First Citizens BancShares, Inc. (FCNCA) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to CIT's Fourth Quarter 2012 Earnings Conference Call. My name is Mike, and I will be your operator today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Kenneth Brause, Director of Investor Relations. Please proceed, sir.

Thank you, Mike, and good morning, everyone. Welcome to CIT's Fourth Quarter 2012 Earnings Conference Call. Our call today is hosted by John Thain, our Chairman and CEO; and Scott Parker, our CFO. After their prepared remarks, we will have a question-and-answer session. [Operator Instructions] We'll do our best to answer as many questions as possible in the time we have this morning. 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 2011 Form 10-K that was filed with the SEC last February. Any references to non-GAAP financial measures are meant to provide meaningful insight and are reconciled with GAAP in the press release. For more information on CIT, including the slides that will be referenced in today's call, please visit the Investor Relations section of our website at www.cit.com. I'll now turn the call over to John Thain.

Thank you, Ken. Good morning, everyone. And thank you, all, for being on the call this morning. We had strong fourth quarter results. We earned $252 million pretax, $207 million after tax or $1.03 a share. We originated over $3 billion of funded volume in the quarter. Our commercial assets grew and our total assets grew quarter-over-quarter a little bit. The credit quality in our portfolio has been stable, with charge-offs and provisioning at cyclical lows, and our core expenses were essentially flat to third quarter. Our headcount -- we brought our headcount down in the fourth quarter. And Scott will talk more about our expense management program. All 4 of our commercial businesses were solidly profitable. Our Corporate Finance business generated funded volume of $1.5 billion. This was the seventh consecutive quarter where our Corporate Finance business generated over $1 billion of new commitments. In the fourth quarter, just to give you an idea of the volume of transactions, we were involved in 105 different transactions. Our commercial real estate business and our equipment finance business both grew nicely. And then as you saw, we completed -- we've signed a portfolio purchase at the end of the year, which fit nicely into our business. It was $1.3 billion of commitments, just under $800 million of funded volume. Our transportation business continues to perform well. Our commercial air business is over 99% utilized of our aircraft. And on our commercial rail side, we have over 98% utilization. And as we've previously announced, we really relaunched -- because we were in the maritime finance business before, but we've relaunched the maritime finance business and intend to grow that business as well. Our trade business, their factoring volume was up 8% quarter-over-quarter. And our vendor business, the vendor volume was up 23% sequentially quarter-over-quarter. So if you look at our 4 main businesses, they were profitable, they were growing, and we are maintaining our credit discipline in those businesses. CIT Bank ended up the year at over $12 billion of assets. We generated over $4.5 billion of online deposits over the course of the year, so we -- that's -- we ended up at the year a little over $4.5 billion of online deposits. And in the fourth quarter, we originated over 95% of our U.S. lending and leasing volume in the bank. For the full year 2012, if you exclude the debt repayment expenses, CI turn -- CIT earned about $1 billion pretax. We ended up the year with a strong balance sheet and strong liquidity position. We ended the year with $7.6 billion of cash and short-term investments. Our capital position, we had 17% capital at the end of the year. We had 16.2% Tier 1 capital at the end of the year. We did file our capital plan with the Fed, which Scott will talk briefly about later. And when we look at our businesses and we look at where we see the economy going -- growing, in the U.S., the U.S. economy is growing. It's growing slowly, but the outlook is more positive, the sentiment seems better. And I, at least, think that 2013, absent some new disaster in Washington, will be a year of improvement. We are well positioned for 2013. We will focus on growing our volumes in both our new and our existing businesses. We're looking to maintain our margins and maintain credit quality, and we will continue to focus on managing our expenses. With that, I'll turn it over to Scott.

Thank you, John, and good morning, everyone. Key operating metrics continue to benefit from our focus on growth, liability management and underwriting discipline. Our commercial portfolio grew 8% from a year ago and 2% sequentially. Economic margin is now within our target range, reflecting the full benefit of our debt restructuring actions and a greater proportion of deposit funding. And our credit metric remained stable in near-cyclical lows, with reserves over 2% on our commercial assets. As described in detail in our press release, we did revise our prior-period financial statements, and we understand this will cause many of you to have to update your models. With the revision, activities are now recorded in the period they occurred rather than when corrected. We believe this will better facilitate the analysis of our financial trends going forward. All my references will be to prior periods with the revised numbers. We provided a financial data package on our website that has also been updated for these revisions, and we also provided a presentation that highlights some of the key trends in our business. Turning to the quarter. As John mentioned, we reported GAAP net income of $207 million which was negatively impacted by $83 million in additional net charges from the prepayment of secured debt primarily related to the sale and restructuring of the student loans that we disclosed in our 8-K. Excluding these charges, pretax earnings were $334 million, up from $176 million in the third quarter. The increase resulted from lower funding cost, higher net FSA accretion benefits and higher non-spread revenue which included an increase in both our core activity as well as some event-driven items in the quarter. Total financing and leasing assets were up slightly as the commercial portfolio grew $600 million during the quarter, while the consumer portfolio declined, reflecting the sale of the student loan assets. Our commercial assets were up 2% from last quarter and grew in all of our lending and leasing segments. Funded volumes, which includes about $300 million of scheduled aircraft deliveries, exceeded $3 billion, with all segments reporting an increase from prior quarter. This was partially offset by portfolio runoffs, including higher prepayments in our Corporate Finance business and some asset sales primarily in the Transportation Finance business. Economic margin, which excludes FSA and accelerated OID, was 363 basis points, up significantly from the prior quarter. The increase reflects the impact of our liability restructuring efforts that I mentioned before, an increase in the deposit funding and a reduction in lower-yielding student loans. You can see the trends on Page 5 of the presentation. Interest recoveries and yield-related fees were elevated this quarter resulting from higher prepayments, and our suspended depreciation was relatively flat at about 30 basis points. Our core margin, which excludes these items, improved from 260 basis points last quarter to around 310 basis points this quarter. In 2013, further funding cost improvements will primarily be driven by increasing the proportion of deposit funding. Other income was $172 million, up from the third quarter and you can see on Page 6 of the presentation. Core non-spread revenue, namely factoring commissions, fee revenue and gain on equipment sales, was $95 million, up from $86 million, reflecting higher gain on sale of leasing equipment. In addition, our fee revenue increased by about $4 million, benefiting from a few transactions in Corporate Finance where we either underwrote and syndicated the deal or provided advisory services. Other non-spread revenue was also up, primarily driven by a few items. First, higher counterparty receivable accretion caused by the student loan restructuring. Second, we had a gain on sale of our student loan portfolio and also had some gains in our investment portfolio in Corporate Finance. And finally, we recognized the gain on the Dell European platform sale, and we still expect to sell the remaining portfolio in held-for-sale during the second half of the year. Excluding restructuring charges, as John mentioned, operating expenses were about $220 million, down from last quarter due to a $10 million recovery of legal fees. Outside of that, operating expenses were essentially flat. As you recall, last quarter, we announced a plan to reduce operating expenses by $15 million to $20 million per quarter. Savings will come from many initiatives and will be phased in over the course of this year. We've made some initial progress in the fourth quarter. In December, we reduced headcount by 80, changed some of our benefit plans and consolidated a few offices. We also expect to see professional fees decline as we completed the buildout of our risk infrastructure and capital planning processes. We plan to drive down overall cost while selectively investing in our growth initiatives and building our bank franchise. We would anticipate additional restructuring charges in the first half of 2013 as we execute on our cost-savings initiatives. And finally, our fourth quarter income tax provision was about $44 million and was impacted by several discrete year-end items totaling around $12 million that increased the provision. The key drivers of our tax provision is the geographic mix of earnings, and you should continue to think about it on a dollar basis as you look at 2013. Turning to the segment results. We again included a table in the press release that adjusts for the accelerated FSA interest expense and other debt-related costs allocated to each segment. This quarter, we also adjusted for the impact of the accelerated OID. My remarks will focus on the sequential trends excluding these items. Corporate Finance adjusted pretax income was $106 million. The increase from last quarter was primarily due to higher non-spread revenue as well as lower operating expenses driven by the recovery of legal fees I just mentioned. In addition, the prior quarter benefited from a reduction in the credit reserve. Assets increased about 4% from third quarter and 16% from last year as our new initiatives in equipment finance and real estate finance added to our U.S. middle market growth. New business activity was strong this quarter across all our industry verticals as many of our clients pushed to close deals before year end. Real estate finance also had a good quarter, though their deal flow tends to be variable. And despite higher volumes this quarter, asset growth was impacted from deals refinancing where we chose not to participate or where the loans paid off. The portfolio transition from the bank holding company continues, with the bank comprising over 70% of the U.S. commercial finance assets, up from 65% last quarter. On the competitive side, ABL pricing has generally stabilized over the last few quarters, but we do continue to see pockets of pressure on structure and pricing in cash flow lending. Finally, as John mentioned, we did agree to buy $1.3 billion of loan commitments of which about $800 million was outstanding at year end. These loans will be purchased by CIT Bank this quarter, utilizing some of its excess cash. The portfolio is right in our strike zone, a combination of commercial real estate, equipment financing and asset-based loans. Also, the yields are consistent with the market and we expect minimal additional expenses to service this portfolio. Moving on to Trade Finance. Adjusted pretax income grew to $22 million, reflecting lower credit costs. Our factoring volume was up 8% from the third quarter due to seasonality and essentially flat from the prior year. Our factoring commissions were relatively unchanged. Overall, portfolio quality remains solid, with a low level of charge-offs and declining non-accruals. And we are seeing progress on new client relationships. Vendor Finance's adjusted pretax income was about $48 million, up from last quarter due to higher non-spread revenue primarily from the Dell platform gain as well as lower funding cost. Portfolio assets grew about 4% sequentially and 8% from a year ago. New business volume was seasonally strong this quarter and up over 17% for the year. Our new business margins remained stable, and this segment's quarterly results have been somewhat variable mainly due to the impact of our portfolio optimization actions over the past few years and the impact on non-spread revenue. As I mentioned last quarter, this business is growing assets faster than GDP in the markets in which we do business but not as fast as we had anticipated. As such, creating operating leverage on a regional basis will be a key focus of the management this year. And lastly, in Transportation Finance, adjusted pretax income increased to $172 million, reflecting lower funding and credit costs, partially offset by lower non-spread revenue. While we took delivery of more aircraft this quarter, assets grew modestly as we actively managed our fleet and sold almost $300 million of air and rail equipment. Our air utilization remains strong, and we have placed almost all of our order book deliveries over the next 12 months. Lease rates have generally stabilized, utilization remains strong. And we continue to see strong demand for new technologies and ordered 10 A350s to be delivered in 2019 and 2020. On the rail business, overall operating results remained strong. Fleet utilization continues to be around 98%. We have lease commitments on most all of our new cars that we have ordered since 2011, and most of these will be financed by CIT Bank. And rental rates remain attractive and have generally stabilized at higher levels, with a few areas of softness, specifically coal cars. On the funding side, we advanced our deposit strategy while improving the economics and overall composition of our debt. Deposits are now almost $10 billion, representing over 30% of our total funding. We refinanced the high-cost student loan securitization into our total return structure. Our weighted average coupon has declined to about 3.2%. And we were glad to see 2 rating agencies acknowledge our progress, with upgrades from both Moody's and DBRS, bringing us closer to our investment grade target. John mentioned that our liquidity and capital metrics at the holding company and bank remained strong. We also submitted our capital plan to our regulators, with a modest capital request. And finally, overall, our capital allocation strategy includes both growing our assets organically and through opportunistic portfolio purchases in all of our core businesses, as well as returning capital to our shareholders. So in summary, we feel good about the progress we've made in 2012 and we're starting to see our improved operating performance reflected in our reported results. Our franchises are performing well, especially in this environment, and our debt structure improvements enable our businesses to be more competitive. As we enter into 2013, we continue to focus on improving our key metrics. In the fourth quarter, net finance margin is now within our target range on a core basis. Key drivers going forward are our funding cost improvements, asset mix and portfolio yield. Credit metrics are near cycle lows, and we would expect the provision expense to trend with new originations as well as changes in asset mix. Our core non-spread revenue improvements will mostly come from increased agency and underwriting roles that lead to advisory and syndication opportunities. And finally, we recognize there's much more work to be done on improving our operating leverage. That said, earning assets are moving in the right direction and we have -- we're taking targeted actions to meet our cost reduction commitments. So with that, I'll turn the call back over to Mike. And we're happy to take your questions.

[Operator Instructions] The first question we have comes from Brad Ball of Evercore.

Scott, could you reconcile for us the difference between the economic margin of 3.63% and what you're calling the core margin of 3.10%? What are the moving parts in there? And can you give us a sense as to what those moving parts look like in the next few quarters?

Yes, so Brad, as you know, so about 30 basis points is from the suspended depreciation, and that's been pretty consistent. And the delta is a combination of both interest recoveries and other yield-related fees. So those happen -- as we have upfront committed fees, if the loan pays off, those fees are accelerated when that loan is refinanced or paid off. And so those, as we've talked about, have been declining. And due to the high refinancing in the fourth quarter, they've kind of spiked back up again. So I would expect the depreciation to kind of stay stable until the second half of the year at around that 30 basis points. And then the interest recoveries and yield-related fees are going to be really dependent on activity in the marketplace. So we've kind of thought those would be kind of getting down below 10 basis points, but they kind of spiked up in the fourth quarter. But those are the kind of the 2 variables that are outside of the core margin.

Okay. And given the increase in deposits and lower-cost funding and the mix on the asset side, your expectation is that the core NIM stays in your targeted range which is 3% to 4%?

Yes. I think we'll see, as we continue to kind of move -- make that transition, that we'll continue to improve our cost of funds. And then on the yield side, if we can kind of keep their yields kind of in the range we are, that would be a good thing. So as long as the market pressures, we can manage those, we should see some improvement on the margin but not at the pace that it was in the past, as we've mentioned before.

Great. And then a follow-up for John. John, could you give us any update on the status of the written agreement, if there is any update there, and whether or not you view the written agreement as impairing your ability to either take acquisitions -- portfolio acquisitions, or capital actions as per your capital plan submitted earlier this month?

So we have no update on the written agreement. The written agreement does not in any way prevent us from making portfolio acquisitions, and we demonstrated that by the portfolio we bought at the end of the year. And it is also really separate from the capital plans. So we did submit, as both of us said, a capital plan, and that capital plan includes a return -- a modest return of capital. So we await a response on that.

Okay. So you think the Fed could approve a return of capital even with the written agreement in place.

They absolutely could.

Next we have Moshe Orenbuch of Credit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: I noticed that the kind of the "normal" FSA accretion over the last 4 quarters has kind of bounced around kind of between, let's say, $60 million and $120 million. Can you talk a little bit, Scott, maybe about what that normal amount is? I mean, because that's included at -- right in the core net interest margin, right?

It -- no, it's not in the core. That's kind of the difference between -- economic margin strips out the FSA. So as we kind of report, you have the GAAP reported and then we strip that out. So the FSA that's remaining right now, if you look -- I mean, you look in [ph] the chance to get in the tables, but we're down to roughly about $2.6 billion on the operating lease portfolio. And if you add up the remaining loan accretion and the FSA on the secured debt, after we did the restructuring of the student loans, they're about equal. So I'd say that those 2 aren't going to -- much of it [ph] going to directly offset dollar for dollar every quarter but they'll be pretty close, and then it will just be the amortization of the operating lease into depreciation. And that's been running somewhere around $45 million to $50 million a quarter. So I think they've -- that -- from that point of view, I think, going into 2013, John and I will probably not be talking too much about the FSA benefit. We'll kind of focus on the reported results. But you'll have the details on the back of the press release, on what the net accretion was in the quarter. Yes, so...

As we go into 2013, we really will focus on GAAP financials. Moshe Orenbuch - Crédit Suisse AG, Research Division: Right, okay. And just as a -- kind of as a follow-up on a slightly different topic, the portfolio that you bid on, and the kind of the other ones, presuming there are other things that you're in discussion on. Can you talk a little bit about the level of competition for those and who -- against whom you're generally competing? How do you -- how does that -- how has that process been going?

I think competition is very strong. So as you know, most institutions are looking for assets. So we've looked at a lot, as we've said in the past, and we've been very disciplined. This one kind of met our return hurdles and we were also able to close quickly, which we thought was a big competitive advantage relative to our peer group.

Next we have Henry Coffey of Sterne Agee. Henry J. Coffey - Sterne Agee & Leach Inc., Research Division: In terms of your capital plan, are -- which clock are you on? Are you on a CCAR clock where you are going to announce when all the other banks announce? Or are you on a different clock in terms of when we can expect to hear sort of final details?

Well, we're definitely on a different clock. We don't know exactly what that clock is, Henry. But because we are not a CCAR bank and we're not kind of bound by those items, it's not going to be something that we have to disclose the results and those type of things. So ours is really more -- we provide it to the local team and to the New York Fed, and now, I think, over the next couple of months, we'll have discussions with them. But we won't -- we don't have a set time. There's not a definitive time that, unlike -- or like the CCAR banks. Henry J. Coffey - Sterne Agee & Leach Inc., Research Division: You've talked about continuing to work on improving funding cost. Obviously, in addition to moving assets into the bank, can you give us a sense of what are you -- what some of your other opportunities look like?

Yes, we've continued to just -- we're continuing to look at some of our international platforms, if there's ways to put in secured financing that's at attractive rates. I know it seems a long time out, but we have a maturity of $1.3 billion that's in March of 2014. And so we will have to start building cashed [ph] based on how we do our liquidity testing and our hope would be to redeem a majority of that with free cash flow and some unsecured debt. So those items are kind of the -- probably the key thing outside of the kind of the deposit funding.

Next we have a question from Bill Carcache of Nomura.

Can you talk a little bit about -- just hypothetically, let's assume we go down the path where we get -- we see a re-acceleration in GDP growth in the second half of 2013 and into 2014. Can you share how you think about the growth in each of the segments in that kind of scenario? I'm just kind of trying to get a sense for what asset growth is like in each of those segments relative to GDP growth. Is there any kind of a multiplier factor or anything? Any perspective you could give there, that would be helpful.

So the businesses are somewhat different so we should -- we'll -- we can answer that business by business. And then I assume you're talking specifically about the U.S. GDP growth because, in the case of our vendor business, about half of our business is outside the U.S. So the U.S. vendor business typically can grow at a multiple of GDP. So we would expect our U.S. vendor business to be able to grow. If the U.S. GDP picks up, that will help that business grow and we can grow at a multiple of GDP. That should also be true for our Corporate Finance business because, as GDP grows and as confident gets better, there will be more M&A activity and more buyouts and so there should be more activity in the Corporate Finance business as well. Our trade business is really much more sensitive to the activity level at -- among the retailers. And so there, it will depend on more specifically what's happening to retail sales and activity in the retail sector. And then on transportation, you really have to separate between air and rail. So our rail business is primarily U.S. business. It's also sensitive to GDP growth. Although, when we're already at 98% utilization, there's not too much more upside in that business even if GDP picks up, but you would expect that increase in GDP will help on the rates we get as cars come off lease. And then the air business is really a global business. It's really not particularly tied to U.S. GDP growth. It's really tied much more to global air traffic and -- which is really more sensitive to the movement of a greater percentage of the world's population into the kind of middle class and so they can fly. So we see a lot of the growth in our air business being driven by the emerging-market-type countries.

Okay, that's really helpful color. And then finally, as a follow-up on a different topic. When we look at the fact that you guys obtained, this quarter, $1.5 billion of 3-year money at 1.1% via the online deposit channel, can you just talk a little bit about, first, the sustainability of that deposit growth as we look forward? And then secondly, does the success that you're having here give you any kind of a basis with regulators, or just continuing to do what you're doing without having to incur the cost of acquiring and maintaining a brick-and-mortar infrastructure? We've seen examples of other businesses that have successfully grown online deposits and they're not looking to add any physical branches. So any commentary you could give on that.

Well, I would just say on the first part of the question, yes, we have been successful and we continue to be successful on our online deposit gathering. We've continued to diversify our product offerings. So we have a few more products we're going to launch in 2013. So our whole focus is how do we have a great customer experience for those people that come to CIT Bank, and providing the suite of products. And I think that continues to go well, and we continue to originate, as you kind of pointed out, over the course of 2013. So I think that will continue. With respect to the question around kind of branch deposits and does that kind of defer or kind of change our strategy, I think we -- as we said before, I think having a diversified funding mix and having ample ways to raise deposits over time is that we think that there's some merit to the branch network. So we will continue to look at that and evaluate that, but I don't think it's going to be just because you can diversify -- or you can grow online, that those are mutually exclusive.

Let me just add one thing on the online deposits. So we are now starting to see the online deposits that we put on a year ago mature. And we're having very, very good results in terms of having those online deposits, as they mature, renew. And we're also having very good results at getting additional money from those customers who are renewing their online deposits. So the stickiness of those deposits has been very good.

Next we have Chris Brendler of Stifel, Nicolaus. Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division: On the new business volume side, particularly in the Corporate Finance business, there's pretty pronounced slowdown in activity in the third quarter. It sounds like a lot of that activity got done in the fourth quarter. But if you combine those 2 quarters, and let's just assume it's more of a timing difference, how does the pipeline look today? Are we still seeing improving loan demand? Do you feel good about the outlook for 2013 and continue to grow volumes? And could you just comment on the competitive conditions in Corporate Finance as well?

Look, Chris, I -- it's -- I think there was a lot of, as we mentioned, kind of activity in December given some of the uncertainties that were going on with some of the discussions. And my sense would be is -- given that high volume, January has been kind of a little bit slower. And we don't know right now, is that just because there was so much activity in the flurry to get deals done in December, or is that a trend. So I would say that it kind of goes back to, I think, the question around what the GDP growth and what's the outlook. And John mentioned that there seems to be a lot of discussion around that that might be more positive. That would be helpful for us. But I think the competitive dynamics are increasing, as we've kind of talked about. There's the continued focus on loan growth in our competitors as well as ourselves, but we are being very, very disciplined. And so we're going to keep that discipline. And if things kind of hit [ph] into lows [ph], we'll have to kind of make sure that we're being prudent on our asset growth. Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Along those lines, Scott, you've talked in the past about spreads on new business, and I think 400 basis points has been a number I've heard in the past. I don't think we're maintaining those levels, but are we still north of 300 on most of your new business in Corporate Finance?

Yes, I think the -- there's a big difference between the asset-based lending, asset-backed lending and kind of cash flow. So cash flow still is probably in the 500 range, plus or minus, depending on the transactions. Our ABL is probably more in the north of the 300. And then some of the ABL market, more of the retail flow stuff is probably in the 200 range. So at least for our core markets, we feel the risk return is still attractive, but we are definitely monitoring what's happening with respect to kind of pricing and structures in the marketplace. Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Great. On a separate topic, on taxes. Can you discuss if you were profitable in the U.S. this quarter and whether or not you expect to maintain that profitability in the U.S. given the improvement in the NIM and all the other progress you've made in -- on expenses and credit? Just specifically on the NOL and what we can see going forward there.

Yes. So I'd say that, Chris, I just -- I have need to differentiate. So I think, from a book basis, we turned profitable in the U.S. because of the restructuring efforts. But you have to remember, on our tax books, because of the large amount of operating leases we do have, that that depreciation offsets that on our tax books. So we were not tax profitable in the fourth quarter. And from an NOL utilization point of view, it really is taxable income, which is not kind of a simple calculation, but that's really something that we'll continue to talk about and provide guidance as we work through our kind of tax -- our tax books versus our accounting books.

The next question we have comes from Mark DeVries of Barclays.

Scott, can you talk about how much liquidity you have at this point to acquire portfolios and, other than cash on hand, how you'd look to fund any new deals?

Well, they were bank eligible. We had $3.4 billion at the end of the year. Some of that will be used to fund the Flagstar portfolio. We have committed liquidity in the bank that also could be there. And we could ramp up our deposit gathering. So we've been trying to monitor our deposit gathering alongside with the asset growth. So I think, from a bank point view, I don't see, kind of the size of the deals we're looking at, that we would have a problem funding those. From a perspective at the parent company, we have about $2.5 billion at the end of the year and we also have about $1.9 billion available on our revolver. So I think we have capacity if we wanted to do something on an international basis or in kind of the aircraft business. So I think we have ample liquidity for the size of the transactions that we would be looking at.

Okay, great. And I understand, second question, that we're near cyclical lows for credit costs, but you had another pretty significant Q-over-Q drop in non-accruals. And it appears, if anything, your reserves got more conservative relative to these non-accruals. And so my question is, how much longer could we expect little to no provision? And what ultimately do you think is going to start pushing credit costs back up to more normal levels?

That's a good question. We kind of talk about it a lot. So I would say that the provision that we have today is not sustainable. So the charge-offs, you see kind of the net charge-offs are kind of been -- kind of consistent for the last couple of quarters. And the provision, really it's a turn of the portfolio. So we have some of the legacy accounts that had kind of some larger reserve balances as those refinanced or paid off. And we are still provisioning for new business, but the 2 -- new business is being provisioned at a better expected loss than the legacy portfolio. So we expect that transition in -- kind of in the first half of 2013, but it's very hard to predict what that is. But I would just say that negative or 0 provision is not sustainable. And probably, we'll get closer to kind of a normal charge-off and some provision rate in the portfolio.

Next we have Ken Bruce of Bank of America Merrill Lynch.

First, let me congratulate you on turning the quarter. Nice to see a positive quarter. I hope that's a trend we can get used to. My first question is, first, just following on the competition comments made earlier. Can you give us a sense as -- if things continue to grind higher, should we expect possibly a rotation towards more syndication activities where you can, in effect, use these relationships to generate fee income if it's not attractive from a balance sheet standpoint?

Yes, that's an alternative. I think it really comes down to the -- it depends on what role you are and kind of what the expectation for some type of hold position with the credit. But the syndication market can be used for that, Ken. But I think, if the pricing is not right for us, I'm not so sure that that would be the approach that we would go down.

So the alternative would just be to slow growth altogether, in that case?

Correct.

Yes.

Okay. And just, if I look back to the third quarter, you had at that time, wanted to see what the stress-based scenarios were going to look like before you talked about possibly what the -- what's the thoughts around capital would be. Given that information has come out, are there any updated thoughts as to what the required capital is in your business? Or any thoughts around that, please?

No, I think, on the -- I mean, the normal kind of capital that we would think -- our economic capital, as we've said before, is around 12%. The -- kind of the risk-based capital was around 13%. So we'd say they're kind of on par. So that's kind of the normal operating capital that we'd want. And the stress testing in scenarios is, what's the impact on that kind of normal capital in the event of a shock? And we stress that on many different vehicles. And we think that the capital level -- that normal capital level is still consistent with what we need as a company.

The next question we have comes from Sameer Gokhale of Janney Capital Markets.

I just had a question about that portfolio that you acquired from Flagstar. And I was wondering if you could give us some sense for the portfolio in terms of its -- I know, John, you had said market yield. I was hearing somewhere south 5% on that portfolio. So if you could just maybe help narrow down what the yield on that is, that would be helpful. And I think it's also a low credit loss portfolio. So as we think about that and additional acquisitions going forward, is the idea basically that the marginal cost of bringing those portfolios online, it's pretty low, so really because the NIM falling down to the bottom line? So just to be helpful because I know you bought the portfolio, I think, a little north of 90 -- $0.90 on the dollar. So how do you -- how should we think about the framing of the economics of acquisitions? Is it -- do you think your marginal cost is being close to 0 and some of the other metrics? That would be helpful.

Yes, Sameer, I'd say that, in the portfolio -- I'm not going to give you an exact yield on the portfolio, but I think it -- as I mentioned, it was kind of -- the deals that we looked at, we bought a combination of a portfolio of asset-based loans, equipment finance and commercial real estate to -- so it kind of talk about a kind of a blended yield. But the way we looked at it is, we were in some of these deals already so we kind of knew the credits well. Number two is that they -- these were market transactions and we looked at the risk-adjusted margin on the transaction. We had cash in the bank, so we had the liquidity there in the bank. And I think the last piece is that we're taking these on without any incremental cost. So when you kind of look at the kind of the portfolio economics, that was a good transaction with credits that we think are strong and help build out our portfolio.

Yes, Sameer, the -- I think the way to think about it is these were all -- these were ABL deals and so they reflect ABL yields, as opposed to cash flow yields.

Okay. No, that's -- yes, that kind of explains why, I think, the yield was maybe a little bit on the lower side. But I -- I mean, I'm trying to just -- because I know, in the past, John, you've talked about acquisitions and basically said, "Okay, well, you look at the pricing of some of these deals," and it seemed like, on new business also, you were pricing at market rates. Because my question was you had so much excess capital and liquidity, rather than having that just sitting on your balance sheet, it's better to deploy it even if it's kind of a lower-returning business which is better than earning next to nothing on the cash and capital. So it should be again assumed that this is kind of an acquisition and future ones will generate sort of like a -- what are your return assets or, like, expectations on those deposit transactions, like north of 1%? Or are you willing to accept less just because it's better than the alternative of just sitting on cash?

Yes, so this transaction and the way we look at all of the portfolios that we look at is we want the same types of returns on capital for purchases as we get in our new originations. So this portfolio generated returns that were comparable to the returns we get on our generic originations in our core businesses. So we did not -- we'd not price this portfolio kind of on a marginal basis as an alternative to cash and we do not intend to do that.

Okay, that's very helpful color. And just one quick one, additional question on the 787s. I don't believe you have any in your fleet currently, but I do think you have some in your order book. As we think about those aircraft and some of the issues they've been having, are there any concessions you can get from the manufacturer? Or how are you thinking about that order book at this point in time?

Well, Sameer, we have 10 on order. Our first delivery is -- we have 2 being delivered -- or scheduled to be delivered in 2015. So I think -- from our perspective, I think it's a little premature to kind of sort that out. But the viewpoint is that it's modest in our overall order book and we hope that these issues kind of get resolved because it's something -- the aircraft itself is something that is big in the industry.

Yes. And actually -- and those 2 actually are leased.

Yes, we have them...

Those are committed already...

But it's 2015, so I think that's several years off.

And next we have David Hochstim of Buckingham Research.

I wonder, can you just tell us how much of a contribution the new -- relatively new commercial real estate and equipment finance units are making to new business volume in the fourth quarter and maybe compared to the third quarter?

As I mentioned, the commercial real estate had a pretty good quarter in the fourth quarter as we did some deals. And equipment financing is building, but we don't have specific asset numbers we've given out, or volume numbers. But it's commensurate with helping us grow the commercial portfolio by 4%.

Okay. And then can you just talk about the sequential decline in the average yield on loans that you show on the average balance table? Is that -- that 40 basis point sequentially, is there anything kind of unusual in that? Is -- I mean, is that a trend, or is that just...

That table that's in there has FSA accretion and everything else so I would kind of focus more on our kind of core economic margins. So our yields, relative to the third quarter, on the portfolio have been flat. And really, the majority of the improvement was driven by the funding costing -- funding cost side. So yes, those tables are not -- I wouldn't say apples to apples.

I guess there wasn't that much of a change in the asset accretion, though, between Q3 and Q4, was there? I guess some of it would show differently in the loans, I guess, the loan lines...

Correct.

Okay. And then -- I guess maybe it depends since I've asked most of my [ph] question, could you give us again your thoughts on other income and kind of all the -- there were a number of unusual, what looked like kind of unusual, gains this quarter. It sounds like some of those are going to recur. You might have -- I mean, could you have more recoveries from prior charge-offs? I mean, what should we expect? Because most of it was quite a bit higher than you had in that last few quarters.

David, it's a good question. So let me kind of take you through -- so as we kind of broke out in the slides that's out there, the core is kind of what we focused on. And so we've have been -- had some improvement third quarter to fourth quarter. Part of that, as I said, was a few transactions in Corporate Finance. So I think that's one of our key focuses. If you look at the gain on loan portfolios, that includes the student loan gain which was about $16 million. So on that one -- outside of that, we don't plan on selling any additional student loans. So I would say that that's not going to repeat as you go into 2013. Recoveries are kind of episodic. So we will have some, but I don't think -- as we get further away from kind of the emergence period, we're 3 years past that, I think that level will come down. We might get a recovery or 2 based on that, but I think that number will continue to go down. The counterparty receivable accretion really kind of was driven by the restructuring of student loans that we disclosed. And so that one is really just based on the -- I'd kind of go back to a kind of normal level which is going to be much lower, on the $5 million, $10 million range maybe. On the investment sales, we had some -- we have -- in the Corporate Finance business, we have some investments in LPs and sponsored-related activity. And we had some significant gains in the fourth quarter on those. So I don't think those are going to be at that level going forward, but -- as we're going to have some of those. And lastly is -- in other revenue is really where the Dell platform gain was. So in general, our expectation is the core has kind of been fairly consistent as a percent of our portfolio. And the other items -- as you said, in the fourth quarter, we had a lot of kind of transactional events that most -- the ones, I least I had noted, aren't going to repeat. Dell platform gain is not going to repeat. The SLX gain is not going to repeat. The accretion is not going to accrete. So I think that kind of gets you back down to a much smaller "all other" as we go into 2013.

The next question we have comes from Chris Kotowski of Oppenheimer & Company. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: I just wanted to unpack the NIM question a little bit by focusing on the liability side and the interest cost, make sure we have that straight. So if I start with your interest expense in $366 million and back out the $148.6 million FSA and then the $52.6 million for the swap, I get sort of core interest expense of $271 million, something like that. Is that about right? Well, where I'm going with this is roughly -- what I get is a cost of long-term debt, all in, for you a little bit over 4%. Is...

Well, as we mentioned, our kind of -- our weighted coupon is 3.2%, Mike (sic) [Chris]. We've -- I put that in my remarks, so... Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: 3.2% on the debt.

Yes, yes. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: Okay. So -- and -- but modeling it, going forward, your -- theoretically, since all your debt has now been refinanced, we should probably assume the debt no longer goes down but that -- and so that -- we just roll that forward but the incremental loan volume will be primarily funded at deposit cost. That...

Correct. So at the bank holding company -- until our first maturity in 2014, that's kind of fixed. And so it's really deposit cost and also kind of secured structures we put in place for both the vendor business internationally. And we also might have some ECA-backed financing for some of our aircraft. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: Okay. And then just, since you brought it up, can you talk a little bit about the maritime finance business? I mean, how many -- this -- are the economics of that similar to, let's say, the rail car business? And what kind of a size portfolio could that become over 1 year or 2? And how do you see that opportunity?

Well, so we're just restarting it. So it's very new. We just hired the person who's running it. So it's just beginning. But at least right now, primarily because of the market dynamics of a lot of the former lenders into this space pulling back, much like the commercial real estate business where we had a lot of foreign lenders pull back, as well as a lot of the U.S. lenders, we just see tremendous opportunities where we can get very attractive rates on highly secured loans because there's not a lot of competition right now. And so we are looking at quite a number of interesting opportunities, but it's still early. So we're really just starting.

Next we have Mike Turner with Compass Point. Michael Turner - Compass Point Research & Trading, LLC, Research Division: Most of my questions have been answered. Just looking at your risk-weighted assets and the change, it looks it was up 6% quarter-over-quarter. And I know, when you place an aircraft order or for an unused commitment, that drops into the risk weighting, but how do we think about going forward sort of that relationship versus portfolio growth and risk-weighted assets?

Yes, I mean, Mike, I think the other one is, for regulatory purposes, we also did have to put up a regularly capital for the Flagstar commitment that we had. So even -- it wasn't on our books, it was a commitment that we -- a signed commitment. So we did put up capital on that transaction. So those 2 things were kind of what -- kind of made it spike between third quarter and fourth quarter, outside of normal asset growth. So I think, going forward, now that we have kind of pruned out the student loans were -- which were at a lower risk-weighted assets, I think the growth in that is going to be our commercial portfolio. And then any kind of commitments we'll make for aircraft or rail cars for orders would be probably the other driver. So we'll get to a more what I would say steady-state kind of ratio between risk-weighted assets and unbooked assets. Michael Turner - Compass Point Research & Trading, LLC, Research Division: Okay. That's very helpful. And just recapping a question earlier. As far as your targeted capital, I know it hasn't changed, but just to make sure I'm accurate. It's 12% Tier 1 was sort of your target or your targeted capital level?

Well, the commitment we have is a 13% total capital ratio, and the 12% is our internal ECAP or economic capital analysis that kind of validates that we're -- it's kind of in the ballpark of what we think is our economic capital going forward. From a perspective of Tier 1 capital, when we get to that point where we can optimize our capital structure, our hope would be that we substitute some other forms of capital outside of common equity in our capital structure over time. But I think step 1 is to kind of get down closer to our 13% kind of ratio.

The next question we have comes from Henry Coffey of Sterne Agee. Henry J. Coffey - Sterne Agee & Leach Inc., Research Division: As we start to think about return on capital measures and try to model that out on our own -- I know, when we looked at debt paydown, it was really more a question of looking at cumulative debt at the holding company to get a feeling for what your opportunities were. Is that going to be the driver? Or is it more likely that you will be allowed some sort of modest payout on whatever GAAP capital you generate in FY '13? Or maybe it's too complex to comment on, but I was just kind of curious how we should start to model that.

Well, so we've said to you that we filed a capital plan that requested a modest capital return. That modest capital return is based upon both our existing capital levels, which are obviously very high, and as well as our earnings. And so I think you -- rather than trying to do it as a percentage of anything, I would do it more as terms of a dollar amount that matches up with modest.

Well, it appears that we have no further questions at this time. We will conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Okay. Well, we thank you, all, for joining this morning. And as always, if you have any follow-up questions, please call me, Barbara or Bob in the Investor Relations Department and we'd be happy to assist. Thanks, and have a great day.

Thank you, all.

And we thank you, sir and to the rest of the management, for your time. The conference is now concluded. We thank you, all, for attending today's presentation. At this time, you may disconnect your lines. Thank you, and have a great day.