CIT Group Inc. (CIT) June 14, 2012 8:00 am ET Executives Kenneth A. Brause - Executive Vice President of Investor Relations John A. Thain - Chairman and Chief Executive Officer Peter Connolly - Co-President of Corporate Finance James L. Hudak - Co-President of Corporate Finance Matthew E. Galligan - Executive Vice President and Group Head of Cit Real Estate Finance John F. Daly - President of Trade Finance Jon Lucas Jonathan Lucas Ron G. Arrington - President of Vendor Finance Jeffrey Knittel Robert Rowe Joseph M. Leone - Former Vice Chairman and Chief Financial Officer Glenn A. Votek - Executive Vice President and Treasurer Raymond Quinlan Scott T. Parker - Chief Financial Officer, Chief Accounting Officer and Executive Vice President Nelson J. Chai - President Analysts Michael Turner - Compass Point Research & Trading, LLC, Research Division Kenneth Bruce - BofA Merrill Lynch, Research Division Presentation Kenneth A. Brause
And of course, my job would not be complete without the honor of sharing these legal and other important notices with you around forward-looking statements and risk factors. They're in your handouts. I encourage you to read them and take it from there.So now it gives me great pleasure to introduce our Chairman and CEO, John Thain. I've had the privilege of working with John for nearly 2.5 years now, and I consider John to be one of the most accomplished CEOs in financial services. It's been great working with him and the entire CIT team as we're positioning the company for the future. Please join me in welcoming John Thain. John A. Thain Thank you. Well, good morning, everyone. Thank you all for coming. Ken, thank you. This is a great event for us. It really is an opportunity for us to give you a much better in-depth knowledge of our businesses, and I'm personally very proud of the management team that we've put together to present to you today. So I'm going to go through the schedule for you. We're going to go through our businesses and then some of our infrastructure side. First, after I speak, it will be our Corporate Finance area. This is our core middle market lending business where we lend to small and middle market companies. Pete Connolly and Jim Hudak run that business. And then Matt Galligan is going to talk about our commercial real estate business, which is a business we had been in then got out of and have reentered in a very positive way. And just to give you an idea of the experience level of our business leaders, between the 3 of them, they have over 75 years of experience lending into their respective business space. Then we'll have our Trade Finance business, which is our factoring business. We are the #1 factor in the United States. And you're going to see a transition there because John Daly is retiring at the end of the month with almost 40 years of experience in the business, and you'll get to see him. And then you'll also get to see Jon Lucas, who is taking over that business going forward.
After that, we'll have our Vendor Finance business, which is run by Ron Arrington. Our Vendor Finance business is where we provide financing to typically small and middle market companies for computer equipment, telephone equipment and copiers. It's a global business, and Ron can talk about that for you.And then we move to our Transportation business, where Jeff Knittel has run that business for over 30 years. And the Transportation business is both commercial aircraft, business aircraft, railcars and then a leverage lending business. Following that, we'll have Rob Rowe, who's our Chief Credit Officer. And credit and the management of credit is one of the key differentiations of how we conduct our business. Rob has 20-plus years of experience. He was the Chief Credit Officer for Nat City. And the management of our credits is really critical to our success going forward, and so Rob will talk about that. And then we'll move to funding and liquidity. Glenn Votek is our Treasurer. Ray Quinlan runs CIT Bank, so he can talk about the growth in the bank. And then Scott Parker, of course, is our CFO, who you hear about with me quarterly. We'll give you a financial update. And then Nelson Chai, our President, will conclude. And then, as Ken said, we'll have lunch, and I would encourage you to stay for lunch because it will give you a chance to interact with a lot of our management team. So what do we want to accomplish today? We want to try to answer a number of questions for all of you. First of all, how do we compete in our businesses? Why do people do business with CIT? And I really want to -- in each of the different businesses, hopefully, you'll come away with the answers to why do people choose to do business with us, how do we compete.
Second of all, where are there opportunities to grow? So we do see great growth opportunities in our businesses. Our commercial assets are growing. In spite of a lot of the difficulties in the economies in the world, we see a positive, good opportunities for our businesses, and so we want to answer where and how we're going to grow.The third is, what are we going to earn? How do we measure our earnings power? And we want to break that down into the individual businesses profit models. So each of the businesses will talk about how do they make money, and then ultimately, we'll talk about how do we create value for our shareholders. Hopefully, we'll take away from this session today the following conclusions: first of all, that we have good businesses with good leaders with a lot of knowledge and experience in their businesses; second, that we have and we do have very high levels of capital, and we have opportunities to deploy that capital; third, that we have opportunities to grow, and I think that's going to be a theme you're going to hear throughout the course of the day. And then the last point, which has always been one of the complicating factors since I've been at CIT, is FSA, and what we really want to do is, over the course of this year, get rid of the last remaining piece of our old debt. So there's about $4.6 billion of debt left, and that's got FSA built into it, and we hopefully will be able to retire that over the course of the year. And then we can move to a much more simplified GAAP basis of earnings, and I think that'll help with the story of what our earnings actually can be going forward.
In terms of the company, we are a 100-plus -year-old company. Actually CIT, the predecessor company, was founded in 1908. It was originally called the Commercial Credit and Investment Company. It then became the Commercial Investment Trust in 1915. And in 1921, it was reorganized in a corporate form to become CIT Inc., and it was listed for the first of actually 4 times on the New York Stock Exchange in 1924. We are a commercial lender. Our businesses are all in the commercial space, again, mostly small and middle market companies, and we're a leasing specialist. We own assets that we lease. Most of our businesses is small and middle market companies, and one of the attractions as a business is we generate high-yielding assets. And so our assets, especially in this market environment, are particularly attractive because, and you'll hear this from the different businesses, we tend to be a little bit further out in terms of credit risk, but we protect ourselves by having collateral.Our servicing capabilities is another differentiating characteristics and one of the ways we compete. We're very good at providing servicing and collections and processing of our various different loans and lease assets. And of course, as we'll talk about and you'll hear about more, in particular, we do have a very strong capital base and we have significant amounts of liquidity. So what have we accomplished over the last 2-plus years that I've been here? Well, first is we built out a very, very talented executive team, and you're going to hear from many of them today, and you can make your own assessment of them. But I think we have a very, very confident management team, both on the business side and on the infrastructure side. Then in terms of the balance sheet, we have restructured both the asset side of the balance sheet and the liability side of the balance sheet. On the asset side, we sold over $10 billion of non-core assets. We are focused on our core lines of business, and we're now starting to see growth in our commercial assets. On the liability side, we have repaid or refinanced over $26 billion of debt in the last 2 years, and we brought our funding costs down over 200 basis points. And on the risk management side, and I think this is particularly important, we have built out a risk management, credit risk management, compliance, control, internal audit infrastructure. We've successfully gotten the cease and desist lifted at the bank. And you'll hear Rob talk specifically about the credit side, but our risk management infrastructure that's in place now, and I talk about risk management broadly, so it includes internal audit, it includes compliance, I think is in very good shape. You know that the written agreement with the Fed had a lot to do with the risk management and the risk controls. As I've talked about before, we have, in fact, satisfied virtually all of the requirements of the written agreement. We are still waiting for an answer from the Fed on lifting the written agreement. We're still optimistic that that will happen, but that's still in process, and that's really inside the Fed. So to the extent -- I mean, I will answer questions, but I don't really have anything else to say about the timing of that because that's really a Fed internal process. Really, we have done what we can do. We're now waiting for the Fed.
And then we are going to hear more about CIT Bank because CIT Bank is one of the important changes in how we fund ourselves. We have been expanding the bank both on the asset side and the liability side. We are originating most of our U.S. assets in the bank. You can hear Ray talk about how we're expanding the funding base of the bank, but our goal is to have our U.S. business be primarily financed and originated in the bank going forward.So in terms of our priorities, we are focusing on growing our core businesses. We see good opportunities to do that. We are focused on improving our profitability. That will, in particular, come from the origination in the bank and improving on our financing margin. As I said, we want to reduce the impact of FSA going forward, so we have a cleaner P&L. We will grow our banking assets both on the asset side, and then we'll grow the liability side to match that. And I think we're in good shape from a regulatory point of view. As you know, our bank is regulated by the FDIC and by the Utah State Regulators, where we're in good shape there. And on the Fed, we have good relationship with them. We have, in fact, satisfied most of the written agreement items, and so now it's really a question of getting that written agreement lifted and moving forward in terms of expanding our business. So that's kind of the overview of the day. I'm happy to take a few questions now, and then we'll move into the specifics of the businesses. Question-and-Answer Session John A. Thain Yes, if you could just [Audio Gap] come out of those reviews. And there's a little bit of a tendency to have a creeping of what was in the written agreement versus some of those ongoing exams. So they would concede with the point that we have satisfied virtually all of them, but there will be little pieces or little things that, well, you can do a little bit more here, a little bit more there. But it's really nothing particularly subsident. So there's little bits of things that we still need to do, but for the vast majority items, the Fed would, in fact, agree that we've completed them. And then there is an ongoing set of things, so it never stops. So there's always an ongoing set of things you have to keep working on. You can hand out the mics, and we'll pick them up. Yes, go ahead.
Unknown AnalystThe online bank launched back in October of last year raised about $1.1 billion of deposits or so, I believe, since then as of the end of Q1. Is that kind of where you see the majority of the deposit growth coming, or do you see it kind of in the other sides of the banks as well, too? John A. Thain Well, I'll let Ray talk more about that. We're north of $1.5 billion now in internet deposits, but over time, we want to continue to expand the deposit base of the bank. So we want, at some point, to be able to take commercial deposits from our commercial customers. I think that'll be a good opportunity for us. And at some point, we'll have the opportunity to have more traditional retail deposits. And so Ray can talk more about that, but we will expand the deposit-taking capability of the bank. Unknown Analyst With Basel III out for comment now and obviously, a little more clarity in terms of future capital requirements, does that open any doors for CIT in terms of returning capital measures like a dividend or a buyback earlier than 2013, or is it still sort of a 2013, 2014 part of the clock? John A. Thain Yes, so it's not really a Basel III question. We have excess capital under any measure, and so it's much more a question of the process you have to go through with the Fed. So we're not technically a CCAR bank, but to return capital, we will need to submit a capital plan to the Fed that is CCAR-like, so we'll have to stress test our capital base in a similar fashion to CCAR. And that capital plan, for all banks like us, not just -- it is not very specific to us, gets submitted at the beginning of the year. So at the beginning of 2013, we will submit a plan. I expect that that plan will have some form of return of capital, and then that has to get approved by the fed. And of course, you've seen different financial institutions have greater or lesser success with that. But once that plan gets approved by the Fed, then we will be able to return capital, assuming we get the approval. Other questions? Yes?
Unknown AnalystJust curious, how does CIT potentially approach acquisitions? John A. Thain So the idea of acquisitions, I think the place that is the most interesting to us is can we become more bank-like through an acquisition. So is there an opportunity to acquire deposits? That's really the place that we see the most interesting opportunities on the liability side. So we do look at and we will continue to look at the ability to acquire deposits. Second of all, we are looking at portfolios coming out of primarily the European banks. Now so far, there haven't been that many that have actually been traded, but the European banks have been looking to divest themselves of portfolios of assets. We did buy a small portfolio. And so I think we will be opportunistic, and we'll continue to look at things as they become available. And if we can buy them at returns that are attractive to our shareholders and fit our return criteria, then we'll try to be opportunistic in that. All right, well, look, I think we have put together a really good day. I really think this is a great opportunity to get into greater depth in our businesses, and it's a very good opportunity for you to see the people who run our various different businesses. So thank you all. Kenneth A. Brause Thank you, John. So when people hear CIT, I think the tendency is to just think middle market lending. And a frequent question we get is how do we compete against the big banks. So here today to address that and other questions are Pete Connolly and Jim Hudak, who are the co-heads of Corporate Finance; and Matt Galligan, who runs our Real Estate Finance business. I have the pleasure of working with Pete and Jim since I joined CIT. Pete joined about a year before me in 2006 to head up our syndicated loan group after about a dozen years with another middle market lender based in Connecticut that I think you may be familiar with. Jim has a long history with CIT that dates back to 1991, when he joined AT&T Capital, which was acquired by CIT in 1999 as part of the Newcourt deal. Jim's a career lender and previously headed our communications media and entertainment group. Matt's a newer addition to the CIT team, having joined late last year from the Bank of Ireland to restart our commercial real estate activities. I sit down the hall from Matt, and I can tell you that he and his team have certainly hit the ground running. So with that, let me turn it over to Pete.
Peter ConnollyThank you, Ken, and thanks to all of you for your interest in hearing about what we think is a great opportunity for growth at CIT Corporate Finance. Now there are a few key messages that we'd like you to take away today. The first is we're very well positioned for growth. We made tremendous progress in regaining market share over the last year, which is best evidenced by our entering into greater than $4 billion in new loan commitments in 2011. We accomplished this by being a reliable and consistent lender to the middle market. Now feedback from our customers has been great. They're happy to see us back and lending at these levels again. We also recently added to our product offerings the bringing in an expert team of commercial real estate lenders headed by Matt Galligan, who's going to come up and talk to you about the opportunities in that business shortly. And we relaunched our equipment leasing product, which is still a very strong brand recognition in the market, and Jim's going to take you through that. Third, CIT Bank is a great asset for Corporate Finance. It provides us with a sustainable funding source and a competitive cost of funds. Now our U.S. business operates within CIT Bank now, and we expect that nearly all of our loans originated in the U.S. will be in CIT Bank going forward. I have a slide later to discuss the fact that the more loans we do at CIT Bank, the better our net interest margins are going to be. Now at Corporate Finance, we seek to provide our customers with senior secured lending and loan and leasing products to meet our customers' financial and growth needs. Customers use the proceeds of our loans for several reasons, including mergers and acquisitions, working capital facilities, refinancings of existing facilities, recapitalizations, project financings, capital expenditure lines for growth CapEx, to name a few.
Now our go-to-market model is one of the industry specialization. We focus on 7 major industry groups: first, industrials, where we focus on general industrials, chemicals, manufacturing companies and distribution companies, to name a few; energy, where we focus on high-growth companies in the value chain from drill bit to light switch, which includes power, oilfield services, oil and gas production, transmission and storage; in retail and restaurants, we seek to leverage our long-term expertise in providing retailers and restaurant chains with innovative financing solutions; in healthcare, we cover healthcare services industries, medical technology companies and pharmaceuticals, among a few; communications, information services and technology, we target providers of value-added voice, data and video services; in entertainment, sports and gaming, we provide financings for film and television production, sports teams and franchises and Native American casinos; and in commercial real estate, as I mentioned earlier, Matt will take you through in a while.Now it's no coincidence that the industries we focus on make up a significant portion of the U.S. GDP, in fact, 2/3. We wanted -- we've recently focused on these industries as we wanted to have sufficient deal flow to support our level of investment and deal flow needed to be enough that we could grow in a safe manner. You'll see here that there was over $200 billion worth of loan demand in 2011 in these industries. I will point out that this the overall loan market, not just middle market, so it includes larger loans as well. The other thing I'd point out here is that CapEx is significant in these industries, and we have seen companies getting back into reinvesting in growth capital, so that bodes extremely well for our equipment leasing. Now at Corporate Finance, we have 4 major types of loans we provide our customers. The first is an asset-based loan, which is typically revolving line of credit, where we take current assets, such as accounts receivable and inventory, as collateral. These are best suited for companies with high working capital needs such as retailers, oil and gas production and certain industrials. Now the pricing for these types of loan tends to be lower than their cash flow counterparts as the collateral is liquid and the historical losses giving default are very low at this product. Project financing is used by our Energy group for power-related projects such as gas-fired cogeneration facilities and wind projects. These loans typically have strong asset coverage and stable, strong cash flows with minimum offtake agreements from investment-grade utilities.
In capital equipment finance, we look to provide loans and leases against mission-critical assets, which means that the assets are key revenue generators for the company. And when we look to underwrite these, we don't only look at asset values, we also look at the company's ability to generate cash to service the debt.And finally, cash flow lending. This is where we provide senior secured loans that are generally based on a multiple of EBITDA and generally have all the assets of the company as collateral. Now credit analysis is at our core. When looking at cash flow loans, the lending decisions are based on several criteria, including size of company, their competitive position in the marketplace, barriers to entry for the company's products, EBITDA size, et cetera. Now we feel very good about where we're -- the part of cycle we're lending in when it comes to cash flow lending. If you think about it, we just got to see how the companies we're financing today went through this previous recession, how did they behave, how did -- if there was a financial sponsor, what did they do if they need there to be a restructuring, what were the baseline revenues of the companies were able to sustain, how did they cut costs, et cetera. So we feel very good when you look at what your downside scenario in today's companies. When you just went through a recession, we're able to see exactly what happened. Now the middle market makes up a significant portion of the U.S. GDP. It's estimated there are 30 million jobs across 100,000 companies in the middle market. And we frequently get asked, what's your sweet spot? Where do you guys typically play in the middle market? Well, for us, it's companies that have revenues of $50 million to $100 million, the EBITDA size from $10 million to $50 million and they're typically private companies with a credit profile from B to BB. The typical exposure is from $15 million to $30 million per credit, and that's based on several factors, including what's the asset coverage in the loan, the EBITDA size, the company's position in the market, et cetera. In small business lending, we target companies with $100 million of -- I'm sorry, $100,000 to $5 million of revenues, and the typical hold size is $1 million.
Now diversification is the cornerstone of prudent risk management. Obviously, it's something we take very serious along with our risk management group. As a matter of fact, when looking at our growth plans, we always take diversification in mind. The good news here is our $7.4 billion portfolio is well diversified in over 330 different SIC Codes.We think this is a very important chart. It helps explain the transformation of CIT Corporate Finance. If you look back in Q1 of 2011, 78% of our U.S. assets were at the bank holding company level, which obviously has a much higher cost of funds than does our bank. In the past year, we've been successful in growing the assets of the bank by $2 billion, and now 52% of our U.S. assets are in CIT Bank. Now as we continue to grow the assets in CIT Bank and the balance sheet continues to shrink, our net interest margin should improve. Now we do view this growth in the bank as a significant accomplishment as you cannot transfer assets from the holding company to the bank and there are certain restrictions on refinancings, so most of the new business in the bank are new customers, so again, a significant accomplishment. Read the rest of this transcript for free on seekingalpha.com