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CIT Group Inc (CIT)
Q3Â 2019 Earnings Call
Oct 22, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to CIT's Third Quarter 2019 Earnings Conference Call. My name is Keith, and I'll be your operator today. [Operator Instructions] There will be a question-and-answer session later in the call. [Operator Instructions]
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, Keith. Good morning, and welcome to CIT's third 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 cit.com. Our forward-looking statements disclosure and non-GAAP reconciliations are included in today's earnings materials and within our SEC filings. These cover our presentation materials, prepared comments and the question-and-answer segment of today's call.
Thank you, and I'll now turn the call over to Ellen Alemany.
Ellen Alemany -- Chairwoman & Chief Executive Officer
Thanks, Barbara. Good morning, and thank you for joining the call. I'm pleased to report that we had a solid -- we had another solid quarter of performance and delivered continued progress on our strategic plan. We posted net income of $143 million or $1.50 per diluted common share for the third quarter.
We had a few noteworthy items in the quarter as a result of our strategic initiatives that improved our net income by $20 million, and John will take you through those in more detail. Excluding those items, we posted income from continuing operations of $123 million or $1.29 per diluted common share.
On Slide 2 of the presentation, we highlight some key drivers of performance. Our core business continued to post steady growth with average loans and leases up 2% from last quarter and 8% from the prior year period. Our deposit costs remained relatively flat from the prior quarter, as we optimize pricing and continue to grow our non-maturity deposit accounts to about 65% of average total deposits, up from 55% last year.
We remain disciplined on expenses and are on track to achieve our goal for the year, and credit performance remains strong reflecting our strategic step toward more collateral based lending. We ended the quarter with tangible book value of $55.60 per share, which is an 11% increase compared to last year.
To further accelerate our strategic plan, in August, we announced an agreement to acquire Mutual of Omaha Bank. This transaction will diversify our funding profile with scalable lower cost deposits through the addition of a market-leading Homeowners Association banking business, and it will also expand our middle-market commercial banking capabilities with additional products, technology and a broader geographic footprint.
This transaction continues to move forward as planned. We submitted our application to the OCC on September 26 which was a key milestone. We established an Integration Management Office, under the leadership of Mike Weitzman [Phonetic]. Mike is a seasoned banking and integration professional who has joined CIT to lead this effort and drive a robust process around the deal. The full management team is engaged in the process to complete the transaction, deliver on a timely integration and achieve the synergies and growth opportunities that we have identified.
As we have said before, we believe this opportunity will create substantial long-term value for the franchise. In particular, we expect this deal to generate double-digit EPS accretion over time and improve our return on tangible common equity starting in 2020. The profitability enhancement next year will largely be driven by realizing cost savings and deploying excess capital related to the deal. This includes an immediate 20 basis point improvement in our deposit funding through the addition of the Homeowners Association business.
Over a two year timeline, we believe we can continue to improve our returns as we begin to leverage the growth synergies in the HOA space and middle-market banking. Expected growth in the HOA channel should take some pressure of other deposit channels and allow us to further optimize our funding profile.
In addition, a lower cost of deposits and integration of regional middle market banking teams should expand our addressable market and opportunity for fee income. Other longer-term benefits of this deal are expected to include moving more rail assets into the bank as the overall bank grows which will lower funding costs for those deposits -- those assets.
With lower cost of deposits, we can also improve our overall risk profile, which should contribute to our goal of achieving an investment grade credit rating at the holding company. Our operating leverage will expand through growth, which will further improve our efficiency ratio, and ultimately, we aim to free up additional capital as a risk profile better aligns to peers in the industry.
To sum it up, we believe there are several elements of this transaction that will positively affect our business and unlock meaningful value over time. We're focused on our first quarter close, pending regulatory approval and a smooth and timely integration.
As a result of the multi-year transformation we have completed to date, I'm pleased to say that at the end of September, we were added to the KBW BKX Index, which further recognize the CIT as a national bank. We're glad to be listed among other banks in our industry on the index.
Before I turn it to John, I just want to touch few highlights in our business. We drove strong origination volume in the quarter, largely in the Commercial Finance, Business Capital and Consumer divisions. Markets remain competitive however and the rate environment has put some pressure on margins. We remain prudent in our risk appetite and our growth comes from our expertise and key pockets of the market where CIT has strength.
The Commercial Finance business grew average loans and leases compared to last quarter and last year. Our market position in the aviation, renewable power, healthcare and C&I areas enable us to win strong deals in these verticals as we leverage our industry and collateral-backed expertise.
For example, we won a $425 million deal in the healthcare finance business in the quarter where we served as lead arranger and administrative agent for a long-term client. This relationship and our proven track record enabled us to lead the deal and build the significant treasury management relationship and a stream of capital market fees over multiple years. This is an example of the deep relationships we cultivate in this business.
The Business Capital division posted another quarter of solid growth with the technology and industrial -- industries driving volume. Core factoring volume was up in the third quarter, largely due to seasonality in that business. Originations in the commercial real estate business were solid, however, prepayments continue to be elevated. As a result, assets were down in the quarter, but in line with our expectations for this area of the business.
Average loans and leases in the Rail division were flat in the quarter, but our ongoing investments in a modern diverse rail fleet allowed us to maintain a strong utilization rate of 95%. Industrial production has slowed and railroads continue to rationalize their operations, but we believe the quality of our fleet, our market expertise and service level are key advantages in the market.
We continue to post strong growth in our core mortgage of small business lending operations. Total average loans and leases were down slightly in the Consumer Banking segment, reflecting the sale of non-performing loans in the run-off portfolio, as we continue to improve our risk profile.
As I mentioned earlier, we have made progress in shifting our deposit accounts toward more non-maturity deposits and strategically reducing our CD volume. We have also optimized our pricing on the savings builder account to reflect changes in the rate environment and retention in this product remained stable.
We had very good strong deposit growth in the first half and we have taken a more measured approach to growth in the third quarter. Overall, we have been building on our momentum and it was a solid quarter.
With that, let me turn it to John.
John Fawcett -- Executive Vice President & Chief Financial Officer
Thank you, Ellen, and good morning, everyone.
We had another solid quarter with net income available to common shareholders excluding noteworthy items of $123 million or $1.29 per common share and we continue to make steady progress on our strategic priorities. We grew average loans and leases in our core portfolios by 2% from the prior quarter and 8% from the year ago quarter.
Credit metrics remained stable and we remain disciplined in our underwriting. We reduced our operating expenses slightly despite higher costs related to the Mutual of Omaha Bank acquisition. We launched our bank note program and issued our first unsecured note, which had an investment grade rating from S&P, a six non-core five-year term and pricing just inside 3%. And we grew tangible book value per share by over 2% to $55.60.
On Page 5, we had a few noteworthy items this quarter related to strategic priorities that resulted in a net after-tax benefit to earnings and increase to tangible book value of $20 million.
First, we recognized a $53 million tax benefit related to our reassertion that earnings from our operations in Canada would be reinvested indefinitely, which resulted in a reversal of an accrued tax charge. If you recall, in 2016, we took a charge for a similar amount when we decided to sell our commercial and equipment finance businesses in Canada. With the restructuring completed, we have analyzed our remaining operations in Canada and have concluded that we expect to reinvest our earnings there indefinitely.
Second, during the quarter, we entered into an agreement to sell our Livingston office building and move our New Jersey operations, which is mostly corporate functional staff to Morristown, New Jersey, where we entered into a 15-year lease. We took a $22 million after-tax charge, reflecting the impairment of the Livingston building. The new location will be more efficient for our needs and the cost to keep Livingston building operational would have exceeded the increase in the operating costs for the move. In addition, we were awarded a $22 million New Jersey state tax credit to be used over a 10-year period starting in 2021.
And the third, this quarter we also took an $11 million after-tax restructuring charge related to initiatives to improve operating efficiency and expect the benefits to be realized over the next 18 months to 24 months.
I will now go into further detail on our financial results for the quarter, which exclude the noteworthy items.
Turning to Slide 6 of the presentation, net finance revenue declined from the prior quarter, driven by lower interest income from lower market rates on our floating rate loans as well as lower purchase accounting accretion. Net operating lease revenues benefited from lower maintenance cost this quarter, while interest expense was relatively flat.
Slide 7 is our net finance margin walk. Net finance margin was 3.06%, down 7 basis points from the prior quarter and below our target range. As I mentioned last quarter, we expected the margin to decline to the bottom of the target range with potential for further pressure depending upon the rate environment.
Yields on our loans were down across all businesses as well as our cash and investments, reflecting lower market rates. Net operating lease yields in rail were higher this quarter as lower gross yields from repricing rates were offset by lower maintenance expense, reflecting some of our productivity initiatives and a $3 million lease warranty recovery.
As we anticipated, deposit costs were flat, reflecting the reduction in our non-maturity deposit rates, offset by the pricing of CDs. I will discuss deposit trends a little bit later.
The margin was also negatively impacted by lower interest recoveries and prepayment benefits, which were elevated in the second quarter. In addition, as Ellen mentioned, as we continue to improve our risk profile, we sold approximately $200 million of non-performing loans from our Legacy Consumer Mortgage or LCM portfolio in July.
We received proceeds in excess of the carrying value which will be recognized over the remaining life of the pool. However, given the higher risk profile, these loans were also higher yielding. On a pro forma basis, we estimate the sale reduces margin by approximately 1 basis point after considering the reinvestment into new mortgages with a stronger credit profile and at current market rates. We are continuing to look for opportunities for additional sales of LCM loans in the coming quarters.
Turning to Slide 8, other non-interest income decreased by $5 million compared to the prior quarter, which if you recall included a $5 million gain on the sale of a loan that was previously written off. Fee revenues, factoring commissions, gain on sale of lease equipment and income from our bank-owned life insurance program, all increased modestly.
Turning to Slide 9, operating expenses excluding intangible asset amortization decreased slightly from the prior quarter, but includes nearly $8 million in expenses related to the Mutual of Omaha Bank acquisition.
The prior quarter included a little under $3 million in expenses related to the acquisition, and then that difference is reflected in the increase in professional fees. Costs incurred were tied to diligence, legal and regulatory matters in normal course including the OCC application process as well as external support related to ongoing integration.
Advertising and marketing costs related to deposits increased to a more normalized level this quarter, as we had significantly reduced the spending in prior quarter as a result of our excess deposit growth earlier in the year. We estimate that approximately $8 million to $9 million of operating expense this quarter resulted from the adoption of the new lease accounting standard including $5 million of property tax expense that was offset in other non-interest income.
Year-to-date, our operating expenses include approximately $25 million related to the new lease accounting standard, and we now estimate that the new standard will increase operating expenses by $35 million to $40 million in 2019 with $22 million to $25 million offsetting increase in other non-interest income.
The net efficiency ratio increased to 57% from 56% last quarter, resulting from the reduction in revenues, slightly offset by the reduction in expenses and reflects the aforementioned lease accounting changes, which we estimate increases the rate by more than 100 basis points. And while our operating expenses have been elevated for the acquisition costs, we have been running ahead of schedule on achieving our 2020 target operating cost reductions. As a result, we expect to meet our 2019 guidance, despite the higher cost related to Mutual of Omaha Bank acquisition.
Slide 10 shows our consolidated average balance sheet. Average earning assets were essentially unchanged from the prior quarter. During the quarter, we reduced investments and grew average loans and leases by 1%. The increase includes 2% growth in our core portfolio, partially offset by the sale of the non-performing LCM loans previously mentioned, as well as the continued runoff of that portfolio.
Slide 11 provides more detail on average loans and leases by division. Strong origination volume across most of our businesses drove quarterly growth in our core portfolios. Commercial Finance grew 2% from the prior quarter driven by aviation lending, healthcare, renewable power in various sub verticals within C&I. We continue to focus on collateral-based lending, which represented about 60% of Commercial Finance's origination volume.
While risk adjusted spreads have remained relatively stable, loans in this business are floating rate and a reduction in portfolio yield reflect the decline in LIBOR rates this quarter.
In Business Capital, continued strong new business volume in our equipment financing portfolios in higher seasonal factoring activity, drove an increase in average loans and leases. Growth in our equipment finance and small business solution portfolios continues to outpace the industry. However, new business yields in certain areas are being pressured from the decline in swap rates and from competitors looking to aggressively add assets.
In Real Estate Finance, we continue to see good origination activity, and while prepayments remained high, they occurred later in the quarter and as a result, average loans were flat. New business spreads have remained relatively stable. However, portfolio yields declined this quarter as a result of lower LIBOR levels.
Our rail portfolio increased modestly this quarter as new deliveries mostly offset depreciation and our portfolio management activity. Despite growing excess capacity in the North American fleet industry and slowing growth in many industrial sectors, our rail team continues to successfully manage fleet utilization, which declined to just above 95%.
Leases repriced down 9% on average this quarter. We continue to see strength in tank car lease rates, particularly in certain chemical and petroleum markets. This has led to improved pricing and demand for those cars, and as a result, the repricing gap is closing faster than originally expected.
As it relates to our freight cars, with the persistent industry surplus, which increased to 22%, and slowdown in manufacturing sector, freight car repricing levels remained modest with downward repricing in most markets. The sand market continues to show the most weakness. In addition, the late harvest season and continued uncertainty in trade policies are impacting the export demand for grain in other agricultural products.
As we have mentioned in the past, our market position, strong portfolio management expertise, customer service and the quality of our fleet are key strengths, as we continue to navigate in an uncertain environment. We continue to expect lease renewals on the total fleet to reprice down 10% to 15% through 2019 and into 2020, while we expect this to vary quarter-to-quarter, depending upon the number and type of cars renewing.
In Consumer Banking, average loans were down slightly reflecting growth in the core business, offset by the sale of the non-performing loans and continued runoff of the legacy consumer mortgage portfolio. Retail mortgage origination activity remained strong, driven by refinancings with a little over 80% of our retail volume coming through our digital channel. Total new originations continue to have LTVs below 80% and FICO scores in the 775 area.
Slide 12 highlights our average funding mix. Total deposits declined slightly, but remained at 85% of total funding. Average unsecured borrowings remained relatively flat with the prior quarter, but increased at the end of the quarter, as we took advantage of strong market and CIT specific fundamentals at the end of September and funded a significant portion of our needs for the Mutual of Omaha Bank acquisition.
As I mentioned earlier, we launched our bank note program and issued $550 million six-year non-core five unsecured notes at a rate just below 3%. It was rated investment grade by S&P, a new offering was significantly over subscribed.
Slide 13 illustrates the deposit mix by type and channel. Overall deposit rates remained relatively flat, reflecting a reduction in rates in our non-maturity deposits, offset by an increase from repricing CDs. We continue to shift to a higher portion of non-maturity deposits, which we believe will perform better, especially as rates continue to decline. In line with that strategy, average deposit balances were down slightly reflecting a reduction in time deposits, partially offset by an increase in our savings and money market accounts.
In the Direct Bank, in addition to the 5 basis point reduction in rate on May 1, we reduced our savings rate builder by another 20 basis points over the course of the quarter, while growing the average savings deposit balance by 4%. We continue to reduce the savings builder rate by another 10 basis points on October 1st and have not seen any meaningful levels of attrition as a result of these moves. Notwithstanding any rate reductions from the Fed, we were likely to continue to optimize our deposit rates, balancing our need to fund growth and our continuing effort to optimize our overall funding costs.
Turning to capital on Slide 14, the common equity Tier 1 ratio remained at 11.6% reflecting quarterly earnings, RWA growth and a decrease in disallowed deferred tax assets. Capital ratio remained elevated relative to our target as we stopped repurchasing shares due to the pending Mutual of Omaha Bank acquisition. As a result, we now expect our common equity Tier 1 ratio to remain in the mid-to-high 11% range by the end of the year.
Upon closing of the acquisition, our common equity Tier 1 ratio is expected to decrease to approximately 10%, the lower end of our target range. After the close, our intention is to remain out of the market for our common shares in order to increase our common equity Tier 1 ratio to 10.5% within the ensuing 12 months, which is in the middle of our target range.
Slide 15 highlights our credit trends. The credit provision this quarter was $27 million and net charge-offs declined to $26 million or 34 basis points, both slightly below our guidance range. Net charge-offs continue to be primarily driven by Commercial Finance in Small Business Solutions within Business Capital.
Non-accrual loans increased by $27 million, driven by an increase in Commercial Finance and Business Capital, partially offset by a reduction from the LCM loan sale. A little over 60% of non-accrual loans are current and total non-accrual loans remain below 1% of total loans.
Our credit metrics and the broad credit environment remains stable. New business originations reflect our continued efforts to enhance our risk profile, and as a result, continue to come in at a better risk ratings than the overall risk rating of the performing portfolio. Our reserves remain stable and strong at 1.55% of total loans and 1.87% for commercial banking and continue to reflect more than four times the last 12 months net charge-offs.
As I mentioned in September at the Barclays conference, we will adopt CECL at the beginning of next year, upon which the allowance for credit losses must be covered -- must cover credit losses over the entire remaining expected life of the loans and commitments and we will consider future changes in macroeconomic conditions. We have formed cross-functional implementation working groups in preparation for the adoption of CECL, and we continue to develop and test our lost -- loss forecasting models and methodologies.
Our expectation today is that the impact on tangible book value will be relatively modest at $50 million to $100 million. This excludes any impact from the Mutual of Omaha Bank acquisition, which we are still working through.
From a regulatory capital perspective, we maintain the option of facing in the capital impact over a three-year period. We expect the increase in our allowance for loan loss reserves, however, to be around $200 million to $300 million as the increase is expected to be largely driven by our purchase credit impaired or PCI loans in the legacy consumer mortgage portfolio.
I would emphasize the tangible book value would not be impacted by the increase in reserve from PCI loans, as the reserve will essentially replace the existing non-accretable discount with a corresponding increase in the loan balance.
Our current estimated range assumes moderate economic growth, continued low levels of unemployment and the stable credit environment. It also will be driven by economic conditions in the composition of our loan portfolios at the adoption date and therefore is subject to change. We have included a slide in the appendix that illustrates our current thoughts.
Slide 16 highlights our key performance metrics, reflecting the trends we just discussed. Our effective tax rate was 24% excluding the noteworthy items which is slightly below our guidance. Our return on tangible common equity from continuing operations was 9.8%. If you normalize for the semiannual preferred dividend that is paid in the second and fourth quarters, our ROTCE would have been 9.5%.
Page 17 highlights our outlook for the fourth quarter. For the fourth quarter, we continue to expect low-to-single digit quarterly growth in our core portfolio, and slightly lower growth in our total portfolio.
Given the challenging rate environment, we expect our margin for the fourth quarter to continue to decline to between 2.9% and 3% resulting in our full year margin being around the bottom of our target range. This takes into account the impact of the September rate cut and a continued rate decline in the fourth quarter, which will continue to pressure yields on loans and investment securities.
Net rail yields are expected to decline from repricing of renewed leases. Also, we had a $3 million warranty settlement in the third quarter that is not expected to reoccur. We expect declines in deposit rates to only partially offset the asset yield declines.
As I mentioned earlier, we expect to meet our full year 2019 operating expense guidance, despite the additional cost related to the Mutual of Omaha Bank acquisition which implies the fourth quarter operating expenses should be flat to slightly down when compared to the third quarter.
The net efficiency ratio is expected to be around the mid-50s next quarter, reflecting a higher level of capital market fees and gain on sale of assets to offset the lower net finance revenue. Credit performance remained strong, and as a result, for the fourth quarter, our expectation is for the credit provision to be $25 million to $30 million -- $35 million, a $5 million reduction from our previous outlook. The effective tax rate absent any discrete items is expected to be consistent with our full year outlook.
We expect our common equity Tier 1 ratio will remain high in the mid-to-high 11% range, given the impact of the rate environment and the higher capital level, our return on tangible common equity for the fourth quarter, normalized for the preferred dividend is now expected to be 9.5% to 10%. We remain focused on continuous improvement in closing the Mutual of Omaha Bank transaction, and we will update our 2020 guidance on our fourth quarter earnings call.
And with that, I will turn the call back over to Ellen.
Ellen Alemany -- Chairwoman & Chief Executive Officer
Thanks, John. Moving forward, we're focused on advancing our strategic priorities, growing our core businesses, optimizing our deposit costs, managing our expenses and maintaining credit discipline. In addition, we're focused on completing the Mutual of Omaha Bank transaction, pending regulatory approval. We believe this deal will drive significant value for CIT and unlock potential for our customers, communities and shareholders.
With that, we're happy to take your questions.
Questions and Answers:
Operator
Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Scott Valentin with Compass Point.
Scott Valentin -- Compass Point -- Analyst
Good morning, everyone. Thanks for taking my question. Just trying to look out into 2020 on the cadence of the margin, obviously, not looking for exact guidance, but obviously depends on what the Fed does, but if we assume the Fed cuts rates again in the fourth quarter then kind of holds-off with the margin then drop again in 1Q '20, and then with Mutual of Omaha Bank closing at the end of 1Q potentially margin could improve in 2Q, given the lower-cost deposits. Is that kind of a fair cadence?
John Fawcett -- Executive Vice President & Chief Financial Officer
Yes, I think it's a fair cadence, Scott. I mean the reality is, is look you're going to have a series of rate cuts that happened this year that are going to continue to flow through into 2020, and so you'll have July, September, and we're modeling October, and who knows what happens in December. But your point is point spot on and part of the value of the Mutual of Omaha Bank transaction is obviously the lower cost deposits that are then scalable. And so that provides us an instantaneous benefit of 20 basis points in terms of deposit funding.
And more important than that, I think from our perspective is the fact that it's actually scalable. So, yes, I think for the rest of this year you will expect July, September, October to work through, impact rest of 2020 with the benefit of Bank of -- Mutual of Omaha Bank coming in, hopefully early in the first quarter.
And then I think the other lever that we have to play is on the deposits. And so, if you look at what we've done already, so we've had two rate cuts, we've pulled down the online rate on our savings builder product by 35 basis points. We expect that we would move again very early in November to kind of keep pace with the Fed actions. And so, that becomes the wild card.
But again, as you look at the change or what we can actually do in the deposit space, you have two levers. You have rate, which is a large part driven by competition in the marketplace and you have advertising and marketing, which we've also tried to have been very circumspect around, and so you don't want to cut too quickly. And I think so far, we've hit a pretty good note, because we haven't seen any meaningful levels of attrition in the Savings Builder product.
Scott Valentin -- Compass Point -- Analyst
Thanks. That's very helpful. And just one follow-up question. The average core loan growth was a little better than I expected. It was I think 2.3% linked quarter. I know you mentioned factoring seasonality. Is that a primary driver or are you seeing broad based, a little bit better outlook maybe in terms of core loan growth?
Ellen Alemany -- Chairwoman & Chief Executive Officer
Scott, this is Ellen. We're seeing -- we had a really solid quarter, and we're actually going into the fourth quarter with a very, very strong pipeline. You know, and that's -- I mean, despite customers being cautious with capital spending, fears of an economic slowdown, etc., but I would say that in Business Capital, that's probably the strongest growth in the business. In Commercial Finance, the key verticals that have been performing include aviation lending, healthcare, real estate and renewables, project finance. In real estate, we're not expecting any significant growth. And as John mentioned, we had a lot of prepayments, but we've also been -- we had some really good capital market fees from syndicating more deals in real estate. So overall, it wasn't just the seasonality in factoring business and pipeline is very strong.
Scott Valentin -- Compass Point -- Analyst
Okay. Thanks very much.
Operator
Thank you. And the next question comes from Eric Wasserstrom with UBS.
Eric Wasserstrom -- UBS -- Analyst
Thanks very much. Just two points of clarification, please. The first, just on the NPL trend, you mentioned the NPLs that you sold, but then it looks like the NPL ratio also increased in the absolute level, also sequential increased. Can you just walk us through what's occurring there?
John Fawcett -- Executive Vice President & Chief Financial Officer
Yes. So the NPLs are -- basically have been for at least the time that I've been here $300 million plus or minus $25 million or so. I think there's probably a little bit of confusion around the impact of the LCM portfolio. So the LCM portfolio, which is about a $205 million, those were for the most part not included in non-accrual loans at all. So it's not like we came down and went back up. Most of the LCM portfolio was purchased credit impaired and never included in non-accrual. So what you're seeing is non-accruals kind of trending right around 1% of total loans. So, nothing has really changed in the last like probably eight quarter to 10 quarters that I've been here.
Ellen Alemany -- Chairwoman & Chief Executive Officer
Yes. And I just want to reiterate that we don't see any specific indicators that suggest any type of a credit downturn. And when I think we've been talking about this a lot this year, how we really transform the whole credit profile of this company, but just right now criticized loans at the end of the third quarter totaled $3 billion, which is just like 9% of commercial loans and leases. This is kind of the lowest level that I've ever seen this at the company here. It's down about $1 billion from a year ago.
And also we have at the company less exposure to consumer debt. We're underweighed on residential mortgage. We're not in the credit card business. Cash flow loans now are only about 10% of our total exposure. So, I feel we're in really good shape here on the credit line.
Eric Wasserstrom -- UBS -- Analyst
Yes. Thank you for that. And so just to follow up on the NIM, I think as I just sort of extrapolate what the short-term trend is, let's say, heading a bit lower, factor in potentially the impact of Mutual of Omaha and then look out into next year, it seems that the consensus expectation is for, you know, let's say, a 30 basis point or 40 basis point rise from the current level and maybe some of that is reflecting the expectation of the benefit from the lower funding costs from the acquisition, but not pushing for guidance, but just directionally how do we think about the roll forward of the NIM into over the next few periods?
John Fawcett -- Executive Vice President & Chief Financial Officer
Yes. Look, I think it's the same analysis I went through with, Scott. I mean the reality is, is that we're in the midst of our planning process right now, and it's a little bit of a juggling act, because what we're trying to do is dimension, exactly when we think the Mutual of Omaha Bank transaction is going to close. And we think it will be in the first quarter, hopefully sooner rather than later, but I don't have a huge bearing on the NIM guidance.
And so, as I said, we're in the midst of our planning process right now. And so I really can't say much more than that. I do expect that we will come through in the fourth quarter with more comprehensive guidance, and hopefully, even have some perspective from the OCC in terms of when we might expect the trade to close.
Eric Wasserstrom -- UBS -- Analyst
Okay. Excellent. Thanks very much.
Operator
Thank you. And the next question comes from Chris Kotowski with Oppenheimer and Company.
Chris Kotowski -- Oppenheimer & Co. -- Analyst
Yes. Good morning. As I was reading this kind of in a hurry, this morning I noticed you said in the text somewhere that RWAs went up because you increased the rail order book, and I guess that particularly makes sense, since the share buyback is being suspended and you have excess capital right now. But how long does it take? Well, a, how material is it in terms of the uptick in the risk weighted assets and how long does it take before those the order book becomes an earning asset? And how much is involved?
John Fawcett -- Executive Vice President & Chief Financial Officer
Yes. Look, we have a fairly rigorous program around portfolio management. So, I think, Chris, as you know, we've been taking cars out of the HoldCo, which are subject to Fresh Start Accounting and realizing gains that we've probably been doing $15 million to $20 million a quarter. We buy new cars, which is on a fairly regular basis, you know, they come when they come, most -- I think we took delivery of 600 cars in the quarter. I want to say, about 400 of those cars were in the tank space. And so it's not really a special event.
The extra thing I would say about RWAs is, is that we're going to be very circumspect in terms of managing RWAs across the fourth quarter just because it's going to work into the calculation of the amount of shares that we're actually going to deliver to Mutual of Omaha. So, I think we're going to be very mindful in terms of the way we think about risk-weighted assets, in terms of the assets we put on, the kind of returns they are generating, the importance they are -- they might have to the customer, and where we have optionality probably do a little bit less, so that we can kind of provide a little bit less common equity to Mutual of Omaha, which is part -- which is you know we can deliver up to $250 million [Phonetic] in shares to the Mutual of Omaha parent.
Chris Kotowski -- Oppenheimer & Co. -- Analyst
Yes. Okay. All righty. That's it from me. Thank you.
John Fawcett -- Executive Vice President & Chief Financial Officer
Thanks, Chris.
Operator
Thank you. [Operator Instructions] And the next question comes from Vincent Caintic with Stephens.
Vincent Caintic -- Stephens -- Analyst
Hey, thanks. Good morning. I appreciate the fourth quarter guidance and the details there. Just kind of when you think about 2020, I know it's early and you're still planning, but kind of broadly speaking, when you think about the fourth quarter, is that a good jumping point for 2020? Are there particular items there that we should note?
And then kind of focusing on the NIM again, remember the last time we had low interest rates, you had floors and I was just kind of wondering if there are any other mitigating factors to asset yields that we should be thinking about for asset yields declining further for 2020?
Ellen Alemany -- Chairwoman & Chief Executive Officer
Yes. Listen, Vince, I think we're in great shape going into 2020. One is, we've further strengthened the management team. One is, we have one really experienced individual who has done a lot of integration work running the Mutual of Omaha integration for us. And then on the Commercial Banking side, Bob has brought in Dave Harnisch to run the Commercial Finance group, very seasoned, and Phil Robbins to run Asset Management, Capital Markets, and Jim Gifas to run Treasury Management.
So what you're going to see on the Commercial Banking side is more a traditional -- more traditional banking model as we integrate Mutual of Omaha, which is leading transactions, more asset management strategies, we have Orion and Northbridge both up and running. Those are JV structures that allow us to originate deals that wouldn't be our like credit appetite, but we move them into these joint ventures. And then Jim Gifas, running Treasury Management, so that we can generate more merchant card, commercial card, treasury management revenue from our customers. So all that is kind of in place up and running now.
And I think the Mutual of Omaha deal is going to be game changing for us, because that 20 basis point drop in deposits is going to allow us to play in space from a probability to default two notches below where we play today, which will put us in regular more Commercial Banking land in terms of the competitive landscape.
So I feel really positive. We got our application in our Mutual of Omaha in 30 days. We're in the common period now, which ends on Saturday. And as John said, we're hoping that this deal gets approved in the first quarter. Obviously, the earlier we can get approval on this, the better for us, but we're in good shape.
John Fawcett -- Executive Vice President & Chief Financial Officer
And Vincent, just to hit your question of Q4 being a good jump off point, I would say it is definitely not. We're going to continue to aggressively manage our deposit costs down, I think, as we have thus far, and as Ellen said, the Mutual of Omaha Bank transaction is a game changer for us. It just gives us an enormous amount of optionality. So on a go-forward basis, we feel very good about the trade. And I think the more time we spend looking at it, the better we feel.
Vincent Caintic -- Stephens -- Analyst
Okay. Great. And I guess on the asset yields side, just following up on that, the asset yield side, are we -- are you close to your floors? Or I guess, are there other mitigating factors on how we typically think about LIBOR declining and that just directly translating sort of other factors to that?
John Fawcett -- Executive Vice President & Chief Financial Officer
Yes, it's a contract by contract thing. So, I think a lot of the relationships have floors, a lot of them don't. So it depends as go LIBOR, so goes the net interest margin. And I think the other thing too as you wonder at some point, our spreads are going to starting to widen out a little bit to offset some of that, but it's just incredibly hard to forecast. 50% of our loans right now are floating. So if you look at all of Commercial Finance, that's essentially all tied to one-month and three-month LIBOR. If you look at commercial real estate, that's 100% floating, that's tied to largely one-month and three-month LIBOR, which were down I think 31 basis points and 27 basis points in the third quarter and then essentially half of our consumer mortgage book is floating rate. So, yes, it's a big part of the book.
Vincent Caintic -- Stephens -- Analyst
Okay. Got you. And then switching gears on the -- just kind of broadly, as you're talking to your customers, is there any sort of things you're hearing? I know, when we read news reports people are concerned about a recession and maybe a slow down. Just kind of what your -- wanting to get a sense of what you're hearing from your customers, since you've probably good read into the U.S. economy. And then any sort of watch list industries you are looking at. I know credit has been a concern for -- sorry, energy has been a concern for some banks, just your thoughts there. Thanks.
Ellen Alemany -- Chairwoman & Chief Executive Officer
So, you know, I would say just in general what we're observing is that customers are cautious with capital spending. I think that there are kind of indicators in the market of a potential macro slowdown. There is obviously the geopolitical risk out there. We are hearing anecdotally that tariffs are affecting some of our customers. I mean, we had actually some of our leasing customers, the used equipment market is really, really strong right now because new orders on some equipment like material handling equipment is taking six months to 12 months, some consumer electronics are taking much, much longer order book because of the impact on tariffs.
So we are seeing some of that in the factoring business. I think what we've heard from customers is the tariffs aren't affecting the Christmas season, but it may impact potentially the spring season. I think in terms of energy, I mean obviously we finance oil and gas exploration and production companies through our rail car leasing business, but as energy, production in the U.S. has moved to really greener and cleaner, so as our lending business, and we've been doing a lot of project finance in the renewable energy space, E&P, midstream and services energy loan exposure is like less than $1 billion. I think it's $945 million or less than 3% of our total loans. And so I think that we have pretty -- reduced our exposure substantially in the energy space.
So, I think on the credit side, we've been -- and really if you think about everything we've done over the last several years, we've de-risked the company from certain businesses like Financial Freedom, NACCO which was the international rail, the commercial air portfolio. We're now a heightened standard bank. We have stress testing in our portfolio, etc. We've kept all those processes in the place even though we are no longer CCAR bank. We've build out second line of defense. We have credit review in place. These were all things CIT didn't have several years ago that are in place now. So I think we feel we are better prepared to withstand challenges of a downturn in the market than we ever have in the company's history.
Vincent Caintic -- Stephens -- Analyst
Great. Very helpful. Thanks so much.
Operator
Thank you. And the next question comes from Arren Cyganovich with Citi.
Arren Cyganovich -- Citi -- Analyst
Thanks. Hey, one of the things about the Mutual of Omaha acquisition that seem to come up, and I'm coming at this from a view that I view this as a positive deal. But some of the pushback I got from speaking with investors after this was how many of these do we expect in the future and should be concerned about this management team, diluting shareholders further by future deals with kind of longer earn back period. What's your view post this requisition of your appetite for additional deals in the future?
Ellen Alemany -- Chairwoman & Chief Executive Officer
We feel that Mutual of Omaha was a really unique opportunity for CIT and that it enhanced our deposit funding, and it really helped us build out a middle market banking franchise. And although, on a short-term basis, it was dilutive, we think it's going to have a positive impact of like 80 basis points of ROTCE in the first 12 months and 100 basis points thereafter.
But if you -- any feedback that we've ever had on CIT is you need more long-term source of lower beta deposits, and secondly, more earnings, and this deal solves for both those issues. We just -- so we thought it was a really good opportunity for us and we think that the benefits of this deal is going to have really long-term implications for the company in terms of kind of fixing those two challenges that we had.
And I would say that this management team has time and time again, said that we're always open to opportunities that are going to help accelerate or create more value for the shareholders. But right now, this team is really focused on executing this deal as quickly as possible and really showing the market that even though we -- we made a long-term decision here for the company. We took a little short-term pain to do it. But this team is going to execute this deal and show the market that we've really created a lot of value here.
Arren Cyganovich -- Citi -- Analyst
Thank you.
Operator
Thank you. At this time, I would like to turn the floor to management for any closing comments.
Barbara Callahan -- Head of Investor Relations
Great. Thank you everyone for joining this morning. If you have any follow-up questions, please feel free to contact the Investor Relations team. You can find our contact information along with other information on cit.com. Thanks again for your time and have a great day.
Operator
[Operator Closing Remarks]
Duration: 53 minutes
Call participants:
Barbara Callahan -- Head of Investor Relations
Ellen Alemany -- Chairwoman & Chief Executive Officer
John Fawcett -- Executive Vice President & Chief Financial Officer
Scott Valentin -- Compass Point -- Analyst
Eric Wasserstrom -- UBS -- Analyst
Chris Kotowski -- Oppenheimer & Co. -- Analyst
Vincent Caintic -- Stephens -- Analyst
Arren Cyganovich -- Citi -- Analyst
