cit 2004%20q2

CIT Moderator: Valerie Gerard

07-22-04/10:00 am CT Confirmation#8398137

Page 1

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

CIT

Moderator: Valerie Gerard July 22, 2004 10:00 am CT

Operator: Good morning. My name is Andrea and I will be your conference facilitator.

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

Earnings Conference Call. All lines have been placed on mute to prevent any

background noise.

After the speakers’ remarks, there will be a question and answer period. If

you would like to ask a question during this time, simply press star then the

number 1 on your telephone keypad. If you would like to withdraw your

question, press star then the number two on your telephone keypad.

At this time, I would like to turn the call over to Valerie Gerard, Senior Vice

President Investor Relations. Thank you. You may begin your conference.

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

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

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



Page 2

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

business, please refer to our quarterly and annual reports filed with the

Securities and Exchange Commission. Any references to certain non-GAAP

financial measures are meant to provide meaningful insight and are reconciled

with GAAP in the Investor Relations section of our Website located at

www.cit.com.

With that, I’d like to turn the floor over to Al Gamper.

Al Gamper: Thank you, Valerie, and good morning everyone. Welcome to our conference

call and if you’ve been following CIT you know that there’s been some

significant events reported by us recently. One was the completion of the

acquisition of GTS at the end of June. Yesterday we announced the seamless,

smooth, and wonderful - and I say bloodless transition of management around

here. And thirdly, we announced record strong earnings.

Joe will talk about financials and Jeff will talk about the business following

me. But I’d like to just look back a little bit on the progress we made since

two years ago when we went on the road and did the IPO. And I’ll start with

the balance sheet being an old credit guy.

Stronger liquidity, terrific reserve levels, strong capital position and

outstanding credit quality have been delivered over these last two years. Our

business volume is picking up and strong. Our tone of business is good.

Quality is good and we’re making market share improvements in our key

strategic businesses.

We exited, as we told you we would do, low return businesses that were not

essential to this and redeployed that capital. And we did that without making

an impairment to our capital, in doing that. We’ve made four acquisitions that



Page 3

were a fitting, good, solid as we said we were going to do two years ago. And

we have a fifth on the way, we’ll probably announce next week, of a similar

nature plugging right into a strategic plan that makes a lot of sense.

And most importantly we’ve improved the quality of earnings and the returns

on equity. And it’s interesting, we’ve reported a much better return on equity

this quarter than in the past in spite of growing equity, which means we’re

improving our return equity without leveraging it. And we’re doing it by

improving the returns on assets. Extremely important.

We’ve executed on our game plan and now we are turning the game book

over to a new coach. We’ve had a couple of good winning seasons and I

remind you that this whole team will be back for next season with the

exception of their most expensive player. And I made a little comment the

other day to Jeff that said, “While we’re turning this over to Peek, we haven’t

peaked.”

And let me tell you that may be a joke, but let me tell you how serious I am

about that. Some people may think there’s a little steam running out in this

organization. Don’t make that mistake. Don’t make that mistake. We will

continue to improve our margins, there’s still improvement to be made there

from this quarter, even though these were good ones.

Our credit quality will continue to improve. An example of that is Equipment

Finance. We still have 100 basis points to charge-off of Equipment Finance.

We’ve got to get down to 50 basis points. Our rental rates on some of our

aircraft will improve. And we have productivity improvements to make in

this organization.



Page 4

We will see some of those because we have a game plan for that too. I’m

confident that our earnings will continue to go up this year as the quarters

progress as we had in the first quarter and the second quarter. And while I’m

not in the forecasting business, I feel confident that we’re going to see

improved earnings in this organization.

So I say, once again, I’m proud to turn it over to Peek because I know we

haven’t peaked. And with that, I give you Jeff Peek.

Jeffrey Peek: Well thanks Al and good morning to everyone. I think that at the risk of

stretching this too far I think we’d all have to say, we just want to be sure to

win one for the Gamper. But I would just like to take a minute or two to make

one or two comments before I get to reviewing the quarter.

At first I just want to reflect a little bit on the accomplishments of my

predecessor and friend, Al Gamper. Al, you’ve been a terrific leader for CIT,

shepherding it through various economic cycles, five ownership changes, a

tough liquidity crisis, and all the while, continuing our spotless record of 96

years of never having an operating loss. And you’ve built a strong culture

here, one of excellence, particularly when it comes to credit risk management.

By any measure, these are considerable accomplishments - a terrific legacy.

Now I don’t know anyone else who’s built a company that’s so strong and

cohesive as CIT. As was expected, you and I worked very closely over the

last nine months to make this a seamless transition as you mentioned. And I

think we’ve succeeded. The Company is well positioned for future growth. It

has a terrific management team and it’s blessed with a dedicated employee

base. And I’m looking forward to building upon this successful, rich history.

Now for those of you out here who might be wondering how CIT will be

different without Al Gamper, let me just say this, Al and I see the world and



Page 5

CIT in much the same way. But Al and I are different people. I’ll be a

different CEO than he was. Some of those differences will be subtle, almost

invisible to the outside world and others will be obvious to you over the

coming quarters. Now what can you expect from me.

As CEO, you can expect to see us implement a series of initiatives designed to

energize the Company and also raise the bar. So that when you look at CIT,

you’ll see a dynamic world-class company with a high performance culture.

For those of you who attended our investor conference last month, you got a

glimpse of what’s in store.

Going forward, we’ll want to identify more measures to drive us to be a better,

stronger and more responsive organization for our customers, investors and

employees. Expect to see initiatives such as achieving additional operating

efficiencies, building the brand and cross selling projects. You should hold

me accountable for each and every one of these objectives.

Now in turning to my quarterly review of the businesses, you can expect to

hear a candid assessment of our business accomplishments and challenges.

You’ll hear how I look at the business and what I think is important in terms

of growing this franchise.

CIT posted an extremely solid second quarter with good momentum and

energy throughout the organization. It was quite a busy quarter. So let me

spend a few minutes on what I think are the important take aways. When

looking at our traditional performance metrics, we made tremendous progress

in the quarter.

♦ Credit statistics continue to get stronger

♦ Our borrowing costs remain at very competitive levels; and

♦ Volumes are expanding as the economic recovery takes hold.



Page 6

However, we added some new features to enhance the Company’s overall

performance. For example, our growth emphasis broadened to include

accelerating and divestiture of non-core assets, adding more bolt-on

acquisitions and portfolios and syndicating more portfolio risk - thereby

putting up capital for higher returning businesses and assets.

Accordingly, we made significant progress on the ROE front. Relative to last

June, our return on tangible equity improved more than 200 basis points,

ending the quarter at 13.7%. That’s a 60-basis point improvement from the

first quarter, only 90 days ago, of 13.1% excluding the PINES gain. Also the

quality of these earnings was very high with very little in the way of gains on

sale through securitization. Although I do want to caution you, we may

securitize somewhat more in future quarters based upon market conditions at

that point.

The major disappointment in our financial results, from my perspective, was

the further up-tick in dollars of expenses and in the efficiency ratio. Joe a

little later will break down the reasons for the OPEX growth. But let me say

this, operating expenses are too high. Each of our businesses must realize

further operational efficiency. Management is very committed to bringing

down our operating costs. As I alluded to earlier, expect to see some

programs here as part of our effort to bolster our efficiency ratio and improve

return.

Now let’s go to the businesses. Turning to the flow businesses. Returns in

Specialty Finance, Commercial Services and Equipment Finance all

improved, compared to the June 2003 quarter.



Page 7

Equipment Finance enjoyed a particularly good quarter. Volumes were up

over 20% from last year’s second quarter and 14% over this year’s first

quarter. This reflects continued strength in the construction, machinery, and

corporate aircraft sectors where collateral values continue to improve,

inventory levels are coming down, and demand is increasing. Profitability

improved nicely as return on average earning assets exceeded 1% for the first

time in two years. Gains from equipment sales were strong and credit losses

fell to 99 basis points, a level we have not seen since the second quarter of

2001. Now while there’s still a lot of work to do here, and I want to

emphasize there’s still a lot of work to do in Equipment Finance, I am very

pleased with this unit’s progress so far this year. And it feels good to deliver

such encouraging news regarding Equipment Finance.

Now our factoring business continues strong. It did have some seasonal

runoff in terms of assets, but it continues to benefit from the acquisitions we

did last year with good returns and credit quality is in better shape than it was

in the second quarter of last year.

Now let’s talk about Specialty Finance. Major vendor volumes are up some

20% over last year’s second quarter. The research firm, interestingly enough,

IDC recently reported there’s recovery in PC spending, notably in the business

sector. So we feel very good about the performance here and also our future

prospects.

Looking internationally, vendor volumes were also up 20%. We’re really

starting to realize the benefit from consolidating all our platforms in Dublin

last year. Home equity volumes are up over last year and show that we have

the ability to grow this portfolio in a moderately rising rate environment. So

for Specialty Finance, the quarter was quite busy. We completed the GTS

purchase in our small and mid-ticket leasing business. We also closed on the



Page 8

divestiture of TRS, our former test equipment rental business. In addition,

although we’re going to book it in the third quarter, we’ll reduce our

liquidating portfolio further with the sale of our marine and recreational

vehicle portfolios. And this sale is part of our commitment to redeploying

capital into our higher returning core businesses.

Now if you look at our transaction business, the big event here was the

combination of Capital Finance and Structured Finance, as well as the transfer

of the Media and Communications portfolio to Business Credit. We made this

change to become better aligned with our customers. We want to reduce

multiple calls by CIT salespeople on the same organization and also shorten

our response time for client decisions.

Business Credit remains one of the higher returning businesses in the CIT

portfolio. Volumes for traditional asset-based loans were very strong during

the quarter and credit performance continued to improve.

Now moving on to Capital Finance. Here our rail business continues to

perform well. Utilization remains very high at around 99% and lease rates

continue to trend higher given the stronger economy, the growing congestion

on the railroads and higher new car replacement costs due to steel increases

and other.

Aerospace also had quite an active quarter. We placed seven new aircrafts

(four Airbus and three Boeing) with five airlines outside of the US. All 18 of

our 2004 deliveries are placed with two of these deliveries expected in the

third quarter. Of our 209 major jetliners, only three are temporarily on the

ground and they are all covered by pending leases.



Page 9

In addition, we closed on the sale of two thirds of our direct venture capital

investment portfolio, which we talked about at the end of the year. The

balance of our direct investments, expect to close over the next 12 months.

Also, fee income was particularly strong in the former Structured Finance

portfolio due to a very high level of syndication activity, which is very

consistent with our desire to reduce our risk profile.

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

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

and we feel that. That’s clearly reflected in the volume growth witnessed in

Equipment Finance, our vendor programs, home equity and the international

portfolio. While managed asset growth did stall this quarter, it was somewhat

self-inflicted given our deliberate capital reallocation decisions regarding the

sale of non-core assets by TRS and liquidating portfolios like RV and Marine.

I do think we will realize our 2004 target of 8% to 10% asset growth this year

although we may get there somewhat differently than we thought at the

beginning of the year.

Overall, the second quarter performance puts us firmly on a path towards

achieving the financial goals we set for ourselves this year. We do feel very

confident about the balance of the year given our business momentum and the

organization’s energy and enthusiasm. Achieving our 15% ROE target is of

paramount, personal importance to me and significant to the organization. As

we go into our traditionally stronger second half, let me assure you that our

focus will be on achieving profitable growth and success.

Now with that, let me turn the floor over to Joe Leone, our Vice Chairman and

Chief Financial Officer. Joe.



Page 10

Joseph Leone: Thanks, Jeff, and congratulations to both you, Jeff and Al, great team leaders,

managers, etc. Good morning everyone. As you can see, it was a very active

quarter with many accomplishments by all parts of this organization. And it’s

been a terrific quarter in terms of improvements in financial performance.

Once again, higher profitability, lower funding costs, better credit quality and

as Al described, a very strong balance sheet. And Jeff described a lot of

progress on strategic initiatives and progress towards our financial targets.

But I also believe we have further opportunities for accomplishments and

improvements.

I’ll give you some of my financial perspective on many of the items Jeff and

Al just described. You know the earnings 82 cents, 26% higher than a year

ago, 8% higher than a quarter ago. And, as Jeff described, a very strong ROE

performance, approaching our 15% goal.

Returns were up across the board for all segments versus a year ago and

importantly, while we expect more, as Al and Jeff described, some of the

lower performing units like Equipment Finance improved considerably.

Profitability in Consumer Finance-home equity improved again and is

approaching the corporate target. Credit remains strong in that business and

we’ve restored or are restoring the on-balance sheet asset levels to provide

scale to that business. The earnings quality was strong. It was not only a

strong earnings level but a very strong earnings quality across the board.

Jeff described the new business volume being healthy, up 4% sequentially and

8% a year ago. Equipment Finance was strong as Jeff said. Factoring volume

was down a bit, that’s seasonal. But we very successfully integrated the two

acquisitions we made last year, retaining the customer base.



Page 11

Credit quality, very strong. Total losses for the quarter were over 100 basis

points. Core losses were 72 basis points with significant improvement in

Equipment Finance. And Equipment Finance will do better than that level as

well. Our overall charge-off level was better than we even expected this

quarter. We did benefit somewhat from a higher level of loan recoveries,

about 25 basis points this quarter versus about 13 basis points or so the prior

quarter. But overall putting it together for the first six months, 85 basis points

in core charge-offs - pretty good achievement on some of our targets and

credit metrics.

Non-performing assets were down $100 million in the quarter, 1.77% of

receivables, the lowest level we’ve seen in about five years.

Loss reserves, very solid at $621 million, a decline of $16 million. But I want

to make sure you understand this. That decline is principally reflective of

charge-offs we took against the telecom reserve and the sale of the Argentine

portfolio. Core loss provisions approximated the core charge-off level.

Net Finance Margin was flat at around 4% but funding costs continued to

improve, in the quarter. We had higher yield-related fees and we had stronger

lease margins particularly in rail. These positive factors were offset by higher

depreciation expense in commercial aerospace.

Risk Adjusted Margin is approaching our 3.5% target. It moved up to 3.3%

principally due to lower charge-off levels.

Non-spread revenues were very strong at $237 million despite lower

securitization related income. Fees and other income, particularly strong, up

from the prior quarter. Where was it? Strong fees in Capital Finance

particularly out of our former Structured Finance group including advisory



Page 12

fees and income from the syndication of the loans, particularly project finance

loans. And we also had a gain in Specialty Finance from the sale of the small

ticket rental business Jeff described.

We did evaluate our liquidation strategies on our liquidating portfolios. And

let me give you the accounting on this. Jeff described the RV and Marine

portfolios. During the quarter, we accelerated or we decided to accelerate our

liquidation strategy and we transferred on June 30 these assets to assets held

for sale and took a write down to approximate fair value of about $12 million.

This week we signed a tentative agreement to sell these portfolios at a price

approximating that June 30 carrying value. And if you look at our liquidating

portfolios excluding this sale, we’re down to about $700 million. That’s

terrific progress from several years ago.

Securitization gains were down about $10 million sequentially. And at 4% of

pre-tax income, this quarter’s gain is lower than the level we expect to run.

Let’s move to the asset side. We have reduced our securitization strategy and

securitization levels. So, owned assets have been increasing faster than

managed assets and I think that’s a trend you’ll see for a while. Owned assets

are up about 11% from a year ago and 3% from year-end. Managed asset

growth is slower because of the lower level of securitization.

Jeff described strong origination volumes and the asset levels does include a

$500 million GATX technology asset acquisition we made and closed on in

June. We had seasonal runoff in factoring, as the second quarter is one of the

lower points of the year. We did have asset dispositions in Specialty Finance

as we’ve described and higher syndication activity principally in Capital

Finance. Jeff described those. Let me dimension those a little further for you.



Page 13

♦ The small-ticket rental business, - that was sold was a little over $100

million in operating leases, and that transaction generated about a $13

million gain.

♦ We sold about $70 million of the venture capital direct investments in

the quarter at a price approximating our carrying value.

♦ We sold the balance of Argentina that’s about $25 million, a modest

profit.

♦ And the syndications in Capital Finance reduced our hold positions by

some $150 million in the quarter and generated syndication income.

And as Al and Jeff both indicated, and I’ll reiterate, these activities reflect the

risk adjusted capital discipline we’ve been describing to you over the last

several months. We’ve implemented it, we’re redeploying capital and we’re

getting better returns.

Also, the other portfolio dynamic is, we do see strong liquidity in the credit

markets. Our customers have options and we did see some prepayment during

the quarter including a large factoring facility and an international financing

project.

Let’s move to operating expenses. Al and Jeff wanted me to fill in some of

the blanks. The efficiency ratio is 42%. The percentage of expenses to

managed assets is 2.2%, a disappointment to us. But we did have some

impact from our restructuring initiatives in the numbers. The higher expenses

this quarter was a result of restructuring charges we took on the reorganization

we did in Business Credit and Capital Finance. We announced those

reorganizations this past quarter and we put up the restructuring charge in the



Page 14

quarter. We did have higher compensation accruals. Implementation costs

for SARBOX were higher and advertising and marketing efforts also were

higher and contributed to the increase.

But what does that mean for going forward expenses? Our overall expense

discipline will continue. The Capital Finance and Business Credit

restructuring will reduce and lead to lower expenses in the second half of the

year. The sale of the non-strategic portfolios will reduce expenses in the

second half of the year and improve returns. And as always, we are

continuing to look at platform opportunities or platform efficiency

opportunities. Jeff has us all focused on the work we have to do here and the

second quarter initiatives we put in place will pay dividends this quarter. But

we still have more work to do.

Let me move to the operating lease portfolio trends. We performed our

regular quarterly evaluation of the operating lease commercial aerospace fleet,

that’s about 160 planes in our fleet. Having seen declines in older vintage

plane rental rates on eight planes to be specific, with upcoming lease

maturities, we recorded $15 million in additional depreciation in the quarter

on this equipment. Offsetting this higher depreciation was lower depreciation

in the small-ticket operating lease portfolio principally due to the portfolio we

sold. Depreciation on rail assets was about the same, but as Jeff described, we

saw a nice pick-up in rental rates and utilization and the rail business is doing

quite well.

Looking at the right hand side of the balance sheet, liquidity improved even

further. We had $1.8 billion in cash at the end of the quarter and we stayed

ahead of our financing needs. We have plenty of capacity in our commercial

paper program and our bank facilities are both long and strong liquidity.



Page 15

During the quarter, we issued $3.5 billion approximate of unsecured term debt

at very attractive levels ($700 million of fixed, $2.7 billion of floating), that’s

a year-to-date issuance of $6.2 billion. We’re a little ahead of - our financing

schedule. The last floater that we did in the quarter was a three-year at

LIBOR plus 22.

Let me turn to the second half in terms of maturities. We have $3.3 billion of

term debt maturing in the second half - $1.2 billion in fixed and the balance

floating, and a fixed rate debt maturity has an average spread over Treasuries

of 132 basis points and a floating has an average spread over LIBOR of 56

basis points. So you can see we still have refinancing benefits to get as we

refinance these upcoming maturities.

Securitization, $850 million this quarter, down from $1 billion. Securitization

volumes in Equipment Finance were up on strong origination volumes. And

securitization volume was down in Vendor Finance. We should see a slightly

higher securitization levels in the third and fourth quarter.

Risk management, on the right hand side of the balance sheet, remains

consistent. We’re slightly liability sensitive in the short run and asset

sensitive over the long run. We are very matched or fairly matched and we

had no significant change in interest rate sensitivity metrics since the first

quarter.

Tangible equity, almost 11% on strong capital generation. Tangible book,

about $24.50 per share. And finally, we purchased about 1 million shares this

quarter under the share repurchase program we announced last quarter We

currently have about 800,000 shares in Treasury and we will continue that

program on a regular basis.



Page 16

With that, let me turn it over to the operator for Q&A.

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

question, press star then the number 1 on your telephone keypad. We’ll pause

for just a moment to compile the Q&A roster.

Question: Hey. I was hoping you can drill down a little bit more on the asset growth. In

the quarter it looks like on managed basis there was some shrinkage in the

overall portfolio. And as I kind of run through the items you flagged for us it

looks like you acquired $520 million in assets, you had some dispositions but

net you acquired $330 million.

The shrinkage in the liquidity portfolio wasn’t really much more pronounced

than it was in prior quarters. I’m not quite sure how the syndication activity

compares to prior periods. But could you give us some context. We are

seeing more visible strengths in a number of the banks and you do seem to be

as optimistic as you were earlier in the year about asset growth prospects.

Maybe you could put a little more perspective around the numbers for us.

Thanks.

Answer: Let me start generally and then maybe Joe can provide some of the numbers.

I think that on our flow businesses and in Specialty we’re actually seeing

fairly good asset growth quarter over quarter and week over week. I think one

of the issues for us on our larger ticket businesses. If you drill down to some

of our businesses such as Media and Communication, they’re more than

meeting their new business plans. But the problem is that their clients have

alternatives and this wave of liquidity seems to have really shortened the

maturity of a lot of our loans. And I think that’s what we’re seeing probably

with a little bit of a seasonal fall off in the factoring business, getting ready for

the Fall ramp up and the holiday season.



Page 17

But that’s how we’re seeing it here. I don’t know if you have some data you

want to add to that or not.

Well, I did go through some of it. GTS did add $0.5 billion but we did sell

some assets and that’s $200 million. The syndication effort in the quarter was

very high. It was much higher than we’ve seen over the last several years and

there were a few reasons for that. Higher, better liquidity in the market and

we seized on that opportunity or liquidity in the market to manage our risk

exposures on larger exposures down.

Seasonally, we saw several hundred million of run off in factoring. You could

see that in the asset table that we provide. And we had a large prepayment in

factoring of a similar size. So, when I put that all together, there were some

events, episodic as they may be, in the second quarter that offset some of the

stronger volumes.

The other thing I would add is that in our leasing businesses, the second half

of the year is traditionally the better part of the year. And the fourth quarter is

even better than the third quarter. In the weaker part of the cycle we saw a

year or so ago, that did not happen.

With the economy improving, I would expect the equipment business to be

stronger in the second half of the year and stronger in the fourth quarter of that

- of the year. That’s a little bit more color.

Question: Okay. And just maybe just a follow-up on that. The heightened prepayment

activity that’s opportunistic because of rates or that the function of the

competitive environment?



Page 18

Answer: That’s a function of liquidity. I’m not talking about consumer finance

obviously, that’s going the other way, rates are going higher. But it’s a

function of alternative liquidity being much more available in the market to

customers as they graduate up on the credit curve. So it’s in the Commercial

Finance arena and it’s a function of liquidity in the market and it’s trends

we’ve seen in former economic recoveries and not surprising to us.

Question: Gotcha. So that’s something that you expect to continue to wrestle with?

Answer: Yes, in an economic recovery. On the flipside, the pie of lending and the

demand for equipment should get stronger and that’s what I’m talking about

in the second half of the year.

I think the other thing is, I think we’re starting to get a little bit of the attention

of our sales forces. We had, for the first time in a long time, we had all of our

sales managers CIT-wide in one place last week for three days and started to

work with them just in terms of passing on some of our growth targets what

we’ve laid out as our plans for the next few years. And so this was the first

time we’ve done this in a number of years and we have a lot of assignments

coming out of that. But I came out of that with a much better feeling about

the energy of our respective sales forces and where we’re going with the other

businesses. So we’ll have to see how that plays out but it was a - I think it

was an excellent first step for us.

Question: Hi, guys. You had mentioned earlier on the call that you were going to be

announcing another acquisition some time next week. I’m just curious if there

are going to be potentially other smaller divestitures like what we saw with

the equipment testing rental business this quarter kind of coinciding with that.



Page 19

And then separately, on the aerospace front, we’ve been hearing that orders at

both Boeing and Airbus have been up pretty recently. And I’m just

wondering if you’re seeing any impact from that on either the demand side for

future deliveries or whether there’s been any impact on your lease renewal

rates?

Answer: Why don’t I take the first one and then Joe could take the second one. I think

on what we foreshadowed about next week, this is - this will be an acquisition

much like the last four or five we’ve done. It will be right there in the same

size category. It fits in with one of our existing businesses, it gives us great

operating leverage on our existing platforms and I think you’ll be convinced

we got it at a very reasonable price given all that it does for us. Whether

we’re going to match that with the divestiture, I - we don’t have any plans in

the next 72 hours to find a divestiture to match it with.

We are more seriously, we are making a continuing effort to try and evaluate

our businesses on an ongoing basis and when we find things that don’t seem

to fit with this or aren’t of a scale where they think a year, two years from

now, their contribution of profitability is going to be meaningful, we’ll think

about divesting them. And that’s somewhat of a separate discipline away

from acquiring companies.

On the air front, I hope all that bullishness is reality. There are better rental

rates on the new planes, we see that in our portfolio clearly, but they’re not

good enough, that’s number one. Number two, I think the news is a bit

mixed. You pick up the Journal this week and it’s a bit mixed. In London it’s

positive, in the U.S. it’s not so positive.



Page 20

So we - I still stay what I said coming into the year or we said coming into the

year where - it’s a better year for aerospace but it’s still not nearly giving us

the appropriate risk adjusted levels return that we will need given the

discipline we have on return on capital. And we hope the improvement in

rental rates continue because we need it to continue to get the returns to where

they need to be for us to put more capital up here.

I’ll make a comment on this. If they’re going to sell more airplanes and make

more airplanes from somewhere, then somebody’s going to finance them.

You’re not going to finance them with a 7% or 8% return equity. I don’t

know anybody who starting a leasing - aircraft leasing company with those

kind of returns. So I think you’re going to have to see improved returns.

And I also don’t know there’s that many airlines out there that can write a

check for an airplane these days. There’s probably not as many as there were

years ago. So I think there’s going to be pressure to finance these airplanes

and keep these airplanes. But that pressure has to definitely get good returns

otherwise capital is not going to flow, as you guys know better than I do; the

capital is not going to flow those areas. And I tell you that CIT capital is not

going to flow those areas because there’s a discipline around here. But I think

if you take a longer-range view, that will happen -- less capital flow, better

returns, and the rates will move up there if things improve throughout the

world in the airline industry. You have to be cautiously optimistic but I put

that word cautiously in there.

Question: I was just wondering if maybe you could put a little bit more color on your

comment about you’re still confident in the 8% to 10% asset growth being

intact but you might get there a little differently. What do you mean by that?

And has anything changed relative to your - the Investor Day in terms of your

outlook for asset growth?



Page 21

Answer: I think - no. I think basically not. I think what I was alluding to is there may

be a change in mix. Some of - we may see more of it coming from Specialty

and less coming from the transaction business which would be one takeaway

probably from the second quarter.

Also, right now, we’re really I think seeing a terrific number of these small

acquisitions, all kind of $300, $400, $500 million in assets and they look like

they fit right in our sweet spot in some ways. So, I don’t think we’re going to

be good enough that we could precisely tell you exactly the zip code of where

the growth is going to come from every last month.

So there - I wasn’t really foreshadowing that other than we’ve got those goals

out there. I think we still feel confident about reaching them and - but they

may come from different sources than where we thought a month ago or two

months ago.

Question: Okay. And just to kind of a follow-up on another topic, in terms of your

philosophy or style, Jeff, relative to Al. We hear a lot about bolt-on

acquisitions. Is that really the extent of acquisitions or is there going to be a

change in the sense of the size or scope of the type of deals that CIT might do

in the future?

Answer: Well, I think in terms of one of the big differences in Al and myself is that I

don’t have a table here in front of me so my report card is - I’ll have to invent

another metaphor.

On the bolt-on acquisitions, I think those are working really well for us. So I

don’t see us doing anything in the transformational sizeable area. As I said,



Page 22

we’re seeing a lot of things, which seem to be, very similar to the businesses

we have.

We like buying the assets. We like getting a look at the people. In GATX, we

love their sales force. I think we hired 26 out of 29 people from the GATX

sales force. So it upped the level of our professionalism on the sales side and

those seem to be working for us very, very well. So I - that’s pretty much our

focus.

If they’re in particular markets, if there are products that we think we could

extend on to our relationships, simple product extensions within a given

market, the small business market or the middle market, we would look at

that. But I think we’re pretty comfortable with this size parameter.

We’re - these seem to be pretty easy to integrate. There doesn’t seem to be

much cultural chemistry that we have to master here and they seem to be

working well for us. And they’re not so big that we distract a meaningful

percentage of our business managers from making their quarter. So, I think

we’ve been successful and they seem to be working for us.

Question: Good morning. You mentioned that there was an increased level of recoveries

in some of your net charge-offs. Is that sustainable trend and what’s driving

that?

Answer: Good morning. What’s driving is we took a lot of charge-offs over the last

few years. But seriously, I think the 25 basis points we had on this quarter

was at a higher level than we would expect. Obviously, we didn’t expect it in

this particular quarter but some of these things come along at times you don’t

expect.



Page 23

We had a large - relatively large recovery on one loan. It’s - the magnitude of

the recovery was in the $4 to $5 million area and that helped the recovery rate

this quarter. I would expect absent anything large like that, we would revert

back to somewhere in the 15 basis points, maybe slightly higher than that.

But we did take a lot of charge-offs in 2001, 2002 and early part of 2003. We

expect to get some of that money back.

If you’ll dial back into the - in the late ‘80s, early ‘90s and then in the mid-

‘90s, our net charge-off numbers that looked so attractive in the mid-‘90s

were also helped by recoveries of charge-offs we had taken in the early ‘90s.

So we fully expect to get some of that back.

Question: Hi. Good morning. I was wondering now given your comments, how much

room CIT has under the salary cap?

Answer: That’s bumping up close to - bumping up pretty closely here.

Question: But actually, seriously, you made some comments in the press release about

taking some costs in the quarter relating to the reorganization. Can you talk

about those costs and what the benefits you’ll see going forward with them?

Answer: The costs relate to the restructuring initiatives we took in putting Structured

Finance into both Capital Finance and Business Credit and we did some

restructuring around those initiatives. The magnitude of the restructuring

charge is in the $5 million area. And we would expect to get a payback

starting in the second half. I can’t give you the specific of the payback in the

second half but we’ll get a good percentage of that $5 million back beginning

in the second half of ’04 and those returns or that efficiency will continue and



Page 24

we’ll fully get that back in ’05. We expect about a one-year or so payback on

that restructuring initiative.

Question: A couple questions, on the asset growth side, it sounds like you’re pretty

happy with where volumes are at the midway point but a little bit disappointed

in the prepayment activity. Does that imply that your second half, if you’re

still comfortable with 8% to 10%, that prepayments will abate and volume

accelerates beyond your expectations or are on the bolt-on acquisitions

picking up that slack? I’m just sort of trying to figure out half way through

the year on the growth side, it sounds like you’re a little bit below where you

wanted to be. And what causes you to be optimistic on the second half on that

front?

Answer: Well, I think we do see some bolt-on acquisition opportunities. I also think

we’re starting to rev up the sales forces a little bit. We looked at the asset

growth both Joe and I have done some analysis on it. And most of our

businesses are meeting their volume - their volume targets - are doing better

than their volume targets. And so it’s really been the amount of liquidity in

the individual portfolios.

As you know, traditionally the second half of the year is our stronger half and

I think we go into it with a lot of energy and the economy also is in better

shape than it was last year at this time.

Question: Okay. Fair enough. On the recovery side, one more follow-up question on

that issue. Is that being driven by any firming of the equipment values or is it

all on the borrowers’ behavior and collecting on past debts? And then is there

any revenue benefits from those recoveries? Have you already booked any

revenue that you previously had deferred?



Page 25

Answer: Let me answer the first part and then you’ll have to explain a little of the

second part of it. I think it’s just hard work. It takes a lot of hard work on a

lot of people -- collectors, workout people, etc., to stay doggedly at customers

who have defaulted on loans in many years past. So it’s just a lot of hard

work.

I guess, in some way shape or form, it’s a function of a recovery in the

economy because if businesses didn’t recover, there wouldn’t be enough cash

to pay off former lenders. So I think it’s good old fashion hard work that our

collection and workout group and credit group have very good experience at,

are very good at and obviously, we had great results this quarter and I hope

that will continue in the foreseeable future.

The revenue benefit - we had a revenue benefit, we had a lower provision, so

to speak, or a lower charge-off as a result. Sometimes, not necessarily all

times, we also collect former non-accrued interest but that would go generally

in the form of a recovery and that would generally get captured in the charge-

off line. If I weren’t so responsive to Part B, let me know.

Question: No, that’s fair. Its just - your fee income is pretty solid this quarter and I was

hope - I was wondering if there was a recovery benefit in there as well?

Answer: Well, actually, there’s some expense negative - not negative but in order to go

get recoveries and do all this work, it will cost you some money. And while

the general trend in repossession and collection costs that we’ve talked about

in the prior quarters, with a downward bias, we didn’t necessarily see that

downward bias this quarter because we got a lot more recovery and you need

to pay lawyers and people to do that.



Page 26

I’ll make one comment on this too. Remember this in the future that is

recoveries are an indication of appropriate charge-off policies. If you don’t

have any recoveries, then you were kind of late to reap the charge-offs, so we

can see that these recoveries are an indication that CIT, over 2001, 2002 and

2003, was taking the appropriate charge-off action.

Question: One more quick follow-up if I could. The $15 million aircraft depreciation -

my hope is that’s sort of one-time in nature, is that fair to say?

Answer: Well, apparently older vintage aircraft, and I mean older, they were on a

limited number of aircraft in the seven or eight area. So $15 million on seven

or eight are - is small. The book value on those aircrafts being old were

relatively low but obviously not low enough. And when we look at similar

type aircraft to other obligors or lessees, we’re very comfortable with the

others - the rest of the aircraft we evaluated during the quarter. So that was it.

Question: Good morning. Just to - I guess a question or a follow-up on your comments

on the margin, given that you’re going - it appears you’re going to continue to

see some benefits from refinancing some of your higher cost debt. Can you

give us a little more color as to how you see the margin before credit losses

trending in the second half of the year?

Answer: Well, that’s not a metric we put out verses a 350 basis point target - we’re at

330 basis point risk adjusted, we want to get to 350 basis points, okay? That’s

one data point. The second data point charge-offs as sort of core this quarter

were 75ish basis points. And we’ve said it, - we’ve said we’re looking at 80

basis points. So charge-offs could get a little better on the margin but not a

lot. So a lot of that has to come from good old fashion making money over

money if spreads improve.



Page 27

So I think a little bit is from the cost of funds financing and I think there was

some confusion by some over the quarter that it’s over. Well, we still think

we have a lot more debt to refinance. And we haven’t even gotten to the

expensive ones yet that we did a couple years ago that were fives and tens, if

you’ll recall. So we have a little bit more there.

So we have 20 more basis points to capture along with it a way of saying I

think most of that given with the second quarter charge-offs came out will

come from good old fashion money over money and improvement in leasing

margins.

Another factor to keep in mind is we liquidated a couple hundred million

dollars of low return margin assets and we bought a company with $500

million of assets in high margins. And so that’s a good way of improving

your margins, get rid of the low margins and put on new increasing margins.

We’ve done that twice this year already and I expect you’ll see more of that.

Question: Just a quick question, you mentioned the outlook that you would expect to see

more securitizations in the back half of the year. Is that a change to the way, I

think in the past, you talked about maybe a 15% limit of total earnings coming

from securitization gains? Is this just a bounce off of the abnormally low

levels? Or is there some change in the way you’re seeing those markets or the

way you’re approaching that?

Answer: No. Let me be clear on that. We did $850 million in securitization in Q2, a

billion in Q1, and we expected an average of about a billion a quarter. Our

securitization strategy has not changed. We think it’s a very, very important

funding tool, very important. We lived through that for two years. It’s very

important we want to keep those programs alive and well.



Page 28

But we have narrowed the focus of our programs over the last year to

commercial finance, both equipment and vendor and that focus continues that

way. We still will on balance sheet home equity. Having said that, if you

look at assets held for sale in our balance sheet, (we give you a lot of

disclosure in this release and I’m sure you haven’t absorbed it all) but that’s

slightly higher as we end this quarter than when we ended last quarter. So a

little bit of it is timing. Second, as I said earlier, Equipment Finance volumes

generally pick up a bit in the second half of the year. And to the extent we

have higher volumes, I would expect the second half of the year for

securitization volumes to follow those higher origination volumes.

We have not backed off the 15% gain on sale; quality of earnings is still a

ceiling. This quarter was 4; that was well below any prior number we ever

printed. I am just telling you that we will do slightly higher securitization

volume in line with our financing strategy but that could move the gain on

sale up a couple of points.

Questions: A couple quick questions. One, you guys are always great in terms of the

disclosure arena and historically, you’ve always provided sort of the look back

on your Website, all the way back to 2000. Now that you’ve integrated

Structured Finance into other business units, will you be providing an update

of that?

Answer: I’ll take that. We did do that for the ’03 period in this release. So you all

have comparable - you have comparisons of Capital Finance restructured,

Business Credit restructured compared to the ’03 period. We need to think

about the prior periods.

And this - the variety of reasons that are environmental, I’ll call it, as to why

we have to think about it and not just do it, and it reflects the overall control



Page 29

environment and how your numbers need to be supported in all the files and

all the work papers and on all the stuff you need to do today.

So we want to be very thoughtful about that before I jump in and say we’re

going to go back and restate numbers for four years because my opinion is

that I think all the benefits will be in your comparisons of ’03 and ’04 because

the prior periods have a lot of noise in the funding and other stuff that was

going on obviously in a different environment with a lot more liquidating

portfolios.

So I’m not saying I have one answer or the other, it’s just interesting you

asked the question; we’ve spent a lot of time debating it, and we made sure

our people did a lot of work to get these ’03 numbers restated for you and all

the documentation in the files that needs to be there to be audited

appropriately in this environment. The long-winded way of saying, we’re

going to look at it, we’ll let you know.

And now Valerie will push for your point of view and the accountants will

push for their point of view and I’ll be the judge.

Question: And I hope Valerie wins. I vote for Valerie. Shifting gears, just talking about

sort of aircraft leasing, as you had kind of mentioned, you depreciated eight

planes. What - can you give us any kind of nature, I mean beyond just that

these were some of your older planes? I mean what percent of your older fleet

did that represent? Or can we get some color commentaries to whether or not

you think this is likely to happen again for some of the older planes?

Answer: I think I answered that already. I mean it relates to older planes and we

looked at - we do have some other models like this with other lessees and we

looked at the carrying value of those other planes we have to other lessees.



Page 30

They were at or below the new number we came up with on these planes.

And it’s a function of the lease market not improving, as we said over the last

few quarters. The lease market has improved on newer planes but does not

necessarily improve significant way on older planes. And it really relates to

one or two transactions so it’s not pervasive at all.

And I would reiterate, as I said in the script and I think in response to another

question earlier, we reviewed every plane this quarter as we always do in

terms of the valuation, and eight out of 160 fell out, so $15 million on eight

planes.

Question: Good morning. Could you just give us the amount of one-time employee

separation costs in the quarter and the employee counts this quarter versus

last?

Answer: Headcount I think at the end of the quarter is about 5,700 people. I think there

are 5,700; it’s down about 100-something people from the sale of TRS I

believe. And it’s been running pretty much 5,800, 5,700 for the last year, year

and a half. I think that’s the right number.

And the other part of your question, I mentioned earlier, the restructuring initiative costs during

the quarter, and I’d say is all people but it’s mostly people, but it’s about $5

million, in the area of $5 million.

Question: I hate to beat this to death but I just want to get a quick clarification on that

aircraft depreciation and then I have a real business question. Did I

understand you correctly that it’s more of a retrospective one-time catch-up to

depreciation and not a $15 million per quarter prospective adjustment?



Page 31

Answer: No, that’s correct. Let me make sure. I’m very clear. The test requirement,

we’ve covered this in prior calls and in our filings, the test is you look at

rental rates and you compare them to your depreciation. And as long as you

have positive cash flow, you keep going; if you have negative cash flow, you

have to look at the current valuation you have versus the current valuation the

market has. And that’s what we did.

We looked at the current valuation we had on these - only on these eight

planes where it fell out and the current market value on these eight planes.

And we took the depreciation and to get those values down to where they

should be in the market, so it’s one time on those planes.

Al Gamper: We’re approaching the 12:00 o’clock hour so if we try to live with our

commitment to all of you for an hour so let’s take in one more question at

least, all right?

Question: Yeah, thanks so much. I was wondering if you could talk in a little bit more

detail about your lending methodologies in the home equity business, along

the lines of a pricing per risk and whether or not you expect to see any change

in the asset quality performance in that portfolio with gradually rising interest

rates?

Answer: Well, let me take a try at that. I don’t know if you remember the slide we put

up at Investor Day but in terms of where we are in home equity, I think the

average loan is around $91,000 and I think the average loan to value is about

71% or something like that. So maybe a little bit higher.

So we see this as being far, far away from the speculative end of some of the

real estate cycles. And we go over that portfolio, I don’t know how much

time you spend with our people, but they’re very quantitative on this and well



Page 32

into predictive behaviors and probabilities and that type of thing. And it is

something we do in terms of looking at our portfolio and tightening up the

scores and everything, it’s something that we do on a monthly basis. So I

think we’ve been pretty happy so far as long as the interest rate increase seems

to be gradual and certainly, it’s been well telegraphed by the Chairman.

Question: Do you see the FICO scores increasing in that portfolio over time or

maintaining kind of the - where you had them in the slide of the fixed FICO

level?

Answer: The FICO score I think is in the 630 area and our guys do a to great job of

changing their scoring or adopting their scoring methodology to what they see

coming back through the front-end. But over time, with a big portfolio, I

don’t know if that moves the score all that much.

I would add additionally on the financial side is that we continue to see very

good credit performance out of the portfolio. Actually, charge-offs are flat to

down quarter to quarter from a very good level in Q1. Delinquencies are

down from a very good level in Q1. We see very positive trends on the credit

side here.

And if you are looking at an increase in charge-off rates sequentially in what

we call Specialty Finance consumer, it’s not home equity. It’s some of the

liquidating stuff that we’re either selling or we carry and liquidate. So just so

you know that, it’s not home equity - those trends are very positive.

Al Gamper I think at this point, we will say thank you to all of you for participating today.

I personally probably will not participate in any more of these calls so make

sure your questions are good and tough for Jeff and Joe going forward



Page 33

because they’ve been pretty easy on me, I know. So I thank you all and

appreciate your coming into the call today.

Operator: This concludes today’s CIT Second Quarter Earnings conference call. You

may now disconnect.

END

Economy & Finance

cit 2004%20q2