First Citizens BancShares, Inc. (FCNCA) Q1 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to CIT’s First Quarter 2018 Earnings Conference Call. My name is Denise and I will be your operator today. At this time, all participants are in listen-only mode. There will be question-and-answer session later in the call. [Operator Instructions] Please note that this call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Barbara Callahan, Head of Investor Relations. Please proceed, ma’am.

Thank you, Denise. Good morning, and welcome to CIT’s first quarter 2018 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. Also, joining us for the Q&A discussion is our Chief Risk Officer, Rob Rowe. As a courtesy to others on the call, we ask that you limit yourself to one question and one follow-up and then return to the call queue, if you have additional questions. We will 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 2017 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 on the Investor Relations section of our website at www.cit.com. I’ll turn the call now over to Ellen Alemany.

Thank you, Barbara. Good morning, everyone and thank you for joining the call. The first quarter was another period of solid progress for CIT as we advanced our strategic plan. We posted strong growth in our core business, continue to expand the direct bank and further optimize capital. Net income in the quarter was $97 million or $0.74 per common share and income from continuing operations with $104 million or $0.79 per share. While credit performance was generally stable, we did post an increase in provision that was primarily driven by a single commercial exposure and that affected results. Credit reserves remain strong, and John will walk you through more details shortly. On slide two you can see an overview of our progress in the quarter. At the top of our list is to maximize the potential of our core businesses. And I'm pleased to say that in the first quarter our average core portfolios grew 2% quarter-over-quarter. This marks the second consecutive quarter of strong growth. As I previously shared, last year we took a number of steps to build on our core capabilities, by expanding into additional market segments, adding talent and investing in our franchises. We are now beginning to see some early results of those efforts. Our origination volume was up significantly from the first quarter of last year and part of that growth is from our new initiative. Let me spend a minute on each of our business areas. Average loan and leases in the Commercial Finance business were up 4% compared to the prior quarter, fueled mainly by the CNI Energy and Healthcare verticals, as well as the newly formed Aviation Lending Group. The marketplace remains competitive and we continue to be disciplined. But we also have some sustained competitive advantages, namely our deep industry expertise and relationships in the middle market. For example, when we decided to re-launch the Aviation business, it was built on a 30 year presence in that industry. It allows us to hit the ground running and deliver results. Average loans and leases were up approximately 3% in the equipment financing areas of business capital, as customer sentiment in the economy remains positive and spending levels remain strong. Growth was led by the capital equipment, industrial, technology and lender finance areas, as well as our small digital business lending division. The real estate finance operation posted modest growth in the core business and continues to take prudent approach to a highly competitive market. We have a very experienced team and we are picking our spots in this area thoughtfully. In the Rail business, we continue to manage through the cycle. We did see utilization rates tick up in the quarter to 97%, but lease renewal rates continue to be impacted by oversupply in certain industries. We have a young and diverse fleet and are focused on our strengths and portfolio management and customer service. Overall, our Commercial businesses are well positioned in their respective segments of the marketplace and our plan is advancing. In addition, the strategic transactions continue to progress. We expect the NACCO sale to close in the second half of the year. And this transaction supports our efforts to exit overseas operations. And we are targeting the end of the second quarter for the financial freedom sale pending regulatory approval. This transaction supports our plans to simplify the company and focus on our core strength. We remain committed to achieving our operating expense target despite elevated annual benefit costs and higher legal expenses this quarter. Our deposit strategy has seen positive results despite the rising rate environment. On average, deposits grew more than $400 million and average deposit costs are up just 5 basis points from last quarter. We are thoughtfully managing deposit pricing and achieving a more balanced mix of products with a greater focus on non-maturity products. The direct bank is an important driver of our deposit strategy and this was a very strong quarter for the franchise with $1.5 billion in deposit growth and 28,000 new customers. The high yield savings accounts continue to be successful and we just launched the new money market account that is off to a strong start. The Southern California retail branch network provided additional balance to the deposit mix and posted modest growth quarter-over-quarter. We took several positive steps to optimize the capital structure during the quarter. In February, we received a non-objection to our amended capital plan which will allow us to increase the capital return in the first half of the year by up to $900 million. Part of that plan was conditions on the issuance of $400 million of sub debt and that has been completed. In addition, we repurchased 3.7 million shares of common stock for $195 million in the first quarter. We are committed to returning the remaining capital in the plan as prudently and efficiently as possible by the end of the second quarter. Lastly, we remain focused on a disciplined approach to risk management. With that, let me turn it to John for more detail account of results.

Thank you, Ellen, and good morning, everyone. Turning to our results on page three of the presentation. We've posted GAAP net income for the quarter of $97 million dollars or $0.74 per common share and income from continuing operations of $104 million or $0.79 per common share. Operating performance this quarter reflected strong new business volume in all our core lending businesses and lower prepayments, which resulted in 1.7% total average loan and lease growth and 2.3% growth in our core portfolios compared to the prior quarter. Net income was negatively impacted this quarter from the charge of a single commercial exposure and a higher level of reserves primarily within our Commercial Finance Division. As shown on page four of the presentation, our financial results included a single noteworthy item which was a $7 million after tax benefit from suspended depreciation related to the pending NACCO disposition. With regard to the NACCO disposition, all remaining antitrust approvals were received by the buyer from the European regulators this quarter, which includes a condition to sell approximately 30% of the NACCO cars to other parties. This additional requirement does not impact the overall economics to us and we expect to close the sale in the second half of 2018. Turning to page five, income from continuing operations available to common shareholders, excluding noteworthy items was $97 million or $0.74 per common share this quarter. This is down from $130 million or $0.90 cents per common share last quarter and from %109 million or $0.54 per common share in the year ago quarter. I will now go into further detail on our financial results for the quarter. Please note that in this discussion, I will refer to our result from continuing operations, excluding noteworthy items unless otherwise noted. Turning to page six of the presentation. Net finance revenue was down $9 million from the prior quarter and net finance margin declined by 14 basis points. Compared to the year ago quarter net finance revenue was down $35 million and the margin was down 20 basis points. Purchase accounting accretion, net of negative interest income on the indemnification asset or net PAA declined from both the year ago quarter and the prior quarter. We expect the purchase accounting accretion to continue to decline as the portfolio runs off. This quarter we recognized about $32 million in purchase accounting accretion, down from $40 million last quarter and $56 million in the year ago quarter. The reduction is primarily in commercial banking where assets have a shorter remaining life than in consumer banking. This quarter commercial banking recognized $11 million of purchase accounting accretion compared to $16 million last quarter and $24 million in the year ago quarter. We continue to see a reduction in PAA as the portfolios runoff. We now have approximately $700 million in total PAA remaining of which almost $615 million relates to the legacy consumer mortgage portfolio, which runs off at about 10% to 15% annually. The remaining $85 million relates to commercial finance and real estate finance and we are forecasting 40% to 50% of it to accrete over the next four quarters. The negative interest income on the indemnification asset declined slightly to $14 [ph] million this quarter. We expect the negative interest income to continue to decline modestly each quarter until the loss share agreement expires in the first quarter of 2019. Excluding the impact of net PPA, our core net finance revenue was down modestly, reflecting higher yields on our loans and investments which are - which was more than offset by lower prepayment related fees and higher interest expense. Net finance revenue also included approximately $2 million in negative carry from the senior unsecured debt issuance and the corresponding redemption activity that required 30 days notice. In early March, we issued $1 billion of senior unsecured debt in two $500 million tranches including the three year traunch with a four [indiscernible] coupon and a seven year traunch with a five and a quarter coupon for a weighted average net coupon of 469. On April 9th, we use the proceeds to redeem almost $900 million of senior unsecured debt due in early 2019 that had an average coupon of 458. While the refinancing modestly increased our overall senior unsecured debt cost to 483 from 481, we extended our 2019 maturities in 2021 and 2025. We will continue to look for opportunities to further repay or refinance unsecured debt. In March we also issued $400 million of Tier 2 qualifying subordinated debt with a 10 year maturity at [indiscernible] related to our amended capital plan. We expect to deploy the proceeds over the course of this quarter as we return excess capital to shareholders. Turning to page seven. Net finance margin declined by 14 basis points this quarter to 337, 9 basis points of the decline was from a lower net purchase accounting accretion and lower net prepayments which mostly impacted commercial banking. Higher borrowing costs reduced margin by 5 basis points most of which was driven by the aforementioned unsecured debt issuance. Deposit rates increased across all of the channels this quarter reducing margin by 3 basis points, while higher yields on loans, investments and mix increased margin by 6 basis points. Lower net operating lease revenue from our Rail business continues to reduce our margin. Rail utilization in our North American business increased to almost 97% this quarter, while rail renewal rates on average repriced down 32% reflecting the mix of cars renewing. We continue to expect leases to reprice down an average of 20% to 30% through 2018 and into 2019, reflecting continued pressure from tank car lease rates which are renewing at a faster pace. The team is doing a good job finding new opportunities for our tank cars and while lease rates have stabilized they are coming off peak levels. Compared to the year ago quarter, the decline in net finance margin was primarily due to the same trends I just described. Turning to page eight, other non-interest income was down slightly from a seasonally strong fourth quarter, as lower fees, factoring commissions and gains on investment securities were mostly offset by higher gains on sales of leasing equipment and other revenue. Compared to last year, other non-interest income is up significantly reflecting higher gains on sales of leasing equipment, income from BOLI and gains on derivative activity. Fee income was down from the prior and year ago quarter's, resulting from prior capital markets fees which can be uneven throughout the year. While factoring volumes have increased year-over-year, commissions were down reflecting the mix of services provided and lower pricing. We are now presenting the gains on leasing equipment and investment securities lines, net of any impairments. The increase in gains on leasing equipment this quarter reflected modestly higher gains on rail equipment and higher end of lease activity in our capital equipment finance business. Gains on investment securities declined this quarter as we have worked through about two thirds of the optimization of higher risk weighted investment securities acquired with the OneWest acquisition. Consistent with last quarter, we had $7 million in net gains and other revenue related to the reverse mortgage portfolio that is being sold with the financial freedom servicing operations. When the reverse mortgages were moved to help for sale the third quarter of last year, we started creating the related purchase discount in interest income. This reduction however was more than offset by gains from loan payoffs, liquidations and sales recognized in other revenue, which will continue until the portfolio was sold. The buyer is continuing to work to obtain the required regulatory and investor approvals. We are still working to close the sale of financial freedom in the second quarter, but the timing is now targeted to be closer to the end of the second quarter. Also and as I had previously indicated, that we dissipated recognizing a pre-tax gain at closing of $25 million to $35 million net of transaction costs, and before any incremental indemnification obligation. But that amount may vary depending on the timing of the close and the performance of the portfolio. Given that we are now targeting a close later in the second quarter, the projected gain may be reduced by the income recognized from the continued run off of the portfolio. Turning to page nine, operating expenses increased from the prior quarter and reflect approximately $10 million from payroll and benefit restarts and the legal accrual. In addition, you may recall I mentioned that last quarter benefited from a reversal of litigation provision, as well as a true-up of FDIC insurance costs. Compared to a year ago, operating expenses declined reflecting lower professional fees, while the reduction in occupancy cost, insurance cost and other expenses were mostly offset by higher advertising and marketing costs and compensation benefits. The increase in compensation of benefits was driven by a number of factors, including higher revenue generating business costs and higher benefit costs. While cost this quarter were higher than our target run rate, we remain on track to achieve our 2018 annual operating expense target of $1.50 [ph] billion. We expect operating expenses to decline modestly next quarter and more significantly in the second half of the year with most of the reduction resulting from lower professional fees and lower compensation and benefit costs. Page 10 describes our consolidated average balance sheet. Average earning assets were up $700 million, reflecting higher loans and leases. The increase in liabilities reflects deposit growth and our unsecured debt actions. The decline in equity reflects our stock repurchases and the impact of unrealized losses in our investment securities book that runs through OCI. Page 11 provides more detail on average loans and leases by division. Excluding NACCO, commercial bankings average loans and leases increased about 1.5% from the prior quarter, reflecting strong growth in commercial finance and a little over 1% from the year ago quarter, driven by business capital. In addition, while North American rail assets remain flat, growth in rail was driven from the NACCO portfolio as we continue to take delivery of cars from their order book. He middle market where we focus continues to be challenging and we remain disciplined in a highly competitive environment, while finding opportunities where we can grow. In commercial finance, average loans and leases were up 4% this quarter with strong volumes in healthcare, energy, CNI and aviation finance verticals, as well as overall lower prepayments. While origination vines were down from a strong fourth quarter, they were up significantly from the year ago quarter. In addition, asset based originations remain over 50% of total new business volume, up from 40% last year, partially driven by our re-entry into aviation, finance and our repositioning efforts. Real estate finance remain flat this quarter and up 1%, excluding runoff from the legacy non-SFR portfolio. The market has become more competitive as CMBS index funds are more active. We are remaining disciplined in our due business originations. North American rail assets remain flat as modest new deliveries were offset by depreciation. We increased our order book slightly this quarter to over $100 million and continue to expect new deliveries to be offset by portfolio management activities and depreciation. Business capital is flat compared to the prior quarter with 3% growth across the equipment lending businesses, offset by seasonal reduction in factored assets. In consumer banking growth in our other consumer banking businesses more than offset the role of the legacy consumer mortgage portfolio. Average loans in the mortgage lending business increased due to stronger originations in the retail and correspondent lending channels. We also experienced an increase in loans from our SBA lending platform. Page 12 highlights our average funding mix, compared to the prior quarter, total borrowed funds and deposits increased, while the overall mix remained the same. Funding cost as a percent of average earning assets increased this quarter by 8 basis points. Higher deposit costs contributed 3 basis points, while our debt actions in March in a higher FHLB costs added 5 basis points to our borrowing costs. As I previously mentioned, we are taking a comprehensive approach to address the impacts from the sale of NACCO, as well as other actions, including further reducing unsecured debt using excess liquidity and or refinancing with lower cost debt in order to improve our overall funding cost. Page 13 illustrates the deposit mix by type and channel, quarter-over-quarter, our average deposits increased approximately $100 million to $30.1 billion, reflecting 6% growth in our online channel, offset by a reduction in broker and commercial deposits. We also increased the mix of non-maturity deposits in conjunction with our strategy to optimize deposit costs, while working within our risk management discipline. The cost of our deposits increased 5 basis points in the quarter. Cumulative deposit betas have remained low at approximately 10% since the Fed started raising rates at the end of 2015 and 20% over the last 12 months. We think deposit betas will continue to increase and we are modeling 65% to 75% through the cycle for non-maturity deposits which are currently a little over 50% of our deposit base and expected to grow over time. Page 14 highlights our credit trends. The credit provision this quarter of $69 million was up from $30 million last quarter and $50 million compared to the year ago quarter. The increase reflects a $22 million charge off of a single commercial exposure, primarily within commercial finance that was episodic in nature. The provision also reflects a higher level of reserves also within commercial finance division. I would also point out that we are not seeing any overall deterioration in the credit environment. The increase in reserves this quarter were not concentrated within any particular industry or geography, and we continue to originate new loans at a better risk rating than that of the overall performing portfolio. As we have indicated in the past, given the low level of losses that we have been experiencing, a higher expected loss for a single credit can create significant volatility in our quarterly credit costs. Over the past five quarters our provision has averaged approximately $35 million and we believe $30 million to $40 million is more normalized level in the near term. Net charge offs were 68 basis points in the quarter, above our outlook range of 35 to 45 basis points. However, excluding the $22 million discrete charge off mentioned, net charge offs would have been 39 basis points in line with our guidance. Non-accrual loans is $236 million or 80 [ph] basis points of loans, remained low at the low end of the quarter and were slightly higher than prior quarter, but down from the year ago quarter. Our reserves within commercial banking remain strong at 1.79% of finance receivables, which is about four times our annualized net charge offs over the past five quarters. Turning to capital on page 15, we received the non-objection to our amended capital plan in February, which enabled us to increase our capital return in the first half of this year by $800 million of which $400 million was predicated on the issuance of Tier 2 qualifying subordinated debt. When added to the $100 million remaining at the end of 2017, we had up to $900 million of capital that can be returned to shareholders through June 2018. In the first quarter we bought back $195 million or 3.7 million shares at an average price of 53 - 16 [ph] per share. In the second quarter through Friday April 20th, we have repurchased an additional one 1.4 million shares at an average price of 51.86 [ph] per share. We intend to return the remaining capital of up to $635 million, inclusive of $25 million originally to be repurchased associated with employee stock plans by the end of June and we'll continue to review options to return the capital as efficiently and as prudently as possible. Pro forma for the remaining capital we expect to return through June 2018, our Common equity Tier 1 ratio would be around 12.5% still above our target ratio of 10% to 11%, but much improved from our current common equity Tier 1 ratio of 14%. We submitted our capital plan earlier this month. The results will become public by the end of June. We designed the plan to bring our common equity Tier 1 ratio closer to the targets we discussed last quarter, which were 11.5% to 12% by the end of 2018 and the upper end of our 10% to 11% target range by the end of 2019, while working within our risk management discipline. Page 16 highlights our key performance metrics both on a reported basis, as well as excluding noteworthy items. Our effective tax rate excluding discrete items was 27% this quarter, slightly higher than the 25% to 26% we guided to last quarter. The increase was mostly driven by higher forecasted state local taxes, as a result of the input impact of U.S. tax reform and state tax law changes during the quarter. As a result, we are now forecasting the effective tax rate to be in the 26% to 28% range for 2018. Our return on tangible common equity excluding noteworthy items of 6.4% was negatively impacted by our hard credit costs. Normalizing for the higher credit provision, ROTCE would have been around 8%. Before I turn it back Ellen, I wanted to give you some thoughts on the second quarter outlook which is on page 17. We expect total average earning assets to be relatively flat with low single digit quarterly growth in our core portfolios, mostly offset by runoff of the legacy consumer mortgage portfolio and sale of the reverse mortgage portfolio. We expect net finance margin to remain in the mid to upper end of the 2018 target range, depending upon the timing of the sale of the reverse mortgages. We expect operating expenses to be down as it is included - as it included about $10 million of elevated costs this quarter. We continue to expect net charge offs to be within the annual target of 35 to 45 basis points, excluding any discrete items. And as I mentioned, we expect the effective tax rate before the impact of discrete items to be 26% to 28%. And with that, let me turn it back to Ellen.

Thank you, John. In closing, I want to say that we remain committed to achieving an 11% return on tangible common equity at the end of 2019. We are encouraged by the performance of our core businesses and believe CIT has a distinct value proposition in the markets we service. We are focused on continued progress on our plan and have demonstrated that we can consistently deliver on our objective. Now let me turn it back to the operator for question and answer.

Thank you, Ms. Alemany. [Operator Instructions] The first question will come from Moshe Orenbuch of Credit Suisse. Please go ahead. Mr. Orenbuch, your line is open for your question.

Hey, guys. This is James Ulan on for Moshe. I was wondering if you can go into greater detail on growth in the commercial finance segment, as well as in business capital. We kind of see that rail and real estate are roughly flat and are curious what’s your strategy is to grow those other two vertical, commercial finance and business capital?

Sure, James. This is Ellen. Business capital, I would say if you look at our year-over-year growth it's been very strong and it really is reflecting overall confidence and market conditions. I think overall we're seeing positive sentiment from small business customers and that's really driving our growth. We also - just in equipment finance, which are all our vendor programs, we doubled volume in the last 12 months mainly due to our investments in technology and industrial. We're also continuing to expand out our front end integration capabilities with major technology companies and we think this is really unique proprietary technology. And so we're very optimistic and we believe that business capital should be one of our strongest growth areas this year. N commercial finance, we – you know, the fourth quarter ‘17 was really the inflection point for the asset levels in this business. We have a solid pipeline and we're making continued progress against our new business initiatives. Most of the asset growth we saw this quarter was in healthcare, real estate, aviation lending, energy and CNI. And - but that being said, the competition for quality credits is you know, very intense. There is a lot of non-bank lenders out there that are taking market share and you know, as we've mentioned in the past leverage levels - leverage lending levels have moved above the guidance for banks. So I think overall in commercial finance the asset growth is really going to depend on market conditions, especially prepayments. And I would also say that a lot of our volume comes from financial sponsors and M&A was down in the first quarter. But pipeline is strong. And then real estate finance you know, we're just being really selective there. We recently had a reception where we had a lot of our real estate customers were there and - you know the price of real estate just raw land is very, very high - high end in New York is you know we're not doing right now, but prepayment flowed in the first quarter for us. And I would say that you know we're really just focusing on the quarter northeast and southern California.

Okay. That's very helpful. Thank you. And if I could just ask a follow up on credit. Can you go into a little bit of greater detail on - not the specific credit item, but just more of the increase in reserves for the broader portfolio? What's causing that and what are your expectations for those drivers going forward?

So in terms of the increase beyond the discrete event which I would like to mention that - to follow on to what John was saying there were irregularities that were episodic in nature to that event. But in terms of the broader increase that we've had, there's no one industry, no one product types, so there's no correlation that we're seeing across the portfolio. So it was just you know a number of names in our performing book that we decided to build reserves on during the first quarter. And that's why we decided to give guidance beyond just the charge offs, but to give it to the provision as well to make it clear from our perspective and from what we're interpreting that we think credit quality remains stable. And what we think the expectations are for the balance of the year.

Great. Thank you very much.

Well come.

The next question will come from Chris Kotowski of Oppenheimer & Company. Please go ahead.

Yeah. On the capital repurchase plans, I guess I think the $675 million is a lot to do in you know, the remaining time in the quarter. And you know - and previously when you had a large amount of authorization obviously you did this kind of structured solution. And I'm wondering if you can talk a bit more about how you plan to get this done by the end of the quarter?

Yes. So I think we're still working through dynamics. I think there are two imperatives associated with return of capital. The first is that we return to capital and the second is that we return to capital by June 30th. And so both of those things have happened. I think in terms of the tools, we're obviously looking at everything and have been looking at everything. We're looking obviously at the tender. We're looking ASRs. We’ve been doing OMR. So I think the complication with OMRs on a go forward basis is there's not enough average daily trading volume approach to actually get it out. If you look at where our stock is traded – or number of shares that are actually trading on a daily basis we probably need on a good day probably 90 trading days to actually move it. So I think we'll manage around the edges with OMR. And then I would expect that at some point there might be a cash cleanup to the extent that tender and an ASR doesn’t get everything out. But it's obviously something that we're looking at very closely. We understand the times that are on our side. And we have to make some decisions. I would say that also you know, just in the context of timing, our amended capital plan was actually approved in February 1, I think we announced February 2nd. There were some challenges in the markets post February 2nd and it wasn't until March 6 that we're actually able to get this sub debt out the door which was a large component of this. So were - and then we went right into a blackout. So we're pretty mindful of what we have to do and how much time we have to do it.

Okay. That's it for me. Thank you.

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

Thanks. John just a couple of follow ups. What was your deposit beta in the period, because my - I was just doing some quick calculation on the change in average deposit balance. And it looks like on the incremental it might have been about 35 basis points and Fed funds moved about 34. So obviously that would imply a much higher beta than the 20 that you cited. So could you just give some clarity to the beta in the period?

Yeah. So it - on overall basis it's probably around it – its up. But it depends on product, it depends on channel, it depends on what you're looking at brokered or commercial. I mean clearly the betas are much higher associated with the non-maturity deposits. You know, and I think to the extent that you know a lot of the growth that you're seeing is in our non-maturity portfolio, you would expect higher elevated - more elevated betas. You know beyond that, I don't know there's much more that I want to say.

Okay. So just so I understand that 65 to 75 beta of that that you've cited that's on average over the course of a year or how do you…

That's over the entire cycle, so that's from the start of the Fed tightening through the entire cycle. I think the non-maturity deposits you can imagine betas is getting up to probably 75% in the non-maturity portfolio. And you know, look, betas are going to move. It's going to be a function of the competition in the marketplace, it's going to be a function of what happens in the left hand side of the balance sheet and where we need the funding. So it really is a balancing act and so I'm not trying to be evasive, but you know, we're living in real time and it's just kind of hard to project where this is all going to go. But I would say, I think we've been pretty effective thus far in terms of you know when you look at the overall change in deposits. I think, clearly I think last year our overall deposit costs grew 5 basis points and we saw 5 basis points just in the first quarter. So things are starting to move. There's no question about it and we don't have our head in the sand in the sand about it. But it's very fluid in terms of the way we think about the mix of products. I think the other thing too that helps us a little bit is that to the extent that we've been aggressively winding down you know, brokered and to the extent we're underweight commercial where you typically find higher betas, it feels like we're in a good place in those spaces. On the brokered cost to deposits, you know that's money still at 250 and so when you think about rotating out of 250 deposits into NMD which I think our offer rates now like 175. You're still picking up 75 basis points, so there's still potentially opportunity for us to be doing things in the deposit space. So let's a little bit more helpful.

That's very helpful. And if I can just follow up with one question on capital, you know, putting aside the capital actions for the near term, can you just help me understand how the - how you achieve that that longer term target and I guess what I'm really trying to understand is how much capital you're anticipating being consumed by growth versus how much incremental capital you feel you need to return in order to achieve the secular target?

Well, I think it's always - it's a constant trade-off. I mean you know I'm coming up on my first year here I think the first two quarters I was here that was a lot of growth across and in fact when the rest of the market was growing quarter on quarter 1.5%, 2%. We were kind of flattish. I think the fourth quarter was very strong. I think the first quarter was similarly very strong and if you look at originations in the first quarter they were better than just about they were better than every quarter almost across the board except for the fourth quarter of last year. So actually growing into our capital by building out the balance sheet would be a nice problem to have. I think you know I think we've been very clear in terms of you know the glide path down, I think about it in terms of you know at the end of last year we're 14.5% common equity Tier 1. We're going to get them at the end of the first quarter or 14% percent. We're targeting get down to 11.5% to 12% at the end of this year and then at the high end of the range 10% to 11% in the next year. Now a lot of things could happen between now and then we've got to continue to operate within the regulatory framework. But you know being in on SIFI relaxed supervisory expectations all weigh into these things. But until any of that stuff happens, I think we're still on our glide path to get to between 11.5% and 12% at the end of this year and down to you know the high end of 10% to 11% at the end of ‘19. And that still feels right to me.

Thanks very much.

[Operator Instructions] The next question will come from Vincent Caintic of Stephens. Please go ahead.

Thanks. Good morning, guys. Appreciate the color you’ve given so far on the group and those specific segments. But just wondering if you could broadly talk about the competitive environment you're seeing in commercial lending. I think we've heard from a couple of banks about the competitors space, so I'm kind of wondering if you can maybe go through some of your products sets broadly and talk about where you might be seeing competition or where you might have a particular edge. And in terms of competition here maybe seeing it in on a yield pressure or people are taking more credit risk or covenants might be loosening? Thanks.

Sure. Good morning, Vincent. So I think we're seeing the most competition and really the commercial finance and the real estate segments of the market. And it's really from a non-bank space and commercial finance where there's just so much liquidity out in the marketplace. And as I mentioned before where the leverage level - lending levels and really coming in late transactions are being done. But that being said, I think where you know in particular our strategy is really going after certain industry niches and we had most of our growth this quarter in healthcare, real estate and aviation lending, energy and some CNI. In real estate you know, same thing, what are the non-traditional lenders and debt funds are really - there's just a lot of liquidity out there and you know the cap rates we're seeing - we haven't really seen a change in the cap rates since you know, roughly about 5% on the high quality properties, 4% to 7% on others and we're also seeing spreads tightening they are because there's just so much cash in the system that the spreads have tightened a little there. So I think in business capital you know, I think it's basically the same traditional lenders out there in the marketplace and where we're really differentiating ourselves is leading with industry expertise, proprietary technology. And then on the small business direct to capital lending you know, we're one of the few fintech companies that's regulated within a bank. There's a lot of small business confidence out there. And so we have good growth in that segment. Rob or John I don't know if you have anything to add.

So I thought that covered it pretty well. I would just be looking at in terms of commercial real estate the banks including ourselves have been pretty disciplined around the cost of loan value in having skin in the game. And so that's why you see slower growth rates for commercial real estate across the board.

Okay. Thanks. That's helpful. And actually a related question there. As you talked about you know a lot of extra liquidity, particularly in non-banks space in your experience what changes that liquidity – what causes that liquidity to maybe go away and maybe this rising rates have a - give a positive benefit for you in that regard?

Really we have to be - kind of the cycle happening, so if you think about commercial finance and then think about the non-banks, whether it’s the CLSO money that's come on board or the credit funds that actually have money, as well, it would really have to be a deterioration in the credit cycle. Otherwise they're going to be able to provide returns to their investor base that are reasonable. And I would imagine that that would continue on. I don't think it's as much interest rates unless the got really aggressive tightening and then it was just really pulling liquidity out of the system. But overall interest rates are still relatively low.

Thanks so much.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to management for any closing remarks.

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 www.cit.com. Thanks again for your time and have a great day.

Thank you. Ladies and gentlemen black concludes today's conference call. Thank you for your participation. At this time you may disconnect your lines.