cit transcriptq4edited

CIT Moderator: Valerie Gerard

01-19-05/10:00 am CT Confirmation # 3102269

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 January 19, 2005

11:00 am CIT

Operator: Good afternoon, my name is Kim and I will be your conference facilitator. At this time I would like to welcome everyone to the CIT Year-End Earnings

Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer period. If you would like to ask a question during this time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question press star then the number 2 on your telephone keypad. I would now like to turn the call over to Ms. Valerie Gerard, Senior Vice President of Investor Relations.

Valerie Gerard: Thank you Kim and good morning everyone. 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 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 Web site located at www.cit.com.

With that, I’d like to introduce Jeff Peek, our Chairman and CEO. Jeffrey Peek: Thank you Valerie and good morning to everyone. To start, I’d just like to

report very strong results for the fourth quarter and for the entire year of 2004. And I’ll just take you through several of the highlights here.

Our core earnings per share were 91 cents for this quarter versus 75 cents for

the fourth quarter of 2003. Now, this is the seventh consecutive quarterly increase in core earnings that we’ve had at CIT.

Return on tangible equity increased to 14.5% compared to 13.1% for last

year’s fourth quarter. We had strong new business volume. New business volume was up 32% over

the fourth quarter of 2003 and up 16% for the entire year versus 2003. In the quarter managed assets increased $1.1 billion and were up $3.7 billion

or 7.5% for the entire year. Credit trends remain favorable with core charge-offs at 52 basis points. Our balance sheet metrics continued strong with the ratio of Tangible Equity

to managed assets at 10.7%. Our year-long effort of redeploying capital in the higher return core businesses

continued with agreements to sell off a majority of our liquidating manufactured housing portfolio and substantially all of our private equity limited partnership interest.

Looking back over 2004, I’d like to discuss the progress we’ve achieved in

our three most important initiatives. Those critical initiatives are: first, improving capital discipline; second, creating a sales and growth culture; and third, enhancing our profitability.

First, on capital discipline. This year we introduced our new risk adjusted

capital allocation methodology and this has literally changed the way we look at our businesses. We’ve been able to liberate capital and redeploy it into higher returning businesses. TRS and Argentina were businesses we wanted to get out of, we lacked scale, and we got out of them.



Our liquidating portfolios of recreational vehicles, marine, manufactured housing; We accelerated those divestitures so we could take the capital and put them into other businesses. And then what we call venture capital, both our direct investments and our private equity limited partnerships, we divested these so we could redeploy the capital. The results have been that over the last seven quarters we’ve had an improvement in return on tangible equity of over 350 basis points.

Our second initiative was creating a sales and growth culture, one which would rival in intensity our credit and risk culture. This summer we held our first sales summit which resulted in initiatives to

promote cross selling, information sharing and general collaboration across our business units. And we’re also actively recruiting a Chief Sales Officer.

We’re moving forward by organizing our businesses around key industry

sectors and key customer areas, and that’s being led by our new Vice Chairman, Rick Wolfert. We have a new industry focus in healthcare and communications, media and entertainment. And we’ll probably roll out several more verticals during the year.

As a result, origination volume was strong across the businesses, up $7 billion

from 2003. And third, improving profitability. While we’ve made strides with

streamlining our businesses during 2004 we obviously need to focus on improving our operational efficiency in 2005. As many of you have noticed, total operating expenses were up $25 million over the third quarter. The reasons for the increase varied from acquisition expenses at CitiCapital to greater incentive-based compensation, to greater expense on a higher level of recoveries. But the reality is that our expenses are too high. And all of us are very disappointed in the efficiency ratio remaining above 40% and we’re going to do better in 2005. Joe will discuss projected improvements and operating expenses in a minute.

Now, let’s look at the highlights of our individual business units during 2004. First Commercial Finance, and as you know this is the portion of our portfolio

businesses that’s now managed by Rick Wolfert. In Commercial Services, it was a record year for our Factoring unit, highlighted by the successful integration of HSBC factoring and GE factoring. Our factoring volume is approaching $40 billion now annually. Also we tapped new market segments away from our traditional textile and fashion industries. This would be electronics, refactoring and furniture. These were all up year-over-year, over 50%. Factoring assets ended the year at $6.2 billion which was down



somewhat during the quarter predictably as retailers liquidate their inventories. Profitability over the year that was improved greatly due to larger commission and fee income.

Now, let’s talk about Business Credit. They had originations of nearly $600

million in the quarter which was strong, although I will say asset levels continue to be offset by high levels of prepayment and general liquidity in the marketplace. We did make good progress on our European lending initiative. We received our UK banking license and also recruited a leading asset based lender to head our London based operation. The media and communication sector within Business Credit had solid deal flow resulting in substantial fees and good margins. We’re also focusing our efforts on building out our Corporate Finance business which services private equity sponsors in the US and Europe.

Now, let’s go to Equipment Finance. Their net income doubled to $25 million

for the quarter. Credit has greatly improved in this unit with charge-offs at 23 basis points. And we are targeting the construction industry and industrial sectors as the primary focus of Equipment Finance going forward.

Capital Finance. Let’s talk about Rail. Having the youngest fleet in the

industry during an economic expansion means the demand for our railcars remains very healthy. The utilization rate here is in the very high, 90%. We added seven new customers in the fourth quarter and lease rates continue to improve. And as you might expect we’re pushing for longer lease terms at this point in the cycle.

On Aerospace. We had improved performance in what I think everyone

would concede are difficult market conditions. We will receive 18 new jetliners in 2005. We’ve already placed 14 of those. We will receive four in the fourth quarter of 2005 and we expect those to be signed in the first quarter of this year. We have two aircraft on the ground, currently one of which is covered by a letter of understanding with a new lessee. Lease rates have stabilized. Rents on new production planes are back to 9/11 levels. Out of production aircraft are still 20% to 30% below their historical level. Our focus is on opening up new markets like China, India and the Middle East. And in the fourth quarter we added eight new customers to bring our base of lessees to 92.

Now, let’s turn to the Specialty Finance businesses that are managed by our

Vice Chairman, Tom Hallman. They had an excellent 2004. Major vendor turned in another solid quarter with volumes up 9% for all of 2004. Profitability increased due to higher margins, excellent credit costs and an 11% jump in major vendor earning assets. Within DFS, our joint venture with



Dell, we are experiencing very good demand for personal computers as well as high levels of repeat business from existing customers.

Now, let’s talk about International. We had growth of 40% in managed assets

in International this year, reflecting the CitiCapital Europe acquisition, and we’re ahead of schedule in integrating that business into our Dublin base. Profitability here continues to improve and returns are approaching corporate targets. Also we found the Pan European platform is critical in attracting new vendors. We’ve signed up OCC copiers and Schindler Lifts.

Small–to-mid-ticket leasing. Assets grew here 15% over the year due to the

GTS acquisition from GATX and volumes were up 11% reflecting an intensified business development effort of 20 of our new sales professionals which have signed up 11 new vendors. In the quarter, profitability declined somewhat due to the charge-offs related to the NorVergence situation.

In Small Business Lending, we had a solid fourth quarter. The volumes were

up 7% relative to last year and we expanded the number of offices where we do business. Credit quality remained good with a noticeable improvement in past dues. And for the fifth year in a row we were ranked as the largest SBA lender and the #1 volume lender to women and minorities.

In Home Equity, overall volume nearly tripled to $1.6 billion in the fourth

quarter. Managed assets in Home Equity are up $1.8 billion from a year ago and credit quality remains good with delinquencies at 2.3%.

During 2004, we made acquisitions in our Specialty Finance unit (two of

them) GTS leasing from GATX and CitiCapital in Europe. And these acquisitions broadened our portfolio. They diversified our customer and dealer base and they added significant resources to our sales force in the US and Europe which we think is very important. And just two weeks ago we announced an agreement to acquire Educational Lending Group which will be a solid growth oriented business for us to add to our Specialty Finance group and a diversification in that portfolio. We’re in the tender offer now and the deal is expected to close in February. When you view this acquisition with our liquidations of Private Equity and Manufactured Housing, EDLG illustrates the redeployment of capital into higher growth businesses with favorable risk return profiles. We like the market for student lending and we like this company. But let me tell you what we think CIT brings to EDLG.

First, we bring the resources to expand their sales force, to accelerate their

conversion to internal servicing and also to promote new products that they had not been able to promote in the past. Also, we give them a chance to invest in new markets such as the plus loans, education loans to graduate students and package loans for professionals once they graduate from school.



Also, we bring funding flexibility to hold the assets on the balance sheet, to sell them in the market or potentially support them with deposits. Also, we think CIT’s extensive banking relationships will sharpen EDLG’s focus on buying and selling student loan portfolios in the second market. Finally, we have a valuable customer list which can be utilized to create strategic marketing alliances with existing clients of both firms.

Now, why do we think we can compete in this space? Like with many of our

businesses, we feel the bank competitors are distracted. Student lending is one of many products for them and they frankly lack the focus on this particular market. Also, we think the market is broader than generally defined. We compete in the school channel but we also find very appealing opportunities in the channel for consolidation loans and also PLUS loans.

We think together CIT and EDLG have efficient funding, reputable and

experienced management teams, proven ability to react to the market in a very flexible and nimble manner and size and scale to build this market in a rapidly developing sector.

Now, I’d like to turn the discussion of our financial results over to our Vice

Chairman and Chief Financial Officer, Joe Leone.

Joseph Leone: Good morning everyone. Thank you Jeff. Just staying at 30,000 feet for one minute we had a great year and it was capped by a great quarter. We grew the business. We grew the profits. And as Jeff said, we significantly improved returns. Those are the bottom lines. But let’s get into some analytics. I know you need some more color on the earnings for the quarter and hopefully my commentary is focused on the areas you have focused on.

First let me give you some more color on the three items that added an

additional 4 cents to our GAAP earnings this quarter. Jeff mentioned some of them.

Consistent with our strategy to accelerate the liquidation of non-strategic portfolios when we compare the valuation we see in the marketplace to sell versus liquidation scenario, we contracted to sell over $300 million of our Manufactured Housing portfolio in December. We transferred the assets to assets held for sale, wrote them down $16 million pretax at year-end and this reduces our fees and other income. The valuation we used was based upon the sales price or expected sales proceeds. And we’re closing on this transaction in January. We also contracted to sell substantially all of our Venture Capital fund investments as Jeff mentioned, roughly $160 million. Again we wrote the portfolio in the fourth quarter to the approximate sales value. In this case, the



pretax loss is $14 million. We show net venture capital losses as a separate line item in the income statement. We expect to close this transaction in April. These two sales free up approximately $200 million of capital in our risk adjusted methodologies and we will redeploy that to the Student Lending acquisition we made, EDLG. So this capital earned little today and is being redeployed to a more predictable, non-cyclical business which we believe will generate good risk adjusted returns.

The Telecom reserve. We’ve been working that portfolio for 2 1/2 years as

you know. We’ve written off or restructured most of the problem accounts. The portfolio is $335 million, $21 million is in non-performing. Given the low level of non-performers, no charge-offs in the fourth quarter and as we look forward into 2005 we have lower charge-off forecasts. So we reduced the Telecom reserve by $43 million; $23 million remains.

Now, let me get into some of the drivers behind the operating results.

Asset growth. Jeff mentioned, assets grew over $1 billion in the quarter and that includes covering $550 million plus of seasonal run-off in Factoring and $120 million in run-off in prepayments and Business Credit, as we do have seasonality in the run-off.

Let me reconcile managed asset growth to organic growth for the year.

Managed asset growth for the year was $3.7 billion, about 7.5%. Jeff mentioned that. During the year we made two acquisitions, $1.3 billion GATX and the CitiCapital Europe. We sold or liquidated $500 million of liquidating portfolios from both owned and managed securitized assets. Earlier we sold our TRS business, $120 million. And if you remember into the second quarter we had two unusually large syndications that we did for risk purposes and that was about $150 million. If you net those acquisitions and dispositions, growth from our core businesses was about 6% for the year, about where we were expecting it to be.

Moving to credit quality, you saw the credit quality numbers. Recoveries were very strong in the fourth quarter, $27 million, 30 basis points. We had increased efforts and expenses on the collection front but it paid dividends. And if you look at it sequentially we had $18 million in recoveries in Q3 which was nice, 22 basis points but Q4 was even stronger.

Margin. The net finance margin was down slightly and we did have

refinancing benefits. While they are decreasing, we still have refinancing benefits and I’ll talk more about that in a moment. Yield related fees were down quarter-to-quarter. Down $6 million and that was about 7 basis points



decline in margin so that’s why the margin was down sequentially. As I’ve said, margin has a lot of dynamic to it but simply put, that was one of the significant reasons.

Lease margins improved very nicely in the quarter, up 35 basis points to about

6.5%, particularly strong in Air and Rail. Rental Income was up $12 million in the quarter due to new placements, working at getting past new rents and improving lease rates in rail. Depreciation expense you’ll see is a bit lower and that’s driven by lower depreciation in our Small and Mid-ticket leasing business.

Non-spread revenue appears flat quarter-to-quarter, but we did put the $16 million Manufactured Housing write down through Fees and Other Income. So if you take that out Fees and Other Income were up driven by very strong fee generation, up about $11 or $12 million in Capital Finance, Equipment Finance and Business Credit.

Operating Expenses. We’re working hard here and we’re very disappointed

here. But I want to give you some numbers. Our efficiency ratio is 43% excluding the one-time items, the losses on the sales of those two portfolios. We’re 43%, but it’s still higher than it was in Q3. Expenses sequentially were up $25 million. Let me give you some analytics.

Headcount was flat quarter-to-quarter, other than the staff we brought on in

the CitiCapital acquisition. The CitiCapital acquisition added $6 million to the expenses this quarter. We will complete the integration of this portfolio onto our platforms in the first half of 2005.

Jeff mentioned that higher incentive compensation accruals occurred this

quarter and that was tied to the higher volume and revenues. And those compensation accruals were up about $7 million in quarter on a 20% quarter-to-quarter increase in volume and fees.

Credit and collection expenses were higher. We think that will turn as the

portfolio continues to improve in quality but we did have a significant number of recoveries. We spent some money to get them as credit collection expenses actually increased in the quarter by $4 million.

We had a severance accrual, in Specialty Finance, put up $2 million as we

restructured some of our back office operations. We will get payback on this in 2005. This is similar to what we did in the Business Credit unit a few quarters ago.

We did make some enhancements to our operating leases enabling us to

improve revenues. And we continue to have higher professional fees to my



disappointment, due to compliance initiatives. That was up about $2 million in professional fees.

So those are the reasons for the $25 million quarterly increases. Expenses were up and we’re not happy about it. Some of the expenses did contribute to the quarter’s earnings, either higher recoveries, margins, etcetera and others will contribute in the future. Having said that we have a lot of work to do.

As I look forward to the first quarter of 2005, excluding the impact of EDLG,

I expect first quarter dollar expenses to be lower than they were in the fourth quarter. And when you think about some of the items I just described I think that will give you some of the reasons I have that belief. As I look to the full year and we’ll be talking about this more as the year develops. We have several initiatives, major initiatives under way to reduce costs. We’re looking at the number of leasing systems we have and can we consolidate them. We’re doing processing efficiency reviews at all our platforms and we will consolidate platforms. As I said earlier, we like to make acquisitions and put them on our platforms, and we will do so in Europe. More on our outlook on expenses later.

Funding. We had a great year in the capital markets on the debt side. We

issued $12 billion in unsecured term debt, $4 billion in the asset back market and we lengthened maturities and tightened spreads both on an absolute and a relative basis to our competitors set. And we further diversified our investor base which is critical in our strategy in terms of growth. I’m particularly pleased with the geographic diversification. We tapped a non-US market this year for over 20% of our funding and that’s up from less than 10% last year.

Some going-forward numbers, as we look to 2005, we have $7 billion of term-

debt maturing, $4 billion fixed which has a rate of Treasuries plus 125 basis points and a little over $3 billion in floating, LIBOR plus 59 basis points. So we continue to see some refinancing benefits there.

Total maturities next year are lower than they were the last two years and

that’s a function of us having lengthened maturities. When I look at the total year I would expect funding needs in the $10 billion

plus area. Capital. A little more color on the risk-adjusted capital allocations. You will

begin to see in 2005 as we implement that into a external reporting. We’ve analyzed the capital requirements of all our sub-segment portfolios. As you know or may know the allocations will range depending on the risk we see in the portfolios and will range from a low of 2% against the government backed



student loans to 100% against any remaining equity investments. But most of our asset classes fall in the 6% to 14% allocation range.

When we pro-forma our year-end 2004 balance sheet for the closing of the

portfolio sales, Manufactured Housing and Venture Capital and the acquisition of EDLG, when we look at our requirements based upon this risk-adjusted methodology, we think the requirements in the 9% plus area utilizing this risk-based approach. And we have reviewed and will continue to review our conclusions on this and our allocations on this with the agencies.

Controls and Procedures. We have been reporting certain income tax controls

as a reportable condition in our Qs. We’ve been rebuilding the tax function. We’ve been hiring and improving the detailed tax basis reporting that’s necessary under current standard which is a tax balance sheet by individual asset and liability.

As you know, Sarbanes-Oxley and PAOB have raised its standards with the

respect to evaluating controls for the year end reporting. And that requirement is that you must a very high assurance, a very high probability of detecting relatively small differences.

As we are still reconciling this detailed asset and liability balance sheet for tax

purposes, we decided we will likely classify the tax controls as a “material weakness” in conformance with that new standard. Having said that, we are confident that our effective tax rate based upon our jurisdiction by jurisdiction analysis and 2004 tax year provision calculations are appropriate.

The outlook for 2005. We’ve completed our 2005 financial plan, so we

thought we would share with you some highlights today. I’ll do some numbers. Jeff will talk about some business color and initiatives.

Some baseline assumption. We see the economy having a momentum into

2005. And we expect GDP growth in the 3% to 4% area. We assume interest rates will rise as the forward curve predicts. So view our guidance and our color in that context.

2005 EPS growth, will come in above our 10% target. More specifically we’re

looking for mid-teens EPS growth. The assumption there is a relatively stable share count. And this excludes the impact of any GAAP change like expensing option which we would plan to adopt in the second half of the year. Expensing option is not a big deal for us. Our current estimate costs us 2 cents a share per quarter.



Asset Growth. We’re looking for organic asset growth in the same range as this year. And we will continue to supplement and look for bolt-on acquisition.

EDLG will boost overall asset growth in 2005. We expect the impact of

EDLG on earnings to be neutral this year. Margin. We’ll continue to benefit somewhat from the refinancing of the high

cost debt. I gave you the numbers earlier. That will be offset by the competition from the higher liquidity in the market and rising interest rates to some extent. If you pro-forma for EDLG, that will reduce margins by 25 basis points. But we also like the non-spread revenue we get out of that portfolio.

Credit quality. Looking for charge-offs in the area of 80 basis points or 70

basis points factoring in EDLG. Efficiency. We are managing to get the efficiency ratio under 40% in 2005

while dollar expenses are likely to increase due to acquisitions, inflation, EDLG. We expect to make dollar progress in Q1 versus Q4 as I mentioned earlier.

Balance sheet, continue to look for balance sheet strength, strong reserves and

liquidity. We will maintain over 9% capital against managed assets following the acquisition of EDLG. And that’s consistent with the numbers I mentioned earlier to you.

Those are some of our financial highlights. Hopefully that helps you with your

analytics. And let me turn it over to Jeff for some additional business color.

Jeffrey Peek: Thanks Joe. Joe has given you some quantitative guidance for 2005 and I’ll try to provide some color. I would, just as an overview, say that our main priorities will be the same as they were in 2004, maybe in a different sequence. But we see those as improving operational efficiency, focusing on organic growth and furthering our capital discipline.

As I look down the road in 2005, I would emphasize that the current business

and economic trends remain favorable for each of our major businesses as the economy continues to expand. So let’s run through that from a high level first for Business Credit.

We think Business Credit is going to benefit from a broader international

origination effort. We’ve opened in London and also expanded marketing activities through the creation of various industry verticals.



Commercial Services, the new business backlog remains very strong here due to it’s market leadership and marketshare. And the penetration of new markets as I said earlier, has been very favorable.

Capital Finance, in Rail we expect another strong year of profitable growth. There’s high demand for the railcars and locomotive. On Aerospace, particularly when you think that it’s 75% outside the US, we see a year of improved profitability and also initiative to penetrate new markets.

In Equipment Finance, the focus is going to be on volume growth. We do see

positive signs in their core markets of Construction, Industrial Equipment and Business Aircraft.

In Specialty Finance, we see another good year in 2005. Obviously Tom and

his people will be focusing on the opportunity provided by the acquisition of EDLG. Major Vendor, we’re looking to benefit from a recovery in business spending as well as the greater acceptance of Internet Protocol Telephony which will help several of our joint ventures. In the International sector, we see growth driven by vendors needing a global financing solution. In Small-to-mid-ticket, the outlook’s good. We’re going to penetrate the direct market with new programs to take advantage of the sales force we acquired from GATX. And in Home Equity, the overall mortgage market remains healthy, although originations are down from the peak refinancing period.

In addition to that, we expect to make significant progress in our sales

initiatives. Our industry verticals will help us with our growth initiatives by getting closer to the clients. We also expect to align our organization around the sales force to a greater degree. And that’ll be driven by a recruitment of a Chief Sales Officer. Also, we’re focusing more on the large industrial sectors: Healthcare, Media, Telecom.

Finally, our acquisition strategy. Our acquisition strategy remains on track.

And we will continue to explore bolt-on opportunities that will lend breadth and depth to our growing business. We view bolt-ons as being the vast majority of our acquisitions going forward.

So in summary, we feel like we have a strong economy behind us. The

outlook is good. We’re on track to reach a return on tangible equity of 15% by year-end and also achieve mid-teens percentage increases in earnings per share in 2005.

Additionally, we have strong momentum on our sales and growth initiatives.

But we feel that all the pieces are in place for CIT to rise to the next level. We’re looking to find new areas of profit and growth in the year ahead as we



continue to build on our position as a leader in providing financial solutions to our clients around the world.

Now with that, I’d like to open it up to questions.

Question: I wondered if you could just clarify what the enhancements to the operating leases were and then the 6% loan growth in 2005, how much of that would be expected from Home Equity? It was a pretty big contributor in 2004. And I have another question about the asset sale.

Answer: Yes, just first on the operating leases, in order to move leases and get them out

on rentals on planes and trains, you need to configure them for the new lessee. So they relate to, principally to the air and the rail portfolio, that’s number one.

Number two, we expect growth in Home Equity again next year or in 2005.

2004 was a particularly strong year where the interest rate environment was. Given that interest rates will in our scenario, likely to increase, we would see some of that growth coming off the 2004 highs. But we’re looking for growth across all our channels. It’s not a specific one-channel growth strategy. And as I said earlier, that’s the organic growth we’re looking for, the current platforms which we should enhance with some of the initiatives described and some of the vertical industry strategies we have targeted for 2005.

In the second half of the year, I think we saw some particularly attractive

opportunities in Home Equity to purchase some portfolios at prices and credit combinations that we hadn’t seen for a while.

Question: Okay and then can you just clarify what changed over the last month and a

half besides the EDLG acquisition that led to the accelerated liquidation of the Manufactured Housing and the Venture Capital Investment?

I guess my sense was before that that was something you were planning but

you were waiting as values recovered and didn’t seem inclined to take a loss.

Answer: Okay, I’ll take that. We track that continuously. And we felt as we got a bid towards the end of the year, we felt that those bids were closer to and in some cases, better than our assumptions of holding and liquidating over time.

So we look at the current bid on a loan sale or a current bid on an equity

investment sale and we compare that to the IRR we see as we liquidate the portfolio over time. And as you know, both those asset classes have long maturity horizons. Some have no maturity horizon. So that’s the analysis. And the question to be specific, the bid improved.



Also on the Private Equity, we had a commitment to fund another $100 million of that. So we felt it was urgent that we get out of that commitment.

Question: You haven’t disclosed the buyer on the MH portfolios, just one quick note.

And if you did, I missed it. But if you could repeat that. And then Joe on the margin, you said the benefit in 2005 will be from less

high cost debt. Can you also breakdown any of the other moving parts and how the EDLG acquisition will impact that and your thinking and how the student loan mix will be funded what part of securitization, what part on balance sheet going forward?

Answer: My memory’s not good enough to remember all that. So where do we start?

We start with the buyer. We did not disclose that name. You did not miss that, so we did not disclose that.

Secondly, the margin benefits, the dynamics on the margin, I did say that we

would continue to have some refinancing benefit. I gave you the numbers so you can do your calculations. It’s several basis points. There’s a lot of expensive debt yet to refinance. Some of it has long maturities but we have about $7 billion in 2005. I mentioned that. So that’s one item that will move.

We expect improved rental rate particularly in Capital Finance. We expect

that trend to continue. That’s two. Thirdly, there’s a mix shift. We see good growth in some of our Specialty Finance businesses, Home Equity. The Small and Mid-ticket business should have nice growth as well as the International business as we’ve put on and integrate the CitiCapital organization. So, we’ll have some mix shift. And generally the Specialty Finance businesses have slightly higher general spread because their losses are higher in those businesses being small ticket.

What else can I tell you? We do see some impact of higher interest rates, the

way we finance the company as the curve flattens or as short-term interest rates increase a little bit. We have a little interest rate sensitivity but not significant. So those are the dynamics we see.

On the yield-related field side, we would expect stable to slightly lower yield

related fees in the margin as pre-payments would decline with a higher interest rate. I don’t know if I got it all, but that’s what I remember you asked.

I missed the EDLG part of it. I think I mentioned that since EDLG has about a

1% spread, we will make nice fees in non-spread revenues in that business. But since that is at 1% spread, as we layer in that business to our overall portfolio. That would have a dampening effect of about 25 basis points or so.



Question: Okay and then just one quick last one. When you said the culture during the course of 2005 will change, I think I heard you say more around a sales culture, looking to hire a Chief Sales Officer. Can you just talk about how that compares to the previous model and what are some tangible or measurable things we might see from that?

Answer: As you know, I think the way we’re organized now is each of the sales forces

are pretty much resident within the business units in the silos. We really don’t have a sales executive who’s more senior in the organization than any one of the business units. So just in a simple way, if we’re approaching the corporate market, we tend to have - large corporation tend to get called upon by six or seven different people from CIT each selling their own product. So we really have a structural flaw in that it’s very difficult for us to organize collaborative selling across a number of products calling on the same company.

So we’re very interested in recruiting a Chief Sales Officer that would help us

with sales management, team selling, trying to make sure that we’re exploring the right markets and for each of our businesses.

We’ve pretty much left that to the business unit CEOs and they’ve generally

done a good job. But we think we can get state-of-the-art, we can get best practice. So we’re deep into looking for that person. And that would be a very senior role within our organization.

Question: Good morning. The earnings guidance or the earnings growth guidance, what

are you guys assuming as the base of earnings of 2004? Are you assuming an operating number? Are you assuming the actual full year reported number that you’re giving the mid-teens guidance off of?

Answer: Three dollars and thirty-five cents is the core operating number. Question: Okay, thank you. And then within the context of as you gave guidance also for

charge-offs in this 80 basis points I thought I heard correctly that for quite some time you’ve been able to bring down reserves. At what point does that stop or should we expect that trend to continue at more or less the same pace in 2005?

Answer: Well, we did reduce reserves on some specific portfolios this year whether it

be Argentina, it got redistributed and charged-off or Telecom which improved significantly. Generally, what we look at - I’ll repeat this - is when we look at our loss reserve every quarter, what we look at are a variety of metrics, going forward losses, level of non-accruals, level of impaired loans as defined under the FASB standard and our feeling about the specific high risk sectors.



And as we’ve looked at that at the end of this year of every quarter, we felt our loss reserves are very strong relative to the continuing improvement in the portfolio. And what we said is that we think the reserve is very strong and we’d like to see the growth take up some of the room in the reserve. And I think you start to see a little bit of that with the loss reserve decreasing a bit in terms of percentage to outstanding.

I would expect as we go forward that the growth that we anticipate would take

up some of the reserve that would free up from the improved credit quality statistic. But if we get the growth we have, we will continue to need to maintain a loss reserve in an area based upon our historical coverage ratios.

So I know it’s a little bit of this and a little bit of that, but the loss reserve

analysis is a very scientific analysis we do at the end of every quarter depending on the risk we see in the portfolio. And if that risk continues to come down and continues to improve, we will have a reserve that we can re-establish for growth and we’ll have to take them back.

Question: Okay great. And just a housekeeping question, is there any chance to have you

run through all the metrics of the guidance that I may or may not have gotten quickly as you gave it, any chance you guys will put that out in writing or as part of a transcript?

Answer: Yes it will be in a transcript.

Question: I think this is always my area of focus with you, but I’m going to try again.

Operating Lease Appreciation. As I look at the mix of operating leases in the portfolios, sequentially there’s no change but yet we see a pretty significant decline in the operation lease depreciation rate which really boosted your operating lease margin significantly. I think you mentioned Small ticket. Can you just give me a little more color there?

Answer: The overall macro trend has been that we’ve been growing the longer term

assets in the operating lease portfolio and shrinking the shorter term assets in the operating lease portfolio.

So when that happens, and the way I’ve said this a few times and maybe it’s

not the right way of explaining it, for $100 of 20 year assets you put on, you have $5 of depreciation. For every $100 of three-year assets that run off, you have $33 in depreciation that runs off. So those two dynamics have a very major effect on the percentage of depreciation, asset mix. That’s number one.

Number two, the Specialty Finance operating lease portfolio continues to be a

smaller part of our overall operating lease portfolio. But even more so, the performance of that portfolio has been very, very good. Actually we’ve had



some significant or very pleasing gains at the end of some of that equipment coming off lease. So as we put on new equipment, we have to take that experience into effect when we set our new depreciation going forward with equipment because it’s sort of mark to market on the new equipment you put in. So that would lead us to slightly slow down the depreciation a little bit that we’ve been taking or increase depending on the direction of values. The over-riding answer to your question though is mix. We see more long term assets and less short-term assets.

Question: Okay, but I’m calculating the mix in this directly as unchanged sequentially,

yet the operating lease appreciation as a percentage of average operating lease assets went from 12.5 last year to 11.8 this quarter. Obviously, the gains at the end are a good thing. It means you’re being conservative. Did you say it’s a retroactive change to the entire portfolio or it’s just…

Answer: No, no, no. No, two things. One, we had a lot of growth in the airline portfolio

towards the end of the quarter. So that may upset your analytics a little bit. And at the year-end there’s a hard evaluation of the depreciation so you would make some fourth quarter adjustments, not a major magnitude, but that may be coming through some of your analytics. So as we look forward, we would expect the depreciation if Aerospace is the growth and Specialty Finance operating lease declines continue to be lower as a percentage of the portfolio.

Question: Okay. If I take the operating leases out of the margin, the finance margin

metrics aren’t quite so impressive. Just give me additional color, I think you mentioned the competitor environment in your 2005 outlook, what are you seeing exactly in the competitive environment? What I’m looking at is it looks like rates are ticking up on you, but your topline yields not ticking up. Do you think we should gain some pricing buy back in 2005 as the economy is recovering? And then also on the prepayment side, are people being really aggressive chasing business right now and that’s why you’re starting to lose some of these higher paying assets?

Answer: I think actually throughout 2004, one of our real issues in a couple of our

businesses has just been the high level of liquidity. And so if anything, the fourth quarter seemed to be a little bit of a let up at least anecdotally in terms of us being paid out of various loans and that type of thing. I think we’ve been pretty good on the calls about Business Credit doing a great job of originating loans but having that growth not stick on the balance sheet because of a doubling or tripling of prepayment. The liquidity thing and the high level prepaids has been with us all year. I’d like to think that the fourth quarter was a trend that had a little bit less prepaids. It would be both for Equipment Finance and Business Credit. Maybe that was going to tone down a little bit.



Question: Hi, thanks. Just going back to that issue of prepayment, Equipment Finance volume looks like it’s picked up pretty well but the actual balance growth has been less robust. Would that be referring back to the level of prepayment activity you’re seeing?

Answer: Yes I think both Business Credit and Equipment Finance probably. Those

would be the two areas where the prepayment activities have been strong and as a result, the volumes look good but the balance sheet growth has been somewhat dampened by it.

Question: Okay, in terms of where you are seeing a pick up in demand on the volume

side, any particular specialized industry niches that you guys are pointing to on Equipment Finance?

Answer: Corporate Air. Over the last 18 months has been very, very strong going from

where there were corporate jets on the runway to now certain models I think are sold out through 2006 production.

Question: Okay and you had mentioned, just changing directions here. On Home

Equity, you had mentioned that the bulk environment was still pretty favorable in the fourth quarter. What portion of that $900 million in sequential growth, in Home Equity, was from bulk purchases?

Answer: I don’t know the exact number but it was a little over $.05 billion – a little

over $.05 billion. Question: Okay great and then there was just one last housekeeping item. You had

mentioned in the press release the charge-offs related to NorVergence, what was the actual number and dollar number on those charge-offs and then how much exposure do you guys have as of the end of the fourth quarter?

Answer: The numbers in the aggregate, our charge-offs that we’ve taken are about $15 million between the two quarters, $10 or $11 million in the third quarter and $4 or $5 million this quarter. And then the remaining exposure that we have any concerns for are covered through and carved out in our loss reserve.

Question: First question is just on asset growth. Joe, you delineated what you thought

organic growth was and if we strip out Home Equity which perhaps is unfair, it seems like the organic growth was very low single digits. I was hoping you could just expand on why we’re not seeing more momentum in some of your more traditional businesses, i.e. not Home Equity and perhaps some of those prepayments, maybe you could expand on that.

And secondly, just a clarification. In terms of the net interest margin absent

the Education Lending Group acquisition, is it your overall statement that on



balance the margins should be relatively flat with the puts and takes in 2005 versus the exit level at 2004? Thanks.

Answer: Yes, in terms of the growth, I think we had pretty good growth overall - all

year and I mentioned some of the ways we covered the dispositions and the liquidation.

Having said that, when we look at the fourth quarter numbers and that’s what

I tried to give some color on, we had relatively high run-off in terms of seasonality which we’ll build again as the year progresses in both Commercial Finance businesses which are Factoring, Commercial Services and Business Credit. So I factor that into my thinking in the quarter - that we had $700 million plus of liquidations or seasonality run-off that we had to cover in the quarter.

Question: Yes, but I was just looking at it year-over-year and you’re saying $3.7 billion

in overall growth, $1.3 billion acquired. Answer: Yes. Question: Which takes you to $2.4 billion and then of that $1.8 billion came from Home

Equity. And I realize that there’s $500 million or so that was also disposed of that worked against the average but still seems like no matter how you cut it, well over a half of the growth came from Home Equity.

Answer: Yes, and I think it’s unfair for you to throw it out because it is growth and it is

growing earnings and is growing value. But I think if you look at it year-over- year I think in the first half of the year and if I can dial back to a call about six months ago when we didn’t show growth because of a lot of dispositions I think since that time the Commercial Finance businesses have picked up a bit in terms of their growth. We did outline our expectations for 2005 and some of the areas we’re targeting and feeling about 2005.

We see pretty decent growth coming out of Specialty Finance businesses

either out of the Major Vendor programs or the Small and Mid-ticket business. And on the Rick Wolfert Commercial Finance side we think with the strategies that we’re employing and deploying that we’ll see better growth in the Business Credit business and we’ll start to see improved growth in a more focused Equipment Finance business be it construction or general manufacturing.

Question: Okay that’s helpful and then just on the margin? Answer: Yes, I would think that’s sort of the way I’m thinking about it and we’re

looking at our plans and remodeling and modeling.



I mentioned some of the factors. Interest rates will rise in the short-term curve

will cost us a few basis points, right? Lower prepayment fees will. We will get some benefits for the refinancing and it is competitive out there particularly in the Commercial Finance arena. In our Business Credit environment in terms of spread, but we’re changing the mix a bit. We’re looking to grow some of the Specialty Finance businesses that have slightly higher margins like the Small and Mid-ticket area or the SBA business.

So I think when we factor all that in, putting EDLG to the side, we’re looking

at a margin that’s flat to our more recent trend over the last six months of the year.

Question: Okay and then just lastly, Jeff mentioned in passing, potentially deposit

funding some of the EDLG portfolio and I was hoping you could elaborate on that. I know you just went live with the bank in the UK, but talk about deposit funding.

Answer: Well, I think with - these are very high quality assets so we now have two

banks, we have a bank in the UK and we have a bank in Utah. Obviously, we have to apply to the regulators and that type of thing. But these are 100% - 98% government guaranteed assets that are generated out of EDLG so that would be a place where we might get attractive funding for this portion of their originations on the balance sheet.

Question: Thanks. Just with respect to the margin guidance, you mentioned a forward

curve, are we to assume that about another 100 basis points by the Fed is what you’re modeling in your internal model?

Answer: It’s 100 basis points or slightly more. Question: Okay. You mention your efficiency ratio under 40%. I’m assuming that’s by

Q4 2005 not for the full year? Answer: No. What we’d like to do is get the efficiency ratio for the year under 40%.

So I recognize we have work to do, but that’s our goal for the 2005 planning horizon.

Question: Okay and then the 15% ROE target you put out an 8-K in December which,

and maybe I read it wrong but it seemed to imply that you were going to revisit that ROE target. Seeing how you’re at 14.5% already and given the overall position, the company is in 15% by Q4 2005 seems conservative.

Answer: I think that we’ve laid out 15% as a goal and we still haven’t gotten there and

we’d like to get there and once we get there we’ll reconsider whether that’s



appropriate or not. But we’re confident we’re going to get there and that’s really that.

Question: Okay, you’ve laid out a pretty good roadmap for 2005, but now that you’ve

been there for awhile, what do you think are the biggest challenges as you head into 2005?

Answer: I think the plan we’ve laid for 2005 and the guidance provided are ambitious

and challenging. I think as you all have reflected the credit improvement, financing improvement, got us through 2004. I feel very good about cleaning up the balance sheet this year and the capital redeployment. I think we’ve done well on that. The organic growth obviously is something that we’re focused on and I’d say managing the operating expense at the same time that we’re trying to build organic growth I think we’re focused on that but that will be a challenge.

The one thing I’d say is we’ve really held headcount flat except for picking up

about 150 people in CitiCapital. So if headcount was going through the roof I’d probably be less enthusiastic about our ability to make our plan that Joe articulated getting the efficiency ratio for the year down below 40%. I’ll just add that is the one that we all get paid on so it has quite a bit of focus here.

Question: Thanks a lot. I just had a couple of points of verification. I was wondering if

you are funding anything right now with deposits and if not, how long do you think you set up that type of funding or default bank as far as Utah Bank? And what type of pricing trends have you been seeing with respect to the bulk purchases of Home Equity?

Answer: On the first question it’s dominimus in terms of our deposit funding. We do have a bank in Utah and dominimus in the $100 million area so it’s not impactful on our overall funding equation yet but as Jeff described we’re evaluating different asset classes to see where we should take that.

Question: Do you know how long…? Answer: And on the Home Equity pricing, we can answer it this way, I think it’s been

attractive to us in that it gives us our targeted risk-adjusted return of 15% or greater when we’ve been looking at these portfolios. So we look at the portfolio, they generally meet our overall FICO in overall credit screens, and based upon the loss assumptions we assume, which are very similar to what we assume on our broker network origination business, then we’re looking for 15% ROE or greater and they do achieve that.

Question: Do you count those bulk purchases in your organic growth?



Answer: Yes. Question: And on the deposit funding, how long do you think it would take to set up that

funding source? Answer: We have to get assets that qualify and then we have to have the systems that

work and move the assets or the assets being originated through a different entity. So there is some setup but the overall mechanics are in place. It’s a question of us making a strategic decision and then putting resources to it. So look for more guidance on that in 2005 as we work our way through it. We’ve actually had it for three years now.

Question: Thanks. I was wondering if you could expand a little bit on the capital issue.

You talked about the risk based capital framework, is that something that you’ve gotten the rating agencies to agree to? And now that that’s in place and you’re still more than 100 basis points better and change the way you are acting going forward?

Answer: Yes, let me clarify. I don’t think we’re 100 basis points better because we

need in the pro-forma and the acquisition we’ve already decided to go forward with, which is EDLG. When we factor that in, we have a nine handle in front of our leverage ratio, so that’s number one.

Number two, we have had fulsome dialogs with the agencies and we will have

our normal annual reviews at the beginning of this year with them and I think it’s been a very favorable discussion. I think they look at the asset classes from a risk weighted perspective exactly the way we do. Now whether they agree with 6% for this or 8% for that, I think on balance and overall I think we’re in pretty good agreement.

More specifically and more recently we had a very good dialog with all the

agencies relative to the capital allocation we make on non-guaranteed student lending or unguaranteed for that matter student lending. And we threw out our ratios, our 2% on the guaranteed and 6% or something greater on the unguaranteed if we decide to go forward with that and they were very much on board with those numbers.

So I think the dialog has been healthy and as described and driven, I think the

discipline which we’ve really put in place internally in our acquisitions and our measurement of businesses to stay in or get out of has been very helpful during the course of 2005. And as you see the numbers in 2005, it’s been helpful in 2004, continue to be in 2005 and as I said before, you will begin to see the different leverage loads on the business segment in the public reporting starting with the first quarter Q. So hopefully you’ll find that useful as well.



Question: I had just one quick follow-up on the airline business. Am I correctly hearing

a bit of a change in tone? It seems like in the past couple of quarters you’ve said well we’re not committing a lot of new capital there. We’re waiting to see if pricing comes back to a point where we can get acceptable returns. It seems like this time you’re talking more about entering new markets and new lessees and that sort of thing. Is there a little bit of a shift going on?

Answer: No, no, I think the environment may be a touch better but we’re just talking.

Our discussion of new markets and new lessees is really just a sign of confidence in our ability to place the new aircraft and we’re 12 months ahead in terms of placements and that type of thing. But we’re still working off our order book from three or four years ago and I think everybody knows that we have planes that we’re going to get this year and in 2006. So there really hasn’t been any change in our view and if there were we would certainly announce it.

Question: Thanks. Just two quick questions, one’s just a follow-up on a question. At

what stage would you consider, perhaps if a rating upgrade is not forthcoming redeploying that excess capital in other ways?

Answer: We view ourselves as being well capitalized at this point and we like our

levels of capital for where we are in the cycle. I’m not sure we would view ourselves as having excess capital at this point.

Question: Okay and secondarily just given your comments a few minutes ago that ex-

EDLG the margin would be largely flat with this year. I’m still confused about why the earnings growth is going to be roughly twice the level of the balance sheet growth. Is that stemming entirely from the operating leverage that you anticipate on the efficiency ratio?

Answer: I think it’s a couple of things. One, we said 6% asset growth plus bolt-on

acquisition opportunities, right? So you’ve got to factor that in. Number two, you mention the operating efficiencies that we need to drive, getting 42% to 40% and then third, the one ingredient that you need to look at is we do have a lot of initiatives to continue to increase the non-balance sheet sources of revenue. So we would anticipate a growth in non-spread revenues that are independent of the asset growth and that’s not an equation that we’ve given any modeling advice on but you can look at fourth quarter trends and the trends we had all year and make some educated guesses there.

So it’s assets, organic plus bolt-on acquisition opportunity, it’s some operating

efficiency as we’ve described, and lastly it’s improvement in generation of more non-spread revenue.



Question: And the primary sources of that non-spread revenue is what? Answer: We’ve challenged all our businesses to create non-spread revenue sources,

whether it’s cross-selling a customer to another unit with other services and can we get fees on things and value that we’re providing to the customer or business strategies that are based on selling our services or selling the value-added we do rather than our balance sheet and generating assets that we may not like from a risk-adjusted return basis but the market may have some more liquidity or higher liquidity asset type work. So there’s a lot of initiatives in every business. Rick Wolfert and all his businesses and Tom Holman and all his businesses as well as part of the EDLG acquisition has non-spread revenue generation. So it’s a charge throughout the organization.

Question: I was wondering if you could address the percentage of your Home Equity

growth that was brokered versus originated directly and what your expectations for that mix is going forward? Thanks.

Answer: When you say brokered I guess you mean bulk portfolio acquisitions. I don’t

have the specific numbers. It would be over $1 billion of acquisitions during the year but I don’t have the specific number.

And as we look forward, as I said earlier, we would anticipate the overall

Home Equity originations declining somewhat given the interest rate environment, having said that, we could offset that by expansion into new markets. So I’m sorry I don’t have the specifics on that but it’s somewhere over $1 billion of portfolios bought during the year.

Question: My question is regarding Education Lending. There’s a little confusion

regarding whether that it is a strategic focus going forward, education as a sector. Do you view that as a focus going forward and your growth plans for early education sectors are more towards origination or syndication? And could you comment on the competitive landscape as well?

Answer: Well, we clearly think it’s a strategic opportunity for us or we wouldn’t have

stepped out of our existing footprint. We think it helps reposition us for the future in terms of what we think is potentially the fastest growing asset class in financial services and very low risk. So clearly it’s something we think is strategic.

One of the points we were trying to make in our prepared remarks is we think

that there’s several opportunities there for us over and above the in-school channel, the consolidation loans, PLUS loans, 2,800 campuses around the country. So we tried to pick a company that had skill and experience in generating loans in all of those channels as opposed to just one.



One of the other things we got was an unrivaled Web presence through Campus Dirt.com and the FinancialAid.com. So, we expect to generate assets out of all three of those channel and we’re excited about it so it’s clearly a strategic acquisition for us and one that we think will pay return going forward.

Question: Do you foresee doing some more acquisitions to bulk up any of the three

channels that you talked about? Answer: I think at this point we probably need to focus on Education Lending and

make sure we fully understand their potential. We can, as I think we’ve said, we continue to look for bolt-on acquisitions. If you go back before Education Lending I think the last five acquisitions we did were all bolt-on and that’s where the majority of our M&A work is going to be in sectors where we’re already a leader.

Question: And will you tolerate dilution for any of the bolt-ons if you find the right

opportunity going forward? Answer: I would say we’d have to look at that on a case by case basis but I think it

would be very rare that we would tolerate dilution on a bolt-on. Jeffrey Peek: Thank you. Thanks everyone very much. Operator: This concludes today’s conference call.

END

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