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CIT Group Inc (CIT) Q2 2020 Earnings Call Transcript

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CIT earnings call for the period ending June 30, 2020.

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CIT Group Inc (CIT)
Q2 2020 Earnings Call
Jul 21, 2020, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, and welcome to CIT's Second Quarter 2020 Earnings Conference Call. My name is Rocko, and I will 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, Rocko. Good morning, and welcome to CIT's Second Quarter 2020 Earnings Conference Call. Our call today will be hosted by Ellen Alemany, Chairwoman and CEO; and John Fawcett, our CFO. Also joining us for the Q&A discussion is our Chief Credit Officer, Marisa Harney. During this call, we will be referencing a presentation that is available on the Investor Relations section of our website at

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.

With that, I'll now turn it over to Ellen Alemany.

Ellen Alemany -- Chairwoman and Chief Executive Officer

Thanks Barbara. Good morning, everyone, and thank you for joining the call. The COVID-19 pandemic has continued to affect the broader economy, and that has carried over to our financial results of the second quarter, although to a lesser degree than we experienced in the first quarter.

As a result, we posted a net loss for this period of $98 million or $0.99 per diluted common share. CIT began this year in a position of strength with a multi-year strategic transformation reinforcing our foundation and the completion of the recent acquisition adding to our franchise capability. That strength, along with the agility of our team will help us to continue to navigate through this unprecedented time.

John will go into a detailed account of the drivers in the quarter, but some key factors in the performance were: Lower net finance revenue primarily due to lower interest rates and holding elevated levels of liquidity during this turbulent period; lower factoring commissions due to retail store closures and the $73 million net charge-off related to a single factoring bankruptcy exposure.

We also continue to build our allowance for credit losses, but with the substantial reserve build in the first quarter, the impact on our provision was much lower. Despite these factors, there were also pockets of strength in the quarter. Our average deposit costs declined by 27 basis points, and we were able to use some excess liquidity to repurchase $235 million of unsecured Bank Notes at a discount.

Our average loans and leases were up 2% from last quarter, which included defensive draws [Phonetic] on revolvers in March as well as new originations in stronger segments of the commercial market. Our capital and liquidity positions remained strong. Our integration plan from the recent acquisition is on track, and we are unlocking greater operating efficiencies than originally anticipated.

Our operations continued uninterrupted with all our branches remaining open, and our customer operations running smoothly, many in a remote model. And we are proactively managing our credit risk through this dynamic period. I want to spend some time on what we're seeing in the business, and how we're leveraging our strengths in the current environment.

First and foremost, CIT's business model is very diverse. We operate across a variety of commercial segments and have deep industry and asset class expertise to support those segments. That is a tremendous advantage across market cycles, enables us to pivot quickly, take advantage of attractive opportunities, and manage our exposure in areas that are more directly impacted by the current environment. And that's exactly what we've done through this pandemic. Let me focus on a few of the opportunities first.

The power and renewables business has continued to be very active with virtually no disruption through the pandemic, and CIT is a leader in this space ranking third in the league tables. We closed five deals where we were the leader colleague [Phonetic] since March, we have another ten lead deals in the pipeline for the second half.

Most recently, we announced a $118 million deal for 112 megawatt solar facility in North Carolina, which demonstrates the continued demand for renewable power. In addition, we are seeing strong transaction activity in the Technology, Media and Telecom division as stay at home guidelines have supported continued investment in telecom infrastructure, cloud-based data centers, as well as additional streaming media content production and distribution.

Our capital equipment finance division had a record quarter as borrowers were looking to leverage their fixed assets. We were able to finance several investment grade and near investment grade borrowers, given our deep asset class expertise. There are good yields in this asset class and we were also able to opportunistically purchase small portfolios from larger banks looking to manage obligor limits. CIT has a long history in the asset-based lending business and this is an area where we are expanding as we see some solid opportunities in the pipeline for the second half that align with our capabilities.

And on the business capital front, we began to see an uptick in applications and volume toward the end of the quarter, as certain businesses started to return to their operations. As a result, our volumes in June were consistent with where they were a year ago. In short, we are seeing opportunities open up and our agility, expertise and balance sheet strength have allowed us to capture those opportunities.

Credit, of course, does remain a challenge in this environment, but many of the qualities I mentioned that help us originate business also help us manage our risk. Our size, industry knowledge, and asset class expertise allow us to adapt quickly and proactively manage issues when they arise. As soon as the pandemic began, we implemented heightened monitoring and portfolio management practices. That included a loan-by-loan review, daily portfolio and industry reporting, and redeployment of resources to help manage portfolios that are most [Phonetic] affected by the economic disruption.

We have granted relief across more than 10,000 smaller ticket business capital notes and leases and about 200 Commercial Finance and Real Estate contracts totaling about $2 billion in net investment combined, and we are underwriting each larger ticket loan modification to ensure there is a path to recovery. We participated in the PPP program with the majority of customers accessing the program being community-based small businesses in our branch footprint. We also recently launched the Main Street lending program for our mid-sized clients. We are staying disciplined to find new opportunities and assist our current customers through this period when possible.

Before I pass it to John, I want to touch on some of our strategic initiatives. The integration of our recent acquisition of the former Mutual of Omaha Bank is progressing nicely and remains on track for this year and ahead of schedule on operating efficiencies. Despite all the complexity the pandemic has brought, the team is making great progress in bringing together the teams, technology, products and footprint. The homeowner association deposit team is hitting their goals with average HOA deposit of 8% to $5.3 billion.

This is a great progress and was a key driver of the acquisition. Continuing to build out this channel will give us even greater funding flexibility and at lower cost. Likewise, the newly integrated treasury and payment services team is bringing an additional commercial deposits from new and existing clients, also at lower costs.

These average deposits were up 18% in the quarter to $3.9 billion, with costs down to 43 basis points. Build-out of these deposit channels complement our consumer deposit in the direct and branch channels, and provide greater funding flexibility and diversity. As part of our integration efforts, we also recently signed an agreement to sell the wealth management business that was part of the former Mutual of Omaha Bank product offering.

As we conducted a strategic review of the business, we determined it was not the right fit for our model. It's a very small transaction, and it's more about CIT focusing on areas of strength, and divesting of activities that are not aligned to our strategy. We expect the deal to close in the coming months, and we will provide additional detail at that time.

As I mentioned, we are unlocking synergies through the acquisition faster than anticipated, and as a result we'll be realizing about $25 million of our 2021 cost saves ahead of schedule this year. In recent years, CIT has proven time and time again that we have a culture of performance and the fortitude to deliver on our commitments and continuously improve. That spirit remains through this pandemic.

We understand the economic disruption is not behind us yet, however, we took prudent actions in the first half of the year to anticipate the impact of this downturn based on the best available information. While the environment remains dynamic, based on what we know today, we are cautiously optimistic for the second half of the year, and in our ability to restore a modest level of profitability, assuming the macro-economic environment does not deteriorate further.

With that, I'll turn it to John.

John Fawcett -- Executive Vice President and Chief Financial Officer

Thank you, Ellen, and good morning everyone. As mentioned, we reported a GAAP net loss of $98 million or $0.99 per diluted common share and a loss of $61 million or $0.62 per share excluding noteworthy items.

Our results this quarter continue to reflect the ongoing global pandemic and low interest rates as we manage through the current environment. Overall, business activity slowed in the earlier part of the quarter, but in June we began to see activity pickup in many sectors where we have strong capabilities. Assuming there is no significant change in the current or forecasted macro environment, or any expected credit performance of our portfolio, we expect to return to profitability and generate modest positive earnings in both the third and fourth quarters of 2020.

Last quarter, we were proactive in our implementation of CECL and appropriately added substantial reserves reflecting the COVID-19 environment. While this quarter's credit provision was considerably lower than in the prior quarter, it remained elevated as we continue to bolster reserves and incurred a $73 million charge related to the bankruptcy of a single factoring customer in the retail industry.

The factoring loss was a result of an unique circumstances directly related to the precipitous economic shutdown and store closures. While we have reserve for additional charges in the retail industry, we do not anticipate another single customer loss of that magnitude in our factoring business. Overall, based on our forecasted view of the macro environment, we expect the provision to continue to moderate next quarter, obviously subject to conditions which remain fluid.

Our net finance revenue and margin were significantly impacted this quarter by lower market rates, primarily LIBOR, which reduced our floating rate loan yields. In addition, we have higher levels of excess cash, primarily due to strong deposit growth, which we estimate reduced our margin by 30 basis points as it earned only about 10 basis points at the Fed.

We took actions to offset some of this margin pressure by lowering our deposit costs throughout the quarter, particularly in our online channel where we lowered our Savings Builder rate by 80 basis points to below 1% at quarter end. We utilized some of our excess cash to tender for our unsecured banknotes, repurchasing $235 million at a discount recognizing a $15 million gain, and reducing interest expense by approximately $7 million annually.

Assuming LIBOR rates remain relatively constant, we believe the margin has bottomed, and we will see a 10 basis point to 20 basis point improvement over the course of the third and fourth quarters as the benefits of lower deposit costs continue to be realized, and we reduce our excess liquidity. Other non-interest income was impacted this quarter by lower factoring commissions as volumes declined considerably due to retail store closures.

We also had lower gains on asset sales, as we suspended some of our portfolio management activities. Factoring volumes improved in the first half of July and we have been running at approximately 98% of 2019 levels as retailers replenish inventory. While we expect factoring volumes and commissions to improve from the second quarter levels, uncertainty around the back-to-school season may temper that improvement.

We are also seeing renewed opportunities to resume selling pools of loans in our legacy consumer mortgage portfolio, and would expect to complete a transaction if existing conditions continue to prevail. We continue to look for opportunities to improve upon our operating efficiency. This quarter, we took a restructuring charge of $37 million primarily related to employee cost and contract terminations. $15 million was already planned as part of the Mutual of Omaha bank merger and integration costs, while the other $22 million related to cost reduction initiatives that we expect to realize over the next 12 months to 18 months.

We are lowering our full year 2020 operating expense target excluding noteworthy items and intangible asset amortizations by $25 million to approximately $1.185 billion, as we are realizing some of our 2021 cost savings ahead of schedule. This reduction includes the acceleration of cost synergies related to the integration of Mutual of Omaha Bank as we bring our two businesses together. In addition, we are responding quickly to the current environment, which has allowed us to accelerate our plans to rationalize our footprint, including the optimization of former Mutual of Omaha Bank branches and the streamlining of office locations.

We plan to reduce our occupancy by 500,000 square feet, representing 30% of our total footprint. These actions are expected to result in an impairment charge of approximately $15 million in the fourth quarter with an estimated payback period of 18 months or less. We remain focused on continuous improvement, and we'll provide an update to our 2020 operating expense target as we gain more clarity on the operating environments.

I will now provide some additional color on our operating trends and refer to our earnings presentation starting with net finance revenue and margin on slide 7 and 8. As I mentioned, the sharp decline in both net finance revenue and margin were primarily driven by lower market rates and a higher mix of cash. Average LIBOR rapidly declined by around 100 basis points this quarter, impacting margin by approximately 40 basis points as our floating rate loan yields declined.

About 60% of our floating rate loans have interest rate floors and since the downturn, we have been getting LIBOR floors of 75 basis points to 100 basis points on most new commercial loan originations in commercial finance, and seeing improvement in spreads in many of our industry verticals. As I mentioned, the higher mix of cash coupled with lower rates also negatively impacted our margin by 30 basis points.

We expect some of this to reverse as we deploy our excess liquidity and higher cost term [Phonetic] CDs run off. Lower rail utilization and renewal rates as well as increased storage cost for cars off lease reduced margin by 10 basis points in the quarter. The North American industry railcar fleet continues to be oversupplied with 32% of the fleet now in storage, driven by the general slowdown in economic activity.

While our fleet is diverse and representative of the broader economy, many car types saw a reduction in utilization and pricing on new leases. Our Rail utilization declined approximately 300 basis points to 88% and lease renewals repriced down 30% this quarter reflecting current market conditions and the mix of cars that came up for renewal.

In particular, sand cars used in the E&P space weighed heavily on repricing activity this quarter, while grain cars, plastic pellet covered hoppers and certain box cars continue to renew at above average rates. Macro indicators in recent weeks are starting to show some real recovery from COVID-19 as many factories have resumed at least partial production late in the quarter, and although still well below 2019 levels, rail loadings have improved over the past few weeks from the COVID-19 trough levels.

As the economy starts to recover and commodity prices drift higher, we expect rail utilization and pricing to improve, although with a bit of a lag as excess capacity from cars in storage but still on lease will be brought online first. With that background, assuming the forecasted macro environment, we anticipate a modest reduction in net rail yields over the next two quarters as leases continue to reprice down.

We expect utilization to push back up into the low 90% area over the next few quarters, and improve to the mid 90% area by the end of 2021. We believe our young diverse fleet with more high load capacity cars are competitive advantages, resulting in higher demand for our railcars while sand cars used in the E&P space particularly fracking are expected to continue to weigh on the recovery.

On the liability side, to offset the impact of lower rates on our assets, we have been aggressively lowering deposit costs. We improved our margin by 21 basis points in the quarter as CDs reprice lower and we lowered our non-maturity deposit rates across all deposit channels. The biggest rate decline in the quarter was in our online channel where we lowered our savings builder rate by 80 basis points ending the quarter below 1%. We also grew average lower cost HOA in commercial deposits by about $1 billion further contributing to lower deposit costs.

The HOA deposit channel reached its highest level ever at $5.3 billion and growth in commercial deposits was driven by both new and existing commercial clients while costs declined by about 20 basis points. As Ellen indicated, we are pleased with the progress we are making expanding these channels and remain on pace to realize growth projections in the HOA channel.

As I indicated earlier, we expect the margin will improve over the course of the third and fourth quarters by 10 basis points to 20 basis points, as the full impact of the recent rate reductions are realized along with continued downward repricing or reduction in maturing CDs and growth of lower cost HOA in commercial deposit channels.

In addition, we continue to look for opportunities to reduce non-maturity deposit rates while balancing our liquidity needs. Slide 4 provides more detail on average loans and leases by division. Average loans and leases grew by 2% this quarter, which includes the impact of increased defensive revolver draws in commercial finance at the end of March, new business volume in key sectors where we are seeing opportunities in the current environment, and a lower level of prepayments.

End of period balances declined as repayment of factoring invoices outpaced new factoring volume and the defensive revolver draws of end of last quarter were repaid. While origination volumes were down, reflecting the current environment, we continue to close deals for our clients and are seeing opportunities in certain of the industry verticals and equipment leasing lending where we have strong leadership as well as industry and asset class expertise. New business activity in commercial finance was driven by key verticals such as power and renewables and technology, media and telecom which included opportunities for capital markets and derivative fees.

As Ellen indicated, we are also seeing good opportunities in the current environment within capital equipment finance. Overall pipelines in commercial finance are lower than last year, reflecting the business slowdown, while we continue to see increased activity in the areas I just mentioned along with healthcare and asset-based lending.

We were also seeing wider spreads and structural improvements, including the LIBOR floors on new originations. In business capital, equipment finance is taking market share as other small ticket equipment lenders have paused or exited the market. We are also seeing increased demand in programs where we partner with technology manufacturers to provide financing to their customers. In Small Business Solutions, we are taking a more focused approach in providing lending in industries, less impacted by the COVID-19 pandemic, while pulling back from certain higher risk industries.

Overall, business capital applications which had slowed considerably earlier this quarter have seen a pickup in the past several weeks as June origination volume increased to June 2019 levels. We remain cautiously optimistic for an increase in origination activity in the third quarter in select areas. As Ellen mentioned, we continue to work with our customers to provide payment deferrals for qualified customers impacted by the economic events brought upon by COVID-19.

As of the end of the quarter, we had granted relief requests to about 1,700 consumer customers with a carrying value of approximately $630 million. We also granted about $1.4 billion in relief requests for over 200 commercial transactions across Commercial Finance and Real Estate Finance as well as $550 million, representing approximately 10,000 smaller ticket equipment contracts in Business Capital, and another $180 million over 100 contracts in our Small Business Administration business.

It is still early days that some of the first deferrals are just expiring, but so far, the trends are relatively consistent with our expectations and we have been staying close with our customers. As an example, we conducted a comprehensive calling campaign, making about 9,000 outbound calls through our Small Business Solutions customer over the quarter and continue to be in touch with them as the deferral period ends.

In our middle market loan book, we have not experienced a large second wave of deferrals yet. But expect deferral request in third quarter as borrowers begin refining their 12 months to 18 months financial forecasts. We are closely monitoring this activity and have provided some additional information on Slide 3 of the presentation. Overall, we think average loans and leases will be relatively flat next quarter, reflecting the lower end of period second quarter balances and as we continue to support our customers and focus on our originations activity on strong risk adjusted opportunities that play to our strengths.

Slide 15 and 16 highlights our credit trends in provision. Net charge-offs increased significantly this quarter to $170 million. Apart from the one factoring customer bankruptcy of $73 million that I previously mentioned, net charge-offs were $97 million or 1.02% of loans, about 3/4th of which were already reserved for and therefore did not have a specific impact on our provision. The retail sector had been facing headwinds prior to this current crisis, and we have been actively reducing exposure to troubled retailers prior to the onset of COVID-19.

The $73 million charge related to a single factoring bankruptcy was unanticipated, and a direct result of the retail shutdown, which precipitated a voluntary bankruptcy. While there were a number of retail bankruptcies this quarter with the exception of the one I just mentioned, we did not have exposure to those names or we had previously exited or reduced our exposures to low levels prior to the bankruptcy.

We expect continued pressure in this industry, and we are monitoring the developments in this sector closely, and remain in constant contact with our customers and clients. Our current factoring exposure in the retail sector is approximately $1.7 billion, down considerably from $2.9 billion at the end of last quarter as collections have outpaced new factoring volume, driven by store closures brought on by the COVID-19 pandemic.

In addition, only $250 million of receivables had extended terms at the end of June, down from $900 million in April. Our top 25 exposures include traditional retailers as well as well -- as well known online, big box and discount retailers. The top five customers which are rated single A to double A comprised a little over 40% of total factored retail exposure. The next ten largest exposures are between $25 million to just under $50 million of which five are investment grade with the largest being non-investment grade. After that, the remaining customer base comprising approximately $600 million of exposure is very diversified across approximately 28,000 accounts.

As I mentioned, so far, July activity has been surprisingly strong as retailers look to restock depleted inventory levels. We are also seeing strength in the furniture sector and increased factoring volume with discount retailers. That said, a second wave of COVID-19, which could result in reduced traffic and/or store closures remains a concern.

We have a robust approval and monitoring framework in place to review customer exposures on a weekly and monthly basis and where appropriate, we continue to implement risk mitigation actions and price enhancements. With respect to our credit reserves, this quarter, we established reserves of $58 million on individually evaluated accounts, and increased our collectively evaluated reserves by $107 million for on-balance sheet exposures.

This quarter, we utilized the June baseline scenario from a provider well known in the industry that assumed a more V-shape recession and longer recovery than the March baseline scenarios that we had used to determine our credit provision in the first quarter.

We also applied a qualitative overlay for other factors that include macro uncertainty, model uncertainty and sensitivity to changes in assumptions as well as additional risk to specific industries or portfolio segments such as oil and gas, factoring and small ticket commercial loans. As a result, our coverage ratio increased approximately 40 basis points to 3.5% on commercial banking loans and 30 basis points to 3.2% for total loans. Assuming no significant change in the outlook, we expect the provision to continue to moderate next quarter.

Non-accrual loans increased significantly in the quarter, primarily driven by loans in Commercial Finance and Real Estate Finance. As Ellen indicated, we have put in place heightened monitoring to carefully watch specific industry trends and indicators of delinquencies. In commercial finance, Real Estate Finance, and Rail, we have conducted a loan-by-loan review, identified high-risk exposures, performed stress analysis and prioritized our most vulnerable accounts.

We are monitoring revolver advances and borrower relief requests for vulnerable borrowers on a daily basis. We have also adjusted our underwriting to reflect the current environment. We are individually underwriting each transaction request for modification in Commercial Finance and Real Estate Finance and Rail to ensure the borrower has a path to recovery.

We have restricted our underwriting in the most distressed industries and suspended auto decisioning in acute areas of risk. We are staying disciplined in our pricing and structures, while continuing to evaluate opportunities that utilize our capital most efficiently. We have updated our slides in the appendix for additional information on portions of our portfolio expected to be more impacted by the current environment.

Slide 17 highlights our liquidity position at quarter end. Our liquidity remains robust at both the bank and the bank holding Company. During the quarter, we issued $500 million of unsecured debt, at just 3.929% at the bank holding company, and our our next maturity is not until March of 2021 and is for the same amount with a coupon of 4.75%. At the bank, we increased our available borrowing capacity at the Federal Home Loan Bank with the assets acquired from Mutual of Omaha bank substantially increasing our sources of contingent liquidity.

Turning to Slide 18, our common equity Tier 1 ratio advanced 30 basis points in the quarter and remained strong at 10%, well in excess of the Federal Reserve's minimum levels including the capital conservation buffer. The growth in the ratio this quarter was driven by the decline in the end of period loans, and a mix shift to lower risk-weighted assets, including cash and PPP loans which have risk weightings of zero. As the economy starts to recover and business activity improves, we expect risk weighted assets to increase from the deployment of excess liquidity and a lower level of PPP loans.

We also expect positive earnings will offset the deployment of capital. Over the next two quarters, assuming the current forecasted macro environment, we expect our common equity level to remain at 9% -- in the 9.8% to 10% range depending on the mix of lower risk-weighted assets. And with that, I will turn it back over to Ellen.

Ellen Alemany -- Chairwoman and Chief Executive Officer

Thanks, John. As I mentioned before, the work we have done to transform CIT over the last few years has strengthened us, tested us, and best positioned us to navigate this period. The business is diverse and adaptable, the Company is as strong as its ever been, and our deposit costs are declining. The management team is seasoned, agile, and resilient. We established a considerable appropriate reserve in the first half to increase our allowance for credit losses and actively manage risk. And we are heading into the second half cautiously optimistic, but also mindful that this is a rapidly changing environment.

With that, we're happy to take your questions.

Questions and Answers:


Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Today's first question comes from Moshe Orenbuch with Credit Suisse. Please go ahead.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks. John, you talked about the 10 basis points to 20 basis points recovery in the margin. I guess given the cuts you made in deposit costs like it -- I'm surprised that it isn't bigger. Could you just talk a little bit about what we might see in Q3 in terms of -- in terms of trends in the margin and in net interest income in dollars, or net finance revenue in dollars. Thanks.

John Fawcett -- Executive Vice President and Chief Financial Officer

Yeah. So Moshe, it's important to -- I think to have a perspective on when the cutting began. So I think it's very early in the second quarter. We've put our toe in the water, a little bit and we had some very minor cuts across April because we were concerned about that it would be significant amounts of attrition. As we've gone further and further, we've realized that a lot of the strategy that we've built out in the non-maturity portfolio in the online bank has actually taken a hold. And across 13 weeks in the quarter, we actually reduced rate 80 basis points across ten cuts and actually had consistent growth across all 13 weeks which is kind of interesting.

So to answer your question, we expect that a lot of the benefit that will go through -- that we in terms of the cuts that we did in the second quarter will continue to play through into the third quarter and beyond. Separately, what I would say is, is that we think that there is continued opportunity to kind of drag pricing down even further, especially in the non-maturity deposit space, but I think across the board, we've done actually a pretty good job in terms of all the deposit channels.

In terms of the broader question around net interest income, the second quarter was pretty challenging. I think it was, you know, clearly the bottom for us and just in terms of business volumes, I think in my script, we talked about business capital kind of coming back online, we're starting to see some shoots -- some green shoots come out of the factoring business through the first, I want to say 17 days of July, factoring volumes were up 97% of what they were last year.

Business capital which was down 30% in the first quarter actually hit what it had done in June of 2019. Our business capital guys are now thinking that notwithstanding the impact of the second quarter, we expect to get 90% of origination volumes. And so, the business feels like it is transitioning. And these are essentially used equipment and business capital is our fastest growing business in terms of imaging technology and phone systems.

As I said, more runway and deposits. We think there -- we know that there are some deposit cliffs and CDs that will reprice down substantially. It also lead to some run-offs. And I think the lower rates may push some of the excess liquidity out at the same time, as business starts to reinflate, hopefully it will consume some of the excess liquidity.

In terms of -- I'm not going to give you dollar amounts in terms of what expectations are in the third and fourth quarter, it's obviously incredibly fluid and as we've said, these are modest levels of returns of profitability. I think the last driver in the net finance margin and net interest income is obviously going to be around rail, and so we've again started to see some green shoots in rail, and it got whacked pretty good in the second quarter.

But coming into June and in July, what we've seen in terms of rail loadings, that's actually started to go up. And so we expect that utilization will continue to crawl up. We've seen the -- hopefully the worst in terms of storage, freight and switching costs and renewal rates, notwithstanding the fact that utilization will increase renewal rates. So I think we're still forecasting to be down around 20% until we see some of the larger North American excess capacity utilized.

Moshe Orenbuch -- Credit Suisse -- Analyst

So, maybe if I could just take this from a slightly different angle. You had PPNR that was about $200 million in the fourth quarter, down to a $180 million in the first quarter, maybe $110 million or so this quarter. That would benefit from some of the things you talked about on the fee income side and expenses. I mean, I guess, are you confident that number will be higher in the third quarter?

John Fawcett -- Executive Vice President and Chief Financial Officer

Yeah, I am confident. I mean, based on what we're seeing now, look, these are very fluid times and so at this nanosecond, I feel pretty confident that the third quarter is going to be better. As you start to look at non-interest income, as I said, we're seeing factoring volumes kind of ramp back up. Rail sales in the -- in second quarter were slightly diminished and a little bit off of what our forecast was of '20. We expect will be on '20 as some of the dislocation in that market normalizes.

We completely suspended legacy consumer mortgage portfolio sales in the second quarter. The pricing, it just completely collapsed and we're not distressed sellers and so, we just took a pause. We expect that the activities that we didn't see in the second quarter will transition into the third quarter, and you'll probably see a double side sale. So what comes with that is not only the gain on the disposition of the LCM portfolio, but also provision release related to the gross of purchase accounting accretion, securities gains should hold in and capital markets fees, I think will continue to kind of trend as the market starts to advance.

And then I think on expenses, we're all over expenses, reducing our footprint by 30% and taking out another body of heads, we're very focused, and so we're --

Ellen Alemany -- Chairwoman and Chief Executive Officer

We accelerated another $25 million in expenses this year from Mutual of Omaha that's supposed to come out next year. I would say business overall is significantly up in June. I would say in commercial, April and May were very slow, but we really started to see increased activity in June in certain industry verticals. And in business capital, we had the same volumes in June as we had June of last year, and it's technology related mostly, it's Lender Finance and Business Capital.

So we think we're really well positioned in some of these industry niches right now. And as John mentioned, you know, in Rail, we think we've seen the trial in Rail, basically with the US China Phase One trade agreements, we're seeing renewed activity in Rail. We had really large order. We've seen the largest corn order from Rail, from China recently. And, we also think that the trade one agreement is going to impact other markets like crude oil, refined products and housing activity bounces driving some demand for lumber products. So we're seeing some activity there.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks very much.

John Fawcett -- Executive Vice President and Chief Financial Officer

Of course.


And our next question today comes from Arren Cyganovich with Citi. Please go ahead.

Arren Cyganovich -- Citi -- Analyst

Thanks. The net finance margin, I think you mentioned was depressed from excess cash, I think you said around 30 basis points. How much of that will -- is incorporated in the improvement of 10 basis points to 20 basis points? And I guess how do you expect to deploy that cash over the coming quarters?

John Fawcett -- Executive Vice President and Chief Financial Officer

Well, hopefully it will -- these two things that are the principal dynamics, one is, is that as we continue to reduce pricing on the deposit product, you would expect to see some deposits attrite, and I think that's OK. I think the other thing is that we've got some fairly high deposit cliffs that are actually coming in terms of CDs across the third quarter. And so, some of that will attrite. What would be best is if we could actually put the deposits to work in growth that we're seeing in the balance sheet as we kind of reinflate.

I think the interesting thing about the whole deposit phenomenon is the last time this happened, it happened during the financial crisis of 2008, 2009 and 2010 and if you looked at surge deposits, which is, I guess what they call it now, the hoarding of cash like the quality, exit of equities and money market funds, delayed investments. All of that kind of activity, that actually ran its course over four or five years and so hypothetically, this could be something that we're living with for a long time, not just us, but all banks as cash continues to be trapped in the balance sheet.

I think what's different about this financial crisis is this one's bacterial, the last one was a real financial crisis. And so, as you know, vaccines and we start to live with this, maybe it will be a little bit different, but right now we're sitting with $2 billion to $3 billion of excess liquidity and cash on the balance sheet. And the expectation is it will start to moderate, but it's anyone's guess as to how long it will take. We will be aggressive in terms of lowering our rates and I think that that will take care of some of the problem. But it might be a multi-quarter issue, for sure.

Arren Cyganovich -- Citi -- Analyst

Okay. And then in the -- on the payment deferral side, frankly I'm a little bit surprised that some of the deferral numbers are low, just, I guess for example Real Estate Finance, I think it was only 5% of the total compared to some of the other statistics, I've seen from other banks. Is -- in the -- I guess, concurrent with that is the NPA is rising, what are the situations where you have a stuff that is moving to NPA versus getting a deferral and what are those situations where it just was so dire that you can't seem to able to even come up with a plan from a deferral strategy?

Ellen Alemany -- Chairwoman and Chief Executive Officer

Marisa, you want to comment on that?

Marisa Harney -- Executive Vice President and Chief Credit Officer

Yeah, I think there were three questions in there. Let me see if I can get them. The low level of deferrals, I would say we took an early approach to -- and I don't know how different we are from others. I've had some anecdotal feedback. But we were pretty, pretty cautious with granting deferrals. For example of -- you can have a deferral for up to 180 days. We chose to do a 90-day deferral with a subsequent 90 days upon further information. We also have a commercial book that has a lot of private equity structures in it, and in many cases, although the operation of a Company might be stressed due to the pandemic, the sponsor continues to have liquidity to support, and this is particularly true in real estate finance to support those borrowers.

And so, we chose not to automatically grant the deferral or to push a deferral in those situations, but rather to press investors to try to follow that with some liquidity. And that in particular is true in real estate finance, which tends to be a more institutional book, and therefore has more well-heeled sponsorship behind it.

With respect to NPAs, we took the approach that if a business and operation was in -- was shut down or had significant disruption due to the pandemic, however, we felt that the recovery period whenever and wherever that might be was going to be particularly extended, and would result in that particular business not being restored to its -- for lack of a better term normal, whatever that is say that we would handle that as you would normally handle a credit that was distressed.

So for example, if a -- if a hospitality property is closed, we feel that the hospitality industry has a long recovery ahead of it. That's also true for passenger airlines, for example. And in those cases, and those -- those are two areas that drove our NPA this quarter, the increase in NPAs.

Arren Cyganovich -- Citi -- Analyst

Okay, thank you.

Marisa Harney -- Executive Vice President and Chief Credit Officer



[Operator Instructions]. Today's next question comes from Vincent Caintic with Stephens. Please go ahead.

Vincent Caintic -- Stephens -- Analyst

Hey, thanks, good morning. Two questions. First one, a quick one on just how you're thinking about the dividend. So your capital levels have remained strong. But I'm wondering if there are any changes to your thinking about the dividend level. Just given that EPS coverage has been low with the past two quarters.

John Fawcett -- Executive Vice President and Chief Financial Officer

I think it's a quarter to quarter exercise. I think it's obviously conversation we have with our Board. I think it's obviously a conversation that we have with our regulatory partners. My view is that we're in a good place. I think we've been very good stewards of capital, when you think about the Mutual of Omaha bank transaction well ahead of that transaction we suspended share repurchases.

We've always maintained a fairly modest dividend payout ratio to the extent that we believe that we're returning to modest level of profitability, it feels like the horses are out of the barn, and we've kind of done the significant amount of reserving in the first quarter and took some of the lumps in the first quarter and augmented that in the second quarter. The impact on Common Equity Tier 1 ratio is about 7 basis points. We have the ample liquidity at the holding company, ample liquidity at the Bank. And the principal driver of the first half financial performance has been provisioning which essentially is a transfer of loss absorbancy from capital to ACL.

And if you actually want to get wonky about '09, '04, which is actually governs our ability to pay dividends in the conversation we talk to the Fed about, it was written in 2009 when GAAP relied on incurred losses and less on the notion of the crystal ball embedded in CECL. So, there is a kind of very fundamental misalignment between supervision and regulation guidance established in 2009 safe GAAP which accelerated loss recognition in an almost spontaneous way. And so it's a challenge. And I guess the last couple of points, and you said it is, you know, our capital ratios are strong and above capital conservation buffers, and we've maintained a very robust capital planning process.

So, notwithstanding the fact that we're not a CCAR bank, we're no longer a SIFI, I'm not sure why we are, but we are. But we've maintained all of those protocols and I think our regulators understand that and appreciate the fact that we didn't throw out the babies with bathwater, we continued to operate with very heightened standards around capital and capital planning.

That's a long-winded way of saying I'm pretty relaxed with it. One way, it's pretty helpful.

Vincent Caintic -- Stephens -- Analyst

Okay, great. Second question, so you had a commentary -- your commentary on June is, I think was very positive and your baseline assumptions for a V-shape recovery, just wondering if you've had maybe any updates from July so far, if there's been any let up just from what we're kind of seeing in the news about maybe a second wave or some stage shutting down just any -- any updates from what you're seeing here. Thank you.

Ellen Alemany -- Chairwoman and Chief Executive Officer

Yeah. The business volume -- we do monthly reviews with the businesses, and most of that activity was June reported activity, and it's very, very current. And Marisa can you just comment on the credit side, if you've seen anything in terms of the buckets?

Marisa Harney -- Executive Vice President and Chief Credit Officer

Yeah. No, I mean, obviously, we're watching the situation very closely. Clearly at the end of March, the economy was shocked by a complete shutdown. My opinion, I don't think we're going to see a wholesale nationwide shutdown. Again, I just don't think it's politically expedient. However, local markets are clearly experiencing a variety of different stresses, probably the single on the pulse of that is in our factoring business where clients who are typically wholesalers or manufacturers are seeing orders pick up as retailing has opened, and we're still seeing factoring volume pretty strong in the month at the beginning of the month of July.

But it's obviously kind of too soon to tell whether we're going to see a significant shut down ordered or in-voluntary, meaning people just don't show up in some of the bigger markets. But no, I don't see anything particular that's changed in credit between June and July.

Vincent Caintic -- Stephens -- Analyst

Great. Thank you very much.


And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final comments.

Barbara Callahan -- Head of Investor Relations

Great. Thank you, Rocko, and thank you everyone for joining this morning. If you have any follow-up questions, please feel free to contact Investor Relations. You can find our contact information along with other information on CIT at Thank you again for your time and have a great day.


[Operator Closing Remarks].

Duration: 53 minutes

Call participants:

Barbara Callahan -- Head of Investor Relations

Ellen Alemany -- Chairwoman and Chief Executive Officer

John Fawcett -- Executive Vice President and Chief Financial Officer

Marisa Harney -- Executive Vice President and Chief Credit Officer

Moshe Orenbuch -- Credit Suisse -- Analyst

Arren Cyganovich -- Citi -- Analyst

Vincent Caintic -- Stephens -- Analyst

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