cit Q2Transcriptedited

CIT Moderator: Valerie Gerard

07-20-05/10:00 am CT Confirmation #7308401

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The following transcript has been provided by a third party transcription service for informational purposes only. The transcript has been reviewed and edited by CIT and in our opinion is the best interpretation of the statements made on the call. The actual conference call may have differed slightly.

CIT

Moderator: Valerie Gerard

July 20, 2005 10:00 am CT

Operator: Good morning. I will be your conference facilitator. At this time I would like to welcome everyone to the CIT Second Quarter

Earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you

would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your telephone keypad.

Thank you. I will now turn the conference over to Ms. Valerie Gerard,

Executive Vice President of Investor Relations. Ms. Gerard you may begin your conference.

Valerie Gerard: Thanks very much, and good morning everyone. Welcome. We’re delighted that you’re here with us this morning to talk about our second

quarter results. After formal remarks by Jeff Peek, our Chairman and CEO, and Joe Leone, our

Chief Financial Officer, we will move into our standard Q&A session. Now as you know elements of this call are forward-looking in nature and relate

only to the time and date of this call. We expressly 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

SEC reports. Any references to certain non-GAAP financial measures are meant to provide meaningful insight and are reconciled with GAAP in the investor relations section of our website at www.cit.com.



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With that it is my pleasure to introduce our Chairman and CEO Jeff Peek. Jeffrey Peek: Well thank you Valerie and good morning to everyone out there. As you’ve seen from today’s earnings announcement this was CIT’s ninth

consecutive quarter of earnings growth. And our business performed very well in the Second Quarter of 2005.

Diluted earnings per share increased 26% to $1.03 over the Second Quarter of

2004. We exceeded our target return on tangible equity of 16% with 16.3% for the

quarter. And this was just one quarter after we raised our target for ROTE from 15%.

We also saw record origination volume for the quarter. This was a record

quarter for us in terms of new business. We did $8 billion which was an increase of 47% over the second quarter of the prior year.

Our new business pipeline is very solid as we head into the second half of the year.

Credit quality and the balance sheet also remain in great shape. And given our

ability to generate capital combined with our strong view of where the franchise is going we have announced a significant share repurchase. A $500 million share repurchase is an example of how we are focused on better capital discipline, improved balance sheet management and increased shareholder returns.

Now we’re very pleased with the solid execution of our portfolio optimization

strategy and the positive impact it is having across the organization. This quarter, as you saw, we announced the sale of the majority of our business

aircraft portfolio to GE and will reposition the balance of the portfolio to take advantage of growth opportunities such as our Fractional Jet Ownership Finance Program. Now this sale to GE reflects our risk adjusted capital discipline and will allow for the redeployment of capital in the higher returning businesses.

This is the first significant divestiture since we put this capital discipline strategy

into place. And as we continue to sell underperforming portfolios and reinvest the capital in other businesses with stronger growth opportunities we will achieve better long term returns for our investors.



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We also sold significant amounts of our home lending portfolio to reduce its overall risk profile. And this is another example of how we are taking a more disciplined approach to managing our assets.

Now let’s talk about acquisitions. As many of you saw yesterday we agreed to acquire Healthcare Business Credit

Corporation, a full service healthcare financing company that specializes in asset based and cash flow financing for U.S. healthcare providers. It’s a proven business, outstanding managing talent, and deep industry relationships. And as you know we are bullish on the healthcare market. And this acquisition accelerates our plan build out providing an efficient, cost effective core platform to support the strong growth we anticipate in this sector.

And while the topic is acquisitions let me bring you up-to-date on two that we

did in the first quarter. First at the end of last quarter we acquired the factoring assets of Receivables Capital Management, RCM, a division of SunTrust Bank. Now the integration of those assets has gone exceedingly well. In fact we fully realized the projected cost take out within the first thirty days of ownership. And I point this out because this demonstrates what we mean by our bolt on strategy where the business complements an existing portfolio enabling us to diversify our client base, cultivate new relationships, but also take significant costs out of the business.

Second I want to provide a brief update on Educational Lending or what is now

known as Student Loan Express. Here too we’re making significant progress. The second quarter was SLX’s first full quarter as a CIT company. Student Loan Express saw improved quarterly results and I’m pleased to say it is already accretive to earnings well ahead of expectations.

In the second quarter SLX gained a large number of consolidation loans,

increased its volume from the school channel, and signed 82 new schools which would make 275 new schools for the last four quarters in over 800 schools that have SLX on its preferred list. New schools in the second quarter included the University of Arizona, Boston College, UCLA, and Lincoln Technical Institute among others, and volume from the school channel was up some 30% compared to last year’s second quarter.

Now one final comment on our portfolio optimization strategy this quarter to

second quarter, we sold or syndicated over $2.2 billion in assets. Now on balance we believe this has a positive impact in terms of enhancing the quality of our portfolio. But obviously it has a temporary negative impact on our overall asset growth. But let me be clear. We still see strong growth opportunities for both 2005 and 2006.



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Now in other areas we continue to leverage our international platform successfully and accelerate our global expansion. In the second quarter we established CIT Aerospace International in Dublin, to be closer to our clients in Europe, Asia, and India. And as many of you know global demand for aircraft is very strong today and the focus of much of our aerospace marketing efforts is international particularly China and India. And across the full frontier of our aerospace business we continue to see improving lease rates and returns especially with non-U.S. lessees.

Now we’re working to refine our business strategy in both Asia and Europe. As

you know China is a growth market for our aircraft leasing business. In addition the Chinese banks continue to show interest in partnering on factoring opportunities. And our equipment leasing business is also growing in China. CIT is now the largest foreign owned equipment leasing company in China. No question China will be a growth market for us and we have a solid starting position there already.

Now outside the U.S. we established several new vendor and leasing

relationships in the second quarter including Xerox in Latin America, Tenovis in Germany, London Drug in Canada, and Autron in Asia-Pacific. And one final note on Europe. I’m pleased to say that we were recently awarded the 2005 Asset Finance Lender of the Year Award for our innovative pan European approach to credit management.

And we continue to implement growth initiatives to make our business more

efficient and better serve our customers. This quarter we made significant progress in the reorganization of our Commercial Finance business around a more customer centric business model. Our realignment of Commercial Finance also supports CIT’s broader corporate mandate to drive organic growth and increase productivity while building on its leadership positions and expertise in key industries.

Under the new structure expert teams will service the full financing needs of

clients where markets where CIT has significant relationships and industry expertise. And the launch of CIT healthcare, a group dedicated to this high growth market, is as I said earlier, a highly strategic way to increase our presence in this industry and a great example of how this new more customer centric model will work.

As part of our restructuring Commercial Finance we combined our global

sponsor asset finance capital markets capabilities under the investment banking advisory services umbrella. And in addition under that umbrella, we introduced the Merger and Acquisition and Commercial Real Estate Advisory practices.



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Now, as we have over the past several quarters, in the second quarter we made outstanding progress in reenergizing our sales culture. Last month we held our Second Annual National Sales Summit where we turn strategy into action. We’re reaching even deeper into the organization by launching a series of Regional Sales Summits in an effort to drive execution and invigorate our sales teams across the entire company. Three priority areas for us in this arena are sales tools and strategies to market more effectively, increasing the size and skill of our sale forces, and just focusing on executing our strategies.

Now in terms of adopting the sales tools we find an important contract with

Salesforce.com in the second quarter to service CIT’s customer relationship management system. And this will help us find the right customer at the right time and greatly enhance the effectiveness of our sales force, a key objective for us. In addition it allows us to better manage our pipeline and gives us the tools and forecasting capabilities that we need to accelerate the organic growth of our businesses.

Now we have increased the Senior Management Team who will drive our sales

efforts under the leadership of Walter Owens, our new Head of Sales and Marketing. And Walter’s quickly developed a first class team and recruited key CIT personnel to the position of Chief Sales Officers in each of the business units. And we expect that these talented and experienced individuals within each of these business units will have an immediate positive impact on their businesses.

However the results that we’re beginning to see from our increased focus on

sales they are really quite impressive. And we’re delighted to announce that we signed a new major U.S. vendor relationship with the Digital Products Division of Toshiba. These products would include portable Notebooks, computers, projectors, and the like, a global company. We think it’s important to remind everyone that these long term relationships that have the potential to grow significantly over time and in different markets around the world.

In addition, in the second quarter, we partnered with MBNA to offer a private

label co-branded business card to our small business customers. Also in that quarter just to give you an idea of some of the brand names where we have expanded or established new relationships with well known organizations in the quarter we did do business with Amazon.com, Manchester United, the New York Mets, Wynn Casinos, MGM, Cold Stone Creamery and the UPS Store.

Now finally I would like to comment on our operating expenses. Excluding

Student Loan Express operating expenses were flat for the quarter. And while our operating efficiency ratio did not improve, I can tell you that I’m very satisfied with the composition of our expenses. We are certainly spending less on running the business and more on growing it. That said we have an action



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plan in place to take out further expenses that will streamline our business and simplify our infrastructure. In fact, Joe will be giving you additional details on the restructuring charge where for instance we have reduced headcount by approximately 200 individuals so far this year.

Now we are off to a strong start for the second half of 2005. And the underlying

business and economic trends are favorable across most of our businesses. So we’re very confident about the remainder of the year. And that’s why we’re raising our earnings guidance for 2005. We now see that earnings per share will grow year-over-year in excess of 20%. And we also have confidence that our return on tangible equity will be greater than 16% for the year.

So in closing, I’ll just say that we had a solid quarter and a very strong first half

of the year. We did make significant progress on many of our longer term business initiatives while meeting our short term profitability targets. And I still see a lot of opportunity to improve efficiency, grow assets, and enhance shareholder returns.

And with that, I’ll turn the discussion of our financial results over to our Vice

Chairman and Chief Financial Officer, Joe Leone. Joseph Leone: Thanks Jeff. Good morning everyone. I think it was a great quarter. We delivered another quarter of strong financial

results. Jeff gave you some of the highlights. I’d like to talk about several areas. I’d like to start off with two areas where we spent a lot of time and effort. I think we have great accomplishments and a lot in front of us. That’s operating expense management and capital management. Let me start with operating expenses essentially with where Jeff left off.

As Jeff said, operating expenses were up about $10 million sequentially in the

quarter with most of that, just about principally all of that, due to increases in spending at Student Loan Express, $7 million of that increase reflected the full quarter impact of the acquisition and $3 million related to our strategy to expand the marketing and the sales force and build out the school channel and hiring additional sales people. So given all the initiatives Jeff spoke about, I think the fact that the quarterly expenses only increased because of expenses in Student Loan Express gives you an indication of the focus we have on it.

Let me give you a forward view of expense management here at CIT. I think

you saw and Jeff mentioned briefly, we announced at the end of the second quarter, our plans to consolidate certain businesses and technology. And we posted a restructuring charge of about $25 million pre-tax and that principally related to the headcount reduction of 200 that Jeff described.



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About two thirds of that relates to Commercial Finance where we began to

streamline back office processes in certain businesses. We eliminated certain management layers. We consolidated the former Business Credit portfolio support functions into three offices from six. We streamlined the marketing strategy at Equipment Finance and eliminated some underperforming sales territories and began to better automate the underwriting processes in that business. More on that in a moment. We’re also becoming more efficient in Specialty Finance; specifically we are consolidating our business technology financing and Agilent financing service centers from New Jersey into Michigan and Florida, where we have small ticket leasing servicing centers. And we’re also streamlining the supporting leasing software used by these two excellent centers. We began to improve efficiency in our Canadian operations. We put a head of country in place. And we began to streamline that back office support.

And while the savings from these initiatives began in Q2, they were minimal and we’ll see increases in those savings in the third quarter. And these initiatives will provide us with roughly $25 million of annualized savings. We think that’s a pretty good payback in terms of the restructuring investment.

We have more to do. As we look forward, I expect we’ll get more efficiency in

corporate procurement. We have some additional system consolidations to do on the technology front and we continue to migrate to more shared services models throughout the company. The overall strategy, I think Jeff laid it out, is to improve efficiency in the back office and put that money back into the front office to increase growth, build out the sales force, and expand product offerings. So essentially we’re paying the bulk of the build out with the back office efficiencies.

Jeff mentioned some of the build outs. Walter is the head of sales and got off to

a great start. He’s focused on up sizing the sales force, improving the market coverage, and making our sales personnel more productive. And the early successes are improved pipeline tracking, something I’ve been working on and looking forward to, and the improved sales force automation tools that Jeff discussed.

In Commercial Finance, we’re focused on building out non-spread revenue

sources in our corporate banking group, in our advisory and M&A services, and our sponsor finance group. And as Jeff said, we continue to build out our healthcare finance capabilities. Specialty Finance, I mentioned we increased the student lending channel sales force. We’re expanding certain non-spread product offerings in credit insurance areas and we’re also adding resources to our vendor sales program and I think you heard some of the successes Jeff mentioned.



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The build out of our operation in Dublin for our international aerospace operation has some costs associated with it about $5 million or so in annual investments but that has resulted in considerable tax savings that you can see in the results that I’ll talk about in a moment.

Overall, the first half of the year, these initiatives that I just spoke about added

about $15 million to expenses; however, when we look at our plan versus our actual in terms of spending for the first half of the year, we’re right on plan. So all in all, I think we have a smart focused strategy here with more opportunities and work to do.

Moving to capital, we’ve spent a lot of time on capital management. Jeff

mentioned some of the initiatives. So far this year, we increased the dividend in the first quarter from 13 to 16 cents. We accelerated the liquidation of certain non-strategic or discontinued portfolios. We sold $400 million of assets in the first half in manufactured housing and venture capital. We adopted the risk adjusted capital allocations. And you see those numbers in our disclosure and you feel the impact in our decision-making.

A topic we get a lot of questions on, how about the underperforming businesses?

What’s happening there? Returns in Capital Finance doubled year-over-year and are approaching 13% return on equity and we implemented the new tax structure. That helped. And we’ve seen significant improvement in rentals in both air and rail.

Looking at air, specifically, returns on new deliveries are now over 20% due to

these market and structural tax improvements that we made. As a result, we are studying extending our order book for aircraft beyond 2007. And the way we’re thinking about it is strong global market demand. We’re looking at projected returns and we’re looking at optimization of our fleet in terms of age and product offering to our customers. We’re focused on our order relative to the orders we’ve had in the past. And I think the thinking right now is any order would likely be somewhat smaller, somewhat shorter, and have more flexibility than our last order.

Moving to Equipment Finance where returns have been low. We began an

expense reduction program, which I mentioned earlier. We refocused the business on its core markets of construction and industrial equipment. And Jeff mentioned the $900 million sale in business aircraft. That freed up over $100 million of capital from this unit. We transferred gaming and healthcare assets to other units where we saw greater expense and synergies – growth synergies. And while the return on equity in Equipment Finance is about 9% in Q2, there’s a lot of work to do but I think we will see improvement with the growth initiatives and the expense and efficiency initiatives going forward.



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Overall capital, internal capital generation, the quarter was very strong. Fourteen percent and our capital ratio approached 10%. And that compares to our bottoms up modeling of a 9% or so capital requirement.

Let me take you forward on our capital initiatives to the second half of the year

and we announced some of that this morning in our release. We will continue to analyze the portfolios based upon our risk-adjusted approach including monitoring prices for the remaining parts of our liquidating portfolios.

We’re looking at our capital structure and want it to be the most efficient and

flexible it can be. Given the low-cost or low long-term interest rate environment and the high equity content that the rating agencies ascribe to perpetual preferred stock, these securities are more attractive to us and we’re looking at those securities fitting into our third quarter financing plans depending upon market conditions.

You saw we executed or will execute on the approved $500 million share

buyback. And our expectation is that these purchases will be completed before the end of the year. Why the stock buyback program now? It’s consistent with our overall analysis of capital. It’s consistent with our objective to improve ROE. Our capital levels are strong. The balance sheet is strong. And internal capital generation of over 14% is in excess of our targeted asset growth. And we also like the financial impact of the reallocation of the capital structure from all common to include some preferred.

Specifically on the share buyback, we’ve entered into an accelerated repurchase

agreement, which will collar our average share price. And that collar range will be established in the third quarter. Just to give you an example. If we buy out stock back at an assumed price of say $45, we would buy in about 11 million shares over the next five months with the number of average shares bought in for the second half at about $8 million. So 11 million by the end of the year and because of the accelerated program, it would average about 8 million share reduction for the second half.

As I think about our overall goals for capital management, here they are.

Develop the most efficient capital structure we can. Maintain a 9% or better tangible equity to managed asset ratio. Maintain strong ratings, mid A at a minimum with a desire for an A1, A+. And maximize the returns to stakeholders.

On another front in capital, we have been managing the funding side slightly

differently over the last 18 months and I want to make sure we punctuate this. Year-to-date we’ve issued about $7.5 billion of term debt with five years weighted average maturity. And that’s slightly longer than our asset maturity of about three years. And while that adds some costs, we feel that it strengthens



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and lengthens our liquidity and it’s particularly smart in a market and an environment when credit curves are relatively tight. The term debt extension so far in ’05 has probably cost us five or six basis points on the margin but we think that’s a good trade off. And having said all that, I want you to be aware that it has not materially impacted our interest rate sensitivity as we continue to match fund fixed and floating rate assets.

Asset growth Jeff spoke about a bit. New business volume was strong again - in

all segments, yet asset levels were down and we had some asset management strategies and some seasonality. Let me start with the seasonality. Factoring receivables, just as you saw last year in the second quarter, declined first quarter to second quarter as balances generally pay down after spring and summer sales. And we expect to ramp up for the holiday season. So we expect a very strong third quarter asset growth in factoring. And as Jeff mentioned, we sold over $2 billion in receivables in the quarter including the $900 million business aircraft sale. And we syndicated over $200 million of Commercial Finance assets for risk management reasons.

Taxes. Let me give you a few comments on taxes because we have had some

movement in our tax rate, actually improvement in our tax rate. Another area of progress for the company, the tax rate for the quarter was 33.75% and that was down from about 36.75% in Q1. And that reflects profit improvement across Europe and the full implementation of our aerospace structure, with improved profits in Europe or in Specialty Finance, with strong profit growth from productivity initiatives, and the CitiCapital vendor acquisition that we’ve integrated.

As we look forward to the rest of 2005, we expect the full year 2005 tax

provision to be in the 35% area. So for the modelers out there, we’re expecting a 35% or so tax rate for the second half of the year. The accounting rules require us to adjust our year-to-date tax provision to our expected full year tax rate, so that’s why the second quarter’s tax provision was below 34%.

Some other areas I get many questions on. Margins. Net finance margin was up

in dollars but down 18 basis points, and if you adjust for the one-time, non-recurring charge we had in Q1, it was down about 30 basis points. Why? We had a lower level of pre-payment fees, particularly in Specialty Finance and pre-payment fees were down about 15 basis points overall in the margin. The full quarter impact of Student Lending was about 12 basis points. And the rising short-term rates and lengthening of maturities compressed margins somewhat. That was offset by the refinancing of higher cost debt. And lease margins were slightly stronger on the quarter and that added several basis points due to strength in both air and rail.



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On the funding front, we’re very active. We were very proud of the execution we had in our Student Lending asset securitization with LIBOR plus 12 basis points in funding for seven years. And that was better than we had modeled in the acquisition analysis and part of the reason why the acquisition or the unit was accretive this quarter before expectation. Just part of the reason.

As we look forward, we have some refinancing benefits in the back half of the

year. We have about a $1.5 billion and a half of fixed rate maturities maturing at an average spread of 160 basis points over Treasuries. And $1.5 billion in floating rate paper maturing at an average spread of 32 over LIBOR.

Student Lending volumes were very strong. I think Jeff mentioned that. But the

combination of those strong volumes and funding cost savings resulted in that earnings momentum.

The last thing I’d like to close with is we did change our disclosure a bit. We

enhanced it by changing the segments that we report to you as a result of the realignment of the businesses in Commercial Finance. Most specifically we broke out Commercial Services, Retail, which is our factoring group as a stand-alone segment. And we added a new segment, Corporate Finance, which has the former Business Credit portfolio, the Healthcare business, Power and Energy, and Infrastructure, and the Corporate Banking functions. I hope these disclosure enhancements are helpful to your analysis.

With that, I think I turn it back to the operator for questions. Question: Good morning. I wonder if you could speak a little bit more about what’s

happening with aircraft leasing and give us a sense of how much lease rates are up on the planes that were released during the quarter?

And then, how long can you wait to place new orders if you do order new

aircraft given the kind of growing backlogs that exist now at Airbus and Boeing and the fact that you’d like to keep your delivery spread starting in early 2007?

Answer: Yes, I guess a few part question. Hopefully I’ll get them all. We’ve seen 15% to

20% improvement in lease rates. So that’s a real positive. We’ve seen very strong demand in Asia, not only in China but in India. And some of our placements the second half of the year will be there. Third, we have had discussions with the manufacturers. And you’re correct; their order books have been filling up. There’s a demand from other leasing companies and airlines throughout the world. And - as we look at the demand for aircraft particularly outside the US, we think it’s a good time for us to be considering and analyzing the new order book. I don’t know if I missed anything there

Question: How long can you wait?



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Answer: Oh how long can we wait? That’s right. Their order books are filling. Their

manufacturing lines are filling. And our analysis has been underway in the last quarter particularly with the catalyst of our double digit initiative. So I think we’ve been doing the analysis in detail during the second quarter. And during the second half of the year, we will be reaching a conclusion on the order book. That’s why I say the economics look more attractive given the market improvement and the structure we’ve put in place. So we’re not waiting, we’re doing right now.

The only thing I’d add is we have both said that we wouldn’t move forward with

any commitments until we can see how the business unit can get to a 15% return with its new customized level of capital. And, they’ve basically doubled their returns and we’re getting a lot closer to being able to see how they can get to in excess of 15% return on equity.

Question: My question is really on asset growth. I was just hoping you could just give us a

little bit of incremental detail specifically on the factoring. I appreciate the seasonality. My recollection is through last year the bulk of the decline in factoring was tied to the end of a specific relationship with Tyco. And that kind of exacerbated the seasonality. I’m just wondering if there’s something unusual this quarter.

And then in terms of your comments about syndication activity, is that of the

existing book or is that on incremental volume and is that a very different run rate? Maybe you could just explain how that’s working. What I’m really trying to get is a sense of in your traditional Commercial Finance businesses, what the organic growth was. So if you could just maybe speak to that as well generally.

Answer: I think one of the things we felt very good about in the quarter was that

originations were up almost 50% quarter-over-quarter. So for us, I mean, we’re starting to try and energize the sales force for us to have originations at the $8 billion level where a year ago they were at the $5.3 billion level, we think that’s significant progress and even in the quarter which all four quarters of the year is seasonally always our softest.

Question: But just on that point is that - I mean is a lot of that reflecting just the churn

given prepayment activities or do you view that as more of a core indication? Answer: I think we view that as more of a core indication. But the fact that there is

increased liquidity out there as well as some of the syndication and sell down that we did for credit purposes, the result is what it is that ends up on the balance sheet.



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Yes, last year’s second quarter had a high liquidation rate and yes it did include a relatively high unusual one-time relationship which was our former parent. This year a couple of factors. We had a much larger portfolio because of acquisitions. And secondly there is - the market is fairly liquid. And the pay downs in that book were slightly higher than our expectation. Having said that, as I mentioned in my prepared remarks, we are gearing up for a very strong third quarter in terms of the build back - build up that’s coming back.

In terms of - I think that you asked a question about syndications, I don’t have

the specific numbers handy or on my mind, but the syndications were generally in the Corporate Finance area. That’s where we generally did the sell down for risk purposes. And it’s a combination of existing loans and loans that were originated for sell down. I put those in my mind. It’s not something I break out in the analytics I see. But to take away and additional information I give you, it was principally in the Corporate Finance area, to some lesser extent in Equipment Finance.

Question: Okay and then just secondly on the interest margin, if you could just go into a

little bit more detail in terms of how much of the compression do you calculate was from EDLG and how much was due to pricing pressure? I know you alluded to this a little bit in your remarks, but maybe just give it to me one more time.

Answer: Yes I thought I more than alluded to it, but I’ll give it to you one more time. In

terms of EDLG, we had a full quarter. That was about 12 basis points of compression. The prepayment fee impact, we had lower prepayment fees in - particularly in Specialty Finance. There was about 15 basis points. And the lengthening of maturities in the rising short-term rates before any refinancing benefits was about 5 basis points. But that was offset somewhat by refinancing benefits.

Question: Good afternoon. I had a question for you on credit quality. The charge-offs were

a lot lower than I thought they’d be given your prior guidance of them going toward about 70 basis points by the end of the year. And I think a lot of that had to do with strong recoveries. Can you give us your thoughts on where you see that trending for the rest of the year and if your guidance still holds for just a little south of 70 basis points?

Answer: I think the recovery’s a bit pretty much flat with the last. We had an exceptional

fourth quarter of 2004 in terms of recoveries. But I think recoveries have been right around 16, 17, 15 basis points both in the first and second quarter. So I think our risk and credit people are doing a terrific job. We continue to feel like credit, this is the high end of credit. That’s why we continue to guide you a little bit higher than the 52 basis points.



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Question: Okay and also in home equity, can you tell me how much you did in bulk purchases this quarter and the pricing trends you’re seeing there?

Answer: Yes. Pricing trends, I think there’s been a little softening in prices. I don’t have

the specific in terms of numbers. But in terms of bulk purchases, we did it in and around $1 billion area of bulk purchases.

Question: Hi. I have a few questions. Maybe you could start - I mean the student lending

portfolio was down sequentially. And recognizing the disbursements are going to be a little bit later this year relative to past years, that’s somewhat inconsistent with the volume numbers that we’re hearing with people in the industry that this has been a particularly robust consolidation season.

I was kind of surprised to see loans actually go down sequentially. Can you

comment on that? Answer: We had some asset sales that are part of some mandated programs in the book.

And as well as part of our overall strategy that we outlined when we acquired the company is we would be holding and securitizing certain percentages of the assets. So the slight decline - we’re essentially flat. Slight decline was the function of the second quarter volume which has some seasonality lows to it in the school channel as well as the asset sales that we had for mandated program purposes and also our overall portfolio strategy.

Question: Okay but wouldn’t the strong consolidation offset a fair amount of the forward

sales? I mean wouldn’t the volumes have sort of been more than - most people are saying the volumes are more than sort of what they had expected coming into the year.

Answer: The consolidation loans were stronger than last year and stronger than our

expectation. But having said that, the volume that we booked versus the sales that we had to do because of program purposes and the sales we had planned for management purposes, when we put the numbers together were essentially flat, down slightly in assets. The school channel should continue to build the rest of the year offsetting the consolidation loan channel staying flat of declining.

Question: Okay and then regarding the decision for share buyback in terms of relevance to

a higher dividend; can you talk about the thought process that went into that? Answer: Sure. Well we did raise the dividend 23% in March. As we outlined, we had the

opportunity to substitute one form of capital for another here in terms of trying to enhance our capital structure so that we could return - improve returns to the shareholders. So this seemed like a good moment with rates where they were to undertake the series of transactions.



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We continue to look at the dividend on an annual basis with the board. And so that was really the thinking. It wasn’t one or the other. But it was more of a package of transactions or initiatives that hopefully are enhancing the returns for people.

Question: Okay. And then as you guys begin to bolt-on and acquire sort of additional

businesses here and there and you sort of think about things in terms of returns on tangible equity, do you guys have any specific targets that you guys have alluded to in terms of return on invested capital? I mean at a certain point there’s a slight difference between - there starts to become a departure between the two to the extent that you take on some goodwill with portfolio purchases?

Answer: Yes, I don’t think we have a metric for that in terms of return on invested

capital. But we clearly are very focused on what the difference between return on tangible equity and just return on equity is. So we’re very focused on the generation of intangibles. And that’s clearly one of the things that we look at when we do these deals.

Question: So what would the IRR hurdle rate be not on an ROTE basis but on an all in

basis? Answer: Yes, the way we look at that, when we do an acquisition, the acquisition analysis

is more like a return on invested capital than an ROTE calculation. I think it’s a high hurdle. Let’s say it’s a very disciplined process. Let’s say we bought a portfolio of $1 billion just to make the numbers easy that we paid a $100 million premium on and it was leveraged at 10 to 1. We would look at the capital requirement on that as being $200 million; follow me $100 million for the assets and $100 million for the goodwill. So we financed the goodwill in our analysis as - with all equity as if it were a capital requirement. So the 15% threshold that we would be looking for -- and that is our threshold -- would be on that $200 million. So it would need to make $30 million follow?

Question: Sure. No absolutely. So what you’re saying is that you’re essentially IRR - your

ROI fee hurdle is essentially equivalent to the return on tangible equity hurdle? Answer: Well it’s not equivalent to. We’re looking for a 15% return on invested capital as

defined by the amount of risk-adjusted capital against those assets plus the amount of premium defined as goodwill that we pay.

Question: Fair enough. That - will lead to higher returns on tangible equity, than 15%

obviously. No that’s great. And then last question -- I know I’ve been running long here but, if you could talk about the $2.2 billion of sales and syndication and just which of that 2.2 billion, you would classify as abnormally high and what you would classify as a normal level?



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I know you alluded that you didn’t - it’s hard to segment that in your brain. But if you could just take a round estimate what portion of it was which?

Answer: I don’t know if abnormally high. In this environment with liquid markets we do

what we think is right. If market says different, we’ll change our thinking. But I would say in that $2.2 billion, clearly the $900 million to $1 billion of business aircraft is not something that we would expect to repeat. The rest of the environment’s the same and our risk appetite is the same and premium’s the same. We may do the same. We may do more. It depends.

Question: Can you please give us a break down of the characteristics of the on balance

sheet home equity portfolio average FICO, averaged size of the loan? And then I know you bought about a billion dollars bulk this quarter did you sell off any exposure in home equity?

Answer: We did sell off quite a bit of exposure in home equity. That’s I think $800

million is part of that $2.2 billion. So that, even though it hurt us in terms of assets we thought that was the prudent thing to do in terms of getting our portfolio back to kind of a, model profile if you were in terms of FICO, loan to value, California versus Texas things like that. In terms, I don’t have the profile right in front of me. We disclosed in our 10Q, the update of the quarter is basically the same as our 10Q disclosures. The average size of the loan is still in the $100,000 area and the average FICO is in the 630 to 640 area. But we have specific targets in terms of demographics and quality and those specific targets are the same as they’ve been.

Question: Of the $800 million that you sold that was from the legacy portfolio and not

including any of the bulk that you bought or is that $800 million against that billion dollar?

Answer: I think most of it was from our organic originations. But, some of it might have

been from bulks. But I mean it wouldn’t make sense for us to buy and then turnaround and sell right away. I think the majority of the $800 million as I said was to try and get, the portfolio back to what we thought was kind of the model profile in terms of credit exposures and the like.

Question: Have you seen any change in apatite for other entities to purchases these loans

from you given the current environment? Any change there? Answer: I think it’s a pretty liquid market. I don’t think, I think we haven’t seen that

much change. Maybe a little, the terms are getting a little tougher to sell but I think there’s still quite a bit of demand out there.

Question: Can you just give us a little more sense of what’s going on in the home equity

business? I think you did not address Consumer Finance as one of the



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underperforming areas but it looks like on your disclosure it is sub 10% returns still and it doesn’t quite jive. Could you give us a little more detail what exactly you’re trying to do by, making these big bulk purchases and also selling. Are there certain types of risks exposure that you like there and maybe if you could talk to what your ARM exposure is in home equity?

Answer: I mean there’s a lot in that question. The returns in the quarter were slightly

lower than expectations. Credit costs were a little higher. Overall the unit and the expectations, the Home Equity portfolio itself is for 15% plus return on equity. We were there in the beginning of the year, we were there, and I think we were there in the first quarter. And I think when we look at consumer I think it’s a combination of Home Lending and Educational Lending which clearly is not at the hurdle rate yet but we’re happy with where it is.

We haven’t given you a Home Equity specific number so when you see

consumer it’s a combination of Home Lending and Student Loan Express so that’s number one. Number two I think the percentage of ARM’s are increasing. I don’t have the percentage off the top of my head we’ll have to get back to you on that.

What else was there in your question? Question: Just the strategy. I mean what are you, did the bulk purchases help to improve

your ROE and similar to the sales also is there suppose to be a master plan here to improve the return and to the purchases and sales. My perspective would just simplistically be that you’ll probably make a little bit better spread and a little better risk investment return from originating it yourself or through the broker channel than you do it from the bulk purchases. But if you could just help me sort of think about that dynamic.

Answer: Well, we look at all the time kind of the originate versus buy analysis and the

returns. The returns on the bulk purchases are very competitive with our own originations. So that’s one of the things that drives the bulk. If they weren’t we wouldn’t be doing it.

Secondly in terms of the sale I think that we’re on top of these portfolios on a

24, 7 basis and I think the fact that we sold a little bit more this quarter with somewhat in reaction to what we’re seeing in some of the markets. But it was really an effort just to get as I said get the metrics of our portfolio back to our profile. So we try to sell some of the higher FICO stuff, sell some of, the lower FICO, some of the higher LTV’s and get out some of the states where we think there’s more speculation than others. Just one other thing on the returns. I would tie it back to my comment on the acquisition analysis that we talked about in response to an earlier questions. Portfolios go through similar discipline as you, hopefully as you would expect and as we do. If a portfolio of $100 million



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comes in the house the operating people and the credit people who look at the portfolio and understand where we want to take the portfolio from a credit metrics perspective put a credit load against that, an expense load, our funding cost and any cost of premium that we have to pay and then we leverage at a risk adjusted leverage depending on the product. And it needs to meet a 15% return on equity. But it goes through the same discipline process.

Question: Okay. Do you expect Home Equity returns to improve? Answer: I think they’re at, when we factor out, you’re seeing some noise in Education

Lending. We’re just at about the hurdle rate. I think Q1 was higher and Q2 a little lower but as we look forward we think it’s a 15% plus return on equity business.

Question: Okay because last year I think you did break out Home Equity separately at your

investor day and it was below. So it’s actually… Answer: That’s right. That’s right and we’ll see in November. We’ll do it again. For

public reporting we have it combined as a segment. Question: The rateing agencies, I think I remember a conversation with you when you

thought that stock buyback, you wasn’t sort of convinced that that was a great use of capital and you really felt like you’d like to get to an A plus rating or higher or at least get on positive watch, this action not a big one but I guess probably suggesting to me that you feel like your tangible equity ratio at 10% is high enough and still growing and rate agency’s are going to do what they want to do but you have excess capital that you’re ready to use I guess to get back some share holders. Is that fair characterization? Where do you stand with rate agencies right now?

Answer: No I don’t think that’s A fair characterization. One, we think it’s a share

buyback at $500 million. That’s number 1. Number 2, what we’re looking at is making our capital account more efficient as I said in my prepared remarks. So we’re looking at a perpetual preferred security which had high equity content to in effect be the exchange for or the funding sources for the stock buyback. So ratings stable to higher are still very important to our overall strategy execution. And obviously we’ve talked to the agencies at length in terms of what we’re doing here in terms of share buyback and the rest of the capital account, freeing up capital through active dispositions and or looking at a security like a perpetual preferred security. So you’ve got to factor, I think you’ve got to look at the whole picture and the other factor that you mentioned which is very strong internal capital generations in the 14, 15% area.

Question: All right. With your conversations what I was suggesting was it doesn’t seem

like your level of capital is the issue. They probably just want to see more



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consistent performance and more improvement in the credit metrics, post the recession.

Answer: I think we have a very strong balance sheet and getting stronger. So I think, the

question is continuing to put up good quarters of earnings. Question: Just trying to handicap the margin going forward. It looks like there’s a lot in

there this quarter. In terms of your position if the yield curve kind of continues to flatten how much can you offset through debt refunding benefits going forward? Obviously the per payment fees you can’t really predict quarter to quarter but if the yield curve were to flatten in another 25, 50 basis points do you have enough juice from debt refunding to kind of keep it at these levels?

Answer: I gave you the numbers in the second quarter I think they’re in our thinking as

we go forward the next few quarters. We had four to five basis points of tightening, pressing as a result of lengthening and the yield curve. We’re going to continue to be fairly long in our liquidity so let’s say that continues and I gave you the numbers on refinancing and that offset the margin compression in the second quarter by a couple of basis points. So I would expect more of the same kind of trends like that.

Question: Well I mean more of the same trends like, margins continue to go down or? Answer: Well no well let me go through it again. The lengthening and the yield curve

compress margins in the second quarter by four to five basis points. That was offset by refinancing benefits by a couple of basis points. If rates continue to go up those kinds of things could continue to happen. It would continue to lengthen, we’d still have the rate compression from the shorter, higher short term rates yet we still have some financing, refinancing benefits and I gave you the numbers earlier in my prepared remarks. Hopefully that’s clearly to you?

Question: If you don’t mind I’m going to continue to the question on the sub-prime

lending. Let me try to understand this but the - on balance sheet assets for the these loans have gone from 6.8% a year ago to 9.2% of total managed assets and sorry up to 10.5% and from 9.2% in the last quarter to 10.5% now. Yet in perhaps the best possible credit environment for sub-prime lending we’re having high charge-offs and just earning at your level, your required return for this business.

I mean we all know this is a cyclical business and everyone’s margins,

everyone’s returns in this business have been going, all the other sub-prime lenders have been going down but they’re still earning very high returns in, without there really being any significant credit losses, across the country.



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How should we understand the fact that you’re just earning adequate returns in the business and what are you going to do with this $6 billion if credit losses pick up, if refinancing slows down and the returns of the business go down from where they are currently? Would you look to sell, get rid of all the assets or what would you do with it?

Answer: Well I think, as a previous caller pointed out 12 months ago this business wasn’t

making a corporate return. And we’re very focused on making those returns and this year their plan is to do slightly better than 15% on their allocated equity. Also part of our increased sales in the second quarter was in response to some of the things you’re talking about just to try and, to take some proactive steps on some of the loans that might be more prone to develop problems later on. I think also we said we anticipate that this business will continue to be one of our businesses but we would be surprised if it got to be more than 13, 14, 15% of our portfolio. So we see it as one of our diversified businesses. But it’s not going to take over the balance sheet.

Question: I mean you guys could say how much sold in the quarter but yet grew it, on

balance sheet amount grew at a 15% annual rate. I’m just confused why aren’t you earning 20 to 25% returns in this business? And in two years from when the market slows down what are you going to do between now and then to maintain 15% when the environment gets more difficult?

Answer: Well right now there’s a lot of liquidity I think spreads will do better. We’d love

to return 25% but we’re working through it and it’s doing a better job this year than it did last year. So but we see it as one of our diverse, as one of our major businesses but we’re not a mortgage company. So we’ll - right now it’s providing us with good profitability and we’re very focused on the credit issues as you talk. But so far it hasn’t really - so far credit’s been all right in that portfolio.

Question: Most of my questions have been answered but just a couple, one follow up

question on the student lending piece. Was just curious you had mentioned the actual growth rate of the school channel originations in the quarter. Can you give us the actual dollar volume?

Answer: I don’t have the number off the top of my head. Question: Okay I’ll follow up later maybe. And can you give any kind of progress I recall

when you, announced the deal you had kind of, hoped that you would be able to continue, EDLG’s effort to build a servicing platform for that business. And can you give us any update kind of on the progress in terms of building up the servicing side of that business?



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Answer: Yes I think we’ve got a good update. We did a securitization that I mentioned and a proportion of those assets are serviced by us. So we had some rating agencies discussion and review of our capabilities. And the deal got done at Triple A red-rated level. So I think that was a good checkmark for us.

Student Lending Express and the whole Student Lending Team are hard at work

at now continuing to move the originations that we’re doing today into our servicing center that we have in Cleveland. And the bigger task or the task that we have ahead of us is moving the existing portfolio from a third-party servicer inside.

So what we’re doing is taking it in steps, getting credibility on what we have,

having done a public securitization, we’re part of the servicer, and we have a game plan to move the servicing over the next six to nine months from a third-party servicer into us. It’s a lot of work, a lot of approvals we need to get including agencies, but I think we’re on plan and making good progress.

Question: Great. And then just a last question, you had given; a lot of color on what went

on with the operating expenses in the quarter and that you felt that, things are going according to your plan from an operating expense perspective. But, you haven’t given us any color on where you stand relative to the prior guidance you had given for this year for efficiency of about 39% and I was just curious if you guys had any update on your ability to hit that target?

Answer: We’re working on it. I gave you a lot of initiatives we have going on. The

pickup in the ratio this quarter was what I had explained it to be. But we think the restructuring reserves that we took and the related restructuring initiatives that we have in the back office from the front office and getting the returns and revenues from those front office investments are still very much on everybody’s agenda from the corporate office through all the businesses. So we’re hard at work at it.

Question: So you think you guys are sticking by your guidance of 39% efficiency for the

year? Answer: We gave the guidance in the first quarter and those targets - we’re not updating

in any way those targets. We updated the earnings guidance and the ROE targets. But we updated the guidance on earnings and ROTE, we’re not doing any updating on any other targets at this point.

Question: I think a fair number of the questions have actually been asked and answered.

But just to go back - I think you mentioned that there was, in addition to the $900 million of corporate aircraft sales with $800 million of Home Equity and some amount in Student Lending, on the Home Equity and Student Lending



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front, are those sales - the large sales done for the year or are there more that are going to fall out in the second half?

Answer: On the Home Equity and the Student Lending. I’d anticipate we’ll have some

more sales in the second half in both those areas but particularly on Home Lending. I think we’re trying to build a more liquid portfolio here that we can update and make some moves where we think conditions warrant that. But I would think in both those categories, you’ll see us make some more sales. We continue to be very focused on returns too. So to the extent that some of our businesses aren’t giving the returns, I wouldn’t be surprised to see some other sales.

Question: Just two very quick things, in your lease, you pointed to in the - Specialty

Finance commercial business, to an increase in vendor programs. Was that a function of this new relationship you announced today or is that a function of something else?

Answer: Are you talking about the volume comment we have in the earnings release? Question: Correct. That’s right. Answer: Okay. No. Well, we have given you a lot of detail on initiatives is an event that

the major vendor and the vendor finance group have made a lot of progress on signing up new customers. And generally, those are new relationships so they’re not having a significant impact on the numbers but they’re starting to have, some small impact on the numbers.

What we mean by the comment we have in the release is our existing brand

name relationships, whether it’s Dell, Snap-On, etc. Question: And the other very quick question is on the capital optimization plan, there was,

no mention of any reduction in the capital allocated to the Student Lending business. So is it safe to say that you plan to continue to capitalize that at a 2% rate through, into the foreseeable future?

Answer: I think so. We just put our capital allocation rates in place in the beginning of

the year. We said that if we got into the private lending side of Student Lending, it would be something different, maybe something in the 6% to 8% area. But right now, we’re sticking with our capital allocations; obviously, we’ll review this and are reviewing this in our strategic planning process but right now, we’re sticking with that.

Question: Can you talk about yesterday’s acquisition a little bit and the business plan for

healthcare finance going forward and how big a portion of your overall receivables you can see this becoming?



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Answer: Sure. The business plan was basically that this was arguably the largest sector in

the U.S. economy and we were quite significantly underexposed to it. I think at the end of the year, we probably, with the broad definition of healthcare, had something around 1.5% of our assets at CIT so now involved in the healthcare business for a sector that was arguably 17%, 18%, maybe even 20% of the economy.

So we set out at the end of the year really to start to recruit a group of people

who could develop an industry group around healthcare and I think we’ve been very successful in getting high quality people from a number of other healthcare finance competitors. And we probably started the year with about 25 people I would say that were already CIT; the one healthcare area we had was equipment vendor financing where we would finance equipment like CAT scan and MRI machines and that type of thing.

And so we’ve been building this up over time and they had quite a good - I think

June was a terrific month for them in terms of - I think originations were about $300 million in June. So we’re at a place where the leadership team is substantially place.

The acquisition of this healthcare company really accelerated the development

of our platform. We pick up about 70 people that are very experienced in asset base and cash flow lending in the healthcare area. They’re down in Mt. Laurel, New Jersey and that will be one of the locations low cost where we can be very efficient in terms of building that business.

As to how big it gets, I wouldn’t want to particularly get into that because I think

that will be speculative. But we do look for obviously faster growth in this particular sector than the economy as a whole and I think the immediate footprint, expand our market reach there dramatically in a short period of time.

So we’re quite happy with that. And even before the acquisition, we were quite

happy with the progress we were making. We’ve really got a quality team in healthcare now.

END

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Economy & Finance