Good morning, and welcome to CIT's First Quarter 2019 Earnings Conference Call. My name is Andrew, and I will be your operator today. At this time, all participants are in a listen-only mode. There will be a question-and-answer session later in the call. [Operator Instructions] As a reminder, this conference call is being recorded.

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

Thank you, Andrew. Good morning, and welcome to CIT's First Quarter 2019 Earnings Conference Call. Our call today will be hosted by Ellen Alemany, Chairwoman and CEO; and John Fawcett, our CFO. After Ellen and John's prepared remarks, we will have a question-and-answer session.

As a courtesy to others on the call, we ask that you limit yourself to one question and a follow-up and then return to the call queue, if you have additional questions. Elements of this call are forward-looking in nature and may involve risks, uncertainties and contingencies that may cause actual results to differ materially from those anticipated.

Any forward-looking statements relate only to the time and date of this call. We disclaim any duty to update these statements based on new information, future events or otherwise. For information about risk factors relating to the business, please refer to our 2018 Form 10-K.

Any references to non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in our press release. Also, as part of the call this morning, we will be referencing a presentation that is available in the Investor Relations section of our website at cit.com. Thank you. I'll now turn the call over to Ellen Alemany..

Thank you, Barbara, and good morning, everyone. Thank you for joining the call. I'm pleased to report that we had a solid first quarter. We began to deliver on next phase of our strategic plan and posted net income of $119 million or $1.18 per common share. In addition, our tangible book value per share was up 2.5% compared with the fourth quarter.

With the simplification efforts completed, we began the year on a much stronger foundation. We remain committed to our financial and operational goals for the year and are planned to power forward the next chapter of CIT as outlined on page two of the presentation. Let me hit a few highlights for the first quarter.

We grew average loans and leases term interest by 2% and continued to see strong origination volumes in Commercial Banking. Our average consumer deposits grew significantly by about 8% from last quarter, driven largely by the Direct Bank.

This is from a tremendous success of the Savings Builder product, which has accelerated our deposit growth faster than planned but nonetheless we’re encouraged that so many customers have chosen CIT in a crowded marketplace. We returned about $205 million of capital to shareholders between stock repurchases and dividend.

We remain focused on reducing operating expenses, and we're continuing to drive efficiency while also investing in the business. For example, we have been investing in modernizing our systems and digitizing our operations, and this will drive operating efficiency and the ability to unlock greater business potential.

And the broader credit environment remains stable, credit reserves were strong, and we continue to be disciplined in our underwriting despite competitive markets. John will walk you through a detailed account of results, but first let me touch on few business updates.

Our Commercial Banking volume was up 5% year-over-year and we continue to find good opportunities in the markets that speak to our core strengths. Average loans and leases in Commercial Finance were up 4% from last quarter and 7% from a year ago.

Some of this was driven by strong originations in the fourth quarter that drove greater asset growth in the first quarter. We also saw lower prepayments. The underlying business opportunities remained strong, particularly in more collateral based blending.

Our growth in the quarter was driven by deals in our power & energy, communications & technology, healthcare & C&I verticals which have strong market positions. Equipment financing areas within the Business Capital division also posted strong results with average loans and leases up about 3% from last quarter and 12% from a year-ago.

Our proprietary technology in this business is a key advantage and helped to drive a significant portion of our 17% origination growth year-over-year. We continued to grow market share in small and mid ticket equipment financing and have core competencies in this market. We remain highly selective in commercial real estate.

We're seeing good opportunities based on our strong relationships and industry knowledge but average loans are down 1% from the prior quarter and 3% from last year. We have an experienced team and we are being disciplined. Average loans and leases in the North American Rail division were flat quarter-over-quarter and up 2% from last year.

Utilization rates were strong at 97%, and we continued to proactively manage the portfolio through the cycle. As I mentioned earlier, we had a strong quarter of deposit growth in the Consumer Banking segment, driven by the Direct Bank. We welcomed nearly 50,000 new customers to CIT and grew average deposits by $2.4 billion in the quarter.

The Savings Builder product has had strong appeal and has helped us increase our non-maturity deposits as we strategically reduced our time deposits. We continue to monitor our deposit growth and will adjust as needed going forward to best align with our funding needs.

Before I wrap up, I also want to mention the addition of Bob Rubino and Jim Hubbard to the management team. Jim is our new General Counsel, and Bob will help drive our growth strategy as Head of our Commercial Banking segment. They both bring a tremendous amount of key banking and marketplace experience to CIT, and I’m happy to have them on the team.

So, we're off to a strong start and we’re focused on powering forward to deliver on our plans for the year. With that, let me turn it to John..

Thank you, Ellen, and good morning, everyone. We are off to a solid start this year with net income available to common shareholders of $119 million or $1.18 per common share as we continue to make progress towards our 11% return on tangible common equity target for the fourth quarter of this year.

We achieved these solid results by executing on our strategy. We grew average loans and leases of our core business by 2% from the prior quarter and 7% from the year ago quarter. We continue to strong origination volumes in Commercial Banking, which grew 5% from the year ago quarter, driven by growth in Commercial Finance and Business Capital.

We stayed disciplined in our credit underwriting. We remained focused on our operating expense initiatives while continuing to invest in technology to improve operating leverage over the longer term.

We continue to look for opportunities to optimize our funding profile, and we've repurchased 180 million of common shares -- common stock below tangible book value for this quarter. With the business transformation completed and our financial statement is much simpler, we had no noteworthy items this quarter.

However, given that prior periods were impacted by noteworthy items, I will refer to our comparative results from continuing operations, excluding noteworthy items, unless otherwise noted. I will now go into further detail on our financial results for the quarter. Turning to slide six of the presentation.

Net finance revenue declined from the prior quarter as higher deposit costs in the current quarter and lower net operating lease income were partially offset by increase in revenues on our loans and investments. On slide seven, net finance margin was 3.20%, down 19 basis points from the prior quarter.

The prior quarter included 3 basis points from elevated levels related to favorable usage collections in Rail as well as a special dividend from the Federal Home Loan Bank. In addition, we estimate that the lower day count in Q1 reduced margin by 2 to 3 basis points.

The remaining decline this quarter was primarily driven by higher deposit rates, lower net yields on Rail operating leases and the impact of higher percentage of average cash and investment securities in average earning assets, which was partially offset by lower borrowing costs.

As Ellen indicated, we experienced strong performance in our Savings Builder product, which was designed to attract long-term savers and increased non-maturity deposits, which we believe will result in longer relationships and better performance in this portion of the cycle. We increased the rate on the product to 2.45 early in January.

And while it is currently one of the higher online savings rates in the market, it is lower than online term CDs and gives us more pricing flexibility over the cycle. With the Savings Builder performance, average total deposits increased 8% this quarter, well ahead of our expectations.

As a result, the mix of average cash and investment securities increased to a higher than normal percent of total average earning assets, which we estimate resulted in almost an 8 basis-point drag on our margin.

We’ll utilize these excess deposits to repay higher cost Federal Home Loan Bank borrowings towards the end of the quarter and we anticipate utilizing a portion of this liquidity to offset upcoming CD maturities next quarter.

In addition, over the course of the next couple of quarters, we intend to deploy the excess cash as we continue to grow loans and leases. Loan yields remained relatively constant as the fourth quarter benefits from the increase in market rates in the fourth quarter of last year were offset by a reduction in day count and yields related fees.

Lower net Rail operating lease revenue reduced margin by 3 basis points from continuing repricing pressure and the absence of favorable usage collections in the prior quarter.

Higher deposit rates reduced margin by 16 basis points, reflecting the increase in the Direct Bank Savings Builder rate early in the quarter, and continued migration of our customers from products with lower rates.

Borrowing costs benefited margin by 7 basis points as the decline from liability management actions taken last quarter was partially offset by an increase in Federal Home Loan Bank rates.

Turning to slide eight, other non-interest income increased $5 million compared to the prior quarter and includes $6 million in property tax income related to the amount of estimated property taxes to be collected from customers with an offsetting charge in operating expenses.

This change in financial presentation was a result of the adoption of a new lease accounting standard, and we currently estimate the impact in both property tax income and expenses will be $25 million to $30 million for 2019.

Capital markets fees grew from low levels in the prior quarter and will vary depending on the level of activity and type of transactions. For example, recently, we've been originating more collateral backed loans, which generally provides for lower fee opportunities.

Last quarter, we completed the sale of our private label MBS portfolio acquired in the OneWest acquisition, which had higher yields and higher risk ratings. As a result, going forward, the gains on the sale of investment securities are expected to be modest, more opportunistic, and dependent on market conditions.

Turning to slide nine, operating expenses excluding intangible asset amortization, increased $18 million from the prior quarter, $14 million of the increase was seasonal from higher employee costs related to benefit restarts and the acceleration of cost from retirement-eligible employees.

In addition, there was an estimated $9 million of operating expenses that resulted from the adoption of a new lease accounting standard, including $6 million that was offset in other non-interest income that I just mentioned.

These increases were partially offset by lower professional fees and technology costs which can vary from quarter-to-quarter depending on the timing and progress of various initiatives.

The efficiency ratio increased to 58%, reflecting elevated operating expenses, and we estimate a little over 100 basis points of the increase resulted from the adoption of the lease accounting changes. We remain committed to further reducing operating costs while also investing in our businesses.

And we are laser-focused on achieving our target operating cost reduction of at least $50 million through 2020, as we highlighted last quarter. Slide 10 shows our consolidated average balance sheet.

Average earning assets grew 5% from the prior quarter, most of which was from increase in interest-bearing cash and investments, resulting from strong deposit growth. Average loans and leases grew 1%, reflecting 2% growth in our core portfolio, partially offset by the one-off of the legacy consumer mortgage portfolio.

Average interest bearing cash and investments increase about 250 basis points to 21% of average earning assets this quarter. The average duration of our investment securities book declined to little over two years from about three years as we repositioned some of our books to reflect the higher level of liquidity and the flatness of the yield curve.

Slide 11 provides more detail on average loans and leases by division. Strong origination volume, particularly in Commercial Finance, and the equipment finance businesses within Business Capital, drove growth in our core portfolios.

As Ellen mentioned, in Commercial Finance, while middle market activity slowed this quarter and continues to shift to non-banks, given the diversity of our business, we continue to see good collateral-based lending opportunities.

In particular, communications and technology, power and energy, healthcare and various sub verticals within C&I experienced strong origination volume this quarter while a higher level of origination volume at the end of the year, as well as lower prepayment activity also contributed to the 4% average loan growth this quarter.

In Business Capital, we continue to see strong growth across our equipment financing portfolios, which was mostly offset by seasonal reduction in the factoring business. The real estate finance portfolio was down this quarter as we remained disciplined in a highly competitive market.

We continue to see good opportunities stemming from our strong relationships, deep industry knowledge and speed of execution. Our rail portfolio remained flat this quarter as new deliveries offset depreciation and our portfolio management activity. Utilization declined slightly to 97% but remains strong as leases repriced down 10% this quarter.

We continue to see strengthening in the tank car market. And although new leases continue to reprice down, the gap has narrowed over the past year. Our freight cars continue to reprice near par. However, small covered hoppers used to transport sand and grain, are repricing down.

Weakness in the sand market is due to the shift from northern white sand to local brand sand which we continue -- expect to continue. Weakness in grain is due to lower exports, which is being impacted by uncertainty and trade policies.

We continue to expect lease renewals on the total fleet to reprice down 15% to 20% in 2019, but will vary quarter-to-quarter based on the amount and type of cars renewing. Slide 12 highlights our average funding mix, which reflects the trends I mentioned earlier.

One additional item to note is that while Federal Home Loan Bank advances increased modestly during the quarter, period-end balances were down as we repaid almost $1.6 billion in February and March, which had an average rate of 2.80. Slide 13 illustrates the deposit mix by type and channel.

Average deposits increased $2.4 billion from the prior quarter to $33.3 billion, reflecting growth in our online savings account deposits. We also closed four branches in the fourth quarter as part of our cost reduction initiatives, with the minimal reduction in branch deposits.

The cost of deposits increased as the cumulative beta since the first rate hike of the current tightening cycle in December of 2015 increased to 31% from 23% last quarter.

While prevailing market rates have flattened, we continue to expect the positive costs to rise over the next couple of quarters as deposit repricing cycles grow and customers migrate to higher savings rate products. Turning the capital on slide 14.

In January, we communicated that we have received a non-objection from our regulators to repurchase upto $450 million of common stock through September 30, 2019.

During the quarter, we repurchased approximately $180 million in common shares, consisting of 3.7 million shares at an average price of $49.16, which was 6% below tangible book value, ending the quarter with just 98 -- just under 98 million shares outstanding.

For the second quarter, we have also increased our common dividend to $0.35 per share from $0.25 per common share, a 40% increase. This is our third increase since 2017, and we aspire over time to increase our payout ratio to approximately 30% to 40%, consistent with our regional bank peers.

Despite loan growth and capital returns in excess earnings -- in excess of earnings, our common equity Tier 1 ratio at the end of the quarter remained at 12%, the result of regulatory and accounting changes that impacted the risk weighting of certain assets in our trajectory towards our target common equity Tier 1 ratio.

Our regulatory rule changed the high definition of high volatility commercial real estate or HVCRE loans, which reduced the risk weighting on those loans from 150% to 100%. This change caused $1.15 billion decrease in risk-weighted assets, which we think better reflects the risk characteristics of these loans.

Offsetting some of this reduction was an increase in risk-weighted assets of approximately $200 million, resulting from the adoption of a new lease accounting standard that required us to report on balance sheet to future liability for our leased facilities and equipment along with the corresponding asset.

The net decrease in RWAs will mostly be offset next quarter with the expiration of the loss share agreement with the FDIC, which is expected to increase RWAs by approximately $800 million.

The impact on our common equity Tier 1 ratio was an increase of 26 basis points, which will be mostly offset in the second quarter, resulting in a minimal net impact. We maintain our guidance of 11% common equity Tier 1 ratio by the end of this year. Slide 15 highlights our credit trends.

The credit provision this quarter was $33 million, primarily driven by net charge-offs of $34 million or 43 basis points, which was within our guidance range. Over the past three quarters, net charges-offs had been at the low end or below our guidance level.

The higher net charge-offs this quarter were primarily driven by increase in Commercial Finance, most of which were previously reserved for, and small business solutions within Business Capital. Non-accrual loans increased this quarter but still remained below 1% of total loans.

Reserves declined slightly to 1.56% of total loans, and 1.87% for commercial banking, reflecting continued better risk ratings under originations and the reduction of loans with higher reserves.

The broad credit environment remains stable and new business originations continue to come in at better risk ratings than the overall risk rating of the performing portfolio. Our reserves remain strong and continue to reflect more than 4 times the last 12 months net charge-offs.

Slide 16 highlights our key performance metrics, reflecting the trends we just discussed. Our return on tangible common equity from continuing operations was 9.7%, down from the prior quarter, reflecting elevated seasonal operating expenses in the current quarter.

If you normalize for the semiannual preferred dividend that is paid in the second and fourth quarters, our return on tangible common equity would have been 9.3%.

As Ellen indicated, we remain committed to continuing to improve our returns and are focused on achieving a return on tangible common equity of 11% in the fourth quarter of 2019 and at least 12% by the fourth quarter of 2020.

Further improvements will come from capital optimization, revenue growth in our core businesses, and reductions in operating expenses. Page 17 highlights our outlook for the second quarter.

We continue to expect low single digit quarterly growth in our core portfolio and slightly lower growth in a total portfolio reflecting the run-off of legacy consumer mortgage portfolio.

Net finance margin is expected to be in the low to middle area of our target range due to continued headwinds from a higher mix of cash and investments as it’ll take a couple of quarters to work through the excess liquidity.

We also expect higher deposit costs reflecting a full quarter impact from the deposit growth and continued migration of our depositors into higher rate products. However, these costs will be partially offset by lower borrowing costs from the Federal Home Loan Bank debt we repaid towards the end of the quarter.

Finally, downward pricing on the rail book will also continue to pressure margin. We expect operating expenses to decline from elevated seasonal compensation and benefit costs in the first quarter, but continue to reflect the lease accounting changes.

We have also provided guidance for the full-year to reflect the impact from the lease accounting changes. We continue to expect operating leases for 2019, excluding intangibles and the impact of lease accounting changes, to decline approximately 3% from the 2018 level of approximately 1.050 [ph] billion.

However, for modeling purposes, we now include our full-year operating expense guidance, our expectation of 1% to 2% increase, including the impact of lease accounting changes.

The net efficiency ratio is expected to remain in the mid to high 50% area next quarter, reflecting the trends I just mentioned, and including the impact of lease accounting changes. Credit metrics and the effective tax rate absent any discrete items are expected to be consistent with our full-year outlook.

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

Thanks, John. In closing, I want to reiterate our commitment to achieve an 11% return on tangible common equity at the end of this year, and at least 12% by the end of next year. We remain focused on steady execution of our plan and delivering long-term shareholder value. With that, we're happy to take your questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Moshe Orenbuch of Credit Suisse. Please go ahead..

Great, thanks. I wanted to talk a little bit about the net finance revenue and net finance margin. You kind of mentioned that the online deposit costs look like they widened maybe as much as 10 basis points relative to your bank deposit costs.

And I mean, you said you're going to be able to use the deposits a little more efficiently, I guess, as we go through the year, but what are your thoughts in terms of the pricing as you go through with respect to deposits? And then, I’d like to follow up on some of the yield items..

Yes. So, Moshe, this is one of the things we look at pretty closely. I think, if -- the 2.45 was clearly the high end of the range in terms of the market. There are rates that are higher. There's a couple of right around 2.45, and there is a bunch of to 2.40 and 2.30. So, we're a little bit long in terms of rate.

But I think that that was part of the plan. If you look back to what we did back in the first quarter of 2018, we launched the same kind of promotion. I think, one of the things that we're really pleased with in terms of this promotion is that we added almost 50,000 new relationships.

If you went back to last year, it took us the first and second quarter, it actually had about $3 billion in deposits and it took us two quarters to raise about the same number of relationships. So, we're pleased with that. I think, the second thing is, is that we're competing in the money market space as opposed to the CD space.

And so, if you look at one year CDs, they are 283%. And so that feels pretty good. I think the test of time will be our ability to actually hold on to those relationships. But, this isn't just a wide net cash. I mean, these are targeted relationships that we're going after. And so, we're looking for generation X, Y, and Z.

This is a population that comes in with relatively small balances, $45,000 and less. And the Savings Builder program was built as a program, that you could be a continuous saver by adding $100 a month to an account and get the preferred rate. So, I think, we're pretty pleased with the program.

If I had my druthers sitting in the finance chair, I guess I wish it was a little bit less successful, but we are where we are..

Got it. And then, maybe turning to the yield side, you mentioned rail car. I guess, we were sort of sitting here hoping for rising energy prices, and now we've got it.

And now, I guess -- I mean, maybe could you just elaborate a little on your comments about the yields on some of the various cars, and maybe when we could expect those to inflect back in something of more upward direction?.

Yes. So, if -- let me start with last year in terms of the guidance that we provided last year. So, last year, we guided to prices down 20% to 30%, and we actually came in down about 14% to 15%. This year, we're guiding down 15% to 20%.

If you look at the renewals actually in the first quarter, it was fairly low population in terms of the type of cars that actually renewed. I think, the challenge -- and we're seeing at least in the tank cars, they're repricing ahead of plan; they're still less than car renewal rates, but ahead of plan.

I think where we're starting to see a little bit of challenges is in -- and I mentioned this in the call script, is in the sand cars, and the challenge between northern white sand and more local brown sand as it relates to fracking. So, that's become a bit of a challenge, and we're seeing the sand car reprice down.

I think the good news from a sand car perspective is that they're multiuse cars and they can be repurposed into cement. And so, we'll see how that goes. But, that was a part of the drag that we saw in the first quarter.

And I guess, as the geology around brown versus white sand continues to play out, we would expect potentially that more of our sand cars would be converted into cement cars..

And just around that, given that your first half margin will likely be kind of in the lower half of your guidance range, what is it that gets it back? Is it the utilization of those deposits in the back half of the year? What -- how does it kind of get back up here?.

Yes. So, clearly, it’s part of deposit utilization. I think in Business Capital, we're continuing to experiment with price expansion. We started that in the second and third quarter of last year, we're continuing to keep our toe in the water in terms of where we can start to expand.

Given the flatness of the yield curve, it's not likely that we're going to see any margin expansion in Commercial Finance or commercial real estate. And then, there are opportunities to continue to kind of pay down some of the more expensive Federal Home Loan Bank borrowings.

And we do have a fairly robust pipeline in terms of new business activity that’s coming. And so, a little bit of a way to think about this as we prefunded growth on the left hand side of the balance sheet.

And as we plan out in terms of the overall mix of deposits, we do have some CD cliffs coming in the second and third quarter of this year, which again we're prefunded on..

The next question comes from Eric Wasserstrom of UBS. Please go ahead..

Thanks very much. John, just to get to maybe a different topic in the efficiency ratio and just kind of to understand the quarterly cadence, obviously, you started the year up at 58 and if the full year is as a mid-50 target, including the accounting changes, it suggests that you're ending the year in the low 50s.

So, can you just -- because it seems like that's the primary delta in terms of the improvement in the ROTC. So, can you just help me understand kind of what kind of gets you there over the next three quarters, like where we should look for the changes? And yes, I guess that’s really the core of the question..

So, Eric, obviously in the first quarter, we had the impact of the FICO resets and some of the retirement benefits that kind of cycled through. The lease accounting actually presents a bit of a challenge for me internally, because I don't want to keep two sets of books.

But, that's probably worth another 125 basis points, which kind of resets the expectations around where we're going to go on the efficiency ratio. In terms of the things that we're doing on in the expense space, I mean, we are literally looking at everything.

I think Ellen's made a very conscious effort to invest in technology and digitization of the Company and right sizing people as we kind of invest in the technology to support the place.

I think one of the ways that I kind of look at the expense is that if you compare the fourth quarter ex intangibles of 270, you back out the accounting changes of property tax of 6, the deferred origination costs another three, adjust for benefit restarts, and I get down to about 247, which is apples to apples versus Q4.

So, if you just run rate the first quarter for these anomalous kind of one-time events, you get to a run rate that's about a $1 billion, which kind of suggests that we're on the path to continue to be vigorous.

Now, there's going to be ups and downs quarter-to-quarter, but through the first quarter, absent some of the noisy counting, in FICO resets, we feel like we're in a pretty good place and we haven't taken our eye off this ball..

Yes. Eric, this is Ellen, if I could elaborate more on the expense side. So, we have a lot of specific initiatives to target against the whole 50 million number reduction that we had identified.

Just in terms of labor costs optimization, we're looking at lower cost locations; we're still working on right sizing; we're converting contractors to perms at a much lower rate. We have some strategies to reduce FDIC insurance costs. John has mentioned, we have done some branch closures, and we're also looking at further real estate rationalization.

Credit reengineering is a really big opportunity for us, and then, just other things like records management, travel and expenses. So, we've got all of these are well underway, and we're making good progress. .

Thanks for that, Ellen.

And just to clarify, the 11% target, is that inclusive or exclusive of the impact from accounting change?.

It includes the effect of the accounting change, it’s 11% return on tangible common equity in the fourth quarter of ‘19..

Got it. And so, if I'm just understanding correctly, it would assume that the accounting change is approximately a 90 basis-point headwind to that target.

Is that right?.

I don't think it's that high. It’s -- I mean, we can take this offline, and Barbara will follow up with you. But, it’s not 90 basis points. It's smaller than that..

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

Yes. Good morning. My favorite slide was slide 20, where there were no noteworthy items this quarter..

Ours as well..

And I guess, what I'm wondering is, Ellen, you outlined a vision of a national middle market bank a couple of years ago. And at that time, the only thing that I can think of that kind of doesn't fit with that vision is still the maritime portfolio.

And I'm curious, are we kind of done with the major restructuring items now, are there still more things to go? And can you update us on whether the maritime is now -- is that strategic and core or is that still -- are there any other major restructuring items left as far as you can see?.

Sure. So, one is just in terms -- I mean, I think the focus on Commercial Finance are really collateral based portfolios. And to the extent that maritime fits that, we're going to do more collateral based deals. I think, in terms of the major divestitures, we're pretty much finished.

Although, I have to say that looking at our portfolios and dynamic process, we're always looking at ways to market opportunities and ways to optimize the portfolio.

But, just in terms of the core strategy where basically every business has a set of revenue initiatives that we're working on, we're going to continue with strengthening our funding profile going forward. I mean, right now, deposits roughly represent about 81% of our total funding, and we have a loan to lease deposit ratio of 92% at the bank.

John and team have been making really good progress on the capital front. Operating efficiency, we put the new 50 million target out there. And then, really from a risk perspective, as I said, the whole shift in the portfolio has been to more collateral based.

That being said though, we set out the target of at least 12% next year, which we recognize is still behind other banks. And so, we are opportunistically looking for portfolio purchases, small deposit acquisitions. We recognize that where our stock trades, it's really difficult for us to make an acquisition.

And so, as I said, we're hoping that one of these -- we get one of these opportunities to accelerate the 12%..

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

Thanks. I guess, just kind of following up on your last comments, Ellen. M&A, it seems like you'd have some opportunity, if you could acquire some sort of lower cost deposit base, maybe some better opportunities and some other peers. I know that you don't have a great currency for that.

But, can you talk about the ability or how you think about acquiring some lower cost, higher quality deposits? And then, the comments on portfolio purchases, what would you say the environment is for that? Are you seeing there many portfolios available to add to the balance sheet?.

Yes. So, we're -- one of the things we want to do to improve our valuation is to continue to have more deposits funding as a franchise. And we also think that there's still a lot of upside in our valuation.

We're seeing -- I mean, I think the portfolio purchases -- most of the portfolio purchases we're looking at, would be in the business capital space or acquiring large programs.

So, what we did was we created a sales force and business capital that's really hunting for the large programs out there, and having a conversation with the customer, how can we help you with your customer financing. And if you win one of these programs, you can get significant volume.

There's been, I would say, over the last 18 months, a fair amount of leasing companies that have put themselves up for sale. We've looked at some of these transactions, and we -- either because of price or credit, we didn't win any of these transactions. But, as I said, we're still continuing to look there.

And then, with the deposit acquisitions, occasionally we see something come up in the marketplace. And it really is coming down to price on these transactions. And then, we're also, I mean, there have been some, obviously MOEs announced in the marketplace.

And, I mean, I think the nice part of these transactions is that it can create value without paying a premium for the transaction. We've had lots of discussions with our Board; we're all interested in maximizing long-term shareholder value. And we're very open to any type of transaction..

Okay. That's helpful. Thank you. And then, I think John had mentioned in the Commercial Banking, Commercial Finance, you're facing still some non-bank competition.

Can you talk about where that's coming from? Is that coming from private funds, is it coming from BDC? Just something that whenever to we talk to a lot of our non-bank, commercial mortgage or its BDCs, they typically talk -- don't really indicate they're competing with banks.

I’m just trying to understand better, where you're seeing that competition coming from..

I mean, I think in the leveraged finance space in particular, we’re competing with the BDCs. And -- but I think it was a little less this last quarter as reflected by some of the lower prepayments that we've had in the business.

But, as I mentioned, our strategy is to go more towards the collateral-based transactions and we've like, for example, we've increased our healthcare real estate portfolio; we're expanding our corporate and industrial financial services group; we reintroduced aviation financing; we've done a little maritime lending.

So, that's where we've seen most of our growth going forward. And then, we're still active in communications and technology and in energy.

But, we are seeing still a lot of competition in the BDC space, which was one of the things that drove us to form the Northbridge joint venture to allow us to participate in some of these transactions without -- we can originate them and not put them on our books..

And I guess, that I want to add to that is, is that especially as it relates in the commercial real estate space, we're actually seeing average loan balances decline. We've opted not to compete on terms and conditions. And so we're kind of sticking to our discipline. And that's across the board. So we're not trading credit for volume, and won't..

Was there any follow-up, Mr.

Cyganovich?.

Sorry, not. I’m good. Thank you..

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

Good morning, everyone. Thanks for taking my question.

Just with regard to the increase in that charge-offs linked quarter, I know you kind of attributed to just general Commercial Finance and Business Capital, but any specific industries or geographies you're seeing any stress?.

Yes. So, this is Ellen, Scott. In Business Capital we had a -- we did experience a higher level of net charge-offs in Small Business Solutions, which is our direct online banking platform. And we saw some pockets in the transportation and restaurant industries that showed some weakness there.

And we think that these are industries that have been impacted by labor market shortages and higher wages. We also had some challenges in their collection process in that area, and as a result we've quickly modified their underwriting practices and we also augmented some of our collectors.

The business has been growing rapidly and I don't think we hired as many collectors as we should have. So we had this kind of blip in charge-offs in Business Capital. But, I would say that, otherwise, in general, we haven't seen anything abnormal. We're still projecting losses in everything to be within the guidance that we've given the market..

And then just, I think you mentioned, healthcare is being one of their -- healthcare real estate, I think, it's been one of the areas you focused on for growth. It seems you have uncertainty around healthcare currently.

Just wondering how you kind of get comfortable with this kind of the longer term loans, typically, in real estate and just given potential changes in the healthcare environment, how you're getting comfortable or what assets you're selecting to minimize credit concerns?.

Yes. I mean, I think in the healthcare real estate portfolio, we've increased the portfolio by roughly, I think, around $0.5 billion over the last couple of years. And the idea there is we're secured by real estate, we're focusing on medical office buildings and then we're also specializing in skilled nursing and assisted living facilities there..

The next question comes from Vincent Caintic of Stephens. Please go ahead..

Two related questions. So first on the volume growth and then on yields. So the first question, so nice to see that the core average loans from leases were up 7.5% year-over-year. I guess, for your guidance for next quarter and then also for the full 2019, you're in the low to mid single-digit growth range.

So I'm wondering, was there something in the first quarter that drove higher than what would be for the year's growth rate. Is there any seasonality or anything of that nature? And then relatedly on the yield side, I guess, I would have thought that yields would have been higher just from seeing LIBOR move higher.

So I'm just kind of wondering if you could expand on maybe some of the yield guidance for some of those different asset classes moving lower..

I'll have John address the yields. But I think in terms of the volumes, I mean, one is we have the impact of some of the liquidating portfolio and -- on the business. But I think, in general, customer sentiment remains pretty optimistic.

The rate environment is competitive, but pipelines are strong, especially in business capital and commercial banking. Some customers still have, there is some concerns with the broader economy, there is some concerns with tax reform in China and Brexit, some of the uncertainty there.

But, I would say it's just a solid sentiment on business and that's in both Commercial Banking and in Business Capital..

So, as it relates to -- and I just want to make one other point around the balances that you're seeing in Commercial Finance. So there was a lot of activity in the last couple of weeks of the fourth quarter, which did reflect in the average balances of the fourth quarter, but obviously carried through to the entirety of the first quarter of 2019.

On a normalized basis, we probably expect to see within Commercial Finance growth of 1% to 1.5% to 2%, quarter-on-quarter growth. But still the predominant growth engine for this franchise is in Business Capital.

In terms of what you're seeing in yield is a lot of it is, is that a lot more of what is that we're doing is collateral-based lending, and so, inherently less risk. There's a change in mix that we live with quarter-on-quarter. And then also in the first quarter we had a lower level of prepayments.

And you probably have to go back to the first quarter of 2017 to see as low level of prepayments, which also impacted yields..

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks..

Thank you, Andrew. And thank you, everyone for joining this morning. If you have any follow-up questions, please feel free to contact me or any member of the Investor Relations team. You can find our contact information along with other information on CIT in the Investor Relations section of our website at cit.com. Thank you again for your time.

And have a great day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..