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CIT Group Inc. 4Q11 Earnings Call

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CIT Group Inc. 4Q11 Earnings Call CIT Group Inc. 4Q11 Earnings Call January 31, 2012 8:00 a.m. The following transcript has been provided by a third-party transcription service for informational purposes only. CIT expressly disclaims any responsibility for the accuracy of this transcription. CORPORATE PARTICIPANTS: John Thain; CIT Group Inc;Chairman, CEO Scott Parker; CIT Group Inc; CFO Ken Brause; CIT Group Inc; Director - IR Mark Devries; Barclays Capital; Analyst Moshe Orenbuch; Credit Suisse; Analyst Chris Brendler; Stifel Nicolaus; Analyst Brad Ball; Evercore Partners; Analyst David Hochstim; Buckingham Research Group; Analyst Henry Coffey; Sterne, Agee & Leach, Inc.; Analyst Bill Carcache; Nomura; Analyst John Stilmar; SunTrust Robinson Humphrey; Analyst Ken Bruce; BofA Merrill Lynch; Analyst Operator: Good day, ladies and gentlemen. And welcome to the fourth quarter and year-end 2011 earnings -- CIT earnings conference call. My name is Lacey and I'll be your coordinator for today. At this time all participants are in listen-only mode. Later, there will be a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the presentation over to your host for today's call, Mr. Ken Brause, Director of Investor Relations. Please proceed, sir. Ken Brause: Thank you, Lacey. Good morning this is the CIT fourth quarter and year-end 2011 earnings conference call. Our call today will be hosted by John Thain, our Chairman and CEO, and Scott Parker, our CFO. After their prepared remarks we will have a question-and-answer session. As a courtesy to others on the call we do ask that you limit yourself to one question and a follow-up and then return to the call queue if you have additional questions. We'll do our best to answer as many questions as possible in the time we have this morning. Elements of this call are forward-looking in nature and may involve risks, uncertainties and contingencies that may cause actual results to differ materially from those anticipated. Any forward- looking statements relate only to the time and date of this call. We disclaim any duty to update these statements based on new information, future events or otherwise. For information about risk factors relating to the business, please refer to our 2010 Form 10-K that was filed with the SEC in March 2011. Any references to non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in our press release. Also, please note that we have posted an updated financial data package on our website this morning. This package has been updated for fourth quarter results and reflects the prior period revisions for the time periods presented. For more information on CIT, please visit the Investor Relations section of our website at www.CIT.com. I'd now like to turn the call over to John Thain. John Thain: Thank you, Ken. Good morning, everyone and thank you for being on our call this morning. We reported a good, profitable fourth quarter and we were profitable for the full year. We originated new business volume in the quarter that was up across all four of our commercial business segments. We originated $3.3 billion of new committed volume which was up 40% sequentially. As Scott correctly predicted on earlier calls, our commercial finance and leasing assets grew for the first time this quarter, they grew about $900 million, since our bankruptcy. We continue to redeem and repurchase our high cost debt. We redeemed or repurchased $860 million in the quarter and as you've seen from our press releases we are in the process of repaying $2.5 billion of high cost debt in the first quarter of 2012 and it's our objective to pay back the remaining approximately $4 billion of Series A debt over the course of 2012. Q4 2011 CIT Group Inc. Earnings Conference Call 1/31/12 8:00 a.m. 1 Our credit metrics improved across the board. Charge-offs, non-accruals and in-flows to non-accruals all were lower. CIT Bank grew both on the asset side and on the liability side. Our commercial assets in CIT Bank were up about 35%. The launch of our Internet Deposit Platform was very successful. As of last Friday, so not as of the year-end but as of last Friday, we had over $600 million of Internet Deposits. The average rate on those deposits was about 1.1%, and the average maturity was about 1.5 years. We did at year-end substantially satisfy all of the written agreement items and we're now awaiting the Fed's acknowledgement of that. We ended the year with very strong capital. Our Tier 1 capital was 18.8% with a lot of liquidity. We had $8.4 billion of cash. We also had $1.9 billion of our $2 billion revolver undrawn. And our expenses were in line with our expectations. Just briefly across our businesses, in our Corporate Finance business we originated new committed volume of $1.2 billion. That was up 10% sequentially on over 40 transactions. On the Transportation side we added 15 new airplanes in the quarter. We actually sold 4 so we were net up 11. For the year in terms of aircraft, we added 37 new aircraft and sold 11 so we're up net 26. We also added 1,600 new railcars in the quarter and we delivered our first railcars to CIT Bank, which is the beginning of getting more of that business into the Bank. We also scrapped most of our idle center-beam cars. They show up in held for sale but we're in the process of scrapping those and if you look at our utilization rates in railcars, if you include center-beams our cars were 97% utilized and if you exclude center-beams they were 99.9%. We had about 100 railcars that were not being utilized. At the end of the year we did have one airplane that was off lease but we now have an MOU to re-lease it. On the Trade side, our factoring volume was up slightly for the quarter at $6.9 billion. In our Vendor Finance business our funded new business was up about 11% sequentially, almost all of that business was originated in the Bank. So if you look at the growth in new business volume and if you look at the credit improvement in our portfolio, it's all consistent with the view that we talked about before which, I would restate today, which is that the US economy is growing. It's growing slowly but it is growing and we see that really across all of our business segments. So with that I'll turn it over to Scott to give you more detail. Scott Parker: Thank you, John, and good morning everyone. We had a very good quarter as John mentioned from a business perspective. We had broad-based increases in new business volume. Commercial assets grew for the first time since 2009. Our funding costs continued to decline. Credit quality further improved. And we continue to expand the scope of CIT Bank. However, our reported results continue to be impacted by financial items related to our strategic progress including the ongoing cost related to accelerated debt repayments, the impact from our portfolio optimization efforts and, in the fourth quarte, tax provisions resulting from a change in our assertions regarding international earnings. Before I get into the fourth quarter results, as part of our continued review of internal controls and operating procedures, we determined that a $68 million liability should have been established for unresolved credits in our Trade business that accumulated from 2001 through early 2011. Of this amount, $66 million related to pre-emergence periods. Accordingly, we revised our 2009 results to include this liability that, upon our adoption of fresh start accounting, added a corresponding amount to goodwill. To put this amount in context, it represents approximately 0.02% of the over $300 billion of factored volume during this 10-year period. We also revised our 2010 and 2011 results for this and other immaterial and unrelated entries. The cumulative impact of the revisions is a $2 million increase to net income over the 2-year period, and a $0.32 decrease in tangible book value per share. Moving on to the fourth quarter results, we reported net income of $34 million or $0.17 per share on pretax income of $80 million. Pretax income included about $150 million of costs associated with our liability restructuring actions. Excluding these costs, and net FSA accretion benefits, pretax earnings were $140 million, up from $91 million in the third quarter and a loss of $160 million a year ago. Let me add some color to these figures which are on page 18 of the press release. FSA accretion excluding the impact of debt prepayments was $90 million, up slightly from the third quarter, but otherwise trending down as the remaining accretable discount on assets declines. Next, the FSA cost from accelerated debt reductions was $152 million and related to three things. First, the $500 million student lending Q4 2011 CIT Group Inc. Earnings Conference Call 1/31/12 8:00 a.m. 2 securitization we redeemed in December. The $460 million of Series A debt we prepaid in October. And the roughly $400 million of Series A debt we repurchased during the quarter. Prepayment penalties which also flow through interest expense were $9 million, reflecting the 2% fee on the $460 million of Series A debt we prepaid.
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