cit q4transcriptr1

CIT Moderator: Valerie Gerard

1-18-06/10:00 am CT Confirmation # 3739148

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

CIT

Moderator: Valeria Gerard January 18, 2006

11:00 am EST

Operator: Good morning. My name is Mary Anne and I will be your conference

facilitator today. At this time I would like to welcome everyone to the CIT

Fourth Quarter and Year-End Earnings conference call.

All lines have been placed on mute to prevent any background noise. Thank

you.

I would now like to introduce Valerie Gerard, Executive Vice President,

Investor Relations. Ms. Gerard, you may begin.

Valerie Gerard: Thank you, Mary Anne, and good morning everyone. Welcome. We're

delighted that you're here with us today for a review of our fourth quarter

earnings result.

We are changing the traditional order of our conference call for today. Given

the various items impacting our fourth quarter results, we wanted Joe Leone,

Vice Chairman and Chief Financial Officer to walk through the numbers at



the start of the call. And then Jeff Peek, Chairman and Chief Executive

Officer will discuss the 2005 key accomplishments and provide his views on

2006. After the formal remarks we will move into a Q&A session.

Now as you know, elements of this call are forward-looking in nature and

relate only to the time and date of today's call. We expressly disclaim any

duty to update these statements based on new information, future events or

otherwise.

For information about risk factors relating to our business, please refer to our

SEC reports. Any references to certain non-GAAP financial measures are

meant to provide meaningful insight and are reconciled within GAAP in our

investor relations section on our website which is located at www.cit.com.

Now with that, it's my pleasure to introduce Joe Leone.

Joe Leone: Thanks, Val. Good morning everyone. Yeah, Jeff asked me to give you some

color on the numbers before he gave you his perspective on '05 and an outlook

for '06.

Let me start with some color on the quality of the numbers first. I think we

ended the year very strong - a very strong momentum going into '06. We had

record Q4 loan originations and we began to see some benefits from our sales

agenda and larger sales force.

We grew revenue sequentially 4% and our forward credit markers remain

strong with non-performing loans actually lower in dollars than when we

came into the year. And we had a very active quarter and I think several

actions position us well into '06 and these actions impacted our fourth quarter



metrics. We laid them out in our press release. Let me give you some

additional color.

First we sold our micro-ticket point of sale leasing business, and that gain

added about 13 cents to earnings per share. The business was in Specialty

Finance Commercial and we had about roughly $300 million in leasing assets

in that business. The business was profitable but we did not have scale and

our decision to sell was a direct result of our strategic and capital analysis.

Second, a little bit more color on some tax movement. We reversed certain

deferred income tax liabilities and that added 8 cents to EPS. These deferred

tax liabilities were established in prior years for US tax obligations on income

from aerospace assets. As you know, in the middle of the year we had

transferred certain of our assets from the US to Dublin.

This quarter we completed our analysis of the assets that we transferred, the

related deferred taxes and we concluded that the US taxes on these assets

could be released because we moved them to our Dublin, Ireland location

earlier in the year. This benefit is in addition to the tax rate benefit we had

discussed with your earlier from international operations.

Third, we had a couple of operating expense charges that increased our

operating expense line by about $11 million and that reduced EPS by about 3

cents. First we incurred a lease termination charge in our getting rid of the

lease on three floors of our existing New York City space. And this positions

us to move to our new New York City headquarters at 505 Fifth in the first

half of the year. And at that time certain back office functions will move to

lower cost space.

We also incurred some costs for a legal settlement.



Finally as we disclosed in our conference call and a press release in

December, we wrote down the value of seven derivative contracts that did not

qualify for hedge accounting treatment and reducing fourth quarter pre-tax

earnings by $23 million and earnings per share by 6 cents.

The full-year 2005 impact from the derivative restatement that we had

announced in December was $43 million, 11 cents accretive. The situation is

now remedied.

Let me talk about certain operating trends. First asset growth, we had record

new business volume I mentioned and Managed Assets increased nicely in the

quarter by about $1.6 billion with strength in many areas. Managed Assets

ended the year at a record $62.9 billion and that was up 18% from a year ago,

in line with the guidance we gave you at the start of '05.

Without business acquisitions and the leading impact of business dispositions

the year-over-year asset growth was about 10%.

Breaking down the $1.6 billion in fourth quarter growth, our student lending

business grew nicely, up 23% this year and we are very happy with that.

Corporate Finance grew $500 million. We had strong volume across the

businesses, particularly in Healthcare and Communications and Media.

Transportation Finance, trains and planes, increased $300 million on the

delivery of new airplanes and about 3,000 rail cars.

Home Lending increased $1.4, solid volume from our broker network and

higher net portfolio purchase activity.



We had some offsets in the quarter. We had runoff and sales totaling of about

$1.9 billion, $400 million of strategic asset sales. I spoke about $300 in the

micro-ticket business and about $100 million in manufactured housing, a

liquidating portfolio.

We had about a little over $1 billion of season runoff in our retail trade

finance businesses, $700 million or so in factoring and $400 million in

business capital.

And lastly we syndicated and sold about $400 million in loans in Commercial

Finance. And we like our expanded capabilities that allow us to originate and

syndicate.

Clearly it was an active business generation quarter and I think a very positive

one.

Moving on to credit, we charged off about $50 million related to our US hub

carriers specifically Northwest and Delta. We had previously announced our

exposures to those names. There was no current quarter P&L impact from

these write-offs as we had provided hub carrier reserves in previous periods.

We do not anticipate anymore charge-offs on these names.

Excluding those hub carrier losses, net charge-offs were very good, actually

47 basis points, about the same as the third quarter. And net charges continue

to benefit from strong recoveries of about 18 basis points in the quarter.

We did place a lease exposure of approximately $60 million on a power

project on non-accrual this quarter. Even with this non-performing assets

down to 1.18%.



Loan loss reserves at year end were $622 million, 1.4% of receivables. After

the aerospace charge-off which got charged to reserves, reserves increased

about $17 million in the quarter, reflecting our risk evaluation. And it was a

provision in excess of charge-offs and it also reflected portfolios acquired.

Excluding the student lending assets which are government guaranteed

reserves of 1.6% or so of receivables, down from about 1.7% or so last year

because of the strong credit quality.

Margin. Fairly stable, stronger operating lease margins offsetting a slightly

lower lending spread on mix changes. Core non-spread revenue almost $270

million, 38% of total revenues and that was up nicely from Q3. And we had

broad based fee income strength across the businesses as well as equipment

gains on sales across our leasing businesses. We had very little securitization

gains. I think it was another high-quality revenue quarter.

Operating expenses. Excluding those two charges on lease termination and

litigation I mentioned were higher by about $9 million sequentially. And that

reflects our sales build out and some year-end seasonality. Specifically

employee costs were up about $7 million or so on higher comp accruals and

higher headcount. Other marketing support expenses, including building our

salesforce.com tool for our sales management initiatives, increased about $4

million in total. And these increases were offset somewhat by the impact and

savings from restructurings we did earlier in the year consolidating back

offices. And we saw some improvement in the efficiency ratio.

A little more on income taxes. Excluding the impact of the deferred tax

liability reversal I spoke about earlier, our effective tax rate was 34% this



quarter, continuing to reflect improved profitability in our European

businesses, specifically Aerospace and Vendor Finance.

For 2006 we expect the income tax provision to be 33% or better.

Capital. Very strong generation, over 14% in the quarter and our capital ratio

improved. And we have about $500 million or so in excess capital over our

bottoms-up analysis.

We made very good progress in the quarter gearing up the infrastructure of

our Utah Bank and getting it ready for its growth. Right now we're at $400

million in deposits and by year end we expect to build it to $2 billion or so.

And we got a good start to the 2006 funding. We actually prefunded some of

our debt refinancings next year, about $2 billion of prefunding in the fourth

quarter.

For your earnings per share calculation and ours, share count declined about

2.8 million shares as we completed our share repurchase program.

A couple of businesses I'll comment on. Aerospace - core aerospace returns

were in the double digits and they've improved nicely post 9-11, particularly

in '05. And returns on new deliveries are at 15% or greater.

Market lease rates are up nicely from a year ago, although we see a leveling

off. But expiring leases are still repricing better for CIT. At year end we had

nine aircraft on the ground, all of which had commitments. And we look into

'06 our forward order book is 14 new planes with 9, I'm sorry, 19 new planes

with 14 placements. So this sector is showing some renewed strength.



Home Lending. I mentioned we had record Home Lending volumes in the

quarter, broker originations up 22% versus the prior year. And we were active

in the whole loan market taking advantage of attractive pricing and quality

portfolios. We bought about 1.7 and we sold about 1/2 billion home lending

portfolios.

Credit quality continues to excellent in the portfolio with charge-offs less than

100 basis points in delinquencies at about 2.8%.

Student Lending, I am very pleased. We had three objectives for the year and

we made very good progress on the three objectives. We signed over 300 new

schools this year and our school channel volume was up 68% from '04. We

are servicing about $1.5 billion of loans at CIT now and that's growing. And

after being earnings neutral in the first quarter, the acquisition has been

accretive each quarter thereafter.

With that color on the numbers, I'd like to now turn the call back over to Jeff.

Jeffrey Peek: Well thank you, Joe, and good morning everyone. As discussed, we delivered

another solid quarter to end a very successful year. In 2005 we built the

foundation for long-term profitable growth while demonstrating outstanding

agility in achieving our immediate business objectives. And I believe that our

results speak for themselves.

We delivered strong earnings, exceeded our target return on tangible equity,

significantly increased our origination volume, grew our managed assets and

meaningfully increased our dividend.



And 2005 was a year of action where we successfully executed on the five key

elements of our business strategy. And let me just share some of the

highlights of that strategy with you.

The first is sector alignment. During the year we developed and implemented

a rigorous strategic planning process to focus on the most attractive

opportunities in the commercial middle market.

Throughout 2005 we accelerated the divestiture of underperforming

businesses to reinvest the capital in high return, high growth businesses.

Today we're actively managing our portfolio, prioritizing our investments and

working to improve our return on equity.

We've also chosen to focus on businesses that will deliver predictable and

acceptable returns. And let me just give you a couple of examples of that.

As Joe mentioned, in aerospace in this current quarter we made a significant

investment with the commitment to purchase ten new Boeing 737 800 aircraft

for approximately $600 million. Upon delivery these assets are projected to

earn returns well in excess of 15%.

The build-out of our healthcare group – it’s nearing completion and we’re

pleased with its execution in the marketplace.

Organic asset growth in Healthcare in the fourth quarter was almost $400

million in new assets, bringing total assets for the group to $1.5 billion, triple

from a year ago. And we expect this accelerated rate of growth to continue in

2006 as CIT remains significantly under-invested in this sector.



The integration of Student Loan Xpress is going very well. The business is

accretive ahead of schedule. We had a 50% increase in 2005 volume to $2.5

billion and we now have $5.3 billion in managed assets in this sector. We’re

optimistic about the future of this business.

The next element of our strategy would be client focus. And during the year

we strategically reorganized and restructured our business model around our

clients, including creating industry-specific sales teams with deep sector

knowledge. We’ve also invested significantly to broaden our products and

services so that we can better serve our customers’ expanding needs.

Our Communications, Media and Entertainment group is a good example. We

brought together several complementary units that were spread across the

company, increasing their collective traction, and then recruited senior

industry experts in professional sports and cinema to fill gaps in our sector

coverage.

Now in every business unit at CIT, we continued our emphasis on our sales

initiatives with a more customer-centric perspective. We’ve reenergized our

sales efforts with a focus on building long-term profitable relationships.

In 2005, we increased our sales force by almost 200 professionals and we

increased our origination volume excluding factoring from $24 billion to over

$31 billion.

And finally we implemented Salsforce.com across all of CIT, giving us our

first comprehensive client management system.

The third element would be productivity. We’re streamlining our back office

expenses to reinvest capital into the customer-facing segments of our



business. In 2005, we took out more than $45 million of our expense run rate

to offset sales recruitment and business build-outs.

Now, we’ve also consolidated our leasing platforms in Specialty Finance both

in the US and internationally. And in Commercial Finance, we’ve

implemented a shared services platform and made progress on improving the

efficiency of our Equipment Financing platform.

Fourth would be our continued strong risk management. And the numbers

bear this out. We intent to have state-of-the-art risk management. Our

reserves are strong, non-accrual levels are low, and the quality of our book is

high.

We’ll continue to invest in our risk management capability to maintain our

exceptional record here.

And finally we’re committed to improving our capital discipline. We will

attempt to remain smart and thoughtful in deciding where to invest our capital

to produce the best returns.

Our risk based capital allocation system has been the cornerstone for

realigning our portfolio of business and improving our returns. And while we

continue to vigorously work for improved debt ratings, we’re also dedicated to

returning capital to the shareholders.

Yesterday we announced a 25% increase in our dividend and we have

resumed our normal share repurchase now that the $500 million share

buyback is complete.



Now with all that was accomplished in 2005, we’re extremely optimistic

about our prospects for 2006. Our strategy has a clear vision for our five

operating groups in 2006. In addition to robust business plans for each of

these units, we look to capitalize on opportunities between groups.

These potential transactions can be consummated through more collaboration

across CIT and the additional financing and advisory services we added in

2005.

I also want to remind everyone that as we stated at Investor Day, the new

financial reporting under these operating groups will be rolled out in 2006 and

thus become effective as of January 1.

Now let’s take a quick look at the outlook for each of our operating groups.

First Corporate Finance – Corporate Finance will grow at a relatively rapid

pace in 2006. The products and services we added last year plus the

introduction of our industry verticals will generate additional revenue as we

continue to develop our preferred lender position.

Here our focus will be on the growth areas of healthcare, financial sponsors,

communications, media and entertainment, and energy.

Second is Global Trade Finance, our factoring business. Global Trade

Finance will maintain its record of consistent growth and high returns in 2006.

Its market share will remain very good, bolstered by expansion in non-

traditional sectors of the economy in Asian and European accounts.

Third is Transportation Finance, our planes and trains business.

Transportation Finance will grow faster than CIT as a whole next year due to



its scheduled delivery of new aircraft and railcars. And results will improve

significantly because of increased lease rates, continued high utilization

factors, and expanding asset levels.

Fourth is Vendor Finance. In Vendor Finance, we are combining all of our

vendor business within one organizational entity to offer our customers a

unified set of solutions.

Given the power of our platform, we will continue to drive global

partnerships, extend our regional mandate, and grow our portfolio of smaller

dealer/vendor relationships. In fact, over 500 new vendors were signed in

2005, with more than 300 in the second half of the year alone, providing

further evidence of this group’s momentum.

And finally, Consumer/Small Business. Now the three units comprising

Consumer/Small Business are home lending, SLX, and SBL. And all of these

units will benefit from a significant increase in sales force headcount in 2006.

Through our expertise in origination, processing, and credit, we anticipate

growing each of these businesses to a pre-tax net income level of $100

million.

And as you’ve heard, we have specific 2006 business objectives for each of

these five operating groups. In addition, across the entire spectrum of CIT

businesses, we have three high priority programs for the year – strengthening

our sales culture, expanding internationally, and upgrading our technology

platforms.



In 2006, we will build upon our intensified sales effort through a commitment

to better sales force execution. We’ll expand our sales force from 1275 to

1575 professionals, roughly a 23% increase.

Utilizing Salesforce.com, we will increase pipeline visibility and improve deal

close rates with the goal to grow revenue 10%. We’ll drive a more rigorous

and disciplined approach to the sales process using our Chief Sales Officers,

the Sales Council, and performance dashboards across all of our business

units. And we’ll improve our client focus with specific account plans for our

top 50 customers.

In 2006, we look to expand our international business with increased

contribution to net income. Now new factoring clients will be added in Asia

and Europe for Trade Finance, capping the expertise we acquired with

SunTrust factors.

The majority of our new aircraft deliveries will be leased to non-US operators

out of our Dublin Aerospace Center. We anticipate leveraging our London

Corporate Finance business with increased usage of our UK banking license.

And a combination of our various vendor operations will enable us to extend

existing customer relationships into Europe and Asia.

In 2006, we’ll continue to upgrade our technology platforms to improve

productivity and response time. We’ll increase the efficiency of our

operations and call centers with standardized technology and best practices.

We’ll continue to evaluate efficiencies across our leasing systems and

centralize our commercial lending activities on a single lending platform.

We’ll implement an improved automated credit decision system across the

organization and in Student Loan Xpress, we’ll bring our servicing in-house.



Now to close, let me reiterate that the fourth quarter was a strong end to an

excellent year for CIT. In 2005, we increased the growth potential in our

portfolio of businesses, vastly improved the scope and focus of our sales

forces, and made significant progress in reorganizing our business model.

We are well positioned to take advantage of the best opportunities in the

middle market.

In 2006, we will continue to set ambitious financial goals four ourselves.

Earnings per share will increase from a core base of $4.16 to a range of $4.75

to $4.85. And note that’s before expensing for stock options.

Return on equity will increase to 15%. And as you may recall, we have made

return on equity, not return on tangible equity CIT’s critical return metric.

Now the CIT management team strongly believe that we’re poised to be the

leading global finance company serving the middle market.

So with that, let me open it up for questions.

Thank you…

Operator: Again as a reminder if you have a question, please press star then the number

1 on your telephone keypad…

Valerie Gerard: While Mary Ann’s getting our first question together, I’d like to remind the

audience that we’re going to limit the questions to one question per caller.

Thank you.



Operator: Your first question is from (Josh Steiner) of Lehman Brothers.

(Josh Steiner): Hi guys.

Jeffrey Peek: Good morning, (Josh).

(Josh Steiner): My – morning.

My one question I guess is on healthcare, you know. It sounds like the

numbers you gave were pretty impressive so far. It’s up I think you said $1.4

billion.

I’m wondering if you cold talk a little bit about the growth outlook in that

business, the ROE in that business, and whether that business is an area where

acquisitions would make sense?

Jeffrey Peek: Sure.

Actually – I think I said $1.5 billion in terms of year-end asset levels on the

balance sheet.

You know, a year ago we had about 35 people doing that business. It was

strictly one product, which was vendor finance for CAT scan machines. And

we currently have about 150 people doing that business.

As (we’ve) said, originations in the fourth quarter were just short of $400

million and I think commitments that we approved were $550 million.

So we still maybe have 2-1/2% of our assets in a sector of the economy that is

close to 20% of the US economy. So we think there’s a lot of upside



potential. And most of the build-out is complete in terms of headcount. And

the profitability on these deals is good. It’s passing our test.

So we think that’s going to be one of the real drivers for the next few years in

terms of increased profits and increased revenues. And the deals they’re

doing now are meeting the corporate hurdle rate of 15%.

(Josh Steiner): And is that a business you see potentially making acquisitions in the future?

Jeffrey Peek: Well, we did in July. Healthcare Business Credit.

Valerie Gerard: Okay, thanks a lot, (Josh). Next question please.

Operator: Your next question is from Laura Kaster of Sandler O’Neill.

Laura Kaster: Yes, good afternoon.

In looking at your reserve levels, Joe, I believe you said excluding the student

lending reserves you were 1.6% versus 1.7% last year.

Joe Leone: That’s correct.

Laura Kaster: Can you give us an outlook on where you see (your) credit quality? It seems

like your credit quality performance is much better than what you had guided

to before.

And, you know, excluding the mix, can you tell us where we might see

reserve levels going forward and how you see the credit quality of your

portfolio?



Joe Leone: Yeah, as I said, we were very happy with where we ended the year on the

credit quality spectrum. I think our, you know, our thoughts stay the same as

what we had, at the Investor Day in November (Larry) addressed the market at

our investor day.

This year I would say in the fourth quarter our charge-off number was

outstanding at under 50 basis points excluding the airplanes for a moment.

And, you know, our longer-term target is 80 basis points or so and we see ’06

continuing – we see ’06 to be higher than the 50 basis points that we ran, but

not quite at the 80 basis points in terms of the long-term target.

Having said that, we’re very happy with where we ended the year in terms of

credit markers.

So, you know, the objective is always to do better, and the objective is always

to get the money back that we lend. And we’re working hard at that.

Valerie Gerard: Thanks, Laura. Can we have our next question?

Operator: Your next question is from (Mike) Hodes of Goldman Sachs.

Michael Hodes: Hi. Good morning everyone.

My question is on sub-prime mortgage, really just trying to get a better sense

for your appetite for growth. It seems like in the fourth quarter you guys were

very opportunistic in bulk acquisitions. Yet you also seem to be indicating an

appetite to increase the sales force.



And I was just hoping you could give us a little more color on what you’re

ultimately trying to do, how big you want to be, what kind of growth (that)

you’re looking for.

Jeffrey Peek: Sure. I think you had that right, (Michael), in that we did see some very

attractive bulk acquisition opportunities in the fourth quarter at reduced

premiums. So we did take advantage of that.

But I think that masked probably the build up in the sales force, which in

terms of our organic originations during the year we've moved pretty much

from something close to 200 million a month up closer to 300 million a

month.

So we're making good progress in building that sales force out. We're now up

over I think 200 originators from maybe 150 eighteen months ago.

At the percentage of the portfolio, where it is now, I think going forward we

look for less bulk purchases and more organic origination.

So I think we're pretty comfortable with its proportion now. And I think we’d

be surprised if it grew beyond that.

But we are making a lot of progress in building and upgrading the sales force,

and have big goals for them in 2006.

Michael Hodes: Got you. Thanks a lot.

Valerie Gerard: Thanks (Mike). Can we have the next question please?

Operator: Your next question comes from Chris Brendler of Stifel Nicolaus.



Chris Brendler: Hi, good morning. Thanks.

Jeffrey Peek: Good morning.

Chris Brendler: I just want to quickly - I guess I'll limit myself to one question here. If you

could provide a little more detail on the sub prime business. I think it

obviously makes sense to take advantage of difficult market conditions when

home pricing falls like it did in the fourth quarter.

But I'm just trying to think about better - think about your strategy as it relates

to, you know, how you want to hold these assets. You haven't done a

securitization in quite some time. And the margins still aren't that great

relative to your cost of funds basis as I calculate on home equity.

And can you just give us a sense, if you could, how you see that? And then

how you see taking advantage of potential for continued difficult market

conditions if they occur in that business? And also update us on where you

stand relative to interest-only loans and resets that are coming in '06?

Jeffrey Peek: Thanks for that question.

Joe Leone: Okay, I'll take it. I'll start. I think I remember it all, Chris. You know, we

saw very high-quality opportunities, as (Jeff) said, in terms of the portfolios

that were offered to us. They had very strong FICOs. You know, we have

explained to the market we have a target demographic. And these

demographics met or exceeded that.

Here's a metric I think you should know. When we look at how these

portfolios performed, sort of on a static basis, I'll factor out to the growth in



'05. The portfolios that we bought for example in '04 have less than a 1%

delinquency and about 25 basis points in losses or less. I think that's, you

know, a positive and a very attractive performance. That's number one.

Number two, the sale - the buys and the sells are a function of us and Tom

Hallman and Randy Chessler managing to their risk profile. As I said before,

we have a targeted demographic. And the sales balance out the purchases and

the broker activity from the channels to balance out the risk.

Third part of the question that I recall you asking is securitization.

Securitization still, of home lending loans, is still on our liquidity strategic

drawing board so to speak. Because we think it's important at some point to

prove the liquidity of the assets. And I sort of like the fact that the market,

you know, takes them and churns them and looks at the overall quality.

Having said that, we haven't done it in a while. Because the cost of that has

been well in excess of our unsecured costs. So we look at it from a liquidity

and a cost point of view.

The other dimension I would give you is if - because of the long-term nature

of this, and because of the prepayment volatility in this asset class, that we do

such a securitization, we probably will keep the accounting on balance sheet

as we do our student loans.

The last aspect of the question is returns. When we look at the returns on the

current originations they look good. The portfolios are actually in excess of

our hurdle rate slightly. And that's a function of good credit quality paper, our

ability to finance it, our excellent servicing costs. And when you look at the

overall returns, I know in the quarter we disclosed our number of consumer

ROE. And that's got a lot of dimension to it. First, it's got the build out of



student lending, which while accretive all year has - clearly is not at our

hurdle rate yet. That's number one.

Number two, in the quarter we saw some increased prepayment activity on

some of our older, home lending securitizations. That we took care of. So

that's sort of hurt the returns.

And number three, and we're looking at this from, how we disclosed this and

how we measure it. Some of the high-cost debt we have done is trapped in

those returns. It is going to be there for awhile. So you know, you got to look

at the history of the numbers and - versus the current marginal profitability.

So as we look at today, the returns still look attractive. I think the opportunity

is that there's some fallout in the marketplace. There's some improvement in

fundamentals. We think we're a good fundamental lender. And it looks

attractive to us right now.

And that answer is probably is a little longer than your question, Chris. I hope

I covered it all.

Valerie Gerard: Thanks Joe. Thanks Chris. Can we have our next question please?

Operator: Your next question is from Joel Houck of Wachovia Securities.

Joel Houck: ...in parts with the divestitures and the building up of the sales force. And

maybe you could talk about how you guys, you know, the efficiency ratio,

where you guys came in at the end of the year relative to kind of your

expectation, and then what you think you can achieve in 2006?



Valerie Gerard: Yeah Joel, it's Valerie. The first part of your question cut off. Would you

mind recasting that for us?

Joel Houck: Sure. There's a lot of moving parts this year with the divestitures, as well as

kind of building up the sales force. And so it's kind of difficult to see, you

know, if you hit your targets on efficiency. And so my question is, where did

you come in relative to management's expectation? And kind of what's the

expectation in '06?

Jeffrey Peek: Well I think that we've taken it as a higher priority to build out the sales force.

I think we were happy with where that's going. We were happy with volume

being up. If you look we had a - you know, second and third quarters we were

right around 8 billion in our origination volume each quarter. And we got

close to 10 billion this year. And you know, we're looking to do better next

year. So we're happy with that.

I think probably of the financial metrics for 2005 I was probably a little

disappointed that we didn't make more progress on the efficiency ratio. But

we did come close to taking 50 million of the run rate out. A lot of that went

into building the customer-facing parts of the business.

So I think directionally we would like to bring down the efficiency ratio in

'06. But I think improving the ROE and improving the earnings are probably

higher priorities for us.

I don't know, Joe, if you want to add or...

Joe Leone: Yeah. What I would add, (Jeff), is, you're right, Joel, there were a lot of new

moving pieces in the year, and I think good moving pieces. And we tried to

explain them clearly in our release. And hopefully you got them all. But



when we look at the year, which had some moving pieces, we look at the

efficiency ratio net of our current operations, and how our real operating costs

are. And we were a little north of 41% on the efficiency ratio. And we

wanted to get below 40. And I think I mentioned at Investor Day, some of

that is investment, some of it is mix. But clearly as Jeff said, we'd like to

continue to move that in a positive direction.

Valerie Gerard: Thanks Joel. Next question please.

Operator: Your next question is from Kristina Clark of Wachovia Securities.

Valerie Gerard: Chris, are you there?

Kristina Clark: I'm here. Can you hear me?

Valerie Gerard: Yep.

Jeffrey Peek: Yes.

Kristina Clark: Okay, sorry about that. Just wondering if you could elaborate a little bit more

on some of the current characteristics of the home loan portfolio, such as

average FICO, percentage of IOs, the rate reset dynamics, and LTVs?

Joe Leone: Yeah. I guess that was an element of Chris's question earlier as well...

Kristina Clark: Yeah. Just following up on that. Yeah.

Joe Leone: Yeah, the current FICO is still in the range of what we've spoken to you on

about, in the 635 or so area. And the percentage of IO’s is about 10%. And

the overall demographics are basically in line with what we have shown you



quarter to quarter, and will continue to do that with regards to the overall

portfolio. I guess we've seen some increase in the average loan size over the

last few quarters. But again, overall portfolio is still in the low $100,000 or

so.

Kristina Clark: Do you test the portfolio for rate resets?

Joe Leone: A couple of things that we do. Yes. And we underwrite with rate resets in

mind. And I think Tom Hallman shared with the group, or the market, at

investor day, another stressing we did which is on value. You know, we talk

about our LTV being in the 80% or the high 70s or 80 percent area. And

that's based upon original LTV. When we look at a snapshot of our portfolio,

along the lines of what I discussed earlier, factoring out some of the current

origination, and looking at current LTVs, based upon current market prices

and our loan balances, we're at about 70%. So that gives us another factor that

we stress test for.

Valerie Gerard: Great question. Thanks. Next caller please.

Operator: Your next question is from Eric Wasserstrom from UBS.

Eric Wasserstrom: Thanks. Joe, I just want to get a little clarity on the capital. Because I'm still

a little confused about how the tangible equity base grew so quickly in the

quarter.

Joe Leone: Yep.

Eric Wasserstrom: End if you could also just explain - because you know, looking at the dividend

increase for next year suggests that on the dividend alone your capital payout

ratio will be something like 16%. And could you give us a sense of what that,



you know, what the payout ratio could total, given, you know, a fairly

aggressive growth strategy?

Joe Leone: Okay. Yeah, let me clarify the capital ratios. We did print the stronger

number this quarter relative to last quarter. And clearly is a function of very

strong earnings and retention of capital. We did increase the dividend by

25%.

Additionally, as some of you or most - all of you are aware, we have been

working on our deferred tax liability controls. We mentioned this in our 10-K

and we've updated our disclosure in every 10-Q. And we're winding that

analysis down. And as a result we booked a benefit on some of our equity

finance hedges that - tax benefit that went through OCI or other

comprehensive income that actually increased equity this quarter. It will stay

in equity, but it's not part of our run rate in terms of capital generation.

And then there was the last part of the question on dividends. The target or

ratio we have is about 15 to 20 percent. And I see that staying in that line.

And if that's not responsive, Eric, just follow up with a call.

Eric Wasserstrom: Thanks very much.

Valerie Gerard: Thanks Eric, we appreciate it. Any other callers?

Operator: Your next question is from David Hochstim of Bear Stearns.

David Hochstim: Hi. Wonder if Joe could provide some of more color on something that was in

the release about the med finance margin? And just give us a sense of how

much of the year-over-year decline was a result of higher rates? And kind of

what the outlook is in '06 for the margin if short rates continue to rise?



Joe Leone: Sure. I don't have the granularity handy. But I'll give you the concept in our

'06 outlook. Clearly we had significant improvement in the leasing portfolios.

And by that I mean specifically rail car and airplane. One, the rail cars are

coming in at very nice rates. We see some leveling in that improvement. And

airplanes are all repricing at better levels than what we wrote or underwrote

post 9/11.

Additionally, our margin was helped a bit in the quarter by our actions last

quarter to sell and dispose of certain nonstrategic assets, meaning airplanes

and - certain airplanes and certain manufactured housing assets.

Offsetting that, or some other factors are, we did sell a business that had

relatively high margins. So we lost one month of that. And we did grow our

student lending portfolio that has some offset.

So those are some of the pluses and minuses. We continue to run a fairly

balanced and matched rate book. Having said that, clearly a flat yield curve

and increase in short-term rates hurts a little bit. But I think I laid that out

hopefully clearly at our investor day. And there's been no change in our

funding positions.

As I look forward, we do have some expensive debt maturing next year. Most

of that expensive debt matures in the first quarter of next year.

David Hochstim: Of '06, or '07?

Joe Leone: I'm sorry?

David Hochstim: The first part of '07, or '06?



Joe Leone: Of '06. Actually, I think in and around - we have $2 – 2.5 billion of fixed-rate

debt maturing for the year. Most of that is in Q1. And it's carrying spreads of

well over 150 basis points. So we'll get some benefits from that.

We do see continued competitive pressures in our lending businesses.

Factoring all that together, our outlook for our plan, and we've been scrubbing

this and updating it based upon yield curve movements, we still look at

margins basically at the same levels that we've put up over recent quarters and

guidance we've put out on '05 in the mid-part of the year.

So I'm sorry I don't have it in basis point terms. But that's sort of it in

qualitative terms.

Valerie Gerard: Thanks David. Next question please.

Operator: Your next question is from Moshe Orenbuch of Credit Suisse.

Moshe Orenbuch: Thanks. Just wondering if you could relate a little bit to the volume growth

levels to growth rate in commercial lending as we look out into 2006?

Understanding that factoring was obviously seasonally weak in this quarter,

but as we look out over the next couple of quarters?

Jeffrey Peek: Moshe, we're losing you a little bit. Are you talking about seasonality? Or

are you talking about the split...

Moshe Orenbuch: I mean exclusive of seasonality which obviously effects the fourth quarter you

had very good volume growth and even adjusting for the sales in Commercial,

you know, Commercial loan growth this quarter was kind of, you know, it was



there in certain pockets and not there in others, maybe you could give a little

more detail as to what was underlying those numbers?

Jeffrey Peek: Well, I think we obviously factoring the big pay-down as we come into the

Christmas season. So high watermark for it is probably early fourth quarter.

Our business capital has the same kind of cleanup at year-end in terms of the

facilities. And also, a good concentration in Retail which also has that.

What we’re finding with Student Loan Xpress is September and January, the

beginning of semesters are big volume months for them. I’d say in the

Transportation Group, you can chart that pretty much by the deliveries on the

planes and the trains. So hopefully that’s helpful.

Valerie Gerard: Thanks. Next question.

Operator: Your next question is from (Ben Segal) of Winchester Capital.

Valerie Gerard: Hello, (Ben)? Okay, I guess we’re not picking him up. Can we move to the

next caller please?

Operator: Okay. Your next question comes from (Samuel Crawford) of Legg Mason.

Valerie Gerard: (Sam), are you there? Well, we’re really hitting them out of the park today.

Next question please.

Operator: Okay. Your next question is from Stephen Schulz of KBW.

Stephen Schulz: Can you guys hear me?

Jeffrey Peek: Yes.



Valerie Gerard: We can hear you, (Steve).

Stephen Schulz: Hey, you’ve got a live one on the line. I just had one question, if you could

follow-up in terms of some more color on the Healthcare Finance business?

You know, I think you had mentioned about a year ago you were kind of

specifically just doing some vendor finance stuff with cat scans. What kind of

products are you guys doing there? Or how has the product set kind of

expanded since you’ve added Healthcare business credit?

Jeffrey Peek: Well, the product has really - the suite of products has really expanded beyond

just the equipment, the vendor business, into an asset-based lending business

for some of the medium-sized healthcare providers, that’s really what we got

in the acquisition in July of healthcare business credit. We’re also beginning

to see some opportunities to finance facilities, whether they’re assisted living,

clinics, that type of thing. So it’s a much more broad-based area.

We’ve actually advised a couple of healthcare companies on their sale so this

has been an area where we’ve had some early wins in terms of our strategic

advisory. So it’s much more of an industry group built around four or five

subsets within the healthcare sector all the way from assisted living to big city

hospitals. So we see it as a big growth opportunity, Stephen.

Valerie Gerard: Thanks, Stephen; we appreciate it. Next caller please.

Operator: You have a follow-up question from David Hochstim of Bear Stearns.

David Hochstim: Yeah. I wonder if you could just talk to us about loan syndications and

remind us what the limits are and maybe how many deals like that were done

in the fourth and the third quarters and the businesses they were in?



Jeffrey Peek: Joe, this one.

Joseph Leone: Sure. I’ll give you a little color in that. We had built out this capability and

rather nicely and a lot of the units are tying into the syndication function

which is now centralized, we used to do it in a more silo basis and Rick

Wolfert and his Commercial Finance team have put it together in one

syndication fund function under Bill Swenson and Capital Markets.

And in the quarter, we did about $300 million of syndications and it was

basically throughout the Corporate Finance businesses. Like our core

business, called Business Capital, Energy, and Infrastructure, some Equipment

Finance on the diversified side, and that totaled about $300 million in the

quarter.

I think philosophically, what we’re looking for and what we’re looking to do

is we do have some hold limits, you know, per loan. And so it depends on the

industry that we like. Our sweet spot had been somewhere in the $25 to $35

million area but that moves based upon their credits evaluation of an industry,

sector, and outlook.

I think we’re going to use this group, this capability a lot more as we go

forward because one of our strategies is to leverage the origination force more

and manage risk by selling off and other dimension and we’re going to use the

syndication function. So continue to look for a significant amount of

syndication activity that offsets some of the volume growth, it just doesn’t

show up on balance sheet. What we weigh, whether the return and risk is

better on balance sheet or off. So look for more commentaries that as we go

forward, David.



Valerie Gerard: Thanks, David. (Annie), next question please.

Operator: Your next question is from (Bob Napoly) of Piper Jaffray.

(Bob Napoly): Thank you. Good morning. Just would like maybe some more color on the

planes and trains business. I think I heard you say that you expected net

income to grow faster than the assets, significant faster if I heard that

correctly. I was wondering if you could talk about the growth of those - the

asset growth and the rail business and the pricing improvement that you’re

seeing, like the gap between current prices, lease prices, and those of leases

that are running off?

Valerie Gerard: Okay, thanks, (Bob).

Jeffrey Peek: Sure. In the rail area, 2005 was a big year for us. We went from about 55,000

cars at the beginning of the year to about 83,000 rail cars. At the end of the

year, utilization was very high, 99% really I would say 100% given that we

have to move the cars around from time to time, to at least turnover. And

lease rates, in some cases, we even had some doubles.

Now I think we’re seeing - the rate of increase on new lease rates is probably

not increasing at a 20% annual quip where it was. But we still are seeing

significant improvements in lease rates as they come off lease. You know,

we’ve got about 20% of the portfolio turning over every year. So we’re still -

we’re seeing significant increases in that.

You know, we anticipate this year probably going over 90,000 cars and that’s

been an area where - the M&A market has been good, there has been some

portfolios around. So we like that business a lot.



On the aerospace, I think this year we’re scheduled to get another 21…

Jeffrey Peek: Nineteen jetliners and I think we have about 35 leases turning over during the

year. The vast majority of those lease turnovers will stay with the operators.

And, you know, we’re passed the point where all of our leases now are

coming off post-9/11 levels. So we are projecting an increase in lease rates on

almost all renewals we have. And I think as Joe mentioned in his remarks, the

new planes we’re getting - we project that they’ll do better than 15% return on

equity.

Valerie Gerard: Thanks very much for the question, (Bob).

(Bob Napoly): Thank you.

Valerie Gerard: Next caller?

Operator: Your next question is from (Samere Gogle) of Bear Stearns.

(Samere Gogle): Hi, thank you. I think you had talked about your outfit for growth in the

Commercial Finance Group and assets and you talked a little bit about your

syndication activity. I just wanted to clarify in your Equipment Finance

business, and I apologize if I missed it, but the managed assets - I think were

declined sequentially in Equipment Finance, and I just want to clarify, is that

because of syndication activity?

You had mentioned some asset sales specifically, which assets were those and

could you talk about your outlook for some of the - your Construction

industry and demand trends there?



Joseph Leone: Sure. I don’t know if you’re looking quarter to quarter or year to year but

clearly, we’ve had a declining asset balance in our Equipment Finance

business, some of it has to do with transfers of things like gaming and

healthcare to the industry verticals where we think we can manage it in a more

effective way or a more efficient way. And in the year, we sold our business

aircraft portfolio for about $1 billion. In the fourth quarter, we sold another

couple of hundred million dollars of assets. As we manage the business, right

size the business, look at our risk evaluation in terms of where we want to put

our capital. And so we had sales.

Additionally, the velocity of the portfolio, the prepayments fee of the

portfolio, is relatively high, not higher than it’s been but it’s relatively short-

term paper. At the same time, we’ve been restructuring the sales force,

downsizing the sales force to outlooks and certain industries; for example, in

construction and certain other diversified manufacturing industries. So I think

we’re rightsizing the sales force. With that change comes a little momentum

blip and I think we’ve had a momentum slowdown a little bit in our sales

origination in that business.

Having said that, I think the outlook for ’06 on the Construction and

Infrastructure side is positive. Our outlook is positive. What we need to do is

find our way to get our fair share of that paper with the right credit and the

right pricing. So that’s a little bit where we are.

Clearly, it’s a business that’s declined in assets, it’s one that has strategic

focus. I think if you look at the ROE year to year, we’ve made some nice

progress there. The question for ’06 is how do we get it to the next level, and

it’s more efficiencies and improvement in the sales force and the organization

efficiency. Thank you.



(Samere Gogle): Perfect. Thanks, Joe.

Valerie Gerard: We’re just about at the end of our hour. Do we have any other callers on the

line?

Operator: Yes. You have a question from Chris Brendler of Stifel Nicolaus.

Chris Brendler: Hi, a quick follow-up, guys. On the Home Equity business, if you could just

talk more strategically, it’s a little bit of a challenging time for a lot of the

independent players; you guys had the benefit of a strong balance sheet,

you’ve been very selective, you’ve been in the business for a long time.

Do you see continuing to add capital to this business and grow this business if

you find the pricing for some assets in the marketplace as attractive as you

have - and basically, are you optimistic on the Home Equity business as we

enter a period of likely housing slow down?

Jeffrey Peek: Well, Chris, I think we’re optimistic on the business. You know, in a lot of

our businesses, when some of the more aggressive players leave the

marketplace, that’s been a pretty good time for us to come in with a little bit

more of a value orientation on the business. And, you know, I don’t think

we’ve ever suggested in Home Lending that we were going to be the most

aggressive originator out there, - that’s just not our DNA.

So I think part of your question, if I got it right, was if we can’t get the returns

in that business, will we continue to put more capital into the business, and the

answer to that is no.

Valerie Gerard: Great, thanks, Jeff. Thank you everybody. That’s the end of our hour. We

appreciate that you’ve called in today. We would welcome you to call



Investor Relations should you have any more questions. You can reach me,

Valerie Gerard, at 973-422-3285 and you can get Steve Klimas at 973-535-

3769. Thanks and have a great day.

Operator: Thank you for participating in today’s conference. You may now disconnect.

END

cit q4transcriptr1

Economy & Finance

valerie gerard1

joe leone

quarter results

quarter earnings result

active quarter

good morning

ct confirmation

yearend earnings conference