cit 2004%20q1

CIT Moderator: Valerie Gerard

04-22-04/10:00 am CT Confirmation #6401042

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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 April 22, 2004 10:00 am CT

Operator: Good morning my name is Summer and I will be your conference facilitator.

At this time I would like to welcome everyone to the CIT First Quarter

Earnings call. All lines have been placed on mute to prevent any background

noise. After the speaker’s remarks there will be a question and answer period.

If you would like to ask a question during this time simply press star and the 1

on your telephone keypad. If you would like to withdraw your question press

star 2. Thank you Miss Gerard you may begin your conference.

Valerie Gerard: Thank you. During this call any forward-looking statements made by

management relate only to the time and date of this call. And we expressly

disclaim any duty to update these statements based on new information future

events or otherwise. For information about the risk factors relating to our

business please refer to our SEC reports, quarterly reports, annual 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 Web site at www.CIT.com.



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With that I would like to turn the floor over to Al Gamper.

Al Gamper: Thank you Valerie, and good morning everyone to our first quarter conference

call, a quarter which I think represents a good start for 2004.

According to my positives and negatives as I usually do; On the positive side

of the ledger, I was really pleased with the improvement in our margins, we

saw this quarter, which we had expected but we delivered on.

Our credit quality continued to improve - I think Joe will give you more detail

about that. But the trend in credit continues to get better and I think it will

continue to get better as the year progresses.

We had a respectable amount of new business this quarter. And I look back to

last year’s first quarter and probably would say that adjective respectable was

probably modest. It was a lot better than last years first quarter and the tone

of the business and the tone of the environment and demand this quarter

compared to a year ago was substantially better.

Our return on equity is 13% this quarter. Last year at this time it was 11%.

That is real progress as far as I am concerned - and I think one of the most

important demonstrations of improved profitability for this organization. And

keep in mind that’s happening with two units still under performing and

putting a drag on us.

We also added a new director this quarter Gary Butler President of ADP - a

fine organization not too far from here up the road. An organization with a

great record and he has a great record.



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And along those lines we have been reviewed by at least three organizations

with - in terms of governance and got really high - some of the highest ratings

in terms of governance, which I think speaks well for the governance

principles as well as the governing people, the board of directors, who are

outstanding.

On the negative side expenses, were a little higher and Joe will talk a little bit

about that. Expenses were a little higher than we expected and there is some

work left to be done there. And of course, our Equipment Finance and

Aerospace units while making progress, are still - still have a lot of challenges

ahead of them.

Two interesting things that happened subsequent to the March 31 closing:

one, we have announced an acquisition, which will close sometime in the

second quarter, and Jeff will tell you about that. But it is a perfect fit for us

and it will be good for us the second half of this year when it is on board. It

makes a lot of sense. And we have worked very hard on it this first quarter

and we signed up recently. And I expect it will close sometime in mid-June.

And secondly, we have signed an agreement to sell our Argentina operation

subject to regulatory approval in Argentina. That will take place in the second

quarter. There will be a nominal - a very nominal gain from the sale of that.

But that - I think that a settling operation which is very good for us.

Overall I guess I would call this a typical CIT quarter where we delivered on

our game plan and delivered well. When 5800 people from Dublin to

Danville, from Tempe to Toronto did what they do very well, worked very

hard, and I appreciate that.



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At this point I will turn it over to the Jeff and Joe show with Jeff being the

first one up.

Jeffrey Peek: Thanks Al and good morning to everyone.

Let me echo what Al just said. CIT posted an extremely solid first quarter.

We have very good momentum and energy within the organization. And while

we still face some challenges like restoring profitability to historical norms in

Aerospace and Equipment Finance our portfolio businesses continues to

benefit from the credit and funding improvements begun in 2003. Credit

statistics are still getting better and our borrowing costs are at very

competitive levels. And the positive trends we have seen in credit and

funding are now carrying over into expanding volumes and asset growth.

The first quarter is typically slow in our business for several reasons, but

volume was strong this quarter rising 16% March over March. Much of that

increase is coming from our flow businesses where we are succeeding in

growing assets both organically and by acquisition. And managed assets are

back about $50 billion. Excluding run off in the liquidating portfolio managed

asset growth was about 1% for the quarter and 7% versus a year ago. Owned

assets are 12% higher than in March 2003. Securitized outstanding have

declined gradually over the last year, as we have been funding home equity

originations on the balance sheet, that’s because there is a cost advantage in

funding them this way and we basically like to hold the asset.

Now with that I would like to review some business highlights for the quarter.

I will start with Specialty Finance, our largest segment, where, as Al

mentioned, we announced an acquisition last week. This is not a first quarter

event but I would like to focus on this deal for a moment. Specialty Finance

agreed to buy $520 million in technology assets from GATX Corp. Based in



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Tampa, Florida, GATX Technology Services, a leading vendor independent

lessor in North America, provides leasing solutions from the mainframe to the

desktop in the network. And, this acquisition is another excellent example of

the type of “bolt-on” acquisitions that we seek; one that fits in nicely with our

existing core technology financing business, strengthens our market

leadership position and meets our return on equity hurdle for acquisitions.

The portfolio is very complimentary to our own middle market leasing

business - there is very little customer or geographic overlap. We like this

business because its got above average returns for CIT. Now while the deal

terms were not disclosed, I can assure you that we paid a conservative

premium relative to net asset value.

Now turning to the first quarter business highlights for all of Specialty

Finance, new business generation is quite robust - increases in every business

line compared to the same period a year ago. Consumer and international

volumes were supplemented with some bulk receivable purchases - two home

equity portfolio purchases and a technology leasing portfolio in Europe.

With respect to the vendor programs, volumes increased from the prior

quarter. We also won some new, albeit smaller, vendor relationships and even

rolled out a new program for Honda in Australia.

Our home equity business had a solid quarter as well. Volumes were up

solidly even without the $400 million plus purchase of bulk receivables.

These transactions bring total owned and managed home equity assets to

almost $5 billion, up 33% from a year ago and 10% from year-end. Given the

relatively small size of our position in this asset class, we believe we have the

ability to grow this portfolio through origination and bulk purchases even in

the face of gradually increasing interest rates.



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Finally, volumes in our Small Business Lending operations were up about 6%,

a significant achievement given that the 7a loan program had been capped for

most of the first quarter. So, we are particularly encouraged about this unit’s

prospects given the removal of the loan cap by congress earlier this month.

Commercial Finance here, year over year volume was strong in both factoring

and asset-backed lending units. In Commercial Services, our factoring

business, volume was up and we benefited from the two acquisitions that we

completed in this sector in 2003. In fact, March factoring volumes set a

monthly record for CIT factoring. Also during the quarter, this unit smoothly

integrated the HSBC portfolio into its operations and we got very positive

feedback from the clients.

Now for Business Credit. New business volumes were up nicely from the

same quarter last year. That is important because this quarter the first quarter

is typically slow for this unit. While the lending dynamics here continue to

shift the away from the large DIP financings and significant restructuring and

bankruptcy fees toward more traditional working capital loans, that’s okay,

because this type of transactions is typical of a recovering economy. All in all

we are seeing signs of a stronger more attractive deal market in Business

Credit.

Now for Structured Finance. In Structured Finance one large project finance

charge-off dampened the profitability for the quarter. Still, if you look

through that the fundamentals here are as good as there is a renewed sense of

optimism among its borrowers, which is reflected in stronger volumes relative

to last year. The large deal market is showing signs of life again. Financing

activity in the communication sector is quite high and we are seeing lots of

new business opportunities in the various media sectors such as publishing

cable and broadcasting. When we come to power and energy deals we



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continue to see new opportunities there. So overall, Structured Finance is

seeing more positive signs-in terms of new opportunities and higher fees-than

it has seen in quite some time.

Now lets talk for a minute about Equipment Finance. As Al said, this unit has

made good progress over the past twelve months. Volumes were down

seasonally from year-end as demand for construction equipment normally

slows until the spring, and that was especially true this year given the severity

of the past winter. But compared to last March, the first quarter of 2003,

volumes were up 11% reflecting strength in the construction machinery and

corporate aircraft sectors. In these sectors collateral values are improving,

inventory levels are declining and demand is increasing.

As Al touched upon, profitability also improved from last quarter reflecting

lower credit losses and higher equipment gains. The firming of this

marketplace is yet another positive economic signal. Still, Equipment Finance

business volumes have a way to go. We need real and sustained improvement

here.

Lastly Capital Finance. Rail continues to do exceedingly well with utilization

remaining very high - about 99%, which reflects an increasing demand for

railcars as the global economy accelerates. Lease rates on both cars and

locomotives continue to increase reflecting not only a better outlook for

business, but also a higher car replacement cost and growing delays in

congestion on the railroad system. Locomotive demand is also quite high as

the Class 1s are struggling to hire and train qualified crews and deploy reliable

power to meet the growing freight needs. As car supply tightens and

congestion worsens demand for our very modern fleet should be at a

premium. Clearly the outlook for rail is improving and we feel very good

about the timing of last year’s acquisition of Flex Leasing.



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On the Aerospace side, fundamentals are improving especially outside of the

US where the majority of our plans fly. Volumes for this unit are down due to

fewer aircraft deliveries as we are focusing our efforts on placing new

deliveries and planes coming off lease. That focus has paid off as our entire

new 2004 order book has been committed with lessees. And the only new

delivery we had in the first quarter was a Boeing 737, which we placed with

an existing customer.

Now, in summary, let me say again that our businesses have a lot of positive

momentum. The economy is expanding, showing real signs of improvement.

That is clearly reflected in our volume growth of 16% March over March.

And we are getting some traction with respect to asset growth, both organic

and by acquisition. And that gives me real confidence that we will realize our

2004 target of 8 to 10% growth in assets.

The first quarter performance puts us firmly on a path toward achieving the

financial goal we have set for ourselves this year. As Al said at the top of this

conversation, this quarter was a typical CIT quarter. We feel confident about

the balance of the year given our business momentum.

I look forward to sharing more of the CIT story with all of you at our Investor

Conference on June 9 in New York.

Now let me turn the floor over to Joe.

Joseph Leone: Thanks Jeff and again good morning everybody. Yes I think we had a very

solid quarter. The financial results were strong, and it does reflect a lot of

momentum I see throughout the franchises. And we have made significant

progress towards our financial goals. Profits were up from a year ago and



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return on equity, very important metric for us, was over 13%. And four out of

five units were up in profitability from the prior year. Let me give you some

color on certain selected financial areas.

First margin, I have mentioned in prior calls that our margin has many

dynamics. Let me give you some insight as to some of the happenings this

quarter. We saw 14 basis point improvement in margin essentially from lower

funding costs with interest expense from the refinancing we did over the last

two quarters including the PINEs call being at very attractive levels.

And we also reduced excess liquidity levels. Finance income was a bit lower.

Yield related fees were down - it was slightly short quarter for us in the

calendar. And rates were a little bit lower in the period. And those factors

reduced margin by 3 to 4 basis points.

You often focus on our operating lease margin so let me spend a moment

commenting on that. Operating lease margin increased slightly this quarter in

both dollars and percentages. We have described over time that our portfolio

has been migrating towards longer live assets, planes and trains from

technology on the operating lease side. Rental income fell in the quarter about

$10 million and depreciation was down $14 million. We saw slightly better

pricing in our small and mid-ticket leasing business and utilization levels have

remained very strong in both air and rail with some improvements in lease

rates in rail. This operating lease portfolio improvement increased margins by

about 4 basis points.

Risk adjusted margins increased about 30 basis points to 3.09%. We had

lower charge-offs in addition to the lower funding costs. And that is very good

progress we made, in the quarter, towards our goal of 3.5%.



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Credit quality. Charges-offs were $99 million. More importantly core

charges-offs were $73 million, 98 basis points below a 100 basis points, as we

were in the third quarter of last year. Jeff mentioned the only significant item

we had in charge-offs - we had - that increased quarter to quarter was

Structured Finance reported higher loses due to a write-off of a non-

performing loan in the project finance area. We continue to see improvement

in past dues and we are working hard at taking that charge-off level even

lower.

Loss reserves. Very strong. Total reserves were $637 million and we

provisioned an amount equal to charge-offs, excluding telecommunication

losses of about $14 million, which we applied to the telecom reserve that is

dedicated to it. We picked up about $7 million in reserves through the

acquisitions we made. And general reserves, excluding the telecom in

Argentina, increased to $531 million. And were down slightly in percentages

and that is due to the better credit quality. We have about $93 million left in

the telecom reserve. Our Argentina reserve remains at $12.5 million. And we

continue to have very strong discipline around our credit loss reserve levels.

Funding. Another very solid quarter in the capital markets. We issued $2.8

billion of debt about evenly split fixed and floating. Fix rate issuance included

five and tens at 79 and 103 basis points over Treasuries. If we look back a

year ago we issued five year at 138 basis points over Treasuries. On the

floating side, we did $460 million two-year floaters at about 8 basis points

over LIBOR and $1 billion of three-year floaters at 20 basis points over

LIBOR. A year ago we did two year at 43 basis points over LIBOR. So, the

improvement in funding costs continues.

Looking ahead, we have scheduled debt maturities for the remainder of 2004

of $5.6 billion. That includes two - just short of $2.5 billion of fixed rate debt



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at an average spread of 130 - 137 basis points over Treasuries. And we have

$3.2 billion of floating rate debt at an average spread of about 57 basis points

over LIBOR. So, we should be able to continue to make progress on our

money costs.

We also took advantage of an improved bank market and we extended

liquidity. We renewed our bank facilities ahead of schedule. The transaction

was over subscribed and we attracted some new participants. We now have

$6.3 in committed facilities in three equal traunches, due in April 2005,

October 2008 and April 2009. That improves an already strong liquidity

position. We established our Australian dollar facility to support our growth

in Australia and to support our CP and MTN funding programs there.

And our capital base continues to expand with our leverage ratio, tangible

equity to managed assets, increasing to 10.7% much stronger than our target

but consistent with our strong balance sheet philosophy.

Let me spend some time in interest rates sensitivity, particularly in light of the

recent run up in interest rates and expectations for possible further increases.

CIT has performed very well in rising rate environments. These

environments, rising rate environments, generally are accompanied by an

expanding economy and that meant better volumes for CIT and even better

credit quality.

Having said that, we have a very comprehensive capital management

framework in the company and we manage interest rates and liquidity risks

very well. We follow consistent funding strategy here at CIT, for at least as

long as I have been here and that has been since the mid 1980s. And if you

look at our earnings performance through cycles, our funding strategy not

only is designed to mitigate interest rate sensitivity, it has served us very well.



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Specifically, we are a matched funder which means we target the match, the

tenor and basis of our assets with the same on the liability side. That means,

for the most part when we originate that fixed year, three-year asset, we fund

it with a three year fixed liability. Whether it is a straight piece of debt or a

floating note swaped to fixed. And our businesses price and are measured

based upon this funding discipline - matched funding discipline.

Let me give even more specifics. One of the approaches we look at in a

comprehensive approach - this is just one-is a maturing GAP approach. We

try to match cash flow liability and assets. Let me give you a simple way of

looking at this. At year-end, just using December 31 numbers, we had fixed

rate loans and leases of about $21 billion. At year end about $16.5 billion of

our liabilities, after swaps, were fixed rates. If we allocate half of our tangible

equity to fund part of those assets, that leaves us with about $2 billion of fixed

rate assets funded with floating rate debt. And that difference relates to our

consistent strategy of funding fixed rate asset flows with maturities of less

than one year with short-term variable rate debt. If rates went up, the impact

on our margin would not be very significant.

A second way we have of looking at interest rates sensitivity is duration. Our

liability duration is slightly longer than our assets duration. Which means that

our assets re-price a bit faster than our liabilities. Of course these are two and

only two simple ways of looking at risk management amongst many we use.

We look at timing of rate resets, possible improvements or movements in our

funding spreads and other ways of allocating equity and margin at risk. The

point is we manage this closely and we are not overly sensitive to interest rate

movements up down sideways. Hopefully that is helpful.



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Operating expenses. Al mentioned that was on his negative side of the ledger.

Versus a year ago, we are up $22 million versus the prior quarter up $11

million. Let me give you some color. Compared to a year ago - we have the

cost of the acquisition we made in 2003 in rail and factoring. We have issued

restricted stock in lieu of some stock options in mid 2003 and early 2004 and

those costs for restricted stocks are amortized through P&L. Sarbanes Oxley

compliance costs were higher as we started in earnest our compliance with the

standard, and that related to outsourcing and professional fees to help us

through a cost and documentation - a cost bubble with the documentation

standard. Versus the prior quarter employee expenses were higher as they

generally are in the first quarter. Benefits were higher and incentive

compensation was slightly higher. We spent more on advertising we are

growing the organization and again Sarbanes Oxley on a quarterly basis were

up.

Partially offsetting this were credit costs. Credit and collection costs have

come down reflecting the improvement in past dues. When we pull it together

our efficiency ratio was 41%, and we are disappointed about that. Our

business mix is different but we continue to target to get it into the mid 30s.

But first we need to get into the high 30s. And let me tell you a few ways

we will get there. I think we will make progress in three ways. First, the

denominator will improve, as our margin - our funding costs continue to

improve. And that - right now our funding costs are deflating our efficiency

ratio by a point - 1 to 2%. Second, our expense spending levels relative to

asset levels need to improve. And we will focus on efficiency in initiatives as

we always do. And third, some of the Sarbanes Oxley implementation

expenses should reduce over time.

A couple more points. We did make a reporting change in the quarter to

better match our public reporting with the way we are measuring our



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businesses today. What we did is, we took underwriting commissions on the

debt we paid, which had been in operating expense, and move that to interest

expense. So therefore, now our all-in funding costs are included in our

margin. No bottom line impact obviously, but it does change some of our

expense and margin metrics. Debt related fees in the first quarter about $8

million and the effect of that re-class is lowering margins by 9 basis points

and improving expenses to managed assets by about 7 basis points. So, small

impact on our metrics. We restated prior period figures to conform with this

presentation to help you in your analysis.

Finally, our board approved the share repurchase program that we will use for

employees stock programs. We had a similar program the last time we were

public. Over the last nine months, we have been covering employees’

exercise of options through open market purchases at the time of exercise.

We will now be in the market with a regular, and we believe a more efficient,

program. This will not have a significant impact on EPS or leverage ratios.

Our share count of about 216 million shares will not change significantly as a

result. With that, I will turn it back to Al.

Al Gamper: And we will turn it over to the operator for questions from all of you - go right

ahead.

Operator: At this time I would like to remind everyone if you would like to ask a

question please press the star 1 on your telephone keypad.

Question: Two questions. First, I was hoping you could give us a little more flavor of

what you are seeing competitively, or starting to hear about loan growth at

banks picking up. Are you starting to see some of that in terms of competitive

forces?



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And secondly, just in terms of fee income, I know there is a seasonal

component to that, and it did DIP versus the fourth quarter but seemed,

particularly in the fee and other income line light relative to last year. I was

hoping you could give us a little clarification there.

Answer.: I will take the first part - the first part, I think, loan demand - clearly business

activity is better now than it was a year ago. It is hard to make judgments

quarter to quarter because I would like to go back a little further. But if you

look back a year ago I remember the call very well a year ago.

And I kept saying things are kind of muddling along saying nothing-big

happening. This time we see much better demand and the banks are seeing

that demand there is no question about it. And so are we. It hasn’t really

translated into aggressive pricing yet. We have seen a little bit more

aggressive lending in terms of multiples of EBITDA and things like that on

certain deals. We’ve seen that take place in the last couple of months. but

overall I think tone is good. Looking beyond that, beyond the deal

marketplace which is very transactional or look at the flow business, the flow

businesses were in both the technology business or the home equity business

or the factoring business or the equipment finance business. The tone there

seems to be much better. I’m hoping it will continue that way as the year

progresses.

And it was, to some extent, a bad winter. People use the bad winter as an

excuse an awful lot for softness. But in that bad winter the loan, demand

wasn’t bad at all so I’m hoping it’ll get better.

We’re going to take the issue of fees but the first quarter is generally a softer

quarter than the fourth. The fourth quarter, I don’t know whether its human

nature everybody wanting to get their deals done so they make their bonuses



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in the beginning of the year. Bonuses are - you're not thinking as much about

bonuses at the beginning of the year and deals don’t get as aggressively done

or pushed. So there is a lull in the first part of the year and that’s one of the

factors.

I think a dimension of your question was year to year, First quarter versus

first quarter fees and other income were down. Let me give you two things,

two reasons, to analyze or think about.

First, we’ve described this over time. We have seen a migration in our

commercial finance ABL Business Credit unit to more traditional working

capital loans to the middle market as opposed to restructuring. They carry

with it a slightly lower fee component.

Secondly, we had mentioned earlier the significant change we’ve had in our

funding strategy and the impact it’s had on our home equity portfolio with

managed assets down or securitized assets down. And some of the income

stream you get in a securitization shows up differently in a P&L than an

owned asset. So we’re having more margin from putting the home equity

loans on balance sheet but obviously with securitized assets declining we’re

getting less the income on that servicing component. Those are two of the

more significant reasons year to year.

Question: Hi guys. Just wondering if you could comment I guess obviously you

mentioned the share buyback is more to cover option issuance. Where do you

feel kind of your capital ratios are relative to maybe increasing the dividend?

One could logically assume just doing some math that you’re probably even

some flexibility almost to double the dividend over the course of the next

year. Can you comment on that?



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Answer: Yes. Not likely, not likely. Let me give you my perspective. First of all, the

buyback program is solely for the option - I think is that a good word to use-

solely for the option purpose. Not to buyback shares for any other purpose

but it’s for the options that could be exercised and putting those away. We

want a disciplined, systematic program rather than buying on a hit or miss

basis which I don’t think makes sense. That’s the first thing.

Secondly, I mean our capital ratios are very strong today. We could put on a

lot more assets. I think they are very strong in terms of our capital ratios. We

could put on more assets and take them down. I’m comfortable especially

with the improving credit quality and improving returns.

Lastly, the board will look at dividends from time to time as they did this past

year and they increased the dividend 8% this past year I think and we felt

comfortable with that. But I don’t see any reasonable board action on

dividends until probably next year, at the beginning of the year, when we take

a look forward and a look back.

I would just add that, as we look at some of these acquisitions, the fact that

we’re well funded and well capitalized, it gives us the ability to go right in and

make an offer without any kind of financing out. So, we kind of like where

we are I think in terms of our capital ratios as it allows us to be pretty

aggressive in looking at these medium size acquisitions.

That’s a good point and it helps a lot especially when you’re competing

against somebody who wants to – competing as a buyer with a financing out

or a financing qualification.

Does that answer it?



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Question: Sure that makes sense. I guess if I could follow up I mean where are you kind

of thinking about that ratio long-term? Or what payout ratio are you thinking

about long-term?

Answer: Our payout ratio now is around – is about 15% 16%. I think when we went

public back in way - how long ago was that? In July two years ago, I think we

said our payout ratio was going to be under 20% and we had – that was kind

of our target under 20% payout ratio, 15% to 20%.

That’s my concept of where its always been. I mean if you have a 15% return

on equity and you paid out 20% of that, that gives you an internal growth rate

of about 12% without increasing leverage. That’s a good capital generation

rate that gives you the ability to grow assets or acquire assets without having

to stretch your ratios.

I think that’s kind of our – our concept and we want to stick with that concept

for now. Alright.

Question: Hey good morning. Did you mention what the recovery rates have been doing

in Equipment Financing? I know you gave an overview. And what would

you consider kind of satisfactory returns for Equipment and Capital Finance?

I see in your press release you’re talking about, return on assets around 1%

right now in both businesses. What are you hoping for over the next 12 or 18

months?

Answer: Well going back to recovery, recovery rates haven’t changed that much. We

found in the Equipment Finance business when it’s dead, its dead and we

haven’t had a lot of recoveries there in this deflationary and tough

environment over the last two years.



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But I would say that the equipment value rates are getting better, the

secondary marketplace is tighter and therefore that should all go well for

write-offs going forward. The write-offs in severity shouldn’t be as high.

That’s how I’d answer that.

In terms of the second question; Targeted returns. If you look back the

numbers you quoted were pretax weren’t they? There’s a 1% to 1% is that a

pre or after?

Question: Well it just says return on AEA was 88 bps.

Answer: Traditionally we would think that our Equipment Finance business, if I go

back to the good days, was running a return on equity at between 12% and

13%. About 12% to 13% return. I would think in returns of equity rather than

return assets. You get a 12% 13% return on equity target for our Equipment

Finance business. And we really have to get into that area. And in our

Capital Finance business, our traditional return on equity in that business was

in the high teens. 17%, 18% and we got that through both margin and gain on

sale of equipment. What’s missing these days is a soft margin and very little

gain on equipment sales because the market is soft, they don’t sell in that kind

of marketplace. Does that give you a perspective? I mean I think we should

be, low teens to mid teens in Equipment Finance and high teens in the Capital

Finance business. The traditional Capital Finance business we’re talking

about aerospace and rail.

I think that’s a fair way of saying it but the returns we show are after tax.

Question: Okay and I mean is that reasonable over say an 18 month timeframe?



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Answer: Well, I hate to be pinned down to that because 18 months from now you’ll call

me up and say I was wrong. Or tell Jeff he was wrong, I was wrong. I think

we’re moving in that direction so I don’t want to put a timeframe on it, but it’s

a real challenge to keep moving in that direction and I think we are.

I think we’re getting better returns in the rail business and I think the

Equipment Finance business will get better as I think the Equipment Finance

will get better as we get some more volume and more growth in that business.

Question: Okay. Just one more. It’s, I guess in the 10K when you talked about 200

basis point shift in rates is only – its only a 3% sensitivity in net interest

income. Does that include any – I don’t think it does but maybe you can

verify this. Does it include any debt refunding benefit you get as your spreads

obviously are narrower from a year ago?

Answer: No it – I just want to make sure that everybody understands the question – or I

understand the question. Our disclosure is about a 100 basis point.

Question: Oh I’m sorry yeah.

Answer: Okay it’s about a 100 basis point change. No we do not assume any

refinancing benefit in that calculation.

Question: Okay so hypothetically if you – 100 basis point rise in rates could be

neutralized by the debt refunding.

Answer: Well there would be - as I articulated earlier, we have debt maturing this year

at significantly higher spread than we would hope to refinance that that’s

number one. And number two, what we’ve seen through other cycles whether

this is the same or will be different, we’ll see. But as interest rates increase



Page 21

and credit quality improved and the overall economy improved, actually

borrowing spreads did improve somewhat. But that is not built into our

model.

Question: Good morning. A couple of quick ones, first a point of clarification. Eight to

10% asset growth you talk about that’s managed, owned or both?

Answer: Think of that as owned, We talk about owned because I think our managed

will go down as we securitize less and the secured portfolio runs off. So

we’re kind of focusing on owned assets in a sense because it’s the owned

that’s going to be the target of growth. And you saw our securitization levels

are - my guess is secured – managed will run down, is it fair to say?

Securitized will run down, managed will continue to increase.

The securitized will run down, managed will increase because owned will

increase. So I would focus on owned.

Question: And then secondly, I was hoping you could talk a little bit about the home

equity business. I mean you mentioned it had some good growth and you

think it can still grow despite a rise in rates. Could you just spend a moment

talking about that? How you source the business, how you protect against the

volatility of pricing there, some of the competitive dynamics.

Answer: Well, we source it through a wide distribution of brokers to our regional

offices and through the brokerage system which we have thousands of. We

tend to focus more on the fixed rate product rather than the floating rate

product. We’ve been in rate environments up and down, we’ve been pretty

good at sourcing this kind of business through a wide variety of products



Page 22

because I think we have a very good distribution or origination system

nationwide, that covers the whole country.

We supplement that growth with portfolio purchases. I think we referred to a

couple purchases and we make these purchases from time to time from parties

that don’t want to hold and we buy them. We tend to do that on a, two or

three of those a year. That supplements the overall organizational growth.

This year our first quarter was pretty much on expectations in terms of

volume. We expect to be pretty much right, as we’ve heard, be pretty much

on our planned volume for the year.

There isn’t clarity, we are somewhat affected by refinancing exuberance or

not but it hasn’t been bad – it hasn’t had that big impact on it. We are holding

those portfolios now because we think it’s more profitable to hold them than

securitize. Done better on a balance sheet basis than it’s done on asset back.

I think the other thing is particularly when we do these bulk purchases as well

as just in our week to week origination we focus quite strongly on the types of

spreads we can get. So, we wouldn’t be putting these assets on unless they

met our spread criteria.

Well that’s the other thing. We don’t have this big monster to feed here. We

don’t have 6,000 branches and offices all over, unlimited cost structure since

we rely on somebody else’s distribution system with thousands and thousands

of brokers out there.

So, there’s no pressure to do – if we have to do $150 million a month and we

only do $135 million, it isn’t the end of the world. We’re not forced to stretch

on rate or credit or risk so it’s not that kind of pressure on the organization.



Page 23

It’s one small line of business. It is indeed business here. That’s part of this –

parts of the diversity so, the world doesn’t come to an end if we suddenly see

a fall off in volume in one product line.

Question: Okay that’s helpful. Maybe one last little one. Should we see much

variability in the operating expense line depending on whether your growth is

primarily organic or acquired? Or is that not a big enough difference to really

see?

Answer: Well the acquisitions aren’t that big in terms of expenses. If you think about it

we’ve acquired – if you look at the acquisitions we made they don’t bring

with them that much expense as the factoring acquisition brought some. I

think of all the leasing equip – the railcar leasing brought a little.

The one we’re now bringing in, we’ll probably end up with quite a bit of

consolidation since we have an existing operation. So its incremental

expenses, there’s no question about it. But the incremental is not, one plus

one doesn’t give us two it gives us 1.2 or something.

One point one (1.1).

Yeah 1.1 and the factoring is a classic example. I mean, I boost about this but

our factoring volume for the first quarter of this year we did publish that

number at my – its 50% more than it was last year.

Nine billion versus six.

Nine versus six and our headcount is up from 780 to 820 or something like

that, 60 people increase. So what is that? A 5% increase in people and a 50%

increase in volume. I consider that good productivity. That’s what we need in



Page 24

an organization like this so. In fact, there will be incremental expenses from

these acquisitions there’s no question about it. But there should be

incremental profitability that exceeds that.

But most of these acquisitions we’ve been able to get the financial assets and

then have our pick of the people and so we think there’s terrific operating

leverage in these deals we’re doing.

Question: Good morning guys. First of all, thanks very much for your run through in

terms of the interest rate sensitivity. I thought that was very useful. But let

me ask a corollary question if I can. How much work have you all done in

terms of looking at your customer base and if there are segments of your

customer base that may be more or less impacted by a – an outsized rise in

rates over the next 12 months?

Answer.: That’s a really good question because the rate environment is so low today.

Let’s look at the commercial customer base because that’s most of our

business here.

A lot of our customers are fixed rate borrowers. So to the extent that we say

they’re fixed rate borrowers at, the rising rate does not have an immediate

impact. But there’s some that have a floating rate.

I think the fact is that the rate environment is relatively low and if you’re

paying a 50 or 100 basis points rise in rates when the Prime rate goes up 50 to

100 basis points we’re at the low end of the scale of a fixed cost scale, here so

I don’t think its immediate impact.

If the Prime is at 10% it’s one thing but if it’s 3% or 4% or 5%, you’re not

talking about a big increase. So I don’t think that the big immediate impact on



Page 25

a lot of our customers from the rising rates. There’s a lot more liquidity in the

marketplace, the economy is a lot better. I think there’s an interesting to

there’s an awful lot of liquidity in the marketplace for them to borrow at.

And I’m not – I don’t see the pressure right now in those environments unless

you’re talking about, 300 or 400 basis point rise in the Prime rate you don’t

see that kind of impact. I don’t see that kind of being that impactful right

now. And I don’t think anybody is going to see that kind of – I don’t think

anybody’s predicting that kind of escalation in interest rates.

Question: Let me ask one other question. In terms of the acquisitions that you routinely

get a chance to look at, I’m wondering if you’re seeing more acquisition

opportunities given the generally better outlook for the economy over the next

12 months. And could you just spend a second characterizing the seller’s

price expectations relative to maybe where they might have been a year ago.

Answer.: I want to talk a little bit about that because he’s been working on quite a few

of them but I don’t think we’re – I don’t think we’re seeing anything more

today. I mean the flow isn’t any greater. You get different flows. You get

those brought to us by bankers which have generally: are pretty publicized.

And then the ones that we buy on our own and quite frankly of the four – the

five acquisitions we made one, two, three, four of them were all we found on

ourselves basically right? We had a banker for one. And so the ones that

come to us from bankers, we love to have them but they tend to be shopped a

bit. The ones we find on our own tend to be a little bit more attractive and

less - more attractive for us. But I don’t think the flow has been any greater

in the last couple months than it was last year. We looked an awful lot.

We’re very disciplined, it has to be – it has to give us the kind of returns, it

has to fit into our business, it has to be a quality name and that discipline is

going to stick around.



Page 26

What are your thoughts on that?

I agree with you totally. I mean, to the extent that we are seeing more, we’re

also seeing more competition in terms of other buyers. So I think a lot of

what’s happening is, people are restructuring trying to define core versus non-

core.

I think this GATX situation is a great one where that unit I think is a better fit

with us just with some of the other pieces of business we have, than it might

have been for them. And so it’s like finding its natural home.

So, keep in mind that we’re in the marketplace looking for $400 million deals,

$500 million, $600 million deal. We’re not likely to run into the Bank

America and JP Morgan in a sense because their world has got a lot more

zeros on it than we do. And so keep that in mind.

Question: And just one final add on to that. You’re looking for $400 to $500 million

deals what’s the – is there any appetite at all for a deal two to three times that?

Answer: Well, I think the answer is it depends on quality, characteristics, fit. I think

we have the capital to do a deal bigger than $500 million. We have the capital

to do a deal that has a billion dollar number on it but it has to fit. It has to

have the right returns. We don’t want, marginal returns. We’re going to get it

for you in the third year of the plan. It better be while I’m still around.

The other thing is the size of these in terms of the assets are like 1% of our

total asset base. So if, we’re six months or a year late in hitting our 15%

return, that’s something we have to deal with but it’s not that significant in the

overall scheme of things. So we really we like these because they’re, high



Page 27

probability of success, low risk type of acquisitions in businesses we know.

So that’s how we get to the size.

Question: I have two questions. The first is getting back to the capital levels. Can you

update us on any discussions you might be having with the rating agencies

about your capital levels and whether that relates to a rating upgrade at all? It

would seem that at this point they would have to feel comfortable with what’s

occurred over the past year to two years.

And secondly, just on the issue that we were just talking about in terms of

acquisitions, maybe going the other way, are there any business lines or pieces

of business lines or assets beyond the ones that you’ve already set aside that

and beyond your comments today about Argentina that you would consider

perhaps not as core to your business as you initially thought?

Answer: Well the first question on the rating agency I’m going to get help here. We

have had – we’re in good shape with the rating agencies. That’s how I would

describe it. Will we get our rating upgrade? I don’t think rating agencies are

likely to give upgrades too quickly these days.

They’re conservative in their approach. And I think the two issues that we

still I think struggle with to get a higher rating, are return on equity, that’s the

one, and I think the things with wings – airplanes, I think that there’s still a

concern about the aerospace portfolio. And our return at 13% still probably

looks a little low. So I think as we move our returns up and the airplane

market turns around, I think this company is well positioned for a rating

increase.



Page 28

You’ve covered a lot, We’ve had our regular annual updates with each of the

three agencies and it was very comprehensive with a lot of senior management

participating. And as said – those reviews went very well.

I think capital is only one issue in, our ratings and I think we’re very well

positioned, very strongly positioned in our current ratings category today

across the board. And I think where we need to make continued progress in

the rating agencies eyes – they look at a few things. Capital, I think, we’re

very well positioned. Governance, as it was mentioned, we’ve got very, very,

very strong marks.

I think where we still need to make some progress, and we had a good quarter,

and we talked to the agency yesterday about the quarter, is in profitability.

ROE, they would like to see it higher than where we were at 12%. Now we’re

at 13%. So they sort of agree with where we’re going on that. And credit

quality, we still need to make some progress moving our credit costs down

below the 1%. And we’re at 98 and I still think we’ve got room to move.

I think when we get the profitability a little higher and the credit quality a

little bit better, then I think, we’re not only strongly positioned in those rating

categories, I would argue that we are strongly positioned in a higher rating

category. So, it’ll take a little bit more work and a little bit more performance

and we’re working hard at it.

Your other question. We’ve identified the businesses that are in that

liquidating mode, the franchise, the MH, we’ve identified those. We’ve got

Argentina, of course was pretty well identified, and we’re liquidating our

CLEC portfolio.



Page 29

Those are the ones within a – we don’t have anything else. Well, quite

frankly, if we had I don’t think I’d announce it on a conference call like this to

the world. That’s something we’d have to get our act together on and do it in

a more disciplined mannor to be very blunt about it.

But there’s nothing else out there that’s a burning issue. But I can tell you

that Jeff and Joe have just gone through with all of us a strategic planning

process and the big issue is return on equity. And those businesses, they can’t

give us the return on equity that we need within a reasonable timeframe, are

under the microscope. And you know what they are.

We need to get the returns up in businesses and you’re running a business

around CIT and you got an 8% return on equity and next year it looks like its

going to be 10 and the year after that 12, that’s good. But if it looks like next

year is still going to be eight and the year after that eight, that’s not so good.

And so the equity discipline in terms of how we allocate that equity to

businesses is going to be greater going forward and that’s the only way – the

only disciplined management way we can get the returns into the mid-teens

and get the recognition from the whole marketplace, equity agencies and debt

holders that we deserve I think.

So that’s a long-winded answer to we’re not going to tell you in a sense but

we don’t have anything right now that’s burning, other than the ones that

we’ve already identified.

Question: Good morning. You had an earlier question about competition. But maybe

kind of flipping that around the other direction you – your growth target in

loans for the year is actually higher than it was right now. Is that just seasonal

or are there specific businesses where you’re seeing kind of improvement in

the expectations for growth?



Page 30

Answer: I’m not sure I received our growth target higher. The first quarter growth was

around I don’t know – annualized it was about 8% wasn’t it? And so I don’t

see that too much higher than our target. That could get augmented a little bit

by the acquisition but I’m not sure its running higher. It’s running – in fact its

running around the lower end of our 8% – 10% growth but I think it’ll catch

up as we go through the year especially when we add $500 million for the

acquisition.

I’m not sure we got all of your question. But, our 8% to 10% growth in assets

is a long-term goal for annual growth. The first quarter historically is a little

slow for several of our businesses. That’s part of why in our prepared

remarks we were emphasizing the volumes this quarter versus the first quarter

2003. And you can see some of the sectors growth – the flow businesses,

vendor, small ticket leasing, home equity, factoring - we’ve had good growth.

And we continue to think those are going to do well. Things like Equipment

Finance we’ve had less growth. Some of that is seasonal because of the

weather and some of it’s also they’re liquidation portfolios.

And quite frankly, the aircraft business will pick up in the second half of the

year because we have more deliveries in the second half of the year and we’ll

get growth in that business. That’s contractual growth as we can pretty well

identify it and that’ll catch up on the second half of the year.

Right I mean, we probably like a little bit more growth in rail we just can’t

find the railcars.

Question: Could you guys comment on factoring a little bit? You guys have seemed to

of bought up the whole industry and I’m curious what kind of competition you



Page 31

see and more importantly what kind of pricing leverage you might start to

have in that business?

Answer: Well, we haven’t bought up the whole industry because, its interesting and

there’s still quite a few factors out there. But we have another sense of

competition, – there’s a credit derivative marketplace, there’s the bank

marketplace that has receivable financing and the companies like American

Credit and Indemnity and AIG, they write credit insurance. So I wish we had

it all but we don’t. It’s still a very big credit insurance marketplace that we’re

in.

But having said that, we’ve got a very big commitment to the marketplace. It

looks good. We’re going to have a big growth this year over last year because

of the two acquisitions. But this is not a high growth business like this year

it’ll be growing but then once we get to the – and we got to this size - the

growth goes back to – our traditional growth here is 6% to 8%, 5%, 6%, 7%,

8% depending on the economy. The real improved profitability with that

kind of growth is to make sure you get your operating efficiencies into an

organization that are terrific and keep your credit expenses down. So you can

have – you can translate top line growth to better bottom line growth through

operating efficiencies. And we’ve been terrific at that over the years in

factoring. That’s the use of, the digitized world rather than the paper world.

What else could we cover in factoring? Business – the retail marketplace

looks pretty good these days. Knock on wood credit looks pretty good.

Consumers are buying and that’s a good sign and we’ve got and a very

disciplined credit process or our credit quality. Even last year, even going

through the bad economy in the last two years our credit in factoring was

exceptionally good with the exception of a couple of write offs and we moved

some money off on the K name. But other than that it’s been pretty good.



Page 32

And March was a terrific month for us as we said. I mean we broke our

record by more than a little.

Question: Have you raised prices at all in the last couple of years or is it pretty much

static pricing in all volume and efficiency improvements?

Answer: No. Believe it or not it’s a price marketplace we haven’t raised prices. It’s a

little bit like the insurance business. When you have a Kmart blow up on you

like when a ship sinks or, a company has a problem, insurance goes up

dramatically. When the ship sinks, shipping insurance goes up. When K-mart

went into bankruptcy, the marketplace tightens up. The premiums were

higher on insurance. And now that it’s come out and things are better, prices

have softened a little bit, as a matter of fact, in the last six months. So there is

not that kind of - pricing discipline isn’t with us. It’s with the marketplace.

And it really has to do with credit. When you have big bankruptcies or big

explosions – and hopefully we won’t have any – then you get better pricing.

Things get better and the quality of the retail marketplace looks better, well

pricing gets a little soft and everybody’s out there scrambling for business.

So the real key to improve profitability is efficiency and credit. Those are the

two levers. We can’t pull the pricing level, but we certainly can pull the credit

and efficiency levers. And we do that I think very well.

Question: Thanks. I apologize if you’ve already touched on this. And I know that you

mentioned that you were all set for 2004 aircraft deliveries. But I was

wondering if you could talk about where you are with planes coming off lease

this year.



Page 33

Answer: We had seven re-price in the first quarter, and three of those were at pre 9-11

rates, so four were at post 9-11 rates. I think we have about 15 or so, maybe a

little bit more than 15, coming off lease the remainder of the year. And most

of those are at post 9-11 rates.

Question: And how many of those 15 are already satisfied, or are those the ones that you

still have left to do?

Answer: Those are the ones we have left to do.

But we’re highly confident we’re going to lease them because we don’t start

looking until maybe 60, 90 days before they come off lease. And one other

fact is that historically – and it continued through last year – about two-thirds

to three-quarters of these generally get placed with the same airline. So it’s

not like we’re looking for a brand new totally new customer for every client.

So keep that in mind.

Question: Thanks. I’ll try to keep this short. It’s close to lunchtime. I’m hungry.

Two questions, first on the volume related fees and yield, just a little more

color – which business lines typically experience the most seasonality?

Which business – or is some of it related to the continued slow environment in

Equipment Finance? The line I’m looking at on the fee side is the fee letter

income down pretty sharply even on the year-over-year basis and if you could

just give me a little more color there on how I should be thinking about that

one.

Answer: I think we talked this a little earlier. First, volume-based fees – I think you

had a question of where is that more than in other areas. I would say two



Page 34

areas where we get higher fees proportionately to the volume are in the more

highly structured bigger ticket transactions that we would do in Business

Credit and Structured Finance. The other business would have a more annuity

flow and a more regular flow to the fees.

Year-to-year fees and other income – I addressed two reasons earlier why they

were down. One, in the ABL business last year, particularly in the first part of

the year, there were a lot more bigger ticket dip restructuring financing kind of

deals that come with bigger fees than what we’re doing now. Business flow

has been very good. But what we’re doing now is more traditional working

capital lending to the middle market, which comes with a very good return, a

very good rate, but not the big structuring fee up front. That’s number one.

Number two, there is an earnings dynamic that I described earlier. As we put

more earnings on the balance sheet, the margin dollars are higher as opposed

to when we securitize them and get securitization servicing income, the fee

income component is higher. So that tends to move down as we securitize

less.

Question: Okay. I think I got that. I’m just trying to figure out is there some seasonality

benefit that you’re likely to get going forward, and which business lines

would benefit from that.

Answer: Yeah. And in the first quarter, as we’ve been saying – articulated earlier and

Al had some in his comments – the first quarter in certain of our businesses

volume wise is the weakest quarter of the year. So during the year, as

business volumes pick up seasonally, particularly look at the fourth quarter

strength where we have the absolute strongest quarter, fee income should

progress nicely as the economy improves and as the calendar moves forward.



Page 35

Question: Okay, fair enough. The second part of my question is – I seem to ask this

almost every quarter, but maybe one day I’ll understand it – but the disparity

between the improvement in owned delinquencies and the relatively flat

owned NPAs, does that mean anything?

Answer.: Well, NPAs are down a little bit this quarter. One of the issues I think in

Equipment Finance, we had named one NPA that was current, and the reason

that we put it on NPA, because we want to be cautious about things, because

we have some concerns about the credit. So that probably accounts for the

biggest discrepancy. But then, if you look back at the EF there, NPAs were

coming down nicely over the last five or six quarters. So that’s one issue.

I think you’ve got to watch this more than just quarter-to-quarter. I expect

that our NPAs and our delinquencies will continue to move in the right

direction. They’re still a little high in my perspective in terms of percentages.

But I think you’ll see more of it come down. Does that cover it, or maybe we

have to wait until next quarter and try it again? What do you think?

Question: I’m not – I guess I’m still waiting for that light bulb to light over my head.

The numbers I’m looking at are basically that NPAs were flattish and

delinquencies were down. I’m just trying to understand what that means. Is it

collateral value related, or is it some different items that went into the non-

performing category but yet weren’t delinquent?

Answer: I’ll try it. I think the light bulb did go off in your head because that’s a

question that we asked when we started, said how can this be. But some of

it’s timing. And Al described it. Our past due is a contractual metric. And

our non-performing has some discretions to it. So, on a conservative way, we

had about a $20 million loan in Equipment Finance that we had some concern

about, the ultimate collectibility. But it was current so it’s not in the past



Page 36

dues. But we chose to put it on non-performing and that’s a little bit of a

disconnect.

Does that mean anything? We think we’ve got that credit risk factored into

not only your reserving but our provisioning. So I think both metrics have a

nice forward look to them in terms of what it’ll mean in the ultimate charge

off number. But I think you’ve got it.

But I think, if you took that 20 out of it, put the non-performing 20 lower,

you’d see that you wouldn’t have asked that question probably. But that’s

probably the biggest single factor that makes that swing.

Question: Okay. Quickly, I wonder if you could tell us what the purchase accounting

benefit was in the quarter, if any, there’s much of that left?

Answer: It’s very small, It’s very small. I don’t have it in front of me. But I think it

was two or three basis points on the margin benefit. I mean it’s so small I

think even last quarter we talked about deleting the disclosure. But we need

to show it to you because of the prior quarter comparisons. So that is small.

But I think I just need to revisit this because I was passionate about this over

the year. The reason why it’s only 2 to 3 basis points now versus whatever it

was before, let’s call it 20, is we realized that benefit. When we refinanced

things like PINEs and other things that were at a higher rate. That benefits

actually moving into our margin in an interest cost real way. But I think it

was always real, so minimal math.

Question: Okay. And I guess could you discuss what potential uses were considered or

how we should think about the benefit from that debt call? Obviously you

didn’t have to build reserves.



Page 37

Answer.: It went into capital. And it built our capital base and we can leverage it 10 to

1 the way I look at it. It goes back to our point before. We have stronger

capital. If another acquisition comes along, you don’t have to worry about

getting financing for it. We can make the acquisition without financing

contingencies. And it’s a – we had no use for it. The idea of putting it into

my retirement account didn’t go down well around here.

Question: One last thing – I wonder, if somebody could talk about the interest sensitivity

of leasing aircraft and railcars. It doesn’t seem as though those lease rates are

closely linked to interest rates and yet you’ve got to fund the purchase of those

long-lived assets.

Answer.: It’s a good question because in a sense, there is. I think over the long run they

have to be related to capital cost. You can’t have them over the long run-

leasing rates that don’t cover your capital costs. They shouldn’t be in the

business. But in the short run they don’t react that way. So the question is

what funds do you – if you have a 30 year - railcar, do you borrow 30 year

monies is the question. Or do you borrow – since we don’t hold the railcar for

30 years because we turn them over and all that, we probably wouldn’t put 30

year money. If the average turn over was six or seven years, we’d put six or

seven year money.

That’s right. I think you have to look at this over a longer period than a few

months. And I think there is some correlation with the lag or with some delay

in leasing rates moving up for a variety of reasons, the economy’s better, the

supply, as mentioned earlier, there’s not a lot of railcars to be bought. What

does that mean? That means rates got to move up. And why is that – because

the economy is better. So, maybe there’s a direct linkage on some of the

things that are more floating rate in nature. But there’s also a less direct



Page 38

linkage in terms of better economy, fewer railcars there for rental rates going

up.

So, the way we finance it and the way we think about this is behavioral in a

way in that we look at the history of what’s happened in terms of resetting, re-

pricing of rental rates. And we fund it according to that history and behavior

we see. We think we’ve got it right.

Question: And that would work aircraft too?

Answer: Historically that’s worked in aircraft. We think about more recently is the

behavior going to be different because the whole industry is different. So the

other thing that we’ve been doing is, as I mentioned earlier, we’ve been doing

a little bit more longer duration financing than we historically did. And that’s

for a variety of reasons, and one relates to what you’re talking about now.

Question: These Business Development Corps that seem to be sprouting up like weeds

all over the place. Do you have a comment on overlap or lack of overlap?

And what you know about the businesses that they’ll be lending to and how

that impacts your Structured Finance or Commercial Finance, number one?

And number two, I’m sorry, could you just very quickly – you said fixed rates

are $21 billion.

Answer: Yeah, I’ll go through that again. I’ll go through it again.

Okay. The question on BDCs, which I think the acronym should be “Be Darn

Careful”. I don’t know enough about these, but that doesn’t stop me from

giving my opinion, does it?



Page 39

I think to some extent it’s a healthy sign that there’s kind of a capital coming

into a marketplace looking for deal. That’s a good sign. It’s a sign of

optimism. It’s a sign the economy’s getting better. There’s going to be deals

in the marketplace. That’s a plus quite frankly.

The question is, here at CIT, we’re not a virtual corporation, as some of the

BDCs will be. We’re a real corporation. We have origination capability. We

have credit capability, collection capability. We’ve got it all. So, we in a

sense, can link to some of these I think. I think they could be a source of

business for us, and they could be a source of buying some of our deals.

That’s the first thing.

Secondly, I think they’re going to take more risks than we did. I think they’re

going to take more mezzanine debt. They’re going to take more equity type

risk, longer-term financing. That’s all right too because we don’t take that

risk. A healthy junk bond market is good for CIT. You know why? Because

a lot of our commercial finance deals need that layer of financing. And we’re

not going to provide it. We’re not taking that risk. And if they take us out,

that’s all right because we want to be taken out. We don’t want to be in there

for 30 years on these deals.

So I don’t see these as a threat. I’m not sure exactly what role they play. It

could be a little destabilizing, if they get very aggressive on pricing. But if

they get very aggressive on pricing, they’re not going to get the returns for

their holders. You can’t be aggressive on pricing and take high risk and get

good returns. So I think there could be a link from us to them because we’ve

got it all. They have capital. And we’ve got some terrific resources and

ability to use some of that. And we can do some partnership. And we

actually work with some of these firms on deals already in some of these

companies that are into mezzanine debt or quasi equity range because we take



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the senior debt, senior secured, and they’re partners with us, and we all work

together.

So I think overall I would look at this positively in the sense that the

marketplace is attracting capital for doing deals. You don’t see that – that

doesn’t happen when the world’s falling apart. How these all come out,

whether these are the temporary – is this the securitization phase that comes

and goes, or is it permanent, we don’t know.

I agree. I think the question’s going to be how many of these actually get

funded and actually end up functioning. Right now, there’s a lot of buzz

about them obviously and a lot of filings. And I think we’ll take our

traditional kind of cautious way and we’ll wait for the first wave of these and

try and figure out if they’re actually going to be viable parts of our business or

not. And then we’ll figure out how we have to deal with them.

The answer for you on the debt side.

Just to summarize. One way we have of looking at it’s simplified and static.

But let me give it to you $21 billion of our loans and leases are fixed rate at

the end of the year, $16.5 billion of our liabilities after swaps are fixed rate.

We’ve got to make a choice of how to fund that. Just using half of our equity,

$2.5 billion, that leaves $2 billion of the fixed rate asset portfolio funded with

floating rate liabilities. So that’s sort of the balance sheet for you.

Albert Gamper, Jr.: I want to bring the conference to an end by thanking everybody joining us.

And just to reaffirm our commitment to continuing the kind of improvement

you’ve been seeing over the last several quarters at CIT, improvement in

credit quality, improvement in margins, and improvement of profitability, we

really take those long-term goals seriously. We’re going to move and march



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towards them in a judicious manner. We’re going to look at acquisitions in a

prudent manner, as we have in the past, and kind of continue to deliver the

kind of results we’ve had in the last couple quarters. And you’ve got our

commitment to that. So thank you very much for joining us.

Operator: This concludes today’s conference. You may now disconnect.

END

Economy & Finance

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