improved funding costs, but factoring volumes and commissions were down both sequentially and on a year-over-year basis. And I just wondered if you could give some perspective as to your outlook for core business trend improvement and timing as we look forward from here?

Scott T. Parker

Yes. As I mentioned, Bill, in the quarter, we had a couple specific accounts that kind of was a main driver of the volume. If you look at some of our core segments, the growth is consistent with GDP. So I think the piece that we balance is between the volume and fee income relative to the credit cost. And so I think you -- that's something that we continue to need to balance. But as John mentioned -- John Lucas mentioned at the Investor, we're continuing to look at other growth opportunities and also winning back customers over the next couple quarters.

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

Okay. Can you talk a little bit about seasonality and what role that had? I mean, just looking at some of your numbers historically, pre the bankruptcy, it looks like the second quarter you tended to see funded new business volume growth, seemed to kind of improve. And I wonder if you could just comment on how much overall seasonality plays on the funding new business volume growth this quarter?

Scott T. Parker

For Trade, specifically?

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

Actually, for -- maybe if you could just speak of -- to all the businesses broadly?

Scott T. Parker

Well, I think Trade is definitely seasonal. That's kind of why we use kind of year-over-year comparisons, because you have ramp-ups to different kind of seasons, the Christmas season, now the back-to-school season. So I think a year-over-year comparison for Trade is the most relevant. Vendor does have some seasonality. The fourth quarter tends to be kind of elevated for some of the equipment that we lease. And that's why when we kind of talk about that one, first quarter kind of tends to be down a little bit versus fourth quarter being a high. But other than that, I think that's probably the only kind of real seasonal area. Corporate Finance, I think we're in a period -- third quarter tends to be -- could be kind of seasonal because of vacations. August is kind of a slow month. So it really comes down to either pre kind of holidays or post-holidays. So I think that's something that's there. And on the aircraft, most of that's scheduled delivery, so I wouldn't say there's a lot of seasonality other than our delivery schedules. So in those quarters, like in the first quarter, we had very little order deliveries and that's going be a little bit more lumpy. But we talk about the deliveries and have broken that out for you. At the Investor meeting, we'll continue to talk about that.

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

Excellent. And last quick one here and I'll jump off. What would be the book value impact of paying down the remaining Series C debt, if you could share that?

Scott T. Parker

Yes, so outside of the $600 million, we already announced that, that was about $30 million of FSA. So the remaining $4 billion has about $450 million of FSA discount, and that does not include any potential debt extinguishment cost that we cannot predict or forecast until the transactions happen.

Operator

Your next question is from the line of Moshe Orenbuch from Crédit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Could you talk a little bit about the expenses in the quarter? When you mentioned the equity grant kind of continuing, is that an ongoing expense or is that one-time? And kind of how should we think about that relative to on an efficiency basis, given that revenues are kind of flattish at the moment?

Scott T. Parker

Yes, the equity grant was more really just a sequential trend from the first quarter to second quarter. Since they were issued in mid-February, there was not a full quarter impact in the first quarter, and that came through in the second quarter. So that's not -- that was just a sequential analysis in the numbers going forward. I think with respect to the other pieces, it's a balancing act. But we're trying to continue to invest in the growth of the business and the platforms and balancing that with cost reductions. So I think we focus on this, but it is a balancing act that if the growth does not come, I think we have kind of have to kind of sharpen our pencil around that. But I think part of where we are is we're starting to get the momentum, and we need the platforms and the infrastructure in order to meet our customer expectations.

Moshe Orenbuch - Crédit Suisse AG, Research Division

In the text, Scott, you had mentioned some one-time charges that then I think said were offset by kind of one-time gains, or were that $14 million kind of one-time kind of and should be netted out?

Scott T. Parker

Well, the $14 million is definitely a one-timer, and there was a few positive one-timers that kind of partially offset that. And so that's why I think I was saying that the run rate's a little bit higher than we had in the first quarter.

Operator

Your next question is from the line of Brad Ball from Evercore.

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

Just to clarify on the net interest margin comment. I think you said that the suspended depreciation benefited the margin about 20 basis points and that, that would continue. Is that correct?

Scott T. Parker

That's correct.

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

So that lasts into next year based on what?

Scott T. Parker

It's based on the assets we have held in -- held for sale that we kind of break out. So when those assets are actually sold, the net debt benefit will go away.

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

Okay. And any sense for the timing? Is that going to be first half, second half, next year?

Scott T. Parker

It's really kind of variable based on kind of our transition schedules. So I can't kind of tell you, but it will be sometime next year.

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

Okay. Then that's going stay in the roughly 20 basis point range?

Scott T. Parker

Yes.

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

Okay. And then on credit quality, you continue to put up numbers that are better than your long-term forecast for net charge-offs. You came in at 33 basis points this quarter. I think John's comments were that we're probably nearer the bottom here. How should we look at credit quality going forward? Do you expect that you'll trough, remain near the bottom for a while or will that bounce around?

Scott T. Parker

Well, I guess we're consistent I think with the rest of the industry around credit. If you kind of think about we're at $17 million in charge-offs, so there's not a lot of room on the downside. And I think the piece, Brad, there's -- the Vendor business is fairly kind of -- since it's a flow nature, it's fairly consistent. I think the area where you'll get some variation, because it's much more event-driven, would be on the Corporate Finance side. But I don't expect that this thing is going to shoot back up. But we're -- as we said, we're probably kind of near cyclical lows. And depending on how GDP, the overall macro environment, I think our losses will probably trend consistent with that.

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

Okay. And then just finally, I wonder if you could give us an update, you guys have talked about having an appetite for potentially buying deposits or buying branches. Any comment on the prospects there, how the M&A environment looks for other ways to use your capital between now and perhaps when do you get approval to return it to shareholders next year?

Scott T. Parker

We would continue and do continue to look at opportunities to buy deposits. There haven't been a lot of transactions. And so that's really just opportunistic. As things come up, we will look at them. But right now, as you see from the banks' own liquidity position with $3 billion of cash in there, we don't need a lot of deposits right now.

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

And nothing really on the asset purchase side either, didn't do anything this quarter?

Scott T. Parker

We -- there continue to be these portfolios primarily coming out of the European banks, but not very many of them have actually traded. We evaluate them. They tend to have relatively low yields. And the European banks, at least so far, have been unwilling to sell them at appropriate discounts. So we see them, but we haven't been -- obviously been scheduled to buying any, but not a lot have traded as far as we can tell either.

Operator

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

David S. Hochstim - The Buckingham Research Group Incorporated

I wonder could you give us an update on pricing in Corporate Finance? Has there been any change? What kind of average yields were there?

Scott T. Parker

I'd say that the pricing, as I mentioned, was stable. So I think overall, the marketplace is pretty disciplined, so we feel good about that. So we haven't seen much change from the first quarter.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then how much additional capacity is there to fund railcars in the bank? Is there any?

Scott T. Parker

In the short term, the orders we're placing and the volume we're putting in there, we don't have any near-term constraints or restrictions.

David S. Hochstim - The Buckingham Research Group Incorporated

So all the orders you've got, still to be delivered should be able to go on the bank?

Scott T. Parker

Yes, the majority of those. Yes.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then finally, could you just give us some sense -- I think, it looked like amortization on debt was lower in the quarter than it has been. Is that the normal run rate?

Scott T. Parker

Amortization on the debt side?

David S. Hochstim - The Buckingham Research Group Incorporated

Yes.

Scott T. Parker

You're talking about the FSA amortization?

David S. Hochstim - The Buckingham Research Group Incorporated

Yes. The normal amortization, not the prepayment-related amortization?

Scott T. Parker

Well, I think it would come down just naturally as we -- the run rate, because when we prepay it, we accelerate that. So what's remaining is a much smaller piece to amortize. And I think that would be -- just like the assets, I think those -- you'd continue to see that trend.

Operator

Your next question is from the line of Sameer Gokhale from Janney Capital Markets.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Just a couple. First one was on the operating expenses. You talked about it a little bit. But if we look at the headcount and the increase sequentially, which businesses is that where you're adding headcount? Could you -- I don't recall if you talked about that.

Scott T. Parker

I think at least on the growth perspective, most of the headcount is in -- growth would be in Vendor and Corporate Finance. And other areas would just be, as we -- it grow out, build out our international platforms.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. And then on the Vendor and Corporate Finance, I mean, are there any specific sub-businesses that you think are particularly attractive at this point in time that's causing you to add headcount there?

Scott T. Parker

We've been adding -- well, again, we hired Capital Markets, Neil joined us and that was a big add. So I think that one gives us market color. We have added some originators in certain industry groups that I would say we feel there's attractive opportunities. And then in the Vendor business, I think it's been more along the lines of both industry but also getting more feet on the street.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay, that's helpful. Then my second question is just so I’ve got a general perspective on how you're thinking about this. But I think 90% of volume this quarter was originated in the bank. But then clearly, those volume originated at the hold co. And I know you have some various -- like the Vendor, the conduit facility, et cetera, which are also being used to fund loans. But if you think about pricing on your loans, on loans made at the parent, how are you thinking about those and are you willing to, say, accept lower pricing on certain loans because that may help you gain market share? And then you have cash sitting there that it's better than just sitting on cash or the marginal return is better even if you're willing to accept a lower yield on that cash. Of course, you'll be using part of it to pay down the debt, as you have been doing. But just some sense of how you're thinking about the marginal return on the cash that you have and the capital at the parent, and how you're thinking about that?

Scott T. Parker

Okay. Well, let's start at the parent level. So on a cash basis, the cash that we're holding is cash liquidity we think is prudent, as we've talked about before, to make sure that in the stressed environment that we're able to continue to fund our business and make other commitments that we have with respect to the business. So that cash, we don't think of as being able to have a marginal decision. This cash is part of operating the company. From a second piece about assets and how we think about those at the parent company, both John and I have a big focus on making sure that the returns on assets that we put at the parent company have acceptable returns. And in the event, like we've talked about in a few situations with Corporate Finance, if we have a lead role with a customer, and we cannot finance that in the bank, we do have to make a bigger strategic decision, which is -- does that one transaction have a broader implication on our business, and that one may have a more marginal analysis than kind of returning the targeted return we're looking for at the parent company. And then on the Vendor business, as we do -- a lot of this is we have expectations, and we've delivered that in Canada, we have several others where we'll be able to relieve the parent company cash with other funding facilities that we'll see over the coming quarters.

John A. Thain

I would just add that in general, when we price loans to -- that we expect to hold at the parent, we build into the return analysis the higher funding cost of the parent. And I think your basic premise to your question, are we accepting lower returns or lower yield at the parent? The answer would be no.

Operator

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

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

In looking at your numbers here, it looks like for the last 3 quarters when you reverse all the FSA but keep the taxes and all the other noise in there, you're starting to generate earnings of about $60 million to $65 million a quarter. Is that sustainable and are we at the point where we're going to actually start to see real growth in economic book value?

Scott T. Parker

Well, I think, Henry, I think it's sustainable in the sense that the progress on the funding cost is real. And we've been able to hold or grow the yields over the last several quarters. So based on that, the only other driver that you didn't mention really was around the volatility of the non-spread, right? So the core operating metrics between credit, margin and kind of maintaining operating discipline on the expenses side translate into that positive economic earnings.

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

And we've talked a lot about the 7% notes, the other half of the FSA mark on your debt is -- or approximate other half is tied to some senior -- the senior debt facilities. Are those likely to be restructured -- they're not very efficient, if I remember correctly. Are those likely to be restructured and reworked over the next year as well? And what are the implications of succeeding at that?

Scott T. Parker

Yes, actually most of the FSA that's remaining on the debt side is really related to the term securitizations we have at the parent company and the student loans. So as you recall, last year we restructured one of those because they had auction-rate paper and took the accelerated FSA. So if you think about it, a lot of the loan FSA accretion left is consumer, and the debt FSA on those secured structures are the ones that will kind of offset if we let those run the term.

Operator

Your next question comes from the line of Ken Bruce from Bank of America Merrill Lynch.

Kenneth Bruce - BofA Merrill Lynch, Research Division

I was hoping, John, you might be able to provide a little bit more context to your earlier comment about that you're operating in that okay, not great economic environment. Is that a downgrade at all from prior views or is it stable at this point?

John A. Thain

No, it's pretty consistent with what we talked about last time. So in the U.S., our business activity level is consistent with the U.S. economy that's growing but growing slowly. And so 1.5% GDP growth I think is consistent with what we would see in our business. The only place I was a little bit more negative is in Brazil. We are seeing a slowdown in Brazil, which is more recent. Obviously, Europe is -- depending upon what country you look at, but generally in a recession. But that's not -- we're not particularly exposed to that. And then even if China's slowing down a little bit, we still see good growth there, and the absolute number is still quite positive. So our business continues to grow in China.

Kenneth Bruce - BofA Merrill Lynch, Research Division

Okay. And then could you just remind us how much of your revenues or assets are in Brazil?

Scott T. Parker

Yes, we don't have the revenue breakout, but its couple hundred million of assets.

Kenneth Bruce - BofA Merrill Lynch, Research Division

And then lastly, you mentioned to Brad's question about M&A that you have an interest in deposits. But I don't know if you've really formalized whether you have any interest in brick-and-mortar branches or that if you're just looking at trying to grow the Internet deposit base from here?

John A. Thain

Well, we have said before that we would entertain opportunities to buy brick-and-mortar deposits. So it would depend on where they were and what they cost. But, yes, we would anticipate at some point to have some degree of brick-and-mortar deposits.

Operator

At this time, there are no other questions. I'd now like to turn the call over to Mr. Ken Brause for your closing remarks.

Kenneth A. Brause

Well, we thank you all very much for joining this morning. And if you have any follow-up questions, please either call me or any member of the Investor Relations team, and we'll be happy to help. Thank you, and have a great day.

Operator

And ladies and gentlemen, this concludes your presentation. You may now disconnect, and have a great day.

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