Q1_2007_CIT-Transcript-2007-04-18T15-00

The following transcript has been provided by a third party transcription service for informational purposes only. CIT has not reviewed or edited the transcript and expressly disclaims any responsibility for the accuracy of this transcription.

F I N A L T R A N S C R I P T

CIT - Q1 2007 CIT Group Earnings Conference Call

Event Date/Time: Apr. 18. 2007 / 11:00AM ET

www.streetevents.com Contact Us

© 2007 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without theprior written consent of Thomson Financial.

http://www.streetevents.com

http://www010.streetevents.com/contact.asp

C O R P O R A T E P A R T I C I P A N T S

Steve KlimasCIT Group - VP, IR

Jeff PeekCIT Group - Chairman, CEO

Joe LeoneCIT Group - Vice Chairman, CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Laura KasterSander O'Neill - Analyt

David HochstimBear Stearns - Analyst

Bruce HartingLehman Brothers - Analyst

Joel HouckWachovia - Analyst

Eric WasserstromUBS - Analyst

Matt BernellWachovia Securities - Analyst

Meredith WhitneyCIBC World Markets - Analyst

Evelyn OsmoyeTICTET Asset Management - Analyst

Jordan HymowitzPhiladelphia Financial - Analyst

Chris BrendlerStifel Nicolaus - Analyst

Bob NapoliPiper Jaffray - Analyst

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2007 CIT Group earnings conference call. My name is Sharelland I will be your facilitator for today. At this time, all participants are in a listen-only mode. However, we will conduct a questionand answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is beingrecorded for replay purposes.

I would now like to turn the presentation over to your host, Mr. Steve Klimas, Vice President of Investor Relations. You mayproceed, sir.

www.streetevents.com Contact Us 1



Apr. 18. 2007 / 11:00AM, CIT - Q1 2007 CIT Group Earnings Conference Call



Steve Klimas - CIT Group - VP, IR

Thank you, Sharell, and good morning, everyone. Welcome to our first quarter earnings call. Just a couple of housekeepingitems before we get started today. First, following our formal remarks, we will move into Q & A. In an effort to run an efficientcall and make sure we get to everyone, please limit yourself to one question. If you do have a second question, please returnto the queue and we will come back to you as time permits.

Second, elements of this call are forward-looking in nature and relate only to the time and date of the call. We disclaim any dutyto update these statements based on new information, future events or otherwise. For information about risk factors relatingto the business, please refer to our SEC reports. Any references to certain non-GAAP financial measures are meant to providemeaningful insight and are reconciled with GAAP in the financial tables accompanying the release. For more information onCIT, please visit the Investor Relations section of our website at www.CIT.com.

With that, it is my pleasure to hand the call over to Jeff Peek, our Chairman and CEO.

Jeff Peek - CIT Group - Chairman, CEO

Thank you, Steve, and good morning, everyone. Thanks for joining us today. As you saw in this morning's announcement, CITis off to a solid start in 2007 with our 16th consecutive quarter of record operating earnings. Our operating earnings EPS were$1.30 per share, up 15% from a year ago, and our return on common equity improved to 14.8%. Moreover, the key drivers ofthis success are broad based and they are rooted in the strategies and initiatives that are building CIT's future.

Our sales force investment continues to pay dividends with new business volume increasing 24% on top of the record volumewe generated last year and those increased activity levels translated into top line revenue growth of 14%.

Furthermore, we're making progress in balancing our revenue streams, as non-spread revenue accounted for 41% of totalrevenues, up from 37% in the year ago quarter.

Now each year we conduct an investor perception study and year in and year out, you tell us that portfolio credit quality is akey metric for CIT. Our overall portfolio quality today is quite strong. Total net charge-offs this quarter were essentially flat withwhere they were a year ago, despite a near doubling of home loan losses as commercial credit quality and recoveries have beenstrong. Additionally, we are being prudent with our reserves as our total provision exceeded current period losses and wasmore than twice that of the year ago quarter.

Now, Joe will provide more detail into the numbers, but let me just say in summary that I'm very pleased with our strong financialresults for this quarter. It gets us off to a very good start for 2007.

Now I want to update you on the progress we've made on our broader 2007 strategic initiative of asset management, internationalexpansion, operational excellence and capital optimization. As part of our growth strategy, we recently announced our intentionto acquire Citigroup's $2 billion U.S. Business Technology Finance unit. This acquisition represents another important milestonefor CIT as we work toward becoming the global leader in vendor financing. On top of January's acquisition of Barclay's Germanand U.K. vendor financed businesses, this acquisition increases our economies of scale and market share in the profitable vendorfinance sector.

Second, we had discussed with many of you our efforts to move towards an asset manager business model, as we leverage ourcore strengths of asset origination, risk management, and client service. This past quarter, we filed documentation with the SECfor an initial public offering of Care Investment Trust Inc, a newly organized real estate investment and finance company. Ifapproved, it will allow us to further diversify and grow our revenue stream as we tap the full potential of our very stronghealthcare origination platform.







Another part of our asset management strategy is our collateralized loan obligation business. We have launched our first in aseries of CLO transactions and expect to close the issue later this quarter.

Now let's talk a little bit about operational excellence. Our efforts to drive operational excellence, while at the same timeexecuting on our growth agenda, are starting to bear fruit. Sales force productivity continues to improve, up over 25% thisquarter over the same quarter last year, as the investments we made in 2005 and 2006 are paying off. New originations are upacross the Company and we expect continued growth in future quarters. As we convert our increased originations into top linerevenue growth, we remain focused on expense management. Only expenses flat in the first quarter was a solid start to 2007.

Further, in support of operational excellence, earlier this month, we completed a program to reduce our headcount by 250individuals. In connection with that, we expect to take a severance charge in the second quarter but have an expected paybackof less than 12 months on this streamlining initiative.

Finally, we executed a series of transactions that increase the efficiency of our capital structure. In short, we issued 750 millionof junior capital and used the proceeds to repurchase 500 million of common stock and redeem 250 million of higher costpreferred stock. We also effectively refinanced our two highest cost pieces of debt. In total, $2.5 billion from the Tyco era andthat refinancing will generate a significant interest expense savings looking perspectively.

Now I firmly believe that the actions we have taken with regard to our portfolio configuration and capital structure position uswell to deliver sustainable earnings growth and higher risk adjusted returns.

Now before I conclude with my prepared remarks, I want to address a few topical items that have garnered some interest onboth the investor and media front this past quarter. First, the subprime home lending industry has obviously been underpressure. CIT is a well diversified Company and our mortgage portfolio, which maintains a conservative product set, representsless than 10% of our income. Our delinquencies and losses in home lending have trended higher, as we anticipated and plannedfor, but they are still running at about a third of the industry rate.

Now with this downturn in home lending comes some opportunities that CIT is uniquely positioned to capitalize on. For example,following the New Century bankruptcy filing, our restructuring unit committed $50 million in financing to a total tip finance of$100 million in partnership with Greenwich Capital. This transaction drew upon the intellectual capital of our people and thediversity of the CIT franchise. It further evidences our expanded ability to generate revenue in all phases of the business cycle.

Second, in conjunction with our own internal review of Student Loan Xpress, a business we acquired in 2005, and under reviewby the New York Attorney General's Office, we took decisive action and placed three senior SLX executives on administrativeleave. Randy Chesler, President of CIT Consumer Finance, has assumed interim oversight of the organization.

CIT's solid reputation for many years has been built on a foundation of integrity and trust. The keystone of that reputationremains our committment to maintaining best-in-class corporate governance practices and our internal code of businesscontact. We will continue to cooperate fully and closely with the Attorney General's Office as we go up to come to a timelyresolution on this student lending matter.

Third, with regard to the Sallie Mae buyout, we are unfamiliar with the details of the transaction and have not spent time onthe underlying concepts. Yet to us, there appear to be obvious differences between the two companies in terms of the complexityof our assets, the ease of securitization, the requirement for ratings, and the optimal capital structures, and let me be clear here.Our management team is focused on building the franchise, not selling it. You've seen us demonstrate our committment toincreased returns, a more disciplined view of capital, a proactive portfolio management philosophy, and the ability to structurealternative investment vehicles to leverage our strengths and increase returns. I assure you, we are working to recognize theconsiderable long term value of CIT for both equity and debt investors.







Now with that, I'd like to turn the call over to our Vice Chairman and Chief Financial Officer, Joe Leone, for a more detailed viewof our financial results this quarter. Joe?

Joe Leone - CIT Group - Vice Chairman, CFO

Thanks, Jeff. Good morning, everyone. I would like to give some more financial detail on some of the items Jeff covered.

First of all, I'd like to say we had very strong earnings. The reported earnings per share were $1.37 and that included about a$0.07 benefit from principally two noteworthy items. First, we released $21 million of international tax reserves as the statuteof limitations closed on certain tax years, and second, we paid a $15 million premium to purchase some high coupon debt thatwas non-callable and Jeff mentioned that earlier.

Without these items, I was very happy with the results. Revenues grew double digit and EPS was up 15%, a very good quarter,and I think that's what CIT is all about -- strong balance sheet, diverse franchises, delivering quality results.

Some of the financial trends and how we delivered the quarter. Spreads first. We grew revenues as spread income in dollarswas driven by the strong growth Jeff mentioned, but net interest spreads were lower than I expected and they were downabout 13 basis points sequentially to 2.83%. Let me explain the changes from Q4. First, we had higher leverage in the quarteras we financed the Barclay's acquisition with debt, and we, in effect, swapped common equity for junior subordinated debt,and we did that earlier in the quarter than we had planned. Those two items compress spreads by about six basis points.

We saw title loan and lease pricing in a couple of areas, principally rail car leasing and factoring, and that cost us about fourbasis points, and we continued to have some mix shift with some good growth in student lending and that lowered spreadsby three basis points.

More recently we took a few funding actions that I think will help margins. Specifically, we refinanced some high cost debt andas you know, we measure the financial performance of our segments using a matched money cost approach and the highrelative cost of these securities caused distortion in the measurements and evaluation of performance. So, we made a tenderoffer for a $1.250 billion of high cost fixed rate debt and we received a very responsive, very positive, response rate leading toretiring 78% of that debt and related hedges. We refinanced that debt with five year floating rate debt and we think we'll saveabout 235 basis points on that trade.

Additionally, we refinanced another $1.250 billion of debt that matured on April at a savings of about 200 basis points , andcombined with all the refinancings we did in Q1, we think the savings will be about $50 to $60 million annually with the benefitshowing up in Q2 and that will improve margins by about 7 to 8 basis points.

Continuing on with revenues but moving on to non-spread revenues, Jeff said we had a particularly strong quarter and we didand we continue to work on asset manager strategies and using the balance sheet more efficiently, and non-spread revenuewas up 26% year-over-year. Great progress and a couple of highlights.

Fees and Other Income were up $50 million and we had strength in Vendor Finance versus last year, particularly from jointventure returns, and we had higher Other Income in Corporate Finance on strong lending fees and on other revenue fromhighly structured lending transactions.

Sequentially, non-spread was down. We had lower gains on syndication and receivable sales, some seasonality, and in somecases, we decided not to sell certain assets, construction and home lending in particular, as we did not feel the pricing wasattractive to other alternatives.

Looking forward, the syndication and fee pipelines look pretty good.







Productivity. We out performed my expectation. Jeff gave you some detail. Last quarter I said expenses would be higher in Q1due to the acquisition and FICA, and those factors did add $10 million to Q1 expenses. Having said that, overall dollars spendingsequentially was unchanged. We contained headcount. We were essentially flat, excluding the impact of the acquisition. Wehad lower levels of incentive comp and we reduced discretionary expenditures including third party fees.

Jeff described that our expense management efforts continue into Q2 and other initiatives slated for the year are evaluation ofoffshoring of back office and consolidating common support areas, all with the focus on improving efficiency.

Capital Management, another positive quarter. In addition to the refinancings, we used the proceeds from a junior subordinatednote to buy back 7.5 million common shares, and we should get another million shares or so in Q2. That brings our non-commonequity content to about 15% of total capital, about where we expect to manage that.

On the rating agency front, both [Fitch] and S&P reaffirm their positive long term ratings outlook and while this was not theimmediate upgrade we were hoping for, it was a step in the right direction, certainly supportive of our strategy and anendorsement of our strong operating performance in a business environment that had some challenges, particularly in housing.My comment on ratings, strong debt ratings, continue to be a very important element of CIT's strategy and an A-plus debtrating continues to be our objective.

Credit was outstanding. Outside of home lending, credit quality was terrific. Charge-offs for all other areas was only 22 basispoints, and recoveries were particularly strong, about 30 basis points, and our credit workout staff did a terrific job, particularlythe aerospace team on Northwest and the Energy Group on [Calpine,] and delinquency in non-performing trends were goodin all commercial businesses, vendor and all other commercial businesses compared to last year.

A little detail by segment. With the consumer segment first, then I'll focus on the home lending business. As Jeff said, we thinkour portfolio looks good compared to the industry. That said, we saw weakening. Portfolio losses in the quarter were about 120basis points, about where we expected them to be, and gains on receivables were down. We sold $500 million of receivablesat a premium of 2.3% in the quarter compared to $1.2 billion in Q4. While the liquidity was available to us, we chose to sell less.

What actions are we taking in home lending? On the operating front, many. Our team is focused on the back end. We tightenedhome lending underwriting, we raised minimum FICA requirements, we lowered certain LTVs and we eliminated certain products,including certain elements of non-owner occupied. We raised pricing, and as we always do when delinquencies arise, we addedmore collection and loss mitigation resources. We increased our frequency of contact and calling efforts and we targeted morefinally borrowers more likely to default. We continue to refine our models and are very comfortable with what our models andforecasting strategies are, and we are reducing upfront origination costs. We did close some offices.

On the financial side, I think Jeff mentioned, reserves continue strong and in the home lending area, we did increase our relatedloss reserves and continue to be very vigilant about updating our portfolio role rates and estimates.

Moving on to small business lending, we had an excellent first quarter, record volume and returns in excess of 25%, and onceagain, we're very proud to be recognized as the number one small business administration lender as well as the top lender towomen and minorities.

Consumer lending fundamentals continue strong. Volumes were up 17% and returns doubled from a year ago.

Vendor finance, very successful quarter, ROE close to 20%. This is our highest returning segment and Jeff mentioned we putmore capital into it. The lower returns in Q1 reflect the impact of the international acquisition and we are working through theintegration, tax structure, and synergies and expect to realize them over the course of the year. Once the Citi capital acquisitioncloses, we'll have a $17 billion high returning global vendor business with thousands of vendor partners.







Quick update on Microsoft. We rolled out our financing programs now into six countries, five in Europe and one in Asia, andthat will continue to grow, I hope.

Transportation, air and rail. Profitability improved nicely from a year ago. Aerospace first. Lease rates, utilization and values aresolid. Demand remains strong, all 2007 deliveries and 75% of 2008 deliveries have been placed. Very good returns in the quarter,strong fundamentals, and the northwest loan recovery, and we continue to build the order book and recently committed topurchase five Boeing 737s.

In rail, returns continue very strong, but we did see some softening and it was principally correlated to the housing market.Demand for cars that carry lumber and cement were down as the housing slowdown had an impact. Less than 10% of our carsare in that part of the fleet, but we do see some offsets, particularly in the increased demand for ethanol cars, and while wehave 2000 of those today, we expect to have more of those with orders forward over the next two years. Overall, the businessreturns are excellent and utilization is at 98%, still excellent.

On the aerospace asset manager vehicle, we are on schedule in our initiative to attract third party capital, and we continue toevaluate private offers and public market execution. I still expect the time frame to be late summer.

Trade Finance. We saw pricing compression in commissions and lending spreads due to the liquidity in the marketplace, thebenign credit environment and some mix change. Our efforts here are in cost efficiencies and growing the business internationallyand credit remains outstanding.

Finally, Corporate Finance had an outstanding quarter. There's a lot on the agenda and a lot of our growth agenda is focusedhere. Returns were strong, 16%. Volumes were high, up 36%, and non-spread revenue is terrific, up 46% year-over-year. Reflectstraction in our industry verticals, healthcare and communications to name two, and fees and other revenue, particularly insponsor finance and our general middle market lending business capital unit were very good. It's a very competitive landscape,however. Loan covenants continue light and we need to look at many more loans to get what we want. Having said that, thenew business pipeline looks very good.

So when I add all of that up, we had a very solid quarter , very strong top line growth, very strong earnings, and as Jeff said, avery strong ROE at 14.8%, and that's good progress and I think it reflects CIT, the diversity of CIT, our strong origination platforms,our outstanding risk in capital management and a clear strategic focus, and I think that these strengths that allow us to operatewell in all parts of the business cycle.

So with that, let me turn it back to the operator to open up the line for questions.

Q U E S T I O N S A N D A N S W E R S

Operator

Thank you. We will now begin the question and answer session. Each questioner is asked to limit themselves to one questionand one follow-up question and then return to the queue if you wish to ask additional questions as a courtesy to others waitingin queue. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Laura Kaster of Sandler O'Neill. You may proceed.

Laura Kaster - Sander O'Neill - Analyt

Hi, Jeff. Thanks for taking my question. I have one question on student lending and then a follow-up on your CLO business. Socan we infer from your comments that you are definitively not selling your student lending business despite the premium thatSallie Mae received for their LBL?








Well, good morning. Our process on evaluating these businesses really hasn't changed much. We continue to review them onan annual basis as to whether they can get to our corporate hurdle rates and we try to tack back to that on a continuous basis.I think, as you know and a number of other close observers of the Company, SLX has really done a terrific job in terms of growth.They've really exceeded all of our growth objectives. We bought it two years ago. The Company is more than twice the size ofwhen we bought it , so we continue to review all our businesses and are very committed to fixing or divesting those that wedon't think can get through the corporate hurdle rate within a reasonable period of time, and that will really apply to SLX justthe same way it applies to all of the other business units.


Okay, great. And then just a follow-up on your CLO business which seems to be coming of an increased focus. Can you justremind me, do you originate the loans that you put in these vehicles and do you retain any equity and if so, what percentage?I know that some firms retain 6% to 8%. Middle market lenders are usually higher than that and can you outline what type ofreturn, if you do retain equity, you would get on that?


Because we're right in the market now, it's hard for me to really talk about that without basically forcing us to entirely retreatfrom the market and reapproach it, so the next earnings call we'll be delighted to take you through that. We're quite happywith where it's going. I just can't really give you the detail on that for kind of security provision reasons if you can understandthat.


Okay, thank you.

Operator

Next question comes from David Hochstim of Bear Stearns. You may proceed.

David Hochstim - Bear Stearns - Analyst

Yes, hi. My question is really about home lending and if you could give us an update on your forecast for the on loss rate whichseems in my sense got to your prior forecast a little earlier than I thought, and then also about the decision to grow the portfolioin the first quarter. What kind of assets were you buying and are you likely to continue to grow that book? And then the follow-upquestion is just if somebody could comment on Rick Wolfert's resignation and what the implications of that are in terms of theorganization and I guess his former activities.


Sure, David. Why don't I just, why don't we handle that in reverse order. Let me talk about Rick and then I'll pass it to Joe toreally give you the update with some quantitative highlights on home lending. I think Rick's decision was pretty much forpersonal reasons. There certainly was nothing happening at the Company that would have precipitated that. It was certainlyhis decision, not our decision, and I think it may have been for family reasons also, so that I would kind of extract that from anykind of corporate situation. If you look at it really, Rick was responsible for our larger ticket businesses, Trade Finance,







Transportation, and in Corporate Finance, and really two of those three businesses have for a number of years been run by thepeople that run them currently, John Daly on Trade Finance and Jeff Knittel and George Cashman for Aerospace and Rail, andso those people report to me now directly. There hasn't been a big change in terms of what's going on there. The businessesare doing well, and the third business, Corporate Finance, where there is a lot of growth and a lot of activity. In January, I thinkas you know, we had moved Walter Owens, our Chief Sales Officer, over to oversee the Corporate Finance segment, partiallybecause we just felt there were too many people reporting to Rick, and so in some ways, not knowing anything, it looks like weanticipated something which probably was just more serendipity than anything else. But Walter, John, Jeff Knittel, all reportdirectly to me, and those businesses are doing well, so I don't really think we've missed a beat there on the so-called CommercialFinance part of the platform.

Let me pass it over to Joe to talk a little bit about home lending.


A little detail on home lending, David, if I remember all you asked. The assets were a little higher than we expected at quarterend, and two of the principal reasons were number one, I mentioned earlier, we did sell somewhat less, the amount of portfoliothan we expected to, given the fact that we thought we were better off economically holding than selling. Having said that,we did sell some portfolios in the month of March.

The second is prepayments have slowed down and they slowed down more than our forecast coming into the plan year, andthose were two of the principal reasons the portfolio was higher in addition to some higher origination.

In terms of the loss number, the losses at 120 basis points, as you know, are, I think it was a premise of your question is aboutour guidance for the year. I think I said last quarter that I expected losses in home lending to be in the 120 basis points area,and Q1 came in at 120. So as we looked at the quarterly close, our loss reserve and our roll rates and what we would say inresponse to the question that you asked, we took a hard look at our forecast for dollars for home lending losses in '07 and wecontinue to think that losses that would equate to about 120 basis point area is still the number we're looking at and forecasting.So we could have a slightly higher denominator than we thought but having said that, the amount of dollar losses hasn'tchanged in any significant way from our earlier in the quarter forecast. Did I get everything that you asked?


Pretty much. I guess do we expect the portfolio to grow during the year from here or -- ?


Well, that's right. You did ask that. I think we're taking a close look at that and it's a debate and the question is when is the righttime to buy more portfolios? As we look at it, prices have come down and the question that we have is, is it an opportunistictime to buy portfolios and what I mean by that is the risk in return profile significantly better and attractive to us at this pointto buy more portfolios? And we haven't reached a definitive statement on that. I would expect us to continue to analyze thatas we go into Q2, but we haven't made any decisions to not buy anything nor to go in and buy significant. We're continuing todebate that, but as you know, we look at the risk adjusted returns and we're sort of questioning whether they are quite wherewe expect them to eventually land at the current time.


Okay, thanks.








Next question, please?

Operator

Thank you. Our next question comes from the line of Bruce Harting of Lehman Brothers. You may proceed.

Bruce Harting - Lehman Brothers - Analyst

It's probably the first time in a little while Vendor Finance has popped up as one of the highlights. Could you just talk aboutsome of the wins there and what's driving that? And just a point of reference on subprime, I think Joe, you said in the past thatyou really haven't done a securitization out of the subprime pool for a number of years and it's mostly financed on balancesheet. Is that correct and I'm just curious which type of funding you put against those ones? Thanks.


Well, I'll take the financing question first, Bruce. We have not done a home lending securitization since 2002, and we don't haveany near term plans to do so. All the assets that we book are on balance sheet and all the metrics that we show you, or principallythe metrics we show you reflect our on balance sheet portfolio. We do have some remnants of the securitized portfolio that wedid in 2002. Having said that, one of the concerns is retained interest assumptions in home lending. Our retained interest inhome lending securitization is $40 million or less. Those loans go back to 2002, are very seasoned and the retained interest iscurrently performing in accordance with our assumptions and expectations. So I think that's, well and the way we finance it,we finance it on balance sheet with unsecured debt.


Bruce, on Vendor Finance, it's really been one of our best performing businesses and when we saw the opportunity first to dothe Barclay's deal in Europe, and then basically to acquire Citi's vendor finance unit here in the States, those were just two veryattractive acquisitions for us. The brand names we picked up, the programs we picked up, all really fit for us, so that, I think thatcontinues to be a high performance unit for us. It really augments a lot of our strategy of building market share in a particularsector as well as expanding internationally, so I think you'll see us continue to work on that, and right now, we've obviously gottwo integration programs going on between Barclay's and Citigroup, but the expenses will come down. We've built a lot ofoperating leverage into our global platform so we're quite excited about it.


Jeff, what's the, so it's much less concentrated now than when Dell was such a big part. What is the Dell contribution at thispoint and -- ?


Well --








-- is that in growth or shrink mode?


Well I think we put out something, the way we handled that was we said I think this year, it suggests that no one manufacturerwill account for more than 20% of our volume.


We'll take the next question, please.

Operator

Next question comes from the line of Chris Brendler of Stifel Nicolaus. You may proceed.

Chris Brendler - Stifel Nicolaus - Analyst

Hi. Good morning, gentlemen.


Good morning.


I've got a couple just quick questions. Joe, if you could give us a little more color on the fee and other income. It looks like $185.5million is extremely impressive. It's almost a quarter of your revenues and if you can just help me think about what's drivingthat. I'd like to think it's the M&A investment advisory initiatives that you've been adding talent to over the last couple yearsand trying to grow that. Is there any impact from the servicing component and I guess the most important question on thisfront, is it sustainable at this kind of level?


Wow, Chris, as usual, good question. So, fees and other income were up very nicely. We're very happy with that level. Flip side,syndication gains were down and I think I mentioned earlier that was a little bit due to seasonality, selling less, a little lower inpipeline coming into the year, but on the fees and other income side, I'll give you a couple of things. Vendor Finance, whichJeff just described and an earlier question asked about, had a very good quarter and we got very nice earnings from some ofour joint ventures so that was helpful. On the Corporate Finance side, fees and other income were particularly strong and thatrelated to just strong fees from our upfront lending and structuring expertise, as well as getting some revenues from back endactivities from loans that we've done over the years where we have back end profits built in and by that I mean sometimes wemight take a line, so we had a little bit of that flavor in the quarter and we were to continue to expect as we add value in industryverticals, structure transactions in a significant way, to have more than money over money profits in the earnings stream.

Now you asked another element of dimension. In terms of sustainability, we think that some things haven't hit. Some of thosethings happen one quarter and don't happen the next month but some of the things have not hit yet. For example, your premise







about M&A. We have not gotten any significant M&A fees in that quarter. The pipeline is beginning to build. There's a longgestation period for those fees, as you know, but I would say that the significant increase there is not due to M&A. The otherthing is that we have not cranked up again, in a very significant way, our servicing fees but part of our asset manager activitiesand objectives are to build those servicing fees. So if we do A and when we do our healthcare and aerospace initiatives, weexpect, fully expect that not only would we have earnings coming from our proportionate share of ownership of those entitiesbut also servicing fees to the value-added services we have. So not only do I think we have good momentum there, I think wehave a lot of good strategic objectives that should help.


Okay. Maybe in the future we can get a little more breakout because I think the syndication in sale breakout you started lastnear has been very helpful and maybe we can get another component there.

On home equity, I just have to ask one question at least on home equity. Are you able to, you bought 1 billion, I think or so, ofportfolios this quarter. Are you able to buy those at a discount or are you being that sort of selective where you're selling at again and buying portfolios at a discount so you can sort of take advantage of the disruption? And then I'm still not clear on howyou get comfortable with 120 basis points when delinquencies are still increasing and not modestly. I think they are rising beingpretty quickly and it seems like it's only going to get worse from here but help me think about that.


Yeah. On the portfolios, I think that's a strategy we -- I mentioned earlier we would evaluate on home lending. We have notdone that. We haven't bought deeper down on the quality or the price and then flipped for gains. We have not done that. That'ssomething that, as I said, we have a debate and a discussion and an evaluation going on.


So the purchase you made this quarter was earlier in the quarter?


Yes.


Okay.


And secondly, your question was --


Losses.








Losses. Losses. What we did on the losses is took all the delinquency, well clearly the delinquency as we saw it at the end ofMarch and continued in April, and took all our roll rates and stressed our roll rates, so took the delinquencies, how much roll tonon-performing , how much roll to repo and applied what we think our appropriate, based upon history and our expectationseverity rates are. So we put -- it sounds like something you should do every quarter and we do but there was a lot more iterations,a lot more rigor and a lot more views of it, so we continue to remain comfortable with 120 basis point area in terms of ourforecast. Having said that, we did come out of that box at 120 basis points and we continue to have work to do and that's whyI mentioned some of the initiatives that the unit has ongoing to improve the quality and efficiency of our servicing and takesome costs out of the front end, so there's other ways to get the economics.


Great, thanks, Joe.


Next question, please?

Operator

Next question comes from the line of Joel Houck of Wachovia. You may proceed.

Joel Houck - Wachovia - Analyst

Thanks. Just a quick question on the home lending sales I guess have being down in the quarter. I guess you assume thatoccurred before the end of February and can you tell us, Joe, what the margin of those sales were on those home loans?


I don't know the latter answer to the latter part of that , but I mentioned we sold 500 at a premium of 2.3 or so, and as I mentionedearlier, not all of that was done in January and February. Some of that was in March.


Okay.


So that answers the other part of the question.


So generally, for your type of product, I mean, it's still liquidity I guess is the underlying thought there?








Well, I think so. We'll see what the second quarter brings but we have an additional advantage, a couple of additional advantages,over others. One, we've been selling product into the marketplace for a period of time. The portfolios have performed very well,and lastly, CIT stands behind obviously the reps and warranties within an A, A-plus rating so I think we've got some advantages.


Okay, thanks, guys.


Thanks, Joel. Next question, please?

Operator

Next question comes from Eric Wasserstrom of UBS. You may proceed.

Eric Wasserstrom - UBS - Analyst

Thanks. Joe, can we just go back to the NIM for a moment? I appreciate the breakout you did and I think you indicated that youexpect it to maybe recapture something like 78 basis points because of some of the refinancing activities, but can you just giveus a sense of where you think that the sustainable margin is for the remainder of the year?


Yes. I just want to make sure I heard you right or you heard me right.


Okay.


It was 728 basis points, not 78 basis points.


Yes, yes. 78 would be impressive.


Yes, I know. If it were 78, you wouldn't ask me the other question, I guess. Just want to make sure I had that right. We weretargeting margins to be in the flat to where we ended the year at 2.95% to 3%, and I would say we are going to pick up sevenor eight of that from the financing, but the environment is tough. Liquidity is still pretty ample in the market. Pricing is stillunder pressure. We did see, as I mentioned before, in two areas where we hadn't seen this particular pressure, in rail leasing







rates and somewhat in factoring commissions, because of the environment whether it's housing and/or benign credit, so Iwould say pricing remains tough. Having said that, the thing that we're real happy about in the first quarter, other than deliveringthe bottom line and the revenue growth, is credit was outstanding so that's the flip side of the margin pressure in the benigncredit environment is we still see relatively good credit metrics, particularly in our Commercial Finance portfolio. So while that'snot specific, we work hard to maximize our margin but I do see more pressure as we sit here in April than I did when we sathere in January, but credit seems a little bit better as well.


And just to follow-up on that last point, is the level of recoveries that you saw in the quarter, is that sustainable or did that justrepresent a particularly good period?


Well, I think it was one of our higher quarters of recovery. I would love to have 30 basis points of recovery every quarter butthat's not going to happen. Having said that, we work hard on those counts and I have to say the credit team did an outstandingjob on both of those loans but particularly in Calpine, which if you dial back 18 months ago, we had a lot of exposure thinkingabout a loss exposure on an amount of $60 million and here we end up getting a recovery here in the second quarter. I still seesome recoveries in the future but I think 30 basis points is a high number.


Thanks a lot.


Thank you, Eric. May we have the next question, please?

Operator

Next question comes from the line of Matt [Bernell] of Wachovia Securities. You may proceed.

Matt Bernell - Wachovia Securities - Analyst

Good morning, gentlemen. Just a quick question, I guess about a comment that Joe made in his prepared remarks about itsounds as if you're dedicating more resources, both financial and otherwise, to credit mitigation in the current environmentand certainly makes a lot of sense but I guess I'm just trying to get a size for what impact that might have on expenses or if youcan give us some historical perspective in terms of when commercial losses started rising back in '01 and '02, sort of what thedynamic in terms of costs and manpower was in terms of that, in that business?


I can't give you specifics in terms of dollars. I can talk you through it in terms of concept, Matt, but when commercial creditquality turned down, we do add some people to the back end from the front end that's sort of a transfer of resources, not movethe shortstop and make the shortstop a pitcher, but you do trade off resources in terms of taking down some of the front endcosts and moving them to the back end. And in commercial, you see a big pickup when you have a downturn in third partycosts. We call it credit and collection costs and it's sort of a way of talking about legal fees and the like, repossession fees and







the like. On the consumer side, we're doing the same thing, moving more resources to the back end, being smarter about ourcollection. We did close some offices. That's going to be a way of paying for some of the back end we have in consumer in termsof increased collection costs, and overall, I would say that we factored into our beginning of the year plan the fact that in certainareas we would have to build credit resources and collection resources, so I can't dimension if -- whether it's $5 million or $10million. I would tell you that it's factored into our thinking for the year and it has been since January.


Thanks, Matt. May we have the next question, please, Operator?

Operator

Yes, sir. We have a question from the line of Meredith Whitney of CIBC World Markets. You may proceed.

Meredith Whitney - CIBC World Markets - Analyst

Good morning. I have a few questions. If I look at your loan growth and I take out the Barclay's deal, I've got a high percentageof loan growth from student and home equity and I was under the impression that you were sort of capping the growth of yourhome equity, your, yes, your home equity portfolio, your mortgage portfolio. Is that not the case and then if I missed something,maybe I just need clarification. And then the other question I had was in terms of the ramp rate and the fee income, again, if Imissed something I apologize, could you further clarify that?


Yes, Meredith, I think we did try to cover those. I would just say on home lending, just so everybody is clear, we did have higherassets than we expected to in the quarter and two of the reasons were we had lower prepayments and we sold less in terms ofportfolio sales and that was of our choice. We had -- we thought we had better economics than by holding for awhile, thenselling in March.

In terms of the fees and other income, we continue to see, and I'll just abbreviate this and you can follow-up with IR. We sawstrong fees, particularly fees in other income in Vendor Finance due to some of our joint venture programs and in CorporateFinance more broadly speaking in our healthcare , communication media, sponsor finance, and business capital middle marketlending groups on fees, and other structuring profits that we get when we do a highly structured value-added financing.


Okay so on the flip side then, were other areas of portfolio growth disappointing to you?


I think in the first quarter, as we talk about, there's seasonality in our business and in the first quarter, generally volumes cominginto the year are a little weaker than they are coming into the subsequent quarters. So I think we were generally happy overallwith the platforms, the way the pipeline built into the second quarter. Now we've got to realize on the plat -- on the pipeline,I'm sorry.








All right. Thanks.


Thanks, Meredith. May we have our next question, please?

Operator

Next question comes from the line of [Evelyn Osmoye] of [TICTET] Asset Management. You may proceed.

Evelyn Osmoye - TICTET Asset Management - Analyst

Thanks. Could you further elaborate about the complexity of your assets and your ability to securitize and the ratings expectationsin this regard? I mean the requirements, and how important is the unsecured debt access for you and your committment toyour ratings actually?


I'll take the complexity of the asset side and I think you're referring to a comment Jeff made a little earlier.


Yes, okay.


Yes. When we look, to put it in contrast, we have a lot of different asset classes in our portfolio, some which are more homogeneousand therefore a lot more easily securitizable. For example, we have student loans and mortgages, and the primary way thoseare financed in the marketplace is through securitization because of their homogeneous nature, the small ticket nature, butCIT Commercial Finance businesses does totally different kinds of lending. For example, we do airplane operating lease businesswhere we own an aircraft and then would have a rental stream so we would have an aircraft that we pay full -- a price for thathas an expected life of 30 years and then we have lease streams that are five years, so there's a complexity in terms of financingthat through securitization. Rail cars, the same. Their operating leases where we buy the rail car and then there's shorter termor relative to life in terms of leases.

On the Commercial Finance side, what our strength is is sitting down with the borrower and structuring a financing that meetstheir needs so it's customized financing.

In Vendor Finance, what we have is highly customized programs with vendors where we take back end leasing residual riskson which we realize very good profits so it's not only money over -- money lending that we do is what we do is manage equipmentand make leases and that type of lending is a little less efficiently financed in the secured market and so that's what we meantby the complexity of our assets and the difference in securitization programs. For example, our securitization programs at CITgenerally are limited to our smaller ticket money-over-money lending, not in our leasing or our highly structured CommercialFinance lending, and that's for a reason. It's very expensive to finance it a different way. It's much more efficient to finance itthe way we do. Hopefully that helps.








Okay.


Thank you, Evelyn. May we have the next question, please?

Operator

Next question comes from the line of Jordan Hymowitz of Philadelphia Financial. You may proceed.

Jordan Hymowitz - Philadelphia Financial - Analyst

Hi, guys. A couple questions. One, what was the repricing on the rail this quarter? You didn't give the number, I don't believe.


The repricing. No, I don't think I did give -- I didn't give a number. I just said that certain car types --


Right, but the stuff on this quarter was put on on new lease rates at what percent higher than were wrote off?


No. I'll just repeat what I said because I don't know exactly what the prices did per car type, but the utilization went down by1% from 99% of our cars rolling and paying to 98%, so that was a 1% decline in the numbers of cars that we have operating,and then secondly what I said was particularly in the center beam car class, which moves lumber around the country, there wesaw our weakness in rates but more so in utilization of those cars. So part of the margin decline was not lease rates decliningper se but also utilization declining.


Okay, maybe Steve, you could get back to me with the pricing because I think it was 19% last quarter. Secondly, $11.5 millionwhich is 2.3% of of the $500 billion sold , did that go through the net finance revenue line or which line item does that gothrough?


I don't -- you have to clarify that. I'm not clear. What $11.5 million?


You sold $500 million of subprime loans at a 2.3% premium.








When we break that out, we break out the gains that we have on both syndication and receivable sales as a separate line itemon the bottom of our income statement, okay?


Okay. And finally what do you think the tax rate is for the rest of the year?


Well, we're at 30% now and we want to continue to see strategies like buying international assets and moving more planes toDublin but 30% or better is what I said in the beginning of the year and 30% or better is what I feel now.


Okay, thank you very much.


Thank you, Jordan. We'll take the next question and maybe make this our last question, Operator?

Operator

Okay. Our final question will come from the line of Bob Napoli of Piper Jaffray. You may proceed.

Bob Napoli - Piper Jaffray - Analyst

Thank you. A question on subprime, then a follow-up on rail as well. And thank you for the disclosure, 40% fixed rate in subprime.I was wondering if you could give me a feel or give us a feel for what the -- is the other 60% primarily 228s and what is the creditquality difference on the fixed versus the ARMs, if you can give some feel for that and then a follow-up on rail?


Yes, well, the fixed rate portfolio is a little over 40% and the ARM portfolio is a little over 55%, and I don't have the specific 228percentages but we do have 228 loans in there. In terms of the delinquency performance, I don't have it handy. You'll have tofollow-up with IR, but I believe the ARM portfolio has a higher delinquency that you would expect than the fixed but I don'thave it handy with me, Bob. I'm sorry.


Have you seen any improvement in the capital markets environment over the last week or two in the home equity business, inthe subprime business?








No. I think it sort of continued the trends we saw towards the tail end of March is my understanding, so right now, it seems tobe more of the same. We are seeing more opportunities presented to us to buy portfolios but as I said, that's something we'reconsidering and debating very carefully.


And then on rail, the center beam cars or the lumber/cement cars where, which obviously with home building down, that'swhere you would expect to see some pressures outside of that like in the chemical car sector or other areas, are you seeing anyweakness outside of the center beam cars?


No. I pointed out where we saw weakness, and at a 98% utilization with weaknesses in those other two car types, you can dothe arithmetic. The overall portfolio is performing very well, and I would say in the downturn that we saw in the early 2000's,lease -- rail car utilization rates were much lower than 98%. We always thought full utilization was somewhere 95%, 96% so thebusiness continues to perform very well at 98%, because think about it. There's always cars coming back for refurbishing, movingto other lessees, etc, so 98% is a pretty full utilization rate.


Great. Thank you, Joe.

Operator

Ladies and gentlemen, this concludes the question and answer session. I will now turn the call over to Mr. Jeff Peek for anyclosing remarks.


Thank you very much. I want to just thank everybody for joining us today. Thanks for your questions. Just to recap, CIT had anexcellent first quarter. I thought we delivered solid financial results at the same time that we're making quite a bit of progresson our longer term strategic initiative. As we look ahead, we do remain aligned with our brand, capital redefined, we're outthere providing customized solutions with the relationship intellectual and financial capital that they've come to expect fromCIT. And I want to thank our more than 7,300 employees around the globe for all their hard work during the first quarter andalso all of you out there, our investors, for your continued support. Thanks very much. Have a good day.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect and have a wonderful day.







D I S C L A I M E R

Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes.

In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-lookingstatements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on anumber of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that theassumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that theresults contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDEAN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOESTHOMSON FINANCIAL OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ONTHIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGSBEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

©2007, Thomson Financial. All Rights Reserved. 1511491-2007-04-18T13:25:15.937







Q1_2007_CIT-Transcript-2007-04-18T15-00

Economy & Finance

quarter earnings

financial tables

cfo conference

strong financial results

operating earnings eps

good start

good morning

new information