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CIT Group Inc (CIT) Q2 2019 Earnings Call Transcript

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CIT earnings call for the period ending June 30, 2019.

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CIT Group Inc (CIT)
Q2 2019 Earnings Call
Jul 23, 2019, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, and welcome to the CIT's Second Quarter 2019 Earnings Conference Call. My name is Nicole, and I will be your operator today. [Operator Instructions].

I would now like to turn the call over to Barbara Callahan, Head of Investor Relations. Please proceed, ma'am.

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

Thank you, Nicole. Good morning, and welcome to CIT's Second Quarter 2019 Earnings Conference Call. Our call today will be hosted by Ellen Alemany, Chairwoman and CEO; and John Fawcett, our CFO. During this call we will be referencing a presentation that is available in the Investor Relations section of our website at

Our forward-looking statement disclosure and non-GAAP reconciliations are included in today's earnings material and within our SEC filings. These cover our presentation material, prepared comments and the question-and-answer segment of today's call.

I will now turn the call over to Ellen Alemany.

Ellen Alemany -- Chairwoman and Chief Executive Officer

Thanks, Barbara. Welcome, and thank you for joining the call. I am pleased to report that we had a solid second quarter. We are making steady progress on the next phase of our strategic plan and delivered $128 million of net income in the second quarter or $1.33 per share. Tangible book value per share also increases by 3.6% as we work to create long-term value in CIT.

Let me touch on a few highlights related to our strategic plan that help to drive performance, which you can see on Slide 2. We continue to grow our core business with average loans and leases up 1% compared to last quarter and 8% compared to the prior quarter. Origination volume of solid across the division with commercial finance and business capital driving overall asset growth. We made continued progress in optimizing our balance sheet through deposit growth, a reduction in wholesale funded debt and returning additional capital to shareholders. We grew average customers deposits in the online bank by more than $2 billion, reduced average secured debt by $1.7 billion and repurchased a $158 million of common shares.

As a result, deposit now comprise 85% of our total funding up from 77% a year ago and 95% of our funding in the bank is from deposits. Our operating efficiency also continue to improve and we achieved 56% efficiency ratio, which is in line with our target. We continue to reduce operating expenses while also balancing investment in technology, which is critical to future market place success and our ability to streamline processes and get more efficient scale in the business.

Lastly, credit remains strong and we remained disciplined in our underwriting. We ended the second quarter with a 10.3% return on tangible common equity. Let me share a few highlights from the business. The lending market remains competitive as it has been for a while now and we are still being discipline in winning business. Average loans and leases in the commercial finance division were up 2% from last quarter and 10% from last year. We continue to grow in collateral based lending, where we have strong expertise and can be more selective in the type of deals we do.

We also announced an expansion in our asset management capabilities through a managed financing vehicle with an A rated insurance company. This like the Northbridge structure allows us to leverage our origination expertise without committing significant capital and serve a broader network of clients to create fee income. It will take some time to fully ramp up, but we expect the asset management business to be a source of revenue growth for us over time.

CNC Northbridge just completed their largest deal yet earlier this month, where they lead $100 million revolving credit line for an offshore services company, that was a referral from our capital equipment business. We see a lot of deals in the market and these new structures allow us to serve a broader range of clients, including those that may not be a fit for our balance sheet.

The business capital divisions continue to post solid growth in the second quarter with average loans and leases up 1% from the prior quarter and 8% from the prior year. There were strong volumes in the equipment financing space and our differentiated technology offering is a competitive advantage. Factoring volume is down modestly from last year, but core volumes are up. Across our commercial businesses, customer sentiment generally still feels cautiously optimistic, but is starting to soften in certain markets as businesses contemplate trade issues and tight labor markets.

In addition, the equipment leasing and finance association reduce their growth estimate for 2019. We are watching these and other factors closely and our approach to assessing risk and growth targets remain unchanged at this time.

Average loans and leases and the real estate division were down 2% from the prior quarter and 3% from the year ago. While originations were solid in the quarter, prepayments continue to be a headwind in the space. Our portfolio is performing well as a result of the rigor in our underwriting process and strong client relationship.

Real core average loans and leases are up 1% from last quarter and 2% from a year ago. Utilization remains strong and our diverse fleet is an advantage. Some industrial sectors are exhibiting slower growth, which has slowed loading for certain cars. But we continue to actively manage the fleet and monitor the broader economic trends closely.

The Consumer Banking segment grew average core loans by 6% from last quarter driven by Consumer Mortgages and Small Business Lending. To further reduce risk in the legacy mortgage portfolio, we completed a sale earlier this month for about $200 million of non-performing legacy mortgage loan. Customer deposits grew at the direct bank, albeit at a more measured pace, given we came off a very strong first quarter of growth. Since our last earnings call, we tighten the rate on our leading savings builder product twice and have seen strong retention of existing customers and continued growth of new customers. Going forward, we are focused on maintaining a strong customer value proposition, while also adjusting to market dynamics.

Before I hand it to John, I also want to mention the addition of a new member of the management team with Jim Gifas joining CIT earlier this month to lead the payments and treasury services initiatives across the enterprise. Jim is a proven leader in this space and he will be driving the integration of these banking services in our product portfolio. This is an important area to advance our growth strategy and deliver a more holistic set of products and services. Jim will be working with Bob Rubino and team to unlock the potential in the business.

With that, let me turn it to John for a detailed account of financial results.

John Fawcett -- Executive Vice President and Chief Financial Officer

Thank you, Ellen, and good morning, everyone. We had another solid quarter with net income available to common shareholders of $128 million or $1.33 per common share, as we continue to execute on strategy and progress toward our 11% return on tangible common equity target for the fourth quarter of this year.

We grew average loans and leases of our core portfolio by 1% from the prior quarter and 8% from the year ago quarter, which was driven by continued strong origination activity across all of our businesses. We stay disciplined in our underwriting, credit metrics remain stable, and we reduced non-accrual loans. Our net efficiency ratio improved as operating expenses came down from elevated seasonal levels last quarter. And we further optimized our balance sheet. We reduce our Federal Home Loan Bank debt repurchased $158 million of common stock below tangible book value, which contributed to the 3.6% tangible book value per share growth this quarter. Once again, there were no noteworthy items, and 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, driven by higher deposit costs, which were partially offset by lower borrowing costs on secured debt. Interest income was relatively constant. Higher interest on loans was essentially offset by approximately $6 million from the accelerated amortization of the premium on our mortgage backed securities investments. The acceleration was driven by the reduction in long-term interest rates, which resulted in higher actual and forecast prepayments.

Slide 7 is our net finance margin walk, net finance margin was 3.13%, down seven basis points from the prior quarter. The reduction was driven by higher deposit costs resulting from the full quarter impact of last quarter strong deposit growth, partially offset by lower borrowing costs. The margin was also negatively impacted by approximately five basis points from the acceleration of the premium amortization on our mortgage-backed securities investment portfolio.

As I discussed last quarter, we ended the first quarter with a higher than normal percentage of cash in investments, which was driven by the strong performance in our savings builder deposit product. We redeployed excess cash by repaying about $2 billion or Federal Home Loan Bank debt since the end of February that an average rate of about 2.7%.

We reduced our savings builder non-maturity deposit rate by five basis points on May 1st, and then 10 basis points more on July 1st, which will further benefit the third quarter. And we will continue to opportunistically look at options to further reduce rates as the Fed moves.

Loan yields improved modestly from an increase in day count, but the benefit was more than offset by lower yields on our mortgage-backed securities book described above. The margin benefited from a higher level of interest recoveries and prepayment benefits this quarter, which was mostly offset by the reduction in interest on the indemnification asset, which was related to a law share agreement that expired on March 31st.

Net operating lease yields in rail were relatively constant as lower gross yields were offset by lower maintenance expense, reflecting some of our productivity initiatives.

Turning to Slide 8. Other non-interest income increased $9 million compared to the prior quarter. The increase was primarily in commercial finance and included a gain on the sale of a loan that was previously written off. Capital markets fees were down this quarter reflecting the weaker sponsor driven middle-market M&A environment, but the decline was more than offset by higher customer derivative income in commercial finance.

Turning to Slide 9. Operating expenses, excluding intangible asset amortization decreased $8 million from the prior quarter. $5 million of the decrease related to compensation and benefit cost, which are down from seasonally elevated levels last quarter. We significantly reduced our advertising and marketing costs this quarter related to deposits, as our deposit growth in the first quarter was ahead of our expectations and exceeded the amount needed to offset this quarter's CD maturities. Other expenses increased $6 million resulting from a combination of several smaller items.

We continue to -- we estimate that approximately $8 million of operating expenses resulted from the adoption of the new lease accounting standard this quarter, including $6 million for property tax that was offset in other non-interest income. The quarter included $9 million and the full-year benefit of 2019, we continue to estimate that the new lease accounting standard will increase operating expenses by $40 million to $50 million with a $25 million to $30 million offsetting increase in other non-interest income.

The net efficiency ratio improved to 56% from 58% last quarter, resulting from the reduction in operating expenses and reflects the aforementioned lease accounting changes, which we estimate increased the rate by little more than 100 basis points.

We remain committed to further reducing operating costs, while also investing in our businesses, and we are on-track to achieve our target operating cost reductions of at least $50 million through 2020 when compared to the 2018 level.

Slide 10 shows our consolidated average balance sheet. Average earning assets were essentially unchanged from the prior quarter. During the quarter, we deployed excess cash to repay Federal Home Loan Bank debt and fund investment securities. We grew average loans and leases by 1%, which includes the impact from the runoff of the legacy consumer mortgage portfolio.

Average interest-bearing cash and investments remained higher than our typical run rate at about 21% of average earning assets, resulting from our strong deposit growth in the first quarter, but declined 19% at quarter-end.

The average duration of our investment securities book remains at around two years, reflecting the higher level of liquidity in the flatness of the yield curve. We slowed deposit growth this quarter, on a period end basis, deposits increased 1%, but on average basis, deposits increased 6% reflecting the full quarter impact from last quarter's strong growth.

Slide 11 provides more detail on average loans and leases by division. Strong origination volume across all of our businesses drove growth in our core portfolios. Commercial Finance grew 2% from the prior quarter. Given the diversity of our commercial finance business, we continue to see good collateral based lending opportunities, which contributed to about 60% of origination volume. Prepayments have also remained low, which contributed to the growth.

In business capital, continued strong new business volume drove growth across our equipment financing portfolios, which was mostly offset by a reduction in the factoring business. We also experienced an improvement in yields this quarter driven by pricing increases in the second half of last year in the technology driven businesses with an equipment finance and small business solutions.

That said, we are starting to see some pricing pressure in certain areas given the decline in swap rates and from competitors looking to aggressively add assets. In Real Estate Finance origination activity increased from last quarter, but a continued high prepayment level resulted in a net reduction in average loans.

Our rail portfolio increased modestly this quarter as new deliveries mostly offsets depreciation and our portfolio management activity. Utilization declined slightly to just below 97% as leases repriced down 15% on average of this quarter. We continue to see strength in tank car lease rates driven by the chemical and petroleum markets. However, many industrial sectors are exhibiting slower growth, which is translating into weak rail industry loadings such as in non-metallic minerals or sand, coal and grain. In this environment, we expect some pressure on our fleet utilization and repricing within these freight markets.

As we have mentioned in the past, our market position, strong portfolio management expertise, customer service and young fleet are key strengths as we continue to navigate the various market cycles. 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 cars renewing.

In Commercial Banking, we grew average loans by 2% despite the continued runoff of the legacy consumer mortgage portfolio. We have seen an increase in prepayment levels driven by the current interest rate environment, but it is also driving stronger origination activity in our retail and correspondent lending channels. 85% of our new retail mortgage origination came through our digital channel and total new origination continue to have LTVs below 80% and FICO scores in the 750 area.

As Ellen indicated, as part of our continued efforts to further improve our risk profile, last week, we sold approximately $200 million in book value of non-performing loans within the LCM portfolio. We received proceeds in excess of carrying value. However, given most of the loans were PCI loans, where interest income was recognized on a level yield basis, based on the cash flows of the pools they reside in, the excess proceeds or what would typically be characterized as a gain will be recognized over the remaining life of the pool.

Slice 12 highlights our average funding mix, which reflects the trends I mentioned earlier. We continue to look for ways to optimize our funding mix, including shrinking our bank holding company and increasing our mix of assets funded with deposits.

Slide 13 illustrates the deposit mix by type and channel. Average deposits increased $2 billion from the prior quarter to $35.3 billion, reflecting strong growth in our online savings account deposits throughout last quarter and continued albeit at a slower growth in the second quarter. The cost of deposits increased as the cumulative beta since the first hike of the current tightening cycle in December 2015, increased to 36% from 31% last quarter consistent with our expectations.

We are focusing on optimizing deposit costs by increasing the proportion of non-maturity deposits, which we think will perform better, especially as rates declined. We have also reduced our savings rate builder rate by 15 basis points since the beginning of May and have not seen any meaningful levels of attrition as a result of these moves.

Notwithstanding any rate reductions from the Fed, we are likely to continue to test the elasticity of our deposit rates, balancing or need to fund growth and our continuing effort to optimize our funding costs.

Turning to capital on Slide 14. During the quarter, we repurchased approximately $158 million in common shares, consisting of 3.2 million shares at an average price of $49.64. Below tangible book value, ending the quarter with just under 95 million shares.

Our CET1 ratio at the end of the quarter decline to 11.6%, reflecting the expiration of a loss share agreement with the FDIC, which increased RWA by approximately $800 million. If you recall, last quarter, we had a net increase in the common equity Tier 1 ratio related to the change in the regulatory definition of HVCRE loans. Partially offset by the adoption of the new lease accounting standard.

In aggregate, the net impact on our capital ratios from both of these changes was minimal. We have reduced the common equity Tier 1 ratio from 12% at the beginning of the year to 11.6% and continue to target 11% by the end of this year.

Slide 15 highlights our credit trends. The credit provision this quarter was $29 million, modestly below our guidance range and net charge-offs was $31 million or 40 basis points within our guidance range.

Net charge-offs declined from $34 million in the prior quarter and continue to be primarily driven by commercial finance, most of which were previously reserved for at small business solutions within business capital.

Non-accrual loans declined this quarter by $26 million or 9% and approximately 60% of the remaining non-accrual loans are current. About half of the reduction was due to charge-offs that had been previously reserved and we received slightly above book value on the other exited non-accruals.

Our credit metrics and the broad credit environment remains stable and new business originations continue to come in at better risk ratings than the overall risk rating of the performing portfolio. Our reserves remain stable and strong at 1.56% of total loans and up slightly to 1.89% for commercial banking, and continue to reflect more than four times in the last 12 months net charge-offs.

Slide 16 highlights our key performance metrics reflecting the trends we just discussed. Our effective tax rate was 20% and benefited from debts to fleet items of $9 million, which was driven by audit settlements with several state and local tax authorities in the ordinary course of business. Excluding those discrete items, the effective tax rate would have been 25% in-line with our guidance.

Our return on tangible common equity from continuing operations was 10.3%. If you normalize to the semiannual preferred dividend that is paid in the second and fourth quarters, our return on tangible common equity would have been 10.7%, up from 9.3% in the prior quarter reflecting lower operating expenses and a lower effective tax rate.

We remain committed to continuing to improve our returns and are focused on achieving an ROTCE of 11% in the fourth quarter of 2019, and targeting at least 12% by the fourth quarter of 2020. When we set our initial outlook back in January, we assumed no rate increases or decreases and assumed GDP growth of 2.5% to 3%.

As Ellen mentioned, we are starting to see customer sentiment shift a little in some of our commercial businesses, primarily resulting from the uncertainty related to trade and tariff discussions. In addition, the rate environment obviously continues to evolve and is now reflecting multiple rate cuts in 2019 and 2020. While the 25 basis point interest rate cut next week and another later this year would pressure our net finance revenue, we believe we would still be able to achieve our 4Q '19 return on tangible common equity target of 11%. And we remain focused on continuous improvement.

The uncertain environment is making 2020 more challenging to predict, but achieving at least 12% return on tangible common equity in the fourth quarter of 2020 remains our target. We will keep you posted on our progress as we navigate through the current environment and plan to update our 2020 guidance on our fourth quarter earnings call.

Page 17 highlights our outlook for the third quarter. We continue to expect low-single-digit quarterly growth in our core portfolio and slightly lower growth in the total portfolio, reflecting the sale of the non-performing legacy consumer mortgage assets and continued runoff of that portfolio.

We think our margin for 2019 will now be at the low end of our target range reflecting a 25 basis point cut in the third quarter and another one in the fourth quarter. For the third quarter net finance margin is expected to continue to trend down to the bottom end of the target range and could be pressured further, depending on the environment for rates and deposits as well as other factors.

We expect deposit rates to be relatively flat as continued migration of our CD depositors into higher rate products is offset by a reduction in our savings builder rate. We think Rail yields will continue to reprice down but will be mostly offset by lower maintenance costs. And as I have mentioned -- I have mentioned earlier we had a higher level of interest recoveries in prepayment benefits this quarter, which are difficult to predict and a potential headwind to next quarter.

We expect operating expenses to be flat to slightly higher next quarter related to marketing costs as deposit activities normalize. The net efficiency ratio is expected to remain in the mid-50% area next quarter reflecting the trends I just mentioned, and includes the impact of the lease accounting changes. Credit metrics and effective tax rate any -- absent any discrete tax items are expected to be consistent with our full-year outlook.

And with that, I will turn the call back over to Ellen.

Ellen Alemany -- Chairwoman and Chief Executive Officer

Thanks, John. As John mentioned, we remain committed to creating long-term shareholder value and are focused on achieving a return on tangible common equity goal of 11% in the fourth quarter of this year, and at least 12% in the fourth quarter of next year. We're pleased with the progress in the first half of the year and are focused on continuing to deliver on the plan and unlock the full potential in CIT.

With that, we are happy to take your questions.

Questions and Answers:


[Operator Instructions] Our first question comes from Moshe Orenbuch of Credit Suisse. Please go ahead.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks for all of that detail. I am just wondering if -- John, if you could kind of talk a little bit about how you see the moving parts within the net interest margins for the balance of the year, because there is a lot of moving parts there.

John Fawcett -- Executive Vice President and Chief Financial Officer

Yeah, Moshe. Look, without question, I mean, the biggest element is just going to be our ability to actually manage deposits. I think we got ahead of a little bit in the second quarter in May, we cut five basis points and then in July 1st, we cut our own 10 basis points. I think it remains to be seen how fast we can come down, I think obviously, betas were lower going up and I think most expected. I think we are going to be as aggressive as we possibly can. But that really becomes the linchpin. I think the other thing that is kind of out there is, we are starting to see some softness, a little bit of softness in parts of the rail portfolio specifically in freight, specifically in the stand. It's not a big problem for us, but it is an element out there that we are closely to watching. So I think those are the two wildcards.

On the asset side of the balance sheet, I think, thus far, if you look at originations and origination rates, across our entire book of business. I think we have been pretty effective. I think there have been changes in the mix of yields, but we started last year in the third quarter in terms of business capital, which is our fastest growing business. And we have been able to hold on to that. I think that becomes an exercise in terms of understanding the difference between rates and price point. As rates come down, it will be interesting to see how much competitive pressure we can continue to maintain a business capital.

In commercial finance, I think, we're more than holding our own pockets of strength, they are still in healthcare, real estate, energy, aviation, that seems to be holding on. Real estate, again, we are not competing on terms and conditions and so it is unlikely you are going to see a lot of move there. In the consumer space, it is pretty new, because I think for the most part, it's largely lower small numbers. So I think going back to what I started with the big driver in the quarter is going to be our ability to manage rates coming down especially in the online portfolio, in non-maturity deposits, which is hard to predict, especially since we just can't do in a vacuum, because it's a function of what's going on in the broader environment this competition.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. Just a follow-up, I mean, as you are thinking about getting from what was 10.7% adjusted for the dividend in the quarter, but sounds like nominally between the tax rate and what your guidance for the margin is that maybe the numerator that is coming down. Like how do you think about actually getting from that 10.7%, but maybe on adjusted basis, something less than that, back up to 11% over the next two quarters.

John Fawcett -- Executive Vice President and Chief Financial Officer

Yeah. So, look, I think we remain committed, I think in Ellen's call script and my call script, we remain committed to the 11%. We have certainly got some leverage that we can kind of pull. It goes back to deposit rates and betas. And the question is, how fast can we do? Pull the rates back down. As I said before, I think, we were very early on in terms of the moves we did in May and on the first of July. I think there are elements within the way we fund the place in terms of a mix between deposits and Federal Home Loans Bank borrowers, we have an enormous amount of capacity there.

In OpEx, there remains some opportunities to take more cost out faster and there are also opportunities to kind of delay spends. If you look over non-interest income, we have been very aggressive in terms of growing the BOLI. We added some more BOLI in the third quarter and we have kind of up to our limit on that. Ellen kind of touched briefly on a new JV we just launched, which was important. Our legacy consumer mortgage portfolio sale and rail sales continue. And I think we continue to strategically look at moving HoldCo assets into the bank which to the extent that we can do that, that's generally worth about 200 basis points and funding the differential between senior unsecured debt and deposits. We have few levers.

Ellen Alemany -- Chairwoman and Chief Executive Officer

Yeah, I mean, I just want to add that, if we -- if there is a 25 basis point cut next week, and there is another one later this year, it would put pressure on our net finance revenue. But we still think that we could hit the fourth quarter target of 11%. And, we do have some drivers here, we do have some remaining capital return left. We do expect to now spread income to trend higher this year. We think there is a little more room as John said on the operating expense line. And we are going to continue to look at putting more assets in the bank and optimizing our funding structure.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got you. Thank you.

John Fawcett -- Executive Vice President and Chief Financial Officer

Thanks, Moshe.


Our next question comes from Chris Kotowski of Oppenheimer. Please go ahead.

Chris Kotowski -- Oppenheimer -- Analyst

Yeah, kind of expanding on Moshe's question. I mean, it seemed like on the ins and outs on the margin, you mentioned three things to keep in mind. I guess, one is the amortization of the premium on the mortgage backed. And presumably that goes away if you just don't have long rates coming down further.

And then secondly, -- question one is, do you agree with that, that goes away just as soon as long-term rates stabilize? And then question number two would be, you mentioned the PCI loan sales, and I think you said there was $200 million. But you are not taking that as an upfront gain, you are taking that as an ongoing benefits to the margin? And then thirdly, does your guidance envision further rate cuts in 2020, or is the guidance as we see it just based on two rate cuts and then has been we are done.

John Fawcett -- Executive Vice President and Chief Financial Officer

So -- alright, so on the PCI gains, yeah, I mean, the accounting big take to the extent that this is a sale out of the purchase credit-impaired portfolio that the gain which is kind of in the $20 million to $25 million range gets spread out over the remaining portfolios. So if you think about it in the context that, what is left in the LCM portfolio is essentially probably 10-year life, it will be spread out over the 10 years.

In terms of the 2020 cuts, I think, look, it's incredibly fluid. When I think back to the way we did the plan, we started doing the plan, we had four hikes, then by the time we got through November, December, we got down to zero. And that's way we modeled the plan, no hikes, no cuts. And now we are looking, I guess, at potentially two cuts remainder of this year, maybe three. And I think a lot of it depends on when and how much. I'd say like some of the rhetoric around the 50 basis points coming in July has died down, I think everybody is kind of baked in a quarter points July, but other quarter points sometime in the fourth quarter, whether it is at the beginning of the end who knows.

And then two more in 2020. Is the way we are modeling, but I think the way we think about it is, we've got to be incredibly nimble and flexible. Because the one constant this environment seems to be change. And it seems like the world remains incredibly fluid, even if for no other reason. And then I think was there another question?

Chris Kotowski -- Oppenheimer -- Analyst

Yeah on the amortization of the mortgage backed NIMs?

John Fawcett -- Executive Vice President and Chief Financial Officer

Yeah. So on the mortgage backed, we think, it will smooth out overtime, it will modestly be lower, it depends on the accounting, and I don't want to get into the weeds. I think we're on a retrospective basis of the accounting, which contemplates not only existing moves intends, but forward rates, forward moves intends and so we are following the curve versus a contractual basis. And that's why you might be seeing a difference in terms of the impact between us and other banks. I suspect there is a universe, it's on retrospect, but I think there is a universe that pulls on contracts. But for us, it should be relatively smooth on a go forward basis.

Chris Kotowski -- Oppenheimer -- Analyst

Okay. And then just, I guess, secondarily, I mean, you are flagging kind of a slowdown of activity on the rail front. Do you see that reflected in behavior or action or payment rates on the general commercial portfolio?

John Fawcett -- Executive Vice President and Chief Financial Officer

No. And I look, I think it is early days, I think there is a lot of things that are going on in rail. I mean, as I said in my script, year-to-date rail loadings are down 2% driven by coal. We do have some coal cars, non-metallic minerals, which is sand and in agriculture and forest products. I think in the sand space, there is geological debate going on in terms of the virtue of Northern white sand and more locally sourced brown sand in terms of fracking. And I think, drillers have kind of transitions to cheaper to deliver brown sand and it remains to be seen what the geology is in terms of how that affects the effectiveness -- efficiency and effectiveness and productivity of the drilling sites. So that is one pressure point. I think the other one is around PSR, which is kind of again at the margin. But historically, it impacts railroad service levels forcing shippers to just conform to more rigid schedules. And so that's a little bit of a pain point. And then, you've got the overhang of tariffs and so to the extent you have got customers with import and export activity, I think they are generally more hesitant to invest in operations given trade uncertainties. And so that lead a little bit to making it more difficult to gauge repricing.

What I would say is, if you look in the first two quarters of the year, we have actually had pretty modest levels of repricing. So in the first quarter it was about between 3,500 car, same thing for the second quarter, which you would expect in a normal course, given you've got 115,000 cars and an average life of 4.5 years. You would expect about 26,000 cars to reprice every year, for 6,000 cars a quarter. So we are a little bit under that. What we have seen thus far is the tanks continue to reprice well ahead of our plan albeit still below prior. And freights are continuing to reprice modestly below plan, but it is early days, and we will see how this all plains out. And maybe as the quarters go, we will get more visibility in terms of what the impact of PSR is and where tariffs go and the impact that that is having on imports and exports.

Chris Kotowski -- Oppenheimer -- Analyst

Okay. Great. Thank you. That's it for me.

John Fawcett -- Executive Vice President and Chief Financial Officer



Our next question comes from Arren Cyganovich of Citi. Please go ahead.

Arren Cyganovich -- Citigroup -- Analyst

Thanks. As we think about the deposits and the deposit cost obviously grows in the second quarter that was a bit of a catch up. But even excluding rate cut that is expected for this quarter, if you kept everything equal would you say that your deposit costs have now kind of peaked?

John Fawcett -- Executive Vice President and Chief Financial Officer

I would say, yes. I think typically in a rising rate environment, we modeled that it take six months for -- kind of the entire portfolio to reprice, I think as rates have started to come down and we have pulled back on our offer rates on our savings builder account. I would say, yes on the non-maturity deposits in the online bank, that has clearly peaked at least in my mind.

Arren Cyganovich -- Citigroup -- Analyst

Okay. And then, I guess the expectation that there would be some pressure to the net finance margin for the next two cuts as you laid out, is that more of a timing aspect? I mean, I know we have to see what the rest of the market does in terms of online deposit, kind of resetting? But assuming it is a rational move, would you expect that there is just a lag between the repricing of your loans? Or would you expect that it is just not going to catch up as much as for loans reprice?

John Fawcett -- Executive Vice President and Chief Financial Officer

Well, look, I think we've tried to get ahead on the deposit pricing. So, we have done 15 basis points before the Fed has moved at all. And I think we are poised for more cuts. So, conceptually you could say that, this cut, if we did another 10 basis points in August 1st, would have a 100% beta, if they do a quarter point. If they do more, I think we will respond accordingly.

But again, it depends. We are not the highest rate in the market. Right now we are at 2.30%. There are still banks at 2.50%, 2.45%, 2.40%, 2.35%. And some of them were big banks. And so we have to be mindful of what the competition is doing. But I think we watch this very carefully.

The other thing is really important is to the extent that we have actually transitioned the customer segment this portfolio, the thesis was they were smaller balances and stickier balances. And so, as we have cut these rates, we have actually gone through two statement cycles and essentially seen no attrition.

The left hand side of the balance sheet, again, the markets remain incredibly competitive. And I think, specifically in business capital, we are very mindful of the mix between price and volume, and the volume and the business has been absolutely terrific. But we are not toned as to the fact that at some point, there will be a tipping point that we are going to have to respond to you from a pricing perspective and so watch that closely. but it is literally day-to-day in terms of what we are seeing others do in the market. It is just a tough place to be, it is a very fluid environment.

Arren Cyganovich -- Citigroup -- Analyst

Okay. And then on the new asset management JV. Maybe just talk a little bit about and what is the potential size of that? Would you be adding additional partner's overtime? And then is this based on purely on volume? Or is there any kind of ongoing recurring fee income associated with that?

Ellen Alemany -- Chairwoman and Chief Executive Officer

Yeah. So we just announced our new structure project Orion [Phonetic]. And basically it allows us to offer expanded cash flow, revolving a term loan options through a managed financing vehicle by an A-rated insurance company. So this is our cash flow vehicle and then we also have the Northbridge JV ABL in place.

And right now in Northbridge, we probably done about $300 million in volume, but it's basically allowing us to serve our customers better and increase our capacity to provide customer's financing that we would not be able to do on our own books, this is more type of business that is being done in the BDCs and also at a long-term recurring revenue stream. I mean, it's really early stages to project how much we are going to do, but it is just another outlet for us to book more business.

Arren Cyganovich -- Citigroup -- Analyst

And just on the tap, is that the volume based or is it -- or will you have some kind of actual recurring fees from that?

Ellen Alemany -- Chairwoman and Chief Executive Officer

It is really both.

Arren Cyganovich -- Citigroup -- Analyst

Okay. All right, thank you.


[Operator Instructions] Our next question comes from Scott Valentin of Compass Point Research. Please go ahead.

Scott Valentin -- Compass Point Research -- Analyst

Yes, good morning. Thanks everyone for taking my question. I think, Ellen, John, one of you referred to additional capital management going forward as one of the ways to hit the ROTCE targets. And you have $112 million left on the current authorization. Does that imply there is room for additional authorization before year-end?

Ellen Alemany -- Chairwoman and Chief Executive Officer

No. I mean, our authorization was through the end of September.

John Fawcett -- Executive Vice President and Chief Financial Officer

Yeah. So Scott, I mean, what we have done is, now that we are no longer CCAR bank, what we have done is we have aligned our -- essentially request the Fed with our strategic planning cycle, which runs October 1st to September 30th. So on September 30th, we will have exhausted the $450 million that was approved by our Board and by the Fed. We would expect that over the course of the coming weeks that we would have an incremental request that would go to the Fed, that would cover the fourth quarter of '19 in the first three quarters of '20. And that would be necessary arithmetically for us to actually manage down to the 11% common equity Tier 1 ratio, which we have been messaging for the better part of the year.

Scott Valentin -- Compass Point Research -- Analyst

Thanks, it is very helpful. And just a follow-up on credit quality, it improved linked quarter. I know you said the economy is slowing down. Are you seeing any sectors maybe that stand out in terms of any watch list issues or are you seeing increased delinquencies in any one sector?

Ellen Alemany -- Chairwoman and Chief Executive Officer

No. I think overall, we feel pretty good about the quarterly provision and the guidance that we have put out of it running between $30 million and $40 million. We have been going through a major transition as a company over the last several years. I mean, we have exited businesses with higher credits, asset and regulatory risk, including Financial Freedom, Commercial Air, NACCO. Our strategy has been lending against assets that are higher quality and collateral based. And we have been meaningfully reducing our cash flow loans. I mean, our cash flow loans now are only 10% of our loan and lease commitments.

We also, are a heightened standard bank, so we have, like, built second line defense and operate credit review and compliance. We are no longer SIFI bank, but we kept all of the robust liquidity and capital stress testing in place. And, even with our cash flow loans at 10% of our exposure, we have first lean positions, the average senior leverage levels are less than four times. The average total leverage levels are less than five times. We have lot of -- we are lending by industry vertical, so we have a lot of industry expertise. So -- last quarter, we saw a tiny bit more in like small restaurants and a little in the smaller owner operator transportation and business capital. But other than that, knock on wood credits remained really solid for us.

Scott Valentin -- Compass Point Research -- Analyst

Okay. Thanks for the color. Thanks very much.


There are no other questions at this time. I would like to turn the conference back over to management for any closing remarks.

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

Thank you, Nicole. And thank you, everyone for joining us this morning. If you have any follow-up questions, please feel free to get to contact the investor relations team. You can find our contact information along with other information on Thank you again for your time and have a great day.


[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Barbara Callahan -- Senior Vice President and 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

Chris Kotowski -- Oppenheimer -- Analyst

Arren Cyganovich -- Citigroup -- Analyst

Scott Valentin -- Compass Point Research -- Analyst

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