First Citizens BancShares, Inc. (FCNCA) Q4 2014 Earnings Report, Transcript and Summary

Good morning and welcome to CIT's Fourth Quarter and Year-End 2014 Earnings Conference Call. My name is Keith, 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 conference over to Barbara Callahan, Head of Investor Relations. Please proceed, ma'am.

Thank you, Keith. Good morning and welcome to CIT's fourth quarter and year-end 2014 earnings conference call. Our call today will be hosted by John Thain, our Chairman and CEO, and Scott Parker, our CFO. After John and Scott'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 any additional questions. We will do our best to answer as many questions as possible in the time we have remaining 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 2013 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 www.cit.com. Now I'll turn the call over to John Thain.

Thank you, Barbara. Good morning and thank you all for being on the call. We appreciate you braving the snow to be on the call this morning. We had a very good fourth quarter. We reported $250 million of net income or $1.37 a share. But please listen to Scott when he covers the benefit in the quarter from discrete asset sales. All of our businesses performed well in the quarter. We originated $2.9 billion of funded volume. Our factoring volume was 7.4 billion which was up 10% from the prior quarter and up 9% from the prior year. Our maritime finance portfolio reached a $1 billion. Both our railcars and our commercial aircraft were 99% leased. We sold the first group of aircraft into the Century Tokyo Leasing CIT Aviation joint venture. And both Nacco and Direct Capital which were acquisition that were completed earlier in the year performed well in the fourth quarter. Our credit metrics remained stable at historically low levels and we continue to return capital to our shareholders, both through dividends and share repurchase. Our book value per share grew to over $50 at December 31st and our tangible book was $46.83. On our combination with OneWest, we continue to believe the transaction is on track to close in the first half of this year. The commentary from some of the California based community reinvestment groups was not unexpected. We and OneWest remained committed to substantial investments of both time and money in our communities. On our exposure to lower oil prices, in our North American commercial finance business, we have approximately $500 million of loan exposure, 80% of which is secured. We have reviewed this portfolio on a name-by-name basis and we will continue to review it to ensure that we're adequately reserved. In our North American transportation business, we have approximately 19,000 tank cars that carry flammable liquids of which 12,000 carry crude. We also have approximately 9,000 sand cars. Both our tank cars and our sand cars currently have strong utilization rates and are typically on long-term leases. So any impact on lease rates, which so far have been stable, would row in over multiple years. As we begin 2015, we're focused on expanding our commercial banking franchise through the completion of the OneWest transaction, maintaining our credit discipline through the business cycle, growing our business franchises with attractive risk adjusted returns, utilizing our NOLs, and continuing to return capital to our shareholders. I'll now turn the call over to Scott to give you more details.

Thank you, John, and good morning to everyone. CIT reported full year 2014 net income $1.1 billion and EPS of $5.96, which includes over $400 million of reversals of the valuation allowance against our net deferred tax asset. As John mentioned, 2014 was a good year and we made progress on our strategic priorities. Our commercial franchises grew 8% organically and 12% overall. Our recent acquisitions Nacco and Direct Capital are performing well and we are progressing with the OneWest integration planning. We have either sold or signed definitive sale agreements on the non-strategic platforms and decided this quarter to sell the remaining small-ticket equipment assets in the UK. We grew deposits by 27% from a year ago. This growth moved deposits to 46% of total fundings and contributed to the decline in funding cost of more than 20 basis points. Our credit metrics remained stable and our non-performing loans are now less then 1% of finance receivables. And we distributed nearly $900 million of excess capital, $95 million in dividends and $775 million through repurchase of common shares. And since the start of this year, we have repurchased an additional 4 million shares for approximately $180 million. While our annual performance was inline with a 2% pre-tax ROE target we discussed at Investor Day, we have experienced some quarterly variability. Turning to slide 2 of the presentation, fourth pre-tax income increased to $222 million, which represents a pre-tax ROA of 2.6%, reflecting the performance of our commercial franchises offset by our portfolio repositioning activities. As detailed in slide 3 of the presentation, the fourth included benefits related to discrete asset sales in our commercial franchises that are unlikely to recur at similar levels. These activities positively impacted net finance margin, the credit provision and other income. Excluding the gains from these discrete asset sales, the performance of our commercial franchises was relatively unchanged from the third quarter adjusted pre-tax ROA of 2.2%. As noted on page 4 of our presentation, there was net pre-tax charge of $17 million from the portfolio repositioning in the quarter. And we expect the future impact of this activity to be driven primarily by the recognition of currency translation adjustments in earnings as we complete our legal entity exits. This quarter also benefited from the reversal of an international tax valuation allowance. Now I'd like to move to our operating segments. Our Transportation & International Finance segment had a strong quarter, generating $185 million of pre-tax income, which represents a 3.9% pre-tax ROA. For the year, pre-tax income was $612 million with a 3.4% pre-tax ROA. The results reflected continued high utilization in both the air and rail leasing businesses, growth in the loan portfolio and benefits from our strategic initiatives. During the fourth quarter, we sold about $300 of the $500 million targeted-seed portfolio to the aerospace JV and we expect to sell the remainder in the first quarter. We also completed the sale of our $350 million UK corporate lending portfolio. While these sales will dampen net finance margin they will be accretive to long-term return on equity. Despite these asset sales, assets grew $2.6 billion or 16% from a year ago with growth in all of our transportation divisions. In aerospace as John mentioned, utilization continues to be strong at 99%. All of our 2015 and nearly two-thirds of our 2016 deliveries are placed. Lease rates on new aircraft are attractive and renewal rents are generally stable. Lease rates on new aircraft – the decrease in the aerospace portfolio yield reflects a larger proportion of lending in the portfolio and the reversion to industry averages in our leasing business, which we expect to continue in 2015. In rail, utilization is at all time high – utilization is at an all time high and renewal rents continue to average above expiring rates. However that differential is narrowing. We have not seen any impact from the decline in oil as John mentioned, but we are closely watching that trend and related developments. All of our tank cars delivering in 2015 are placed and fewer than 2015 tank cars, used to transport crude expire this year. Our maritime portfolio is grown to over $1 billion and we are pleased with the quality of the loans. We have nearly 30 clients and the average loan to value is less than 50%. In summary, Transportation & International Finance has good momentum going into 2015, but there is a fair amount of uncertainty in the global environment. That said, we have a seasoned team that has managed through many cycles and the long-term industry fundamentals still remain favorable. Turning to North American Commercial Finance reported pre-tax income was $122 million, which represents a 3.4% pre-tax ROA. The quarter benefited from a large refinancing and syndication of problem loan, as well as gains on our equity investments sold to comply with the Volcker Rule. For 2014, NACF earned $390 million [ph] before taxes or 2.3% pre-tax ROA, which included several work-out related benefits over the course of the year. Excluding some of these event driven benefits, pre-tax ROA was more inline with our expectations for the business of 1.5% to 2% ROA. Assets grew by 8% from a year ago or 5% excluding Direct Capital and we originated about $1.6 billion of loans and leases inline with the third quarter. While the market remains competitive, we have maintained our underwriting and portfolio management discipline. We remain focused on leveraging our strong relationships, as well as our industry and product expertise to identify opportunities to generate attractive returns and growth, either organically or through acquisitions. Corporate Finance continues to benefit from their strong private equity sponsor relationships. New business pricing remain stable, but we continue to see pressure on deal term and structure. While overall middle-market loan volume growth was modest at best, we continue to gain market share and win more agency roles as demonstrated by our move into the top 10 of the middle-market sponsored lead tables. Competition in the commercial real estate market has increased, which along with a favorable CMBS market, has resulted in an elevated level of prepayment and created a challenge to portfolio growth. In response to this market trend, as well as some concentrations in our portfolio, our team is expanded its geographic footprint and diversified the type of properties financed. For instance, we recently provided a financing to a Class A warehouse and distribution center at a site in Pennsylvania that is ideally situated for fulfillment and distribution. The equipment finance market remains competitive in some of the more traditional areas, such as office products. We continue to look at new opportunities to use our industry expertise and servicing capabilities, enhanced by direct capital which is already exceeding our expectations. We expect the combination of the low cost customer acquisition via Direct Capital's LendEdge platform and lower deposits funding to enhance our profitability and returns in the segment. Commercial Services continues to successfully expand into higher growth non-apparel sectors, and had very strong volume quarter. In the year ahead, we look to capitalize on opportunities to further expand our product offerings, including introducing the LendEdge product to our commercial services large client base. In summary, the segment continues to prudently grow in a competitive market, while maintaining underwriting discipline. Turning to page 5 of the presentation on our key profitability metrics, we anticipate asset growth at the low end of the range with commercial franchise growth consistent with 2014 levels, partially offset by the impact of sales on the non-strategic portfolios and the UK equipment finance assets. Based on the current environment, we expect to continue to generate the pre-tax ROA of around 2%, excluding the impact of the CTA charges I mentioned earlier. We will revisit these profitability targets after the complete the OneWest acquisition. So in summary, we continue to focus on our strategic priorities in creating long-term value of our shareholders. Our business franchises have performed well and continue to originate assets with attractive risk adjusted returns. We have maintained disciplined underwriting and credit performance is stable. Our capital and liquidity positions remain strong and we have returned excess capital to our shareholders. All these actions contributed to nearly a 10% growth in our tangible book value in 2014 to $46.83 per share. With that, I'll turn it back to Keith, and we'll take your questions.

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Moshe Orenbuch with Credit Suisse.

Thanks. It's actually the detail on your – rail business is actually quite helpful. Could you just maybe expand a little bit in terms of your thoughts about the prospects post 2016? How you think about anything about that business and the risk of cars coming off lease and what you've got in the order book? Thanks.

Okay. Moshe, I'd say that 2016, I think the question is depending on the longevity and severity of the oil prices being down at this level. As it translates, if you're talking about 2015, if they stay at this level, I think the drivers would be mainly around utilization and potentially lease rates. One of the things that also should be taken into consideration that, the newer cars will probably be more attractive than some of the older tank cars. So as you know with our portfolio we have mostly newer tank cars and have a very small proportion of our portfolio in the older tank cars. But those dynamics will play out depending on how long this happens and how much actual production declines where we haven’t seen a lot of that, production may not increase, but the question would be is, how much would production decrease and the implications on overall demand for those type of cars.

Moshe, the other impact in the tank car market will be, we do expect some time over the course of this year that they will finalize their regulations on the tank cars and the retrofit of the existing tank cars will take a certain number of tank cars out of the marketplace. And so it’s a little bit hard to know exactly because we don’t know what time frame yet, those cars are going to have to be retrofit. But whatever time frame that, is some percentage of the tank cars will get taken out of the market because of that.

Maybe, could you just update us as to what percentage of yours would be in that, and what you think the cost per car would be?

Yes. We really don’t know yet, because the regulations haven’t been finalized. We do have a mix of newer and older tank cars and – but overall our cars are relatively new. So our expectation is we will in fact retrofit them, but we don’t yet have a good estimate of what the cost is per car.

Okay. Thank you.

Thank you. And the next question comes from Sameer Gokhale from Janney Capital.

Hi. Thank you, and good morning. If you could just remind us, how much you anticipate selling in terms of planes to the joint venture going forward, that would be helpful. I mean, have you committed to some sort of annual target or other types of target in terms of planes that you will sell? That would help us size potential future gains would come from that.

Yes. Sameer, so as I mentioned, with the seed aircraft that we're selling into the JV is a little bit around $500 million. And so we did about 60% of that in the fourth quarter and we expect the remaining to close in the first quarter.

I was looking more longer term, Scott, since this is a joint venture, should we assume that beyond the $500 million you'll have additional sales also to the joint venture, on some sort of regular basis? That's what I was more curious about.

No, I think, that’s possible, but I think the seed capital is kind to get the JV structured and up going. And I think from there they will kind of grow the business within the JV, commensurate with purchases outside of – just from CIT and also placing new orders with the manufacturers. So it’s kind of independent kind of JV that’s focused on growing their business. But time-to-time its possible to do that, but the original piece was put the seed capital in there to get it going.

Okay. Thank you. And then just another question in terms of the commercial real estate expansion. I think you had brought on a pretty seasoned team of people to kind of manage and grow that business. So based on your announced expansion, I think you mentioned somewhere in Pennsylvania, should we assume additional expansion into other geographies? Can you give us a little background? Has this team lent to anybody in that region before, is this a completely new thing for them. That would be helpful? Thank you.

Yes. I think that’s – as you said, we do have seasoned team and we continue to invest in with Matt in the team in regards to the portfolio. I wouldn’t say this a large adjacency Sameer, its just kind of looking in the marketplace, using our expertise to high grade real estate properties. And as you know with OneWest they also have a real estate business that’s kind of more west coast focused. So I think there is definitely a lo of opportunities post closing of OneWest to leverage the capabilities of both CIT, as well as OneWest to look at additional growth opportunities in the real estate area.

Okay. Thank you.

Thank you. And the next question comes from Eric Beardsley with Goldman Sachs.

Hi, thank you. I was wondering if you could just comment on OpEx trends, and when we would start to see the benefit from the non-strategic portfolios going away and what the right level is to think about longer term?

Yes. Eric, I would say that again our focus is to get to the kind of high end of the range. I think on the fourth quarter we had a good trend. In the fourth quarter we had a little bit blip up. Part of that was cost of some of these strategic exits that we announced in regards to retention for the timing between signing and closing. We also had some additional cost related to the integrations of Direct Capital and Nacco and some increases in some professional fees around that. So that’s one piece of it. The quarter also had in it – we closed Direct Capital in August, so we also had another month of the full quarter of expenses for Direct Capital. We had a little bit of increase in our bank deposit funding marketing cost. And then we had a little bit of increase in compensation. So I'd say that if you take out the NSP, non-strategic portfolios, we will be near the high end of the range. And so as we exit, as we – John mentioned at the Goldman, Mexico was planned to exit in the first quarter and then Brazil will probably be kind of late second quarter, maybe third quarter depending on regulatory approval. But if we – its still the benefit from those NSP exits is still online with what I mentioned before about the run rate. So we – we said it was going to be about $50 million per quarter run rate when we exited all those and based on when those will happen we will achieve that. It’s just – its going depend on the actual closure or sale of those remaining assets that we have.

Got it. And then, just on your earning asset growth guidance, you talked about gains at the lower end of the range on an organic basis. Just wondering if you could comment on where you're looking for portfolio acquisition, what type of asset classes?

Yes, actually I'll clarify that. What I was trying to say is, the organic is going to still be around that 7% or 8% that we had this year and to get down to more of the 5% is because of the sales of Mexico, Brazil, as well as the UK small ticket equipment business. So that’s kind of what we are, kind of saying overall the reported growth will be around 5%.

Okay. And are you still looking to do portfolio acquisitions in addition to the OneWest deal or are you just focused on that now?

We're focused on the OneWest and the other Direct Capital and Nacco, but there are some portfolios out there we're constantly looking. I'd say some of the pricing for those have not been attractive to us. But we continue to look for other ways to build out our franchises and we will continue to do that.

Yes. Terrific. Thank you.

Thank you. And the next question comes from David Hochstim with Buckingham Research.

Could you give us more of an update on growth at Nacco? Have you had much growth there yet? Then, I have a follow up.

I would say that we've been successful in – as I've mentioned before in the calls, of growing the portfolio with the – as private company and given kind of our capital base and funding cost. So we've grown in very prudently. We like what we've been able. We won some larger accounts over the last year and we continue to look at areas to grow even faster than we have been able to grow in the first nine months far. We're very happy with the progress and the growth rates of the portfolio.

And we've also been improving the utilization rates of their rail cars.

Okay. And then, could you just give us some guidance on the tax – effective tax rate?

Yes. I think our best estimate as you know, its going into 2015, US earnings will be taxed at the marginal rate of 35% and then our international will be dependent on what region it’s in. Our current estimate right now would be around the 30% still and any variation from the 30% will be the mix of US earnings versus international earnings.

And then NOL utilization, what's reasonable per quarter?

Yes. We had modest taxable – US taxable income in 2014. We expect that to continue and then post OneWest as we mentioned that’s – their portfolio is predominantly US income with very little kind of deferred item. So it will just drop to taxable income.

Okay. Thank you.

Thank you. And the next question comes from Brad Ball with Evercore ISI.

Hi, thanks. Just back on the lower oil prices, I wonder if you could reconcile your comments about $500 million of North American commercial finance exposure with your third quarter Q, which showed about $1.3 billion in oil and gas and another $1.5 billion in energy and utility exposure? Could you talk more broadly about your exposure to the oil decline?

Yes. The oil and gas in the Q, Brad, would include the rail car and then the other piece on the utilities is really kind of not really linked to oil. I mean, its our project finance business and that’s really around utilities and kind of gas fired co-gen facilities of that type of stuff.

Okay. So in terms of direct loan exposure, the net number is $500 million then?

It’s about $500 million, you're correct.

Okay. And then, separately on the – well still on oil but on the aircraft portfolio, could you just let us know what kind of discussions you've been having recently with your clients. With the decline in oil prices have we seen any slowdown in demand for your new technology aircrafts? Have you been able to sign any new lease agreements in the last couple of months on the more efficient A320neos or 737 MAXs?

So in general there has not been any significant change in the demand for the new technology aircraft. I think you have to remember that these – first of all, these new technology aircraft are just beginning to be delivered. And so they won't get delivered – really they get delivered over the course of the next 5 years. There are also aircraft that are going to be in use for the next 20 plus years. And so the efficiencies of these aircraft, people are – airlines are not expecting oil to stay some $50 a barrel for the next 20 years. And so the advantages of the aircraft is over a much longer period of time and the expectation is that they will still continue to be attractive and there is always a demand for the newest technology aircraft.

Okay. That’s helpful. If I could just sneak in one quick one, Scott? What was the dollar amount of the gain on the discrete asset sales in the quarter?

Dollar gain, it’s said on the chart, its about 85 basis points. Brad, I'll have to get – Barb to get back to you on that one.

Okay. Fair enough. Thanks.

Thank you. And the next question comes from Chris Brendler with Stifel.

Hi, thanks. Good morning. Good morning. Can you just discuss the growth outlook, maybe a little bit more in detail on the corporate finance side of the business? You typically see a better fourth quarter on a seasonal basis in the commercial finance business. And corporate, in particular, looks to be the area of weakness. Is it pre-payment activity again, or is it more just not seeing enough demand on the corporate side?

I think its combination of both. I mean, remember last fourth quarter we had some, activity was pulled into the fourth quarter from the first quarter. The pipeline is pretty good going into 2015. But I would say that the overall kind of in the middle market the loan growth is not being great. So as I mentioned in my prepared remarks, we're continuing to find areas to grow in the business. But the growth rate is a little bit muted, right now in the corporate finance area.

And along those lines, I think you'd highlighted fracking and oil and gas as an opportunity for growth in the past. Is that going to have a meaningful impact on the growth as you slow that business, or are you slowing your investment in that business at this point?

I think at least in the mid ticket equipment finance business, with the CapEx reductions that have been announced, that would be an area that we'd see some softness in 2015 relative to some of the past trends, because that was an area that we were involved in. But I wouldn’t say it would be a large piece, but it does – it is an area that we'll – we think there is going to be softness in 2015.

Okay. Great. Thanks, Scott. And then just one last one, if I could squeeze it in? On OneWest, its been quite awhile since you announced that deal and I'm sure this call is not the right opportunity to reexamine what the financial impact will be. But as we get closer to hopefully approval there, are you planning on giving us an updated financial outlook on what these two companies look like together?

Yes. I think we would do that most likely kind of after closing as we kind of came out with new targets and give a perspective on the combined entity. I think trying to do it prior to closing would be a little bit premature.

Okay. Thanks. Looking forward to it.

Thank you. And the next question comes from Bill Carcache with Nomura.

Thank you. Good morning. A lot of banks are talking about how pricing has become so thin on their commercial loans in this environment, that their decision to lend is really a function of their relationship with certain clients. And what they view as their ability to generate fee income in other product areas, given that the profitability on the loans that they are making today is at such thin spreads, that they aren't very attractive on their own. So, I was hoping that you could talk about how that dynamic is unfolding inside of CIT and whether you're finding it more difficult to compete on the basis of your product offerings given the thin profitability that's out there on the lending side?

Well, what I would say is similar to others, I mean, we definitely are as I mentioned, very focused on our relationships and building out our relationships and ensuring that the business that we're putting on meets our risk adjusted returns. So as a previous question was that, that may mean that loan growth may not be at the same pace that we've seen in the last couple of years. But we are clearly focused on ensuring that the business, both the loans plus some of the fee income around supporting those and other opportunities with those customers that we maximize that to improve our overall profitability.

I would also that the pricing in the middle market space is not been as severe as in the bigger company space. And so I don’t think we've seen that same level of thinness on pricing in the middle market space.

Got it. Thank you. That’s really helpful. And if I may, last question, just separately, different topic. There was a lot of noise this quarter, but I was just hoping that you could help us strip some of that out as we think about your earnings power going forward? Just from a high level, your stocks trading below tangible book suggesting that the market doesn't believe that you guys can generate returns that are sufficient to cover your cost of equity. Just, again, high level, if we use a 13% capital minimum that you guys agreed to with regulators when you became a bank holding company, that would imply an asset to equity ratio of about 7.7 times. If we multiply that by your pre-tax ROE of 2%, that suggests that you're earning a pre-tax ROE of around 15%. But on an after-tax basis, it's only about a 10% return. So, I think most people would view a 15% return as relatively attractive but a 10% return as being barely enough to cover your cost of equity. So that kind of leads to the question that we've been getting from investors. And is the reason that someone would want to own CIT purely due to that tax benefit? I'd love to hear how you would respond to that and maybe talk a little bit about whether the earnings power of the business model you think is strong enough that you'll eventually be able to get your GAAP ROAs to at least that 2% level?

Okay. Well, that was a long question. I'd see if we can kind of break it. I think the presentation when you get a chance to look at the presentation, we did try to highlight some of the discrete natures. And over the last couple of quarters we've been doing the same thing. So if you look at the commercial franchise, its kind of been in the 2.2% pre-tax ROA business and we've had some negative impact of some of the portfolio repositioning of getting out of our non-strategic portfolios. So as you kind of drift into 2015, we will have some noise in the non-strategic portfolio around some of the CTA charges that I mentioned. But the core franchise as we've mentioned will kind of stay in that, around the 2% at the franchise perspective. I think in order to – as we mentioned as part of the OneWest deal and what we think we can get on a pre-tax ROA and a pre-tax ROE basis, you're correct that on an after tax basis, given the NOL that we have and the reversal, the deferred tax asset, we will have to accelerate the utilization of the NOLs that builds regulatory capital faster than our book equity. Right, so it’s already 100% in our book equity, we don’t get the benefit in our regulatory capital. So as we accelerate the utilization of the NOL that’s how you get the parity of getting the after tax ROE inline with our cost of capital.

I would also say, I would hope that our investors, as well as all of you covering us can look through our GAAP numbers, and since we obviously don’t pay taxes in the US and won't pay taxes in the US for a long time, I think our pre-tax ROEs are more indicative of the real economics of the business than the after tax GAAP ROEs.

Thank you very much for answering my questions.

Thank you. And the next question comes from Cheryl Pate with Morgan Stanley.

Hi, good morning. I just wanted to touch upon the net finance margin, the guidance. I think we've been towards the top end of the range for a long period of time now, and have talked about interest recoveries and suspended depreciation and some of these benefits fading. I guess, maybe could you just provide some more color on sort of how you see that trajectory towards the middle point of the range? And then secondly, what would it really take to get to the low end of the range at this point?

Yes. So I would say, Cheryl, there is couple of things. So the items that we highlighted on – in the supplemental presentation, these benefits that we've had, like on the interest recoveries and prepayments, some of those were some of the restructurings and the work-outs that we did and those are very hard to predict and they just, when they happen they do provide an uplift into the net finance margin. What I'd say is that we've seen less prepayments on our corporate finance and now we're seeing a little bit as I mentioned in real estate. So part of that, there is going to be a portion probably going forward of prepayments that becomes stabilized or the way it would go to nothing would be as if rates go up and people are not refinancing their loans earlier, that might dissipate. On the suspended depreciation, there is two elements of that, one is the assets that we're selling, so some of the non-strategic portfolios have operating leases and that is a phenomenon that we've gone through as you remember back a couple years ago where we suspend depreciation, so that the margin is higher and then we have an offsetting impairment in other income. And that was elevated on the last couple of quarters because of the aircraft we had in held for sale for seeding the JV, as well as some of the assets that we have in the non-strategic portfolio. So as those kind of dissipate, I think that’s will be what would bring down the net finance margin in the near term, is really the suspended depreciation.

Okay. And then just secondly, on the aircraft yields, can you just maybe provide a little bit more color on what has really been driving the sequential decrease over the course of the year? Is it really more lending versus leasing? Is it to do with the asset sales and the JV? Maybe if you can just help us size that a little bit?

It’s a combination of both. So part of it is the greater proportion of lending in the portfolio and two is that some of the leases that we had that are renewing were at above – reached out above market yields. And so when you kind of get back to market you are getting a little bit of impact of that. But still if you look at the yield, its very consistent with the industry. So we feel that’s a very good performance.

Okay, great. Thanks very much.

Thank you. And the next question comes from Vincent Caintic with Macquarie.

Hi, good morning, guys. I have a few questions centered around your thoughts on energy exposure across your business, and I'll break it up into three pieces. First, on the North American commercial finance, wanted to confirm that that $500 million loan exposure is just for oil and gas extraction? And then also, if you could let us know how much exposure OneWest has and how has provisioning been affected by oil prices? And then secondly, on rail specifically, one of your rail car leasing peers, actually last Thursday, gave pretty positive 2015 outlook for rail car demand. And so I was wondering, what you've been seeing in terms of discussions with your lessees and orders? And then, how have used car prices been doing? And then finally, on aircraft leasing, you're the first guys the aircraft clusters to report. How has the order book been affected, if there's been any repositioning orders and also how have used aircraft prices been affected? Appreciate it.

Okay. So I will – Scott and I will divide it up a little bit I guess. So, let's go backwards. So first in terms of aircraft order book, there hasn’t been any impact on the aircraft order book. And its really goes to the – what I said before, which is the newer technology aircraft are going to get delivered over multiple years and they are viewed as 20 plus year assets. And so we have not seen an impact on the aircraft order books. In terms of the $500 million of exposure, that is to both E&P and oil field services. Actually its more oil field services than it is E&P and as we said we have reviewed that portfolio name-by-name and are comfortable with how that’s reserved and we'll continue to review it. But its – it is actually more oil field services than it is actual E&P.

On the rail cars, I'd say that, we haven’t seen any impact on our growth as I've mentioned all the cars that we have committed in 2015 are already leased. We don’t see, at least today we don’t see any impact on pricings. As I mentioned in my prepared remarks that the renewal rates are still above expiring rates on things that are coming back. So the piece would be is that we don’t see any differences between some of the peer that you mentioned in regards to trends and it’s a longer cycle business, so its going to take some time for things to kind of change in the portfolio, if oil stays down at the level that is today.

And the last piece of the question you asked was about OneWest energy exposure, and OneWest as a non-public company. We cannot comment on that. Obviously when the transaction is completed we can comment on it, but not until then.

Got it. Okay. And just one final point on the aircraft. With lower energy prices, have you seen any effects on the used aircraft prices? In particular, I'm interested in the I guess, the gain on sales that you could be realizing for the sales to the JV? Thanks.

Not really, we don’t tend to have the much older aircraft that presumably would be somewhat more benefited by lower energy prices. And so I would say no, not really.

Got it. Thanks very much guys.

Thank you. And as there are no questions at the present time, I would like to turn the call back over to management for any closing comments.

Okay. Thank you, everyone, for joining this morning. If you have any follow-up questions, please feel free to give me a call 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 www.cit.com. Thanks again, for your time, and have a great day.

This concludes today's call. Thank you for participating.