Earnings Call Transcript - FCNCA Q2 2020

Operator, Operator

Good morning and welcome to CIT’s Second Quarter 2020 Earnings Conference Call. My name is Rocco 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Barbara Callahan, Head of Investor Relations. Please proceed, ma’am.

Barbara Callahan, Head of Investor Relations

Thank you, Rocco. Good morning and welcome to CIT’s second quarter 2020 earnings conference call. Our call today will be hosted by Ellen Alemany, Chairwoman and CEO; and John Fawcett, our CFO. Also joining us for the Q&A discussion is our Chief Credit Officer, Marisa Harney. During this call, we’ll be referencing a presentation that is available on the Investor Relations section of our website at cit.com. Our forward-looking statements disclosure and non-GAAP reconciliations are included in today’s earnings materials and within our SEC filings. These cover our presentation materials, prepared comments and the questions-and-answers segment of today’s call. With that, I’ll now turn it over to Ellen Alemany.

Ellen Alemany, Chairwoman and CEO

Thanks, Barbara. Good morning, everyone, and thanks for joining the call. The COVID-19 pandemic has continued to affect the broader economy, and that has carried over to our financial results in the second quarter, although to a lesser degree than we experienced in the first quarter. As a result, we posted a net loss this period of $98 million or $0.99 per diluted common share. CIT began this year in a position of strength with the multi-year strategic transformation reinforcing our foundation and the completion of the recent acquisition adding to our franchise capability. That strength, along with the agility of our team, will help us to continue to navigate through this unprecedented time. John will go into a detailed account of the drivers in the quarter, but some key factors in the performance were lower net finance revenue, primarily due to lower interest rates and holding elevated levels of liquidity during this turbulent period; lower factoring commissions due to retail store closures; and the $73 million net charge-off related to a single factoring bankruptcy exposure. We also continued to build our allowance for credit losses, but with the substantial reserve bills in the first quarter, the impact on our provision was much slower. Despite these factors, there were also pockets of strength in the quarter. Our average deposit costs declined by 27 basis points. And we were able to use some excess liquidity to repurchase $235 million of unsecured bank notes at a discount. Our average loans and leases were up 2% from last quarter, which included defensive draws on results in March, as well as new originations in stronger segments of the commercial market. Our capital and liquidity positions remained strong. Our integration plan from the recent acquisition is on track, and we are unlocking greater operating efficiencies than originally anticipated. Our operations continued uninterrupted with all our branches remaining open and our customer operations running smoothly, many in a remote model. And we are proactively managing our credit risk through this dynamic period. I want to spend some time on what we're seeing in the business and how we're leveraging our strengths in the current environment. First and foremost, CIT's business model is very diverse. We operate across a variety of commercial segments that have deep industry and asset class expertise to support those segments. That is a tremendous advantage across market cycles, enabling us to pivot quickly, take advantage of attractive opportunities, and manage our exposure in areas that are more directly impacted by the current environment. And that's exactly what we've done for this pandemic. Let me focus on a few of the opportunities first. The power and renewables business has continued to be very active with virtually no disruption through the pandemic. And CIT is a leader in this space, ranking third in the league tables. We closed five deals where we were the leader of financing since March; we have another 10 lead deals in the pipeline for the second half. Most recently, we announced an $118 million deal for a 112 megawatt solar facility in North Carolina, which demonstrates the continued demand for renewable power. In addition, we are seeing strong transaction activity in the technology, media, and telecom division, as stay-at-home guidelines have supported continued investment in telecom infrastructure, cloud-based data centers, as well as additional streaming media content production and distribution. Our capital equipment finance division had a record quarter as borrowers were looking to leverage their fixed assets. We were able to finance several investment-grade and near-investment-grade borrowers given our deep asset class expertise. There are good yields in this asset class, and we were also able to opportunistically purchase small portfolios from larger banks looking to manage obligor limits. CIT has a long history in the asset-based lending business, and this is an area where we are expanding as we see some solid opportunities in the pipeline for the second half that align with our capabilities. And on the business capital front, we began to see an uptick in applications and volume toward the end of the quarter as certain businesses started to return to their operations. As a result, our volumes in June were consistent with where they were a year ago. In short, we are seeing opportunities open up, and our agility, expertise, and balance sheet strengths have allowed us to capture those opportunities. Credit, of course, does remain a challenge in this environment, but many of the qualities I mentioned that help us originate business also help us manage our risk. Our size, industry knowledge, and asset class expertise allow us to adapt quickly and proactively manage issues when they arise. As soon as the pandemic began, we implemented heightened monitoring and portfolio management practices. That included a loan-by-loan review, daily portfolio and industry reporting, and redeployment of resources to help manage portfolios that are most affected by the economic disruption. We have granted relief across more than 10,000 smaller-ticket business capital loans and leases, and about 200 commercial finance and real estate contracts totaling about $2 billion in net investment combined. And we are underwriting each larger-ticket loan modification to ensure there is a path to recovery. We participated in the PPP program, with the majority of customers accessing the program being community-based small businesses in our branch footprint. We also recently launched the Main Street lending program for our mid-sized clients. We are staying disciplined to find new opportunities and assist our current customers through this period when possible. Before I pass it to John, I want to touch on some of our strategic initiatives. The integration of our recent acquisition of the former Mutual of Omaha Bank is progressing nicely and remains on track for this year and ahead of schedule on operating efficiencies. Despite all the complexity the pandemic has brought, the team is making great progress in bringing together the teams, technology, products, and footprint. The homeowner association deposit team is hitting their goals with average HOA deposits up 8% to $5.3 billion. This was great progress and a key driver of the acquisition. Continuing to build out this channel will give us even greater funding flexibility and at lower costs. Likewise, the newly integrated treasury and payment services team is bringing in additional commercial deposits for new and existing clients also at lower costs. These average deposits are up 18% in the quarter to $3.9 billion with costs down to 43 basis points. The build-out of these deposit channels complements our consumer deposits in the direct and branch channels and provides greater funding flexibility and diversity. As part of our integration efforts, we also recently signed an agreement to sell the wealth management business that was part of the former Mutual of Omaha Bank product offering. As we conducted a strategic review of the business, we determined it was not the right fit for our model. It's a very small transaction and it's more about CIT focusing on areas of strength and divesting activities that are not aligned with our strategy. We expect the deal to close in the coming months and we will provide additional detail at that time. As I mentioned, we are unlocking synergies through the acquisition faster than anticipated, and as a result, we'll be realizing about $25 million of our 2021 cost savings ahead of schedule this year. In recent years, CIT has proven time and time again that we have a culture of performance and the fortitude to deliver on our commitments and continuously improve. That spirit remains through this pandemic. We understand the economic disruption is not behind us yet. However, we took prudent actions in the first half of the year to anticipate the impact of this downturn based on the best available information. While the environment remains dynamic based on what we know today, we are cautiously optimistic for the second half of the year and in our ability to restore a modest level of profitability, assuming the macroeconomic environment does not deteriorate further. With that, I'll turn it to John.

John Fawcett, CFO

Thank you, Ellen, and good morning, everyone. We reported a GAAP net loss of $98 million, or $0.99 per diluted common share, and a loss of $61 million, or $0.62 per share, excluding noteworthy items. Our results this quarter reflect the ongoing global pandemic and low interest rates as we navigate the current environment. Overall business activity slowed in the earlier part of the quarter, but we began to see a pickup in activity in many sectors where we have strong capabilities in June. Assuming no significant changes in the current or forecasted macro environment or any expected credit performance of our portfolio, we anticipate returning to profitability and generating modest positive earnings in both the third and fourth quarters of 2020. Last quarter, we proactively implemented CECL and appropriately added substantial reserves reflecting the COVID-19 environment. While this quarter's credit provision was considerably lower than in the prior quarter, it remained elevated as we continued to bolster reserves and incurred a $73 million charge related to the bankruptcy of a single factoring customer in the retail industry. This loss stemmed from unique circumstances directly tied to the economic shutdown and store closures. Although we have reserved for additional charges in the retail sector, we do not foresee another single customer loss of that scale in our factoring business. Based on our outlook for the macro environment, we expect the provision to continue to moderate next quarter, subject to ongoing fluid conditions. Our net finance revenue and margin were significantly affected this quarter by lower market rates, primarily LIBOR, which reduced our floating rate loan yields. Additionally, we have higher levels of excess cash due to strong deposit growth, reducing our margin by 30 basis points as it earned only about 10 basis points at the Fed. We took steps to offset some of this margin pressure by lowering our deposit costs throughout the quarter, particularly in our online channel, where we reduced our Savings Builder rate by 80 basis points to below 1% at the end of the quarter. We used some of our excess cash to tender for our unsecured bank notes, repurchasing $235 million at a discount, recognizing a $15 million gain and reducing interest expense by approximately $7 million annually. Assuming LIBOR rates remain relatively stable, we believe the margin has bottomed and anticipate a 10 to 20 basis point improvement in the third and fourth quarters as the benefits of lower deposit costs are realized and we reduce our excess liquidity. This quarter, lower factoring commissions impacted our non-interest income as volumes declined significantly due to retail store closures. We also experienced lower gains on asset sales as we suspended some portfolio management activities. Factoring volumes improved in the first half of July, and we have been operating at roughly 98% of 2019 levels as retailers replenish inventory. We expect factoring volumes and commissions to increase from second quarter levels, though uncertainty surrounding the back-to-school season may temper that improvement. We are also seeing renewed prospects to resume selling pools of loans in our legacy consumer mortgage portfolio and expect to complete a transaction if current conditions hold. We are continuously seeking ways to enhance our operating efficiency. This quarter, we took a restructuring charge of $37 million primarily related to employee costs and contract terminations. $15 million was anticipated as part of the Mutual of Omaha Bank merger and integration costs, while the remaining $22 million pertained to cost reduction initiatives we expect to realize over the next 12 to 18 months. We are reducing our full-year 2020 operating expense target, excluding noteworthy items and intangible asset amortization, by $25 million to approximately $1.185 billion, as we are achieving some of our 2021 cost savings ahead of schedule. This reduction includes speeding up cost synergies related to the integration of Mutual of Omaha Bank. Additionally, we are reacting swiftly to the current environment, which has enabled us to accelerate our plans to optimize our footprint, including former Mutual of Omaha Bank branches and streamlining office locations. We plan to downsize our occupancy by 500,000 square feet, representing 30% of our total footprint. These decisions are expected to incur an impairment charge of around $15 million in the fourth quarter, with a payback period estimated at 18 months or less. We remain focused on continuous improvement and will update our 2020 operating expense target as the operating environment clarifies. Regarding our operating trends, net finance revenue and margin were sharply reduced, primarily due to lower market rates and a higher mix of cash. Average LIBOR fell by around 100 basis points this quarter, impacting our margin by about 40 basis points due to declining floating rate loan yields. Approximately 60% of our floating rate loans have interest rate floors, and since the downturn, we have secured LIBOR floors of 75 to 100 basis points on many new commercial loan originations while also seeing improved spreads in various industry verticals. The higher mix of cash, combined with lower rates, also negatively affected our margin by 30 basis points. We expect some of this to reverse as we deploy our excess liquidity and as higher-cost term CDs mature. Lower rail utilization and renewal rates, along with increased storage costs for off-lease cars, reduced the margin by 10 basis points this quarter. The North American railcar fleet continues to be oversupplied, with 32% of the fleet in storage, driven by the broader economic slowdown. While our fleet is diverse and reflective of the economy, many car types experienced decreased utilization and pricing on new leases. Our rail utilization dropped roughly 300 basis points to 88%, with lease renewals repricing down 30% this quarter, mirroring current market conditions and the mix of cars available for renewal. Sand cars used in the exploration and production space significantly influenced repricing activity, while grain cars, plastic pellet-covered hoppers, and select boxcars continued to renew at above-average rates. Recently, macro indicators have begun to show signs of recovery from COVID-19, as many factories have resumed at least partial production. Although still below 2019 levels, rail loadings have improved in the last few weeks from their lowest points during COVID-19. As the economy recovers and commodity prices rise, we expect rail utilization and pricing to improve, albeit gradually, as excess capacity and off-lease cars are reintroduced first. Given the anticipated macro environment, we foresee a slight reduction in net rail yields over the next couple of quarters as leases continue to repricing down. We expect utilization to climb back into the low 90% range over the next few quarters and reach mid-90% levels by the end of 2021. Our young and diverse fleet, featuring more high-load capacity cars, provides a competitive advantage, leading to higher demand for our railcars, while the ongoing impact of sand cars in the exploration and production sector is expected to linger on the recovery. To counter the impact of low rates on our assets, we have actively reduced deposit costs. We improved our margin by 21 basis points this quarter as CDs repriced downward and non-maturity deposit rates were lowered across all channels. The most significant rate reduction occurred in our online channel, where the Savings Builder rate was cut by 80 basis points, ending the quarter below 1%. We also grew lower-cost HOA and commercial deposits by about $1 billion, contributing further to lower deposit costs. The HOA deposit channel reached a record $5.3 billion, with growth in commercial deposits fueled by both new and existing clients, while costs decreased by approximately 20 basis points. We are pleased with our progress in expanding these channels and are on track to meet growth projections in the HOA sector. As previously mentioned, we expect margins to improve in the third and fourth quarters by 10 to 20 basis points as the effect of recent rate reductions takes effect, along with ongoing downward repricing, the maturation of CDs, and growth in lower-cost HOA commercial deposit channels. Furthermore, we continue to explore opportunities to lower non-maturity deposit rates while balancing our liquidity needs. Average loans and leases grew by 2% this quarter, reflecting increased defensive revolver draws in commercial finance, new business volume in key sectors where we see opportunities, and a decline in prepayments. End-of-period balances dipped as repayments of factoring invoices surpassed new factoring volume and as revolver draws from the last quarter were repaid. Although origination volumes were down due to the current environment, we continue to close deals for our clients and identify opportunities in specific industry verticals and equipment leasing, supported by strong leadership and industry expertise. New business activity in commercial finance was driven by sectors such as power and renewables, and technology, media, and telecom, which included opportunities for capital markets and derivative fees. We are also finding good opportunities in the current environment for capital equipment finance. Overall, pipelines in commercial finance are lower than last year due to the business slowdown, but we are seeing increased activity in certain areas, along with healthcare and asset-based lending. We are experiencing wider spreads and structural improvements, including LIBOR floors on new originations. In business capital, equipment finance is capturing market share as other small ticket equipment lenders have paused or exited the market. We are also seeing rising demand for our programs partnering with technology manufacturers to provide financing to their customers. In small business solutions, we are focusing on lending to industries less affected by the COVID-19 pandemic while retreating from certain higher-risk sectors. Overall, business capital applications, which had slowed significantly earlier this quarter, have seen a resurgence in the past few weeks, with June origination volumes returning to June 2019 levels. We cautiously anticipate an increase in origination activity in the third quarter across selected areas. We continue to work with customers to extend payment deferrals for those affected by the economic consequences of COVID-19. By the end of the quarter, we had granted relief requests to approximately 1,700 consumer customers with a carrying value of around $630 million. Additionally, we approved approximately $1.4 billion in relief requests for over 200 commercial transactions across commercial and real estate finance, approximately $550 million for about 10,000 smaller ticket equipment contracts in business capital, and around $180 million for over 100 contracts in our small business administration business. It is still early, as some of the first deferrals are just beginning to expire, but trends thus far are relatively consistent with our expectations, and we have maintained close contact with our customers. For example, we conducted a comprehensive calling campaign, making about 9,000 outbound calls to our small business solutions customers this quarter and continue to engage with them as the deferral period concludes. In our middle market loan book, we have not yet seen a significant second wave of deferrals, but we anticipate deferral requests in the third quarter as borrowers refine their financial forecasts for the next 12 to 18 months. We are monitoring these activities closely and have provided additional information in our presentation. Overall, we expect average loans and leases to remain relatively flat next quarter, reflecting lower end-of-period balances from the second quarter, as we continue to support our customers and focus on origination activity with strong risk-adjusted opportunities aligned with our strengths. Slide 15 and 16 highlight our credit trends and provision. Net charge-offs increased significantly this quarter to $170 million. Apart from the one factoring customer bankruptcy of $73 million that I previously mentioned, net charge-offs were $97 million or 1.02% of loans, about three quarters of which were already reserved for, and therefore did not have a specific impact on our provision. The retail sector had been facing headwinds prior to this current crisis, and we had been actively reducing exposure to troubled retailers prior to the onset of COVID-19. The $73 million charge related to a single factoring bankruptcy was unanticipated and a direct result of the retail shutdown, which precipitated a voluntary bankruptcy. While there were a number of retail bankruptcies this quarter, with the exception of the one I just mentioned, we did not have exposure to those names, or we had previously exited or reduced our exposures to low levels prior to the bankruptcy. We expect continued pressure in this industry, and we are monitoring the developments in the sector closely and remain in constant contact with our customers and clients. Our current factoring exposure in the retail sector is approximately $1.7 billion, down considerably from $2.9 billion at the end of last quarter, as collections have outpaced new factoring volume, driven by store closures brought on by the COVID-19 pandemic. In addition, only $250 million of receivables had extended terms at the end of June, down from $900 million in April. Our top 25 exposures include traditional retailers as well as well-known online big box and discount retailers. The top five customers, which are rated single A to AA, comprise a little over 40% of total factored retail exposure. The next 10 largest exposures are between $25 million to just under $50 million, of which five are investment grade, with the largest being non-investment grade. After that, the remaining customer base comprising approximately $600 million exposure is very diversified across approximately 28,000 accounts. As I mentioned, so far July activity has been surprisingly strong as retailers look to restock depleted inventory levels. We are also seeing strength in the furniture sector and increased factoring volume with discount retailers. That said, a second wave of COVID-19, which could result in reduced traffic and/or store closures remains a concern. We have a robust approval and monitoring framework in place to review customer exposures on a weekly and monthly basis, and where appropriate we continue to implement risk mitigation actions and price enhancements. With respect to our credit reserves, this quarter we established reserves of $58 million on individually evaluated accounts and increased our collectively evaluated reserves by $107 million for on-balance sheet exposures. This quarter, we utilized the June baseline scenario from a provider well-known in the industry that assumed a more V-shaped recession and longer recovery than the March baseline scenarios that we had used to determine our credit provision in the first quarter. We also apply a qualitative overlay for other factors that include macro uncertainty, model uncertainty and sensitivity to changes in assumptions as well as additional risk to specific industries or portfolio segments, such as oil and gas factoring at small ticket commercial loans. As a result, our coverage ratio increased approximately 40 basis points to 3.5% on commercial banking loans and 30 basis points to 3.2% for total loans. Assuming no significant change in the outlook, we expect the provision to continue to moderate next quarter. Nonaccrual loans increased significantly in the quarter, primarily driven by loans in commercial finance and real estate finance. As Ellen indicated, we have put in place heightened monitoring to carefully watch specific industry trends and indicators of delinquencies. In commercial finance, real estate finance and rail, we have conducted a loan by loan review, identified higher risk exposures, performed stress analyses, and prioritized our most vulnerable accounts. We are monitoring revolver advances and borrower relief requests for vulnerable borrowers on a daily basis. We have also adjusted our underwriting to reflect the current environment. We are individually underwriting each transaction request for modification in commercial finance, real estate finance, and rail to ensure the borrower has a path to recovery. We have restricted our underwriting in the most distressed industries and suspended auto-decisioning in acute areas of risk. We are staying disciplined in our pricing and structures, while continuing to evaluate opportunities that utilize our capital most efficiently. We have updated our slides in the appendix for additional information on portions of our portfolio expected to be more impacted by the current environment. Slide 17 highlights our liquidity position at quarter end. Our liquidity remains robust at both the bank and the bank holding company. During the quarter, we issued $500 million of unsecured debt at just 3.929% at the bank holding company, and our next maturity is not until March of 2021 and it's for the same amount with a coupon of 4.08. At the bank, we increased our available borrowing capacity at the federal home loan bank with the assets acquired for Mutual of Omaha Bank, substantially increasing our sources of contingent liquidity. Turning to Slide 18, our common equity Tier 1 ratio advanced 30 basis points in the quarter and remained strong at 10%, well in excess of the federal reserves minimum levels, including the capital conservation buffer. The growth in the ratio this quarter was driven by the decline in the end of period loans and a mix shift to lower risk-weighted assets, including cash and PPP loans, which have risk weightings of zero. As the economy starts to recover and business activity improves, we expect risk-weighted assets to increase from the deployment of excess liquidity and a lower level of PPP loans. We also expect positive earnings will offset the deployment of capital. Over the next two quarters, assuming the current forecasted macro environment, we expect our common equity levels to remain in the 9.8% to 10% range, depending on the mix of lower risk-weighted assets. And with that, I will turn it back over to Ellen.

Ellen Alemany, Chairwoman and CEO

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

Operator, Operator

Thank you. Today's first question comes from Moshe Orenbuch with Credit Suisse. Please go ahead.

Moshe Orenbuch, Analyst

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

John Fawcett, CFO

Yes, Moshe, it's important to have a perspective on when the cuts started. Early in the second quarter, we made some minor reductions in April due to concerns about high attrition. As we progressed, we realized that several strategies in our non-maturity portfolio in the online bank were effective. Over the quarter, we reduced rates by 80 basis points with 10 cuts and experienced consistent growth throughout, which is quite interesting. To answer your question, we expect the benefits from the second quarter's cuts to carry into the third quarter and beyond. Additionally, we see further opportunities to decrease pricing, particularly in the non-maturity deposit space. Overall, we've managed well across all deposit channels. Regarding net interest income, the second quarter was tough, but we believe it's the lowest point for us. In terms of business volumes, we mentioned business capital is starting to recover. In the first 17 days of July, factoring volumes were at 97% of last year's levels. Business capital, which dipped 30% in the first quarter, has returned to June 2019 levels. Our business capital team anticipates reaching 90% of origination volumes. This segment comprises used equipment and is our fastest-growing area in imaging technology and phone systems. We believe there's more potential in deposits, and we expect some deposit cliffs in CDs to be restructured, leading to reductions. Lower rates may also prompt some excess liquidity to exit as business activity picks up, which may help absorb the liquidity surplus. I'm not providing specific dollar amounts for expectations in the third and fourth quarters as conditions are quite fluid. As we've indicated, returns to profitability will be modest. Another key factor influencing the net finance margin and net interest income will be rail. We've noticed some positive signs in rail after a challenging second quarter. Rail loadings have started to increase in June and July, and we anticipate utilization will continue to rise. We believe we've seen the worst regarding storage freight and switching costs. Renewal rates, while these factors are improving, are still expected to decrease by around 20% until we see a better use of excess capacity in North America.

Moshe Orenbuch, Analyst

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

John Fawcett, CFO

Yes, I am confident. I mean, based on what we're seeing now, look, these are very fluid times. And so at this nanosecond, I feel pretty confident that the third quarter is going to be better. As you start to look at non-interest income, as I said, we're seeing factoring volumes kind of ramp back up. Rail sales in the second quarter were slightly diminished and a little bit off of what our forecast was of '20. We expect we'll be on '20 as some of the dislocation in that market normalizes. We completely suspended legacy consumer mortgage portfolio sales in the second quarter. The pricing had just completely collapsed and we're not distressed sellers. And so we just took a pause. We'd expect that the activity that we didn't see in the second quarter will transition into the third quarter, and we will probably see a double-sized sale. What comes with that is not only the gain on the disposition of the LCM portfolio, but also provision and release related to the gross to purchase account accretion. Securities gains should hold in, and capital markets fees, I think will continue to kind of trend as the market starts to advance. And then I think on expenses, we're all over expenses. Reducing our footprint by 30% and taking out another body of heads, we're very focused. And so we are…

Ellen Alemany, Chairwoman and CEO

And we accelerated another $25 million in expenses this year from Mutual of Omaha Bank that’s supposed to come out next year. I would say business overall is significantly up in June. I would say in commercial, April and May were very slow, but we really started to see increased activity in June in certain industry verticals. And in business capital, we had the same volumes in June as we had June of last year. And it's technology-related, mostly it's lender finance and business capital. So we think we're really well positioned in some of these industry niches right now. And as John mentioned, in rail, we think we've seen the trial in rail. Basically with the U.S.-China Phase 1 trade agreement, we're seeing renewed activity in rail. We had really large order. We've seen the largest corn order from rail from China recently. And we also think that the trade agreement is going to impact other markets like crude oil, refined products. And housing activity bounce is driving some demand for lumber products. So we're seeing some activity there.

Moshe Orenbuch, Analyst

Great. Thanks very much.

Operator, Operator

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

Arren Cyganovich, Analyst

Thanks. The net finance margin you mentioned was affected by excess cash, which you stated was around 30 basis points. How much of that is included in the expected improvement of 10 to 20 basis points? Additionally, how do you plan to utilize that cash in the upcoming quarters?

John Fawcett, CFO

Well, hopefully, Arren, these two things that are the principle dynamics, one is that as we continue to reduce pricing on the deposit product you would expect to see some deposits attrite. And I think that's okay. I think the other thing is, is that we've got some fairly high deposit cliffs that are actually coming in terms of CDs across the third quarter. And so some of that will attrite. What would be best is if we could actually put the deposits to work in growth that we're seeing on the balance sheet as we kind of re-reinflate. I think the interesting thing about the whole deposit phenomenon is the last time this happened, it happened during the financial crisis of '08, '09 and '10. And if you looked at search deposits, which is, I guess, what they call it now, the hoarding of cash, like the quality, exit of equities and money market funds, delayed investments, all that kind of activity that actually ran its course over four or five years. And so, hypothetically, this could be something that we're living with for a long time, not just us, but all banks as cash continues to be trapped on the balance sheet. I think what's different about this financial crisis is this one's bacterial. The last one was a real financial crisis. And so as vaccines and we start to live with this, maybe it will be a little bit different. But right now we're sitting with $2 billion to $3 billion of excess liquidity and cash on the balance sheet. And the expectation is it will start to moderate, but it's anyone's guess as to how long it will take. We will be aggressive in terms of lowering our rates, and I think that will take care of some of the problem. But it might be a multi-quarter issue for sure.

Arren Cyganovich, Analyst

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

Ellen Alemany, Chairwoman and CEO

Marisa, you want to comment on that?

Marisa Harney, Chief Credit Officer

Yes. I believe there were three questions in there. Let me address them. Regarding the low level of deferrals, we adopted an early approach, and I’m not sure how much it differs from others. I’ve received some anecdotal feedback, but we were fairly cautious with granting deferrals. For instance, you can have a deferral for up to 180 days, but we opted for a 90-day deferral with a possibility of an additional 90 days based on further information. We also have a commercial portfolio that includes many private equity structures. In numerous cases, the companies may be facing challenges due to the pandemic, yet the sponsors still have the liquidity to support them, especially in real estate finance, which allows us to avoid automatically granting deferrals or pushing for them in those instances. Instead, we encouraged investors to seek solutions with some liquidity. This is particularly relevant in real estate finance, which typically has more robust sponsorship. Regarding non-performing assets, we decided that if a business was shut down or significantly impacted by the pandemic, we believed the recovery period would be prolonged and that the business might not return to its normal state. We would manage that situation as we typically would for any distressed credit. For example, if a hospitality property is closed, we recognize that the hospitality sector faces a long recovery ahead. This is also true for passenger airlines, and these areas contributed to the increase in non-performing assets this quarter.

Arren Cyganovich, Analyst

Okay. Thank you.

Marisa Harney, Chief Credit Officer

Sure.

Operator, Operator

Today's next question comes from Vincent Caintic with Stephens. Please go ahead.

Vincent Caintic, Analyst

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

John Fawcett, CFO

I think it's a quarter-to-quarter exercise. I think it's obviously a conversation we have at our Board. I think it's obviously a conversation that we have with our regulatory partners. My view is that we're in a good place. I think we've been very good stewards of capital. When you think about the Mutual of Omaha Bank transaction, well ahead of that transaction we suspended share repurchases. We've always maintained a fairly modest dividend payout ratio. To the extent that we believe that we're returning to a modest level of profitability, it feels like the horses are out of the barn. We've kind of done this significant amount of reserving in the first quarter and took our lumps in the first quarter and augmented that in the second quarter. The impact on common equity Tier 1 ratio is about 7 basis points. We have ample liquidity at the holding company, ample liquidity at the bank. And the principal driver of the first half financial performance has been provisioning, which essentially is a transfer of loss absorbency from capital to ACL. If you actually want to get wonky about '09, '04, which actually governs our ability to pay dividends and the conversation we talk to the Fed about, it was written in 2009 when GAAP relied on incurred losses and less on the notion of the crystal ball embedded in CECL. So there's a kind of very fundamental misalignment between supervision and regulation guidance established in 2009 GAAP, which accelerated loss recognition in an almost spontaneous way. And so that's a challenge. And I guess the last couple of points and you said it is that our capital ratios are strong and above capital conservation buffers, and we've maintained a very robust capital planning process. So notwithstanding the fact that we're not a CCAR bank, we're no longer SIFI. I'm not sure why we ever were. But we've maintained all of those protocols. And I think our regulators understand that and appreciate the fact that we've been throughout the babies in the bathwater. We’ve continued to operate with very heightened standards around capital and capital planning. It's a long-winded way of saying I'm pretty relaxed with it.

Vincent Caintic, Analyst

Okay, great. It's very helpful. Second question. Your commentary on June is very positive regarding your baseline assumptions for a V-shaped recovery. I'm wondering if you have any updates from July so far, especially with some news about a potential second wave or states shutting down. Just any updates on what you're observing? Thank you.

Ellen Alemany, Chairwoman and CEO

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

Marisa Harney, Chief Credit Officer

Yes, we are closely monitoring the situation. At the end of March, the economy faced a significant shock due to a complete shutdown. I don't anticipate a nationwide shutdown happening again, as it doesn’t seem politically viable. However, local markets are experiencing various stresses. One area to watch is our factoring business, where clients, primarily wholesalers or manufacturers, are seeing an increase in orders as retail operations reopen. Factoring volume remains strong at the beginning of July, but it's still early to determine if there will be any substantial shutdowns, whether mandated or voluntary due to a lack of attendance in larger markets. I have not noticed any significant changes in credit between June and July.

Vincent Caintic, Analyst

Okay. Thank you very much.

Operator, Operator

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

Ellen Alemany, Chairwoman and CEO

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

Operator, Operator

Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.