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CIT Group Inc (CIT)
Q1Â 2019 Earnings Call
April 23, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator --
Good morning, and welcome to CIT's First Quarter 2019 Earnings Conference Call. My name is Andrew, 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 call over to Barbara Callahan, Head of Investor Relations. Please proceed, ma'am.
Barbara Callahan -- Head of Investor Relations
Thank you, Andrew. Good morning, and welcome to CIT's first quarter 2019 earnings conference call. Our call today will be hosted by Ellen Alemany, Chairwoman and CEO and John Fawcett, our CFO. After Ellen and John's prepared remarks, we will have a question-and-answer session. 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 additional questions.
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 2018 Form 10-K. Any references to non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in our press release.
Also, as part of the call this morning, we will be referencing a presentation that is available in the Investor Relations section of our website at cit.com.
Thank you. I'll now turn the call over to Ellen Alemany.
Ellen Alemany -- Chairwoman and Chief Executive Officer
Thank you, Barbara, and good morning, everyone. Thank you for joining the call. I am pleased to report that we had a solid first quarter. We began to deliver on the next phase of our strategic plan and posted net income of $119 million or $1.18 per common share. In addition, our tangible book value per share was up 2.5% compared with the fourth quarter. With our simplification efforts completed, we began the year on a much stronger foundation. We remain committed to our financial and operational goals for the year and our plan to power forward the next chapter of CIT is outlined on Page 2 of the presentation.
Let me hit a few highlights for the first quarter. We grew average loans and leases by 2%, and continued to see strong origination volumes in commercial banking. Our average consumer deposits grew significantly, by about 8% from last quarter, driven largely by the direct bank. This is from the tremendous success of the Savings Builder product, which has accelerated our deposit growth faster than planned, but nonetheless we encourage that so many customers have chosen CIT in credit marketplace.
We returned about $205 million of capital to shareholders between stock repurchases and dividends. We remain focused on reducing operating expenses and we're continuing to drive efficiency, while also investing in the business. For example, we have been investing in modernizing our systems and digitizing our operations, and this will drive operating efficiency and the ability to unlock greater business potential. And the broader credit environment remains stable, credit reserves were strong, and we continue to be disciplined in our underwriting despite competitive markets.
John will walk you through a detailed account of results, but first let me touch on a few business updates. Our Commercial Banking volume was up 5% year-over-year, and we continue to find good opportunities in the market that speak to our core strength. Average loans and leases in Commercial Finance were up 4% from last quarter and 7% from a year ago. Some of this was driven by strong originations in the fourth quarter that drove greater asset growth in the first quarter. We also saw lower prepayments.
The underlying business opportunities remain strong, particularly in more collateral based lending. Our growth in the quarter was driven by deals in our power and energy, communications and technology, healthcare and C&I verticals, which have strong market positions. The equipment financing areas within the Business Capital division also posted strong results with average loans and leases up about 3% from last quarter and 12% from a year ago. Our proprietary technology in this business is a key advantage and help to drive a significant portion of our 17% origination growth year-over-year. We continue to grow market share in small and mid ticket equipment financing and have core competencies in this market.
We remain highly selective in commercial real estate. We're seeing good opportunities based on our strong relationships and industry knowledge, but average loans are down 1% from the prior quarter and 3% from last year. We have an experienced team and we are being disciplined. Average loans and leases in the North American Rail division were flat quarter-over-quarter, and up 2% from last year. Utilization rates were strong at 97% and we continue to proactively manage the portfolio through this cycle.
As I mentioned earlier, we had a strong quarter of deposit growth in the Consumer Banking segment driven by the direct bank. We welcomed nearly 50,000 new customers to CIT and grew average deposits by $2.4 billion in the quarter. The Savings Builder product has had strong appeal and has helped us increase our non-maturity deposits as we strategically reduced our time deposits. We continue to monitor our deposit growth and we'll adjust as needed going forward to best align with our funding needs.
Before I wrap up, I also want to mention the addition of Bob Rubino and Jim Hubbard to the management team. Jim is our new General Counsel and Bob will help drive our growth strategy as Head of our Commercial Banking segment. They both bring a tremendous amount of key banking and marketplace experience to CIT and I am happy to have them on the team. So we're off to a strong start and we're focused on powering forward to deliver on our plan for the year.
With that, let me turn it to John.
John Fawcett -- Executive Vice President and Chief Financial Officer
Thank you, Ellen. And good morning, everyone. We are off to a solid start this year with net income available to common shareholders of $119 million or $1.18 per common share, as we continue to make progress toward our 11% return on tangible common equity target for the fourth quarter of this year. We achieved these solid results by executing on our strategy. We grew average loans and leases in our core business by 2% from the prior quarter and 7% from the year ago quarter. We continue to see strong origination volumes in Commercial Banking, which grew 5% from the year ago quarter, driven by growth in Commercial Finance and Business Capital.
We stay disciplined in our credit underwriting. We remain focused on our operating expense initiatives while continuing to invest in technology to improve operating leverage over the longer term. We continue to look for opportunities to optimize our funding profile and we repurchased $180 million of common shares, common stock below tangible book value for this quarter.
With the business transformation completed and our financial statements much simpler, we had no noteworthy items this quarter. However, given that prior periods were impacted by noteworthy items, I will refer to our comparative results from continuing operations excluding noteworthy items unless otherwise noted.
I will now go into further detail on our financial results for the quarter. Turning to Slide 6 of the presentation, net finance revenue declined from the prior quarter as higher deposit costs in the current quarter and lower net operating lease income were partially offset by an increase in revenues on our loans and investments.
On Slide 7, net finance margin was 3.20% down 19 basis points from the prior quarter. The prior quarter included three basis points from elevated levels related to favorably usage collections in Rail, as well as a special dividend from the Federal Home Loan Bank. In addition, we estimate for the lower day count in Q1 reduced margin by two to three basis points. The remaining decline this quarter was primarily driven by higher deposit rates, lower net yields on rail operating leases and the impact of higher percentage of average cash and investment securities in average earning assets, which was partially offset by lower borrowing costs.
As Ellen indicated, we experienced strong performance in our Savings Builder product, which was designed to attract long term savers and increased non-maturity deposits, which we believe will result in longer relationships and better performance in this portion of the cycle. We increased the rate on the product to 2.45% early in January. And while it is currently one of the higher online savings rates in the market, it is lower than online term CDs and gives us more pricing flexibility over the cycle.
With the Savings Builder performance, average total deposits increased 8% this quarter, well ahead of our expectations. As a result, the mix of average cash and investment securities increased to a higher than normal percent of total average earning assets, which we estimate resulted in almost an 8 basis point drag on our margin. We utilized these excess deposits to repay higher cost Federal Home Loan Bank borrowings toward the end of the quarter, and we anticipate utilizing a portion of this liquidity to offset upcoming CD maturities next quarter. In addition, over the course of the next couple of quarters, we intend to deploy the excess cash as we continue to grow loans and leases.
Loan yields remained relatively constant as the full quarter of benefits from the increase in market rates in the fourth quarter of last year were offset by a reduction in day count and yields related fees. Lower net Rail operating lease revenue reduced margin by 3 basis points from continuing repricing pressure in the absence of favorably usage collections in the prior quarter.
Higher deposit rates reduced margin by 16 basis points, reflecting the increase in the Direct Bank Savings Builder rate early in the quarter and continued migration of our customers from products with lower rates. Borrowing costs benefited margin by 7 basis points, as the decline from liability management actions taken last quarter was partially offset by an increase in Federal Home Loan Bank rates.
Turning to Slide 8, other non-interest income increased $5 million compared to the prior quarter and includes $6 million in property tax income related to the amount of estimated property taxes to be collected from customers within offsetting charge in operating expenses. This change in financial presentation was a result of the adoption of a new lease accounting standard and we currently estimate the impact in both property tax income and expenses will be $25 million to $30 million for 2019.
Capital markets fees grew from low levels in the prior quarter and will vary depending on the level of activity and type of transactions. For example, recently we have been originating more collateral bank loans, which generally provides for lower fee opportunities.
Last quarter, we completed the sale of our private label MBS portfolio acquired in the OneWest acquisition, which had higher yields and higher risk weightings. As a result, going forward, the gains on the sale of investment securities are expected to be modest, more opportunistic and dependent on market conditions.
Turning to Slide 9; operating expenses excluding intangible asset amortization increased $18 million from the prior quarter. $14 million of the increase was seasonal from higher employee costs related to benefit restarts and acceleration of cost from retirement eligible employees. In addition, there was an estimated $9 million of operating expenses that resulted from the adoption of a new lease accounting standard, including $6 million that was offset in other non-interest income that I just mentioned. These increases were partially offset by lower professional fees and technology costs, which can vary from quarter to quarter depending on the timing and progress of various initiatives.
The efficiency ratio increased to 58% reflecting elevated operating expenses and we estimate a little over 100 basis points of the increase resulted from the adoption of the lease accounting changes. We remain committed to further reducing our operating costs, while also investing in our businesses, and we are laser focused on achieving our target operating cost reduction of at least $50 million through 2020, as we highlighted last quarter.
Slide 10 shows our consolidated average balance sheet. Average earning assets grew 5% from the prior quarter, most of which was from increase in interest bearing cash and investments, resulting from strong deposit growth. Average loans and leases grew 1%, reflecting 2% growth in our core portfolio, partially offset by the run-off of the legacy consumer mortgage portfolio.
Average interest bearing cash and investments increased about 250 basis points to 21% of average earning assets this quarter. The average duration of our investment securities book declined to a little over two years from about three years as we repositioned some of our book to reflect the higher level of liquidity and the flatness of the yield curve.
Slide 11 provides more detail on average loans and leases by division. Strong origination volume, particularly in Commercial Finance and the Equipment Finance businesses within Business Capital drove growth in our core portfolios. As Ellen mentioned, in Commercial Finance, while middle-market activity slowed this quarter and continues to shift to non-banks, given the diversity of our business, we continue to see good collateral based lending opportunities. In particular, communications and technology, power and energy, healthcare and various sub verticals within C&I experienced strong origination volume this quarter, while a higher level of origination volume at the end of the year as well as lower prepayment activity also contributed to the 4% average loan growth this quarter.
In Business Capital, we continue to see strong growth across our equipment financing portfolios, which was mostly offset by seasonal reduction in the factory investments. The Real Estate Finance portfolio was down this quarter as we remain disciplined in a highly competitive market. We continue to see good opportunities stemming from our strong relationships, deep industry knowledge and speed of execution.
Our Rail portfolio remained flat this quarter as new deliveries offset depreciation and our portfolio management activity. Utilization declined slightly to 97% but remains strong, as leases reprice down 10% this quarter.
We continue to see strengthening in the tank car market and although new leases continue to reprice down, the gap has narrowed over the past year. Our freight cars continue to reprice near par, however, small covered hoppers used to transport sand and grain are repricing down. Weakness in the sand market is due to the shift from Northern White Sand to local brown sand, which we continue -- expect to continue. Weaknesses in grain is due to lower exports, which is being impacted by uncertainty in trade policies. We continue to expect lease renewals on the total fleet to reprice down 15% to 20% in 2019, but will vary quarter-to-quarter based on the amount and type, of course, renewing.
Slide 12 highlights our average funding mix, which reflects the trends I mentioned earlier. One additional item to note is that while Federal Home Loan Bank advances increased modestly during the quarter, period end balances were down as we repaid almost $1.6 billion in February and March, which had an average rate of 2.8%.
Slide 13 illustrates the deposit mix by type and channel. Average deposits increased $2.4 billion from the prior quarter to $33.3 billion, reflecting growth in our online savings account deposits. We also closed four branches in the fourth quarter as part of our cost reduction initiatives, with the minimal reduction in branch deposits. The cost of deposits increased as the cumulative beta since the first rate hike of the current tightening cycle in December of 2015, increased to 31% from 23% last quarter. While prevailing market rates are flattened, we continue to expect deposit costs to rise over the next couple of quarters, as deposit repricing cycles through and customers migrate to higher savings rate products.
Turning to capital on slide 14, in January, we communicated that we had received a non-objection from our regulators to repurchase up to $450 million of common stock, through September 30th 2019. During the quarter, we repurchased approximately $180 million in common shares, consisting of 3.7 million shares at an average price of $49.16, which was 6% below tangible book value, ending the quarter with just under $98 million shares outstanding.
For the second quarter, we have also increased our common dividend to $0.35 per share from $0.25 per common share, a 40% increase. This is our third increase since 2017, and we aspire overtime to increase our payout ratio to approximately 30% to 40%, consistent with our regional bank peers.
Despite loan growth and capital returns in excess earnings -- in excess of earnings, our common equity Tier 1 ratio at the end of the quarter remained at 12%. The result of regulatory and accounting changes that impact of the risk weightings of certain assets in our trajectory toward our target common equity Tier one ratio. Our regulatory rule changed the high definition of high volatility commercial real estate or HVCRE loans, which reduced the risk weighting on those loans from 150% to 100%. This change caused a $1.15 billion decrease in risk-weighted assets, which we think better reflects the risk characteristics of these loans.
Offsetting some of this reduction was an increase in risk-weighted assets of approximately $200 million resulting from the adoption of a new lease accounting standard that required us to record on balance sheet the future liability for our leased facilities and equipment along with the corresponding assets. The net decrease in RWAs will mostly be offset next quarter with the expiration of the loss share agreement with the FDIC, which is expected to increase RWAs by approximately $800 million.
The impact on our common equity Tier one ratio was an increase of 26 basis points, which will be mostly offset in the second quarter, resulting in a minimal net impact. We maintain our guidance of a 11% common equity Tier one ratio by the end of this year.
Slide 15 highlights our credit trends. The credit provision this quarter was $33 million, primarily driven by net charge-offs of $34 million or 43 basis points, which was within our guidance range. Over the past three quarters, net charge-offs have been at the low-end or below our guidance level. The higher net charge-offs this quarter were primarily driven by increases in Commercial Finance most of which were previously reserved for and small business solutions within Business Capital.
Non-accrual loans increased this quarter, but still remained below 1% of total loans. Reserves declined slightly to 1.56% of total loans and 1.87% for Commercial Banking, reflecting continued better risk ratings on new originations and the reduction of loans with higher reserves.
The broad credit environment remains stable and new business originations continue to come in at better risk ratings then the overall risk rating of the performing portfolio, our reserves remain strong and continue to reflect more than four times last 12 months net charge offs.
Slide 16 highlights our key performance metrics, reflecting the trends we just discussed. Our return on tangible common equity from continuing operations was 9.7%, down from the prior quarter, reflecting elevated seasonal operating expenses in the current quarter. If you normalize for the semi-annual preferred dividend that is paid in the second and fourth quarters, our return on tangible common equity would have been 9.3%.
As Ellen indicated, we remain committed to continuing to improve our returns and our focus on achieving a return on tangible common equity of 11% in the fourth quarter of 2019, and at least 12% by the fourth quarter of 2020. Further improvements will come from capital optimization, revenue growth in our core businesses and reductions in operating expenses.
Page 17 highlights our outlook for the second quarter. We continue to expect low single-digit quarterly growth in our core portfolio and slightly lower growth in the total portfolio reflecting the run-off of the legacy consumer mortgage portfolio. Net finance margin is expected to be in the low to middle area of our target range due to continued headwinds from a higher mix of cash and investments as it will take a couple of quarters to work through the excess liquidity. We also expect to higher deposit costs, reflecting a full quarter impact from the deposit growth and continued migration of our depositors into higher rate products.
However, these costs will be partially offset by lower borrowing costs from the Federal Home Loan Bank debt we repaid toward the end of the quarter. Finally, downward pricing on the Rail book will also continue to pressure margin. We expect operating expenses to decline from elevated seasonal compensation and benefit costs in the first quarter, but continue to reflect the lease accounting changes.
We have also provided guidance for the full year to reflect the impact from the lease accounting changes. We continue to expect operating leases for 2019, excluding intangibles and the impact of lease accounting changes, to decline approximately 3% from the 2018 level of approximately $1.50 billion. However, for modeling purposes, we now include our full-year operating expense guidance, our expectation of 1% to 2% increase, including the impact of lease accounting changes.
The net efficiency ratio is expected to remain in the mid to high 50% area next quarter, reflecting the trends I just mentioned, including the impact of lease accounting changes. Credit metrics and the effective tax rate, absent any discrete items, are expected to be consistent with our full-year outlook.
And with that, I will turn the call back to Ellen.
Ellen Alemany -- Chairwoman and Chief Executive Officer
Thanks, John. In closing, I want to reiterate our commitment to achieve an 11% return on tangible common equity at the end of this year, and at least 12% by the end of next year. We remain focused on steady execution of our plan and delivering long-term shareholder value.
With that we're happy to take your questions.
Questions and Answers:
Operator --
We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Moshe Orenbuch of Credit Suisse. Please go ahead.
Moshe Orenbuch -- Credit Suisse -- Analyst
Great. Thanks, and wanted to talk a little bit about the net finance revenue, net finance margin. You kind of mentioned that the online deposit costs and looked like they widened, maybe, as much as 10 basis points relative to your bank deposit costs. And I mean, you said you're going to be able to use the deposits a little more efficiently, I guess, as we go through the year, but what are your thoughts in terms of the pricing as you go through with respect to deposits? And then I'd like to follow up on some of the yield items.
John Fawcett -- Executive Vice President and Chief Financial Officer
Yeah. So Moshe, this is one of the things we look at pretty closely. I think if -- the 2.45% was clearly the high end of the range in terms of the market. There are rates that are higher. There's a couple at right around 2.45% and there is a bunch at 2.40% and 2.30%. So we're a little bit long in terms of rate, but I think that that was part of the plan. If you look back to what we did back in the first quarter of 2018, we launched the same kind of promotion. I think one of the things that we were really pleased with in terms of this promotion is, is that we added almost 50,000 new relationships. If you went back to last year, it took us the first and -- second quarter, we actually had about $3 billion of deposits and it took us two quarters to raise about the same number of relationships. So we're pleased with that.
I think the second thing is that we're competing in the money market space as opposed to the CD space, and so if you look at one year CDs, that are 2.83%. And so that feels pretty good. I think the test of time will be, our ability to actually hold on to those relationships, but this isn't just a wide net cash. I mean, these are targeted relationships that we're going after and so we're looking for Generation X, Y and Z. This is the population that comes in with relatively small balances, $45,000 and less and the Savings Builder program was built as a program that you could be a continuous saver by adding a $100 a month to an account and you get the preferred rate.
So I think we're pretty pleased with the program. If I had my brother sitting and buying share, I guess I wish it was a little bit less successful, but we are what we are.
Moshe Orenbuch -- Credit Suisse -- Analyst
Got it. And then, maybe turning to the yield side, you mentioned the railcar, and I guess, we were sort of sitting here hoping for a rising energy prices and now we've got it. And now, I guess, I mean, maybe could you just elaborate a little on your comments about the yields on some of the various cars and maybe when we could inspect -- expect those to inflect back in something of more upward direction?
John Fawcett -- Executive Vice President and Chief Financial Officer
Yeah. So if -- let me start with last year in terms of the guidance that we provided last year. So last year we guided to prices down 20% to 30% and we actually came in down about 14% to 15%. This year we're guiding down 15% to 20%. If you look at the renewals, actually in the first quarter, it was fairly low population in terms of the type of cars that actually renewed. I think the -- and we are seeing, at least, in the tank cars, they are repricing ahead of plan, there is still less than prior renewal rates, but ahead of plan.
I think we're starting to see a little bit of challenges and I mentioned this in the call script (ph) is in the sand cars and the challenge between Northern white sand and more local brown sand, as it relates to fracking. And so that's become a bit of a challenge, and we're seeing the sand car reprice down. I think the good news from a sand car perspective is that they're multi-use cars and they can repurposed into cement and so we'll see how that goes. But that was a part of the drag that we saw in the first quarter, and I guess as the geology around brown verses white sand continues to play off. We would expect potentially that more of our sand cars would be converted into cement cars.
Moshe Orenbuch -- Credit Suisse -- Analyst
And just to round that out, given that your first half margin will likely be kind of in a lower half of your guidance range, what is it that gets it back, is it the utilization of those deposits in the back half of the year? What -- how does it kind of get back up here?
John Fawcett -- Executive Vice President and Chief Financial Officer
Yeah. So clearly it's part deposit utilization. I think in Business Capital, we're continuing to experiment with price expansion. We started that in the second, third quarter of last year. We are continuing to keep our toe in the water in terms of where we can start to expand. Given the flatness of the yield curve, it's not likely that we're going to see any margin expansion in Commercial Finance or Commercial Real Estate. And then there are opportunities to continue to kind of pay down some of the more expensive Federal Home Loan Bank borrowings and we do have a fairly robust pipeline in terms of new business activity that's coming. So a little bit of a way to think about this is to be pre-funded growth on the left hand side of the balance sheet.
And as we plan out in terms of the overall mix of deposits, we do have some CD clips coming in the second and third quarter of this year, which again were pre-funded on.
Moshe Orenbuch -- Credit Suisse -- Analyst
Got it. Thank you.
John Fawcett -- Executive Vice President and Chief Financial Officer
You are welcome.
Operator --
The next question comes from Eric Wasserstrom of UBS. Please go ahead.
Eric Wasserstrom -- UBS -- Analyst
Thanks very much. John, just to get to maybe a different topic in the efficiency ratio and just kind of to understand the quarterly cadence, obviously you started the year up with 58% and if the full year is a mid 50% target, including the accounting changes, it's the guess that you're ending the year in the low 50s. So can you just -- because it seems like that's the primary delta in terms of the improvement in the ROTCE? So can you just help me understand kind of what kind of get you there over the next three quarters, like where we should look for the changes and yeah, I guess, its really the core of the question?
John Fawcett -- Executive Vice President and Chief Financial Officer
Yeah. So Eric, obviously in the first quarter, we had the impact of the FICO resets and some of the retirement benefits that have kind of cycled through. The lease accounting actually presented a bit of a challenge for me internally, because I don't want to keep two sets of books, but that's probably worth another 125 basis points, which kind of resets the expectations around where we are going to go on the efficiency ratio.
In terms of the things that we're doing on in the expense base, I mean, we are literally looking at everything, I think, Ellen has made a very conscious effort to invest in technology and digitization of the Company, in right sizing people as we kind of invest in the technology to support the place. I think one of the ways that I kind of look at the expenses is, is that if you compare the fourth quarter ex intangibles of $270 million, you back out the accounting changes of property tax of $6 million, the deferred origination cost another $3 million, adjust for benefit restarts. And I get down to about $247 million, which is apples-to-apples versus Q4.
So if you just run rate the first quarter for these anomalous kind of one-time events. You get to a run rate that's about a $1 billion, which kind of suggest that we're on the path to continue to be vigorous. Now, there is going to be ups and downs, quarter-to-quarter, but through the first quarter ups and some of the noise in the accounting and FICO resets, we feel like we're in a pretty good place, and we haven't taken our eye off this ball.
Ellen Alemany -- Chairwoman and Chief Executive Officer
Yeah. Eric, this is Ellen. If I could elaborate more on the expense side, so we have a lot of specific initiatives to target against the whole $50 million number reduction that we had identified. Just in terms of labor cost optimization, we're looking at lower cost locations. We're still working on right-sizing. We're converting contractors to comps at a much lower rate. We have some strategies to reduce FDIC insurance costs. We -- John had mentioned, we have done some branch closures and we're also looking at further real estate rationalization. Credit reengineering is a really big opportunity for us. And then, just other things like records management, travel and expenses, so we've got -- all of these are well under way and we're making good progress.
Eric Wasserstrom -- UBS -- Analyst
Thanks for that element. And just to clarify the 11% target, is that inclusive or exclusive of the impact from accounting change?
John Fawcett -- Executive Vice President and Chief Financial Officer
It includes the effect of the accounting change. It's 11% return on tangible common equity in the fourth quarter of '19.
Eric Wasserstrom -- UBS -- Analyst
Got it. And so if I'm just understanding correctly, it would seem that the accounting changes approximately a 90 basis point headwind to that target. Is that right?
John Fawcett -- Executive Vice President and Chief Financial Officer
I don't think it's that high. It's -- yeah, I mean, we'll take -- we can take this offline and Barbara follow up with you. But it's not 90 basis point. It's smaller than that.
Eric Wasserstrom -- UBS -- Analyst
Okay. Great. Thanks very much.
John Fawcett -- Executive Vice President and Chief Financial Officer
Thanks, Eric.
Operator --
The next question comes from Chris Kotowski of Oppenheimer. Please go ahead.
Chris Kotowski -- Oppenheimer & Company -- Analyst
Yeah. Good morning. My favorite slide was Slide 20, where there were no noteworthy items this quarter?
Ellen Alemany -- Chairwoman and Chief Executive Officer
Ours as well.
Chris Kotowski -- Oppenheimer & Company -- Analyst
And I guess, what I'm wondering is, you -- Ellen, you outlined a vision of a national middle market bank, a couple of years ago. And at that time, the only thing that I can think of that kind of doesn't fit with that vision is still the maritime portfolio and I'm curious, are we kind of done with the major restructuring items now, are there more still more things to go and can you update us on whether the Maritime is now is that strategic in core or is that still -- or there any other major restructuring items left in, as far as you can see?
Ellen Alemany -- Chairwoman and Chief Executive Officer
Sure. So one is, just in terms, I mean, I think the focus on commercial finance are really collateral based portfolios and to the extent that maritime fits that. We're going to do more collateral based deals. I think in terms of the major divestitures, we're pretty much finished. Although I have to say that looking at our portfolio, it's a dynamic process we're always looking at ways to market opportunities and ways to optimize the portfolio. But just in terms of the core strategy where basically every business has a set of revenue initiatives that we're working on, was only to continue with strengthening our funding profile going forward. I mean, right now deposits are -- roughly represent about 81% of our total funding and we have a loan-to-lease deposit ratio of 92% at the bank. John and team have been making really good progress on the capital front. Our operating efficiency, we put the new $50 million target out there and then really from a risk perspective, as I said, the whole shift in the portfolio has been to more collateral based.
That being said, though, we set out the target of at least 12% next year, which we recognize is still behind other banks. And so we are opportunistically looking for portfolio purchases, small deposit acquisitions, we recognize that where our stock trades, it's really difficult for us to make an acquisition. And so, as I said, we are hoping that one of these -- we get one of these opportunities to accelerate the 12%.
Chris Kotowski -- Oppenheimer & Company -- Analyst
All right. That's it from me. Thank you.
Operator --
Our next question comes from Arren Cyganovich of Citi. Please go ahead.
Arren Cyganovich -- Citigroup -- Analyst
Thanks. I guess just kind of following up on your last comment, Ellen, the M&A, it seems like you would have some opportunity, if you could acquire some sort of lower cost deposit base, at least maybe some better opportunity than some other peers. I know that you don't have a great currency for that. But can you talk about the ability or how you think about acquiring some lower cost, higher quality deposits? And then the comment on portfolio purchases, what would you say the environment is for that? Are you seeing very many portfolios available to add to the balance sheet?
Ellen Alemany -- Chairwoman and Chief Executive Officer
Yeah. So, we're -- I mean one of the things we want to do to improve our valuation is to continue to have more deposit funding as a franchise. And we also think that there's still a lot of upside in our valuation. We are seeing, I mean, I think the portfolio purchases, most of the portfolio purchases we're looking at would be in the Business Capital space or acquiring large programs. So what we did was we created a sales force in Business Capital that really hunting for the large programs out there and having a conversation with the customer, how can we help you with your customer financing. And if you win one of these programs, you can get significant volume.
There's been, I would say, over the last 18 months, a fair amount of leasing companies that have put themselves up for sale. We've looked at some of these transactions and we, either because of price or credit, we didn't win any of these transactions. But as I said, we're still continuing to look there. And then with the deposit acquisitions, occasionally we see something come up in the marketplace and it really is coming down to price on these transactions.
And then we're also, I mean, there have been some obviously MOEs announced in the marketplace, and I mean, I think, the nice part of these transactions is that it can create value without paying a premium for the transaction. We've had lots of discussions with our Board. We are all interested in maximizing long-term shareholder value and we are very open to any type of this transaction.
Arren Cyganovich -- Citigroup -- Analyst
Okay. That's helpful. Thank you. And then, I think, John had mentioned in the Commercial Banking, Commercial Finance that you're facing still some non-bank competition. Can you talk about where that's coming from? Is that coming from private fund? Is it coming from BDCs just something that whenever you've talk to a lot of our non-bank commercial mortgages, BDCs, they typically that don't really indicate they are competing with banks, and just trying to understand better, where you're seeing that competition coming from?
Ellen Alemany -- Chairwoman and Chief Executive Officer
Yeah. I mean, I think in the leveraged finance space, in particular, we're competing with the BDCs and but -- I think it was a little less this last quarter as reflected by some of the lower prepayments that we've had in the business. But as I mentioned, our strategy is to go more toward the collateral based transactions and we've -- like, for example, we've increased our healthcare, real estate portfolio. We're expanding our corporate and industrial financial services group. We reintroduced aviation financing. We've done a little maritime lending. So that's where we've seen most of our growth going forward.
And then we're still active in communications and technology and in energy. But we are seeing still a lot of competition in the BDC space, which was one of the things that drove us to form the Northbridge joint venture to allow us to participate in some of these transactions without -- we can originate them and not put them on our books.
Arren Cyganovich -- Citigroup -- Analyst
Okay.
John Fawcett -- Executive Vice President and Chief Financial Officer
And Arren, I guess, that I want to add to that (ph) is, is that especially as it relates in the commercial real estate space, we're actually seeing average loan balances decline. We've opted not to compete on terms and conditions. And so we're kind of sticking to our discipline and that's across the board. So we're not trading credit for volume and won't.
Operator --
Was there any follow-up Mr. Cyganovich?
Arren Cyganovich -- Citigroup -- Analyst
Sorry, not, I'm good. Thank you.
Operator --
(Operator Instructions). The next question comes from Scott Valentin of Compass Point. Please go ahead.
Scott Valentin -- Compass Point -- Analyst
Good morning, everyone. Thanks for taking my question. Just with regard to the increase in that charge-offs linked quarter, I know you kind of attributed to just general Commercial Finance and Business Capital, but any specific industries or geographies you're seeing any stress?
Ellen Alemany -- Chairwoman and Chief Executive Officer
Yes. So this is Ellen, Scott. In Business Capital we had a -- we did experience a higher level of net charge-offs in Small Business Solutions, which is our direct online banking platform. And we saw some pockets in the transportation and restaurant industries that showed some weakness there. And we think that these are industries that have been impacted by labor market shortages and higher wages. We also had some challenges in their collection process in that area, and as a result we've quickly modified their underwriting practices and we also augmented some of our collectors. The business has been growing rapidly and I don't think we hired as many collectors as we should have. So we had this kind of blip in charge-offs in Business Capital. But, I would say that, otherwise, in general, we haven't seen anything abnormal. We're still projecting losses in everything to be within the guidance that we've given the market.
Scott Valentin -- Compass Point -- Analyst
Okay. That helps. And then just, I think you mentioned, healthcare is being one of their -- healthcare real estate, I think, it's been one of the areas you focused on for growth. It seems you have uncertainty around healthcare currently. Just wondering how you kind of get comfortable with this kind of the longer term loans, typically, in real estate and just given potential changes in the healthcare environment, how you're getting comfortable or what assets you're selecting to minimize credit concerns?
Ellen Alemany -- Chairwoman and Chief Executive Officer
Yeah. I mean, I think in the healthcare real estate portfolio, we've increased the portfolio by roughly, I think, around $0.5 billion over the last couple of years. And the idea there is we're secured by real estate, we're focusing on medical office buildings and then we're also specializing in skilled nursing and assisted living facilities there.
Scott Valentin -- Compass Point -- Analyst
All right. That's it from me. Thank you very much.
Ellen Alemany -- Chairwoman and Chief Executive Officer
You are welcome.
Operator --
The next question comes from Vincent Caintic of Stephens. Please go ahead.
Vincent Caintic -- Stephens -- Analyst
Hey. Thanks. Good morning. Two related questions. So first on the volume growth and then on yields. So the first question, so nice to see that the core average loans from leases were up 7.5% year-over-year. I guess, for your guidance for next quarter and then also for the full 2019, you're in the low to mid single-digit growth range. So I'm wondering, was there something in the first quarter that drove higher than what would be for the year's growth rate. Is there any seasonality or anything of that nature?
And then relatedly on the yield side, I guess, I would have thought that yields would have been higher just from seeing LIBOR move higher. So I'm just kind of wondering if you could expand on maybe some of the yield guidance for some of those different asset classes moving lower? Thank you.
Ellen Alemany -- Chairwoman and Chief Executive Officer
I'll have John address the yields. But I think in terms of the volumes, I mean, one is we have the impact of some of the liquidating portfolio and -- on the business. But I think, in general, customer sentiment remains pretty optimistic. The rate environment is competitive, but pipelines are strong, especially in business capital and commercial banking. Some customers still have, there is some concerns with the broader economy, there is some concerns with tax reform in China and Brexit, some of the uncertainty there. But, I would say it's just a solid sentiment on business and that's in both Commercial Banking and in Business Capital.
John Fawcett -- Executive Vice President and Chief Financial Officer
So as it relates to -- and I just want to make one other point around the balances that you're seeing in Commercial Finance. So there was a lot of activity in the last couple of weeks of the fourth quarter, which did reflect in the average balances of the fourth quarter, but obviously carried through to the entirety of the first quarter of 2019. On a normalized basis, you -- we probably expect to see within Commercial Finance growth of 1% to 1.5% to 2% quarter-on-quarter growth. But still the predominant growth engine for this franchise is in Business Capital.
In terms of what you're seeing in yield is, a lot of it is that a lot more of what is that we're doing is collateral based lending. And so inherently less risk, there's a change in mix that we live with quarter-on-quarter and then also in the first quarter we had a lower level of prepayments and you probably have to go back to the first quarter of '17 to see as low level of prepayments, which also impacted yields.
Vincent Caintic -- Stephens -- Analyst
Okay. Got it. It makes sense. Thanks very much.
John Fawcett -- Executive Vice President and Chief Financial Officer
You are Welcome.
Operator --
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Barbara Callahan -- Head of Investor Relations
Thank you, Andrew, and thank you, everyone for joining this morning. If you have any follow up questions, please feel free to contact me or any member of the Investor Relations team. You can find our contact information along with other information on CIT in the Investor Relations section of our website at cit.com. Thank you, again, for your time. And have a great day.
Operator --
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 51 minutes
Call participants:
Operator --
Barbara Callahan -- Head of Investor Relations
Ellen Alemany -- Chairwoman and Chief Executive Officer
John Fawcett -- Executive Vice President and Chief Financial Officer
Moshe Orenbuch -- Credit Suisse -- Analyst
Eric Wasserstrom -- UBS -- Analyst
Chris Kotowski -- Oppenheimer & Company -- Analyst
Arren Cyganovich -- Citigroup -- Analyst
Scott Valentin -- Compass Point -- Analyst
Vincent Caintic -- Stephens -- Analyst
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