First Citizens BancShares, Inc. (FCNCA) Q1 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to CIT's First Quarter 2011 Earnings Conference Call. My name is Veronica, and I will be your operator today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Ken Brause, Director of Investor Relations. Please proceed, sir.

Thank you, Veronica, and good morning, everyone. Welcome to CIT's first quarter 2011 earnings conference call. Our call today will be hosted by John Thain, our Chairman and CEO; and Scott Parker, our CFO. Following our formal remarks, we will have a Q&A session. We do ask that you limit yourself to one question and a follow-up and then return to the queue if you have additional questions. We will 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. Any references to certain non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in the press release. And for more information on CIT, please visit the Investor Relations section of our website, www.cit.com. I'd now like to turn the call over to John Thain.

Thank you, Ken. Good morning, everyone, and thank you all for being on the call. I'm going to make a few introductory comments and then turn the call over to Scott. Our first quarter results reflect continued progress on our strategic objectives. We continued to expand the role of CIT Bank. We're very pleased that the FDIC and the Utah State banking regulators lifted their cease and desist on CIT Bank. We did move our Small Business Lending platform into the bank, and we're now originating new loans for small business lending in CIT Bank. We expect to move our vendor origination platform in the U.S. into the bank later this year subject, of course, to regulatory approval. And we saw a 15% sequential growth in committed loan volume in CIT Bank, including almost 100% of U.S. Corporate Finance being originated in the bank. So the strategic objective of growing the bank, growing the bank's assets and ultimately growing the bank's deposit base will continue. Second, we made progress on our liability restructuring and lowering our funding costs. Earlier in the quarter, we repaid $1.75 billion of our high-cost debt. We issued $2 billion of new 3- and 7-year debt with lower cost and with better covenants. And as we've already announced, we will repay $2.5 billion of our high-cost debt during this quarter, the second quarter. In the first quarter, we originated $1.3 billion of new funded volume. I would characterize our credit portfolio as stable and then you've seen the nonperforming loan balances come down, so that's a good sign. We are continuing to focus on expenses, and our expenses were in line with what we were budgeting for the quarter. Our book value, you saw it grow to $44.85. And you saw us complete the sale of our Dell -- or finalized the agreement to sell our Dell Canada and European assets, which substantially completes the vendor portfolio restructuring. So it's a good quarter from my perspective. We made good progress. And I'll now turn it over to Scott to get into the details. Scott?

Thank you, John, and good morning, everyone. We had a good start for the year, reporting $0.33 of earnings and building book value to $ 44.85. And while our reported earnings are lower than prior period, our economic performance is improving driven by solid levels of business activity, stable credit quality and lower borrowing costs. The first quarter also benefited from gains on asset sales and favorable foreign exchange marks. As with past calls, I will walk you through the key drivers of our consolidated results, review each business segment and update you on funding before turning the call over for questions. Total assets were essentially flat at $51 billion as the $900 million decrease in finance and leasing assets was largely offset by increased cash and investments. Commercial finance leasing assets declined $500 million and a liquidating consumer book contracted roughly $400 million of which $250 million was from asset sales. With respect to cash, you may recall we did close the $2 billion Series C issuance right before the quarter end, so we'll not complete the announced $2.5 billion Series A redemption John just mentioned until May. Regarding the commercial portfolio, new lending commitments totaled $1.7 billion for the quarter. We funded $1.3 billion of new business volume, down sequentially, but up nearly 50% from a year ago. The sequential decline reflected the timing and value of aircraft purchases in Transportation Finance and less volume from our international Corporate Finance operation and Vendor Finance. Importantly, over 60% of our U.S. lending volume and virtually all the U.S. Corporate Finance volume was originated and funded by CIT Bank, up from about 50% last quarter and less than 5% a year ago. The $1.3 billion of commercial volume was offset by roughly $1.5 billion of portfolio collections and $750 million of asset sales. However, the gap between funded volume and portfolio collections is narrowing. Factoring volume declined from the fourth quarter in line with typical seasonal patterns while receivables increased slightly. Reported net finance revenue was $197 million, an $85 million decrease from the fourth quarter. Excluding the impacts of FSA and prepayments on lease on debt, net finance revenues increased $86 million to $145 million. The quarterly impact of FSA and prepayment penalties on margins are provided on the last page of our press release under non-GAAP disclosures. The $86 million increase can be largely explained in 2 broad categories: lower funding costs and increased yields on the portfolio. Lower funding costs account for roughly 2/3 of the increase. Debt repayment and financing added about $15 million to margin with most of the benefit coming from the Series B prepayments. The balance of the funding cost improvement relates to a secured borrowing, the total return swap where collateral prepayments increased swap receipts, which in turn reduced our interest cost. This variability in collateral prepayments is the main reason secured borrowings have fluctuated quarter-to-quarter. Increased yields on the portfolio accounted for the remaining 1/3 increase. Corporate Finance benefited from lower non-accruals and higher yield-related fees. Vendor Finance yields had a temporary benefit related to the accounting for certain assets held for sale. And Transportation Finance benefited from aircraft redeployments and improvements in Rail lease revenue. Net finance revenues, excluding FSA and prepayment fees as a percentage of average earning assets, increased from 56 basis points in the fourth quarter to 146 basis points in the first quarter with over half of the increase attributable to the total return swap and the vendor assets held for sale I just mentioned. The key takeaway is that economic margin is improving, but we expect quarterly variability around the long-term trend line. Future margin improvements will be driven by the economics of new business, which continue to be attractive. Yields on new volume are good, and we are funding the business competitively. As I mentioned last quarter, margins on Corporate Finance loans originated by CIT Bank averaged over 300 basis points and margins on the conduit-funded vendor originations averaged over 500 basis points. Those economics still hold although we have seen some pressure on the corporate lending yields, probably in the area of 25 basis points for asset base and 50 basis points on cash flow. New business yields and vendor remained solid in the low double digits. And in transportation, air rents continue to improve while Rail lease rates are beginning to stabilize. Other income was strong at $278 million, benefiting from the increased gain on sales and favorable net foreign exchange and derivative marks. We sold about $750 million of assets in the first quarter, and the gains on those sales were strong. We sold roughly $350 million of Corporate Finance loans, over 1/3 of those were non-accrual and the remaining were first exposure management reasons; $250 million of student loans, all of which were government guaranteed; and the remaining $150 million consisted of vendor assets and transportation equipment. Recoveries on the pre-FSA charge-offs were $32 million, down from the prior quarter and prior year. Fee and other income was strong, benefiting from investment gains. And factoring commissions dipped slightly on seasonal lower Trade Finance volumes. As John mentioned, credit quality remained stable. Reported a post-FSA net charge-offs decreased $39 million sequentially. Vendor Finance losses declined considerably, while Corporate Finance charge-offs increased reflective of the prior quarter increase in specific or FAS 114 reserves. Non-accrual loans were down over $300 million or 19% on both a pre- and a post-FSA basis. We had further improvement in Corporate Finance due to the asset sales and workouts, and non-accruals in Trade Finance declined 40% as we received payments from a few large accounts. Most importantly, new inflows into non-accruals declined for the third consecutive quarter. These trends, coupled with lower asset levels, resulted in a lower allowance for loan loss. In terms of specific reserve components or in terms of reserve components, specific reserves were released as charge-offs were taken on associated loans in Corporate Finance. Non-specific reserves increased slightly as we continue to establish reserves for new originations. While aggregate loan loss reserves decreased $14 million, coverage remained stable at about 1.7% of loans. Combining the on-balance sheet allowance and the remaining non-accretable discount, we have 2.6% coverage against the $25 billion pre-FSA loan balance. Switching gears, controlling operating expenses as John mentioned continues to be a focus of the management team. And in this quarter, SG&A, excluding restructuring charges, were down to $210 million with much of the savings coming from reduced professional fees. Finally on taxes, we provided $66 million in the quarter, including about $15 million for discrete items. Quarterly GAAP tax provisions will continue to be driven by taxes on international earnings. Now moving onto the business segments. As mentioned in the press release, we refined our capital on interest allocation methodologies for 2011. While these refinements don't change CIT's bottom line, they do give us and you a better view of the economic performance of each segment. Transportation Finance was most impacted given the capital requirements for their 4 purchase commitments while there was minimal impact to the other segments. Prior period results are presented as previously reported. Corporate Finance pretax income more than doubled from the fourth quarter as provision for credit losses was cut in half. Other income including strong gains on asset sales and interest expense benefited from the total return swap. In round numbers, finance and leasing assets fell about $650 million. Its $450 million of volume was offset by $750 million of portfolio collections and $350 million of asset sales. However, with volume up over 200% from a year ago, the gap between volume and collections has narrowed considerably. Charge-offs were higher, but with minimal impact to the bottom line as the amounts were largely reserved in the fourth quarter. And as John mentioned, non-accrual loans decreased 20%, down to about $1 billion in Corporate Finance. On Transportation Finance, pretax income increased $33 million sequentially, driven by the change in leverage as we increased the amount of capital allocated to this segment. We also had improved rent and higher non-spread revenue. Assets were up slightly as we added 7 aircraft to the fleet. And in February, we put in an order for 3,500 railcars to be delivered over the balance of this year and next. All of the 2011 rail deliveries have lease commitments on them. Utilization remained solid in Air, with all planes either on lease or committed to be leased and Rail utilization further improved to just over 95%. Aerospace rents benefited from the redeployment of several aircraft, while Rail rents continued to come off cyclical lows, and we also saw some improvement on per diem rent. On Trade Finance, they had a slight pretax loss as it bears high-cost debt associated with relatively short-term receivables. Global factoring volume was about $6.1 billion, down seasonally from the fourth quarter and down slightly from a year ago due to the runoff of our European factoring operation. U.S. volume was up from the prior year as we experienced upward trends in new business signing and stability in the client base. Factoring commissions were down slightly on lower volume and credit was stable with a slight decrease in net charge-offs and lower non-accruals. Finally, Vendor Finance generated $14 million of pretax income, down from the prior period, driven by higher credit costs as the fourth quarter's provision benefited from a reduction of reserves. Finance and leasing assets were down slightly, about $150 million as the gap between volume and portfolio collections is narrowing in Vendor as well. New business volume was down slightly from the fourth quarter, excluding the [indiscernible] business we sold last year, volume grew over 15% from a year ago. Net charge-offs declined considerably on both a pre- and post-FSA basis and non-accruals were flat. With regards to the pending sales of Dell Canada and European platform, the Canada sale was about $340 million in assets and is targeted to close mid-2011, while the European sale with current assets of approximately $400 million is expected to close in 2012. As John mentioned, we've substantially completed the restructuring of our Vendor Finance portfolio and continue to focus on diversifying and growing our vendor partner base. We made a lot of progress on our long-term funding strategy this quarter. We issued corporate debt for the first time since 2007, and we did it in size. The financing consisted of $1.3 billion of 3-year notes at 5 1/4% and $700 million of 7-year notes at 6 5/8%. Not only were there economic savings in terms of coupon reduction, but the new Series C paper has investment grade-style covenant. We also believe demonstrating access to diverse and cost-efficient funding is important to all our stakeholders. We also renewed our $1 billion U.S. Vendor Finance conduit at more attractive term and a longer tenure. Typically, conduits have 364-day commitment period. This facility is committed for 2 years. We also increased the advance rate and reduced the fully drawn costs. We've paid down $1.75 billion of high-cost debt in the first quarter and announced $2.5 billion of Series A redemptions in the second quarter. The income statement impact for each of these is detailed in the press release. We redeployed about $6 billion of cash that was previously held in overnight deposits and prime fund and directly invested in our short-term U.S. Treasury bills. So while cash is down sequentially, our liquidity position, including cash and short-term investments, actually increased about $600 million from year end. Finally, with respect to CIT Bank, cash remained strong at over $1 billion, so we allowed some deposits to contract slightly. On the asset portfolio side, while fairly flat, the trend is in the right direction with commercial assets growing and student loans running off. With that, I'll turn the call back over to Veronica, and we'll be glad to take your questions.

[Operator Instructions] And your first question comes from the line of Moshe Orenbuch from Credit Suisse. Moshe Orenbuch - Crédit Suisse AG: Great. Following up on the last comments on liquidity, could you talk a little bit more about how you derive the amount of liquidity that you're maintaining and how we should think about that as we go forward? And as a corollary, how might that relate to any plans for any kind of expansion of the bank or acquisition thereof?

Well, I think how we think about liquidity -- as you know, cash is our main liquidity source. And as we continued to make progress as we mentioned on the conduit, kind of getting a 2-year commitment that does provide us additional liquidity in 2011 that we didn't have in 2010, but we've been prudent on our cash balances and think that, that is a good strategy given where we are as a company. But we are continuing to advance our liability management strategies and will kind of adjust our cash balances as we progress in 2011. On the bank side, I think the liquidity there, as we've talked about in the past, as we continue to grow the business, we also are looking and continue to diversify the funding sources of the bank outside of brokered CDs. Moshe Orenbuch - Crédit Suisse AG: And I guess the other piece of that was whether there was any interest in either making additional investments in the bank or an additional bank subsidiary?

It's John. As we've said before, it is a strategic objective to grow the bank, both in terms of assets and liabilities and to diversify its earning assets and diversify its deposit base. We are in the process of doing that. And so over time, I would expect that it will have a more diverse funding base than it has today.

Your next question comes from the line of David Hochstim from Buckingham Research.

Could you just run through again the effects on the margin, of the changes on the total return swap? And then my follow-up question is given the increase in demand for aircraft and I guess other transportation assets, would you -- are you looking at maybe selling off or taking public a piece of the Transportation Finance business, would that make sense? Could you use that to pay down debt faster, the proceeds?

David, I'll answer the margin question and I'll just kind of repeat what I said and then I'm sure if you have additional questions, it'd be best to probably take it offline with Ken and the IR team. But we've said the secured borrowing facility is our total return swap facility. And when we have -- as we've seen in some of our assets on the Corporate Finance side, the acceleration of the collateral prepayment increased our swap receipts, which in turn is netted against the cost of our borrowing. So our secured borrowing costs is going down based on those swap receipts.

No, I understand that, but I just wondered if you could give us a sense of how much of the margin improvement was specifically attributable to that this quarter?

Yes. As I mentioned in my comments, between that and the temporary benefit from the vendor assets that we have held in sale and some of the accounting related to that, over 50% of the increase was driven by those 2 items.

Okay. All right, thanks. And then on...

Yes. On your strategic question, we obviously keep track of what's going on in the marketplace and the fact that both the Aircraft business is attracting a lot of capital right now and the Rail business is continuing to improve are both good trends for those businesses, but both of those businesses are very important contributors to our overall earnings power. And we -- as you saw from both us buying more airplanes and buying more railcars, intend to continue to expand that a bit.

So selling off or taking part of it public wouldn't make sense?

We don't believe so.

Your next question comes from the line of Brad Ball from Evercore Partners.

Sorry about that. Scott, what was the amount of gain on sale of assets in the quarter? And could you talk about the outlook for the portfolio? When will it stop shrinking? What's your outlook for adding to the portfolio maybe later this year?

Well, the gain on the loans and portfolio sales was about $74 million. And then the gain on equipment was about $40 million.

Okay, thank you. And then in terms of the portfolio?

Yes. The portfolio, as I mentioned, I guess back in February, our current expectation is late in the second half, probably most likely in the fourth quarter given the trends that I spoke about this morning. And a lot of that is dependent again on the macroeconomic in regards to volume going forward. But we've seen a decline in our asset sales and our portfolio collections are starting to narrow between our volume and the normal runoff of the portfolio, our normal collection of the portfolio.

And can you give us any idea about volume trends so far in April?

Well, I think we have -- it's kind of dependent, I guess, [indiscernible] one of the business, but it think in Corporate Finance, we continued to have a strong pipeline of activity that we also saw in the first quarter and the mix of that business is predominantly right now kind of refinancings that are happening. On the Vendor side, I think there've been some industry kind of press around some of the kind of seasonal kind of year-over-year increases. We've seen similar increases in our Vendor business. March was a pretty good month and we hope that, that kind of continues on in the second quarter. On the Transportation, that's kind of very delivery based, which is kind of set. And on the Trade side, it's kind of on plan with respect to kind of the first quarter.

Your next question comes from the line of Chris Brendler from Stifel, Nicolaus. Christopher Brendler - Stifel, Nicolaus & Co., Inc.: First question on the operations side, I think we talked about last year that there was some additional accruals for compensation that may not be recurring this year. Is this a good run rate for that effects [ph] in this first quarter?

Yes, I think I've said back in February, kind of we're kind of shooting for the 2 -- kind of $220 million. So first quarter was a little bit better than kind of the viewpoint that we have there. We'll continue to kind of manage and look at our cost structures and balancing that with both growth and the progress we want to make on the written agreement. Christopher Brendler - Stifel, Nicolaus & Co., Inc.: Okay. And then on the funding side, as you progressed through the year, can you talk at all about additional opportunities you may see? Obviously, the cease and desist, I think, is a positive. But I don't think -- and correct me if I'm wrong, a whole lot has changed in that front until you can really take advantage of increased origination capacity in the bank and probably not until Vendor is improved that you can actually grow the deposit base above the $5.5 billion cap. If you can you just comment on that, and also your capacity to do additional term debt issuances after your successful deal last month. Thanks.

Let me answer the bank one first. So in terms of the bank, the cap on broker deposits, which was $5.5 billion, no longer exists. But we were already substantially below that. And as I mentioned before, we don't intend to fund the bank solely with broker deposits. So we have a lot of liquidity there now. We are originating assets there now. But we intend to diversify the bank's funding base away from broker deposits and to have a broader, more diverse funding going forward.

So on the other piece, we continue to diversify our kind of liability strategy. If I could just kind of go back a little bit just to kind of give you a little bit of the history and then talk a little bit about 2011, but as we've come out of kind of end of 2009, we paid down and refinanced all the first lien debt. We redeemed all the Series B and we redeemed all the 2013 Series A or will be redeeming all the '13 Series A and part of the 2014s as we mentioned. We will continue to access multiple funding sources during 2011. So that will include both the secured financing market whether it be term or conduits as we renew some of the ones put in place in 2010 at hopefully better -- at better rates as well as advance rates. And as we did in March, accessing the corporate bond market, I think that our bonds have performed very well since issuance and that has positioned us for the potential for different alternatives in that market, too. And so as we just mentioned with John, too, is that the bank is clearly a big focus of continuing to grow the originations into the bank. So I think we have a multipronged approach and that will -- what we do in 2011 will be to kind of maximize both diversity as well as cost and also have less restrictions on the fundings that we put in place. Christopher Brendler - Stifel, Nicolaus & Co., Inc.: Just a quick follow-up on the bank. Obviously, this has come up a couple times on this call, I'll just be a little bit more direct about it. Do you think you need a branch deposit gathering system to please the regulators and to further diversify and satisfy that need to diversify the funding away from brokered CDs? Or can it be an online direct CIT-branded deposit-gathering effort?

Well, I think the answer is it could be either or both.

Your next question comes from the line of Sameer Gokhale from KBW. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Thanks. Just the first question was on computation. John, I think you talked some of the reductions and asset yields on your asset-based lending and cash flow side. It seems like the larger banks, they've had some challenges in terms of loan growth and the sense I'm getting is that they're trying to penetrate some of the other markets or maybe they had paid less attention in the past and one of them could be middle market lending, and I think you've heard some banks talking about that. So can you talk about the outlook there when sequentially, I think, there was a little bit of a dropoff in volumes for Corporate Finance loans. And what is your outlook there in terms of growth and demand and your willingness to give up a little bit on the yield in order to generate that growth?

This is Scott. So I kind of mentioned the piece on the Corporate Finance. I think a lot of the downward pressure of the larger institutions, we would classify as kind of the higher middle market, kind of the $50 million EBITDA and above versus what we would call the core middle market that it's kind of our niche, which is below that. That one tends to be less the syndicated model, much more of a kind of a smaller participation around providing those solutions to the customer. So again on that, the upper middle market, we have seen some of the larger institutions coming into that marketplace. The sustainability and how that plays out we'll continue to watch in 2011. But we feel pretty comfortable around our niche in the middle market. And with respect to kind of the pricing, part of that is you're coming off kind of late 2010. So just as we kind of did with our debt issuance, I think the credit or the pricing is being tightened a little bit, but not as much as I would say in the larger syndicated loan market. But our volume -- we have a niche, lot of the activity today, we want to make sure that we stay in the deals in the segments that we specialize in versus chasing volume. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Okay, that's helpful. I mean I know historically basically, the story has been that you've focused on this niche market and that's not where the larger banks have been traditionally focused. And it sounds like from what you're saying that really hasn't changed very much despite their ability to generate the loan growth on the upper end. So is that correct that really does sound like you're still maintaining your presence in your niche?

Right now I mean if you look at the deals that we're competing on, we haven't seen a lot of the participants that you're speaking about. That could change, but right now it's kind of, the kind of industry players that we've been kind of competing with for years. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Okay, that's great. And then just another question on a totally different topic. The other income accretion was a little bit higher. I think $32 million or so compared to last quarter and was remodeled. Was that driven by asset sales in the quarter or was there something else going on there, specifically?

In regards -- you're talking about the accretion? Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Yes, the other income accretion.

I don't know specifically, so we should probably -- if you don't mind, maybe follow up with Ken or the IR team on that? Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Sure, that's fine.

Your next question comes from the line of Henry Coffey from Sterne Agee. Henry Coffey - Sterne Agee & Leach Inc.: Can we talk about the dynamics of transferring business units into the bank. Obviously, SBA business and you were the largest lender in the country for a while out there, but I know that business has sort of slowed a little bit for you, and then of course Vendor Finance and is it the assets go in or the origination capacity goes in? And what are the cash flow implications for the holding company once you move these assets into the bank?

Right. Henry, it's John. So it is the origination platforms that are moving. And so what will happen over time as the origination platforms originate new volume, that new volume will be funded out of the bank. And the basic cash flow implication is it is more substantially more profitable in the bank. And so that's really what we're doing here. But it is the origination platforms, so you'll see the benefit over time. Henry Coffey - Sterne Agee & Leach Inc.: And then as both non-bank Vendor Finance stay down, that cash stays at the holding company and "new assets" go into bank, is that the dynamic?

Correct, exactly. Henry Coffey - Sterne Agee & Leach Inc.: And then in terms of the cash build, are we right in assuming you've got about $6 billion of unencumbered cash just from reading the note? Or can you give us a sense on what that balance is and how likely you are to use that to pay down more debt?

Yes, so Henry, you're right. At the end of the quarter, between cash and the treasury bills I talked about, we have about $6 billion at the parent company. But remember, on that one, we've already committed $2.5 billion to be paid down on the Series A in early May. And so that balance will be reflect -- does not reflect that payment, so that would take you down substantially from there. And then I think the -- as we've talked about, we continue to evaluate and look at opportunities to see what the right level of liquidity for the overall enterprise. And if we feel that we can reduce that liquidity, we will do so with respect to potential paydown of additional debt.

Your next question comes from the line of Don Fandetti from Citigroup.

John, I was wondering if you could provide us an update on where you are with the written agreement with the New York Fed. I mean obviously the cease and desist move was very helpful and I understand there's a checklist and then a period of monitoring. Can you talk a little bit about where you are and what the run rate may look like?

Sure, Don. So as I said on our last call, there is a laundry list of items that we need to complete with the Fed on the written agreement. And it will take us through the end of this year to complete those items. And so I think we will be substantially completed with their list of items by the end of the year. And then they will want to be comfortable with their review of how we're doing on those items. And as I mentioned before, they also -- because they have a continuous review process, they also have a tendency to add new ones. And so which is why we'll never be 100% complete at the end of the year. But I do anticipate we will be substantially complete with the written agreement items by the end of the year.

Your next question comes from the line of Mike Taiano from Sandler O'Neill. Michael Taiano - Sandler O’Neill & Partners: My question is on capital. Your Tier 1 is up over 20% now. Could you give us a sense of how you're viewing capital at this stage? It seems like you've got a lot of excess capital. Your thoughts on priorities in terms of deploying it and the timeframe over which potentially you could return some of that excess capital to shareholders. And if you have some sense of where your capital ratios would stand on a Basel 3 basis. Just directionally, that would be helpful. Thanks.

Well, Michael, I'll take a stab at it. I think as you know on the capital side, the focus for us is to continue to grow the business and use the capital for funding new business growth, which we have talked about with respect to both the Aircraft and the Rail businesses. We do have restrictions in some of our debt covenants in regards to return of capital or things of that source. So until we're able to address that in the Series A, that's going to be something that we're focused on and one of the key reasons, as we've talked about, why we issued the Series C in regards to the kind of the covenant that we were able to provide in that piece of paper. With the respect to kind of the regulatory, kind of capital, as you know, we have kind of a 13% kind of agreement in place. We've gone through our economic capital analysis. And I would say that, that number both on a Basel 3 and on a regulatory point of view, our internal analysis is in that range now. Slightly below, but in that range. Michael Taiano - Sandler O’Neill & Partners: Okay. And then just a quick question on the sale of the student loans. I get $250 million in the quarter. Was that above where you had those assets marked? And if you could just maybe update us on your views of those loans. Are they still -- I guess technically, they're not up for sale, but it's something that you would consider selling if you've got the right price. Is that fair to say?

Yes, exactly. I mean we continue -- as you know, those are 97% guaranteed. So the gain on those are very minimal with respect to a transaction and a lot of it is just to -- as we've talked about is kind of continue to manage our liquidity in the bank. And in the current scheme, the yields on those are more attractive than holding cash.

Yes, I think you think you should consider those as an alternative liquidity pool. As we need funding, we can sell them and they're just a more attractive investment at the moment than if we turn them into cash.

Your next question comes from the line of John Stilmar from SunTrust.

Thank you. Really quickly, with regards to the written agreement that you have at the parent, you're clearly going to be substantially done by 2011. What -- can you give us a path at least in terms of the restrictions and the focus that you have today on your enterprise in making progress on this? And really what is it that's gained by that written agreement being lifted or by you becoming substantially complete, what does that really gain for CIT at least in terms of a strategic objective of advancing your goals, and how should we be thinking about that milestone?

Well, much of what is in the written agreement are really things that we would need to do anyways. So a lot of it is focused on risk management, on compliance, on internal controls. And those -- all of those types of things, we should have and would need to have -- whether the Fed made us do it or not. And so from the point of view of running a large financial institution, having the type of risk controls, having the type of compliance procedures and compliance departments and having the type of internal controls and internal audit, all of those things we really need to do. And so I don't think it's anything other than what we should actually be doing anyways.

Okay. Well, I guess maybe more to the point, a lot of people have been -- I guess we're all wondering is that when you get -- become substantially complete and provided that you do that, does that allow you to be more aggressive? Does that milestone allow you to be more aggressive with regards to potentially advancing or advancing your strategic objectives by looking at acquisitions of the various platforms? Is that kind of a milestone that allows you to become more aggressive? Or is it really just a focus of you're just doing the operating things that you would normally do and so therefore, it's just the prudent ongoing course and doesn't restrict you today? I'm just curious about the milestone.

Well, there's no very easy way to answer your question the way you have phrased it. Because anything that we would do would require a regulatory approval in any case. And so the Fed, the FDIC, the Utah State regulators, all would require regulatory approval of any type of transaction. I think the one way to think about it is the further along we are in satisfying the written agreement issues, the more likely it is we get a positive reaction from the various different regulators.

And then just one quick follow-up. On the International businesses that you have with regards to financing, is the financing of those platforms really still going to stay with unsecured and secured capital markets financing? Or are there international banking platforms that you could potentially take advantage of to probably access local deposits to gain a more efficient cost structure than -- and more quickly, I guess, than waiting for an investment-grade rating that seems like you're well on your way of getting?

Well, the answer to that is we do already have international banks, and we are already using them. So for instance, as an example, we have a bank in Brazil, and it is in fact accessing deposits to fund a portion of its business. So the International businesses, just like the U.S. businesses, will be funded with a mix of bank, bank deposits, secured funding and unsecured funding.

Your next question comes from the line of Matthew Schultheis from Boenning and Scattergood.

Really quick question for you or actually 2 very quick questions. First off, on the 3,500 railcars. What's the dollar figure associated with that?

It's a little bit over $250 million.

Okay. And second question is actually a follow-up to Henry Coffey's question. Obviously, the origination platforms can be in the bank, the Vendor financing you still need the approval for. Could you file -- I think it's a 23A and move existing holding company assets to the bank and would you?

Well, the theoretical answer is yes. There is a process to move assets using 23A. And that -- any transaction like that would be a discussion with the regulators.

And do you think you'll actually go down that avenue or is it just sort of, yes, we could?

Right now we're focused on moving the origination platform.

Your next question comes from the line of David Hochstim from Buckingham Research.

Just a follow-up on the comments about the Dell business. Could you just give us a sense of what the financial impact will be in terms of freed up capital and loss of earnings? And I have a follow-up.

Yes, I think as we've talked about, David, our focus is more on the assets. These are still in the process of closing and to give out -- try to give out financials based on kind of where we are is probably not prudent. I think from a perspective of the kind of the business piece of that is we will continue to support Dell as we mentioned in other regions of the world. And we continue to focus on developing and signing up new vendor business partners, and that will continue. But we have a solid franchise in both Canada and Europe outside the Dell assets we talked about.

Okay. Is it risk sharing or the revenue-sharing arrangement with Dell different than other partners, so that it might be less of an impact when you lose these assets than other business left?

I mean each one of the -- again we've been with Dell for over 12, 13 years. So I think agreements that are signed over time each one is somewhat customized to the kind of the requirements for that particular partner. So I don't think you can kind of draw a corollary between kind of the assets and the profitability of our particular program.

Okay. And then just on railcars, out of curiosity, what kind of railcars are you buying? And what's the character of the 5% that's not currently leased in the existing portfolio?

Yes. I'll start with the latter first. Most of the -- we're about 95%. And the one area that we have, the least amount of utilization is on a car called the centerbeam. And the centerbeams are used in construction in housing, which as you know, has been very impacted over the last couple of years. So if you take out the centerbeam assets we have, you're closer to about full utilization, 99-plus utilization. And so given that we saw an opportunity, it's a mix between covered hoppers and tank cars that will be used in kind of the agricultural and the mining areas, so very specialized assets that are used for very specific areas that are very high in demand. So that's why we've been able to place the order as well as have full commitments on those assets at very attractive rates. So it's kind of a -- it was a very calculated niche transaction in an area that had capacity constraints that we were able to fill.

Okay. Then you made a reference to the European factoring volume. Is Europe still a focus in terms of factoring or...

We had, several years ago, a German factoring operation, and that's kind of been -- kind of run down over the last year, year and a half. And so that's just impacted on comparability of volumes year-over-year, so that's why we pointed it out. It's very small. It should be pretty much done in the second, third quarter of this year.

And so there's no plan to try and build the European factoring business?

Not currently, but it's an option. It's a very robust marketplace in Europe, the factory market. So it's not saying we would not consider it, but currently it's something that's -- it's not going to be a near-term kind of growth strategy.

Your next question comes from the line of Moshe Orenbuch from Credit Suisse. Moshe Orenbuch - Crédit Suisse AG: Great. Just -- maybe you could just come back to the idea of diversifying of funding at the bank and maybe just a little more detail as to what is available to you in your current configuration?

Sure, I'll review. Really what was asked before, which is both Internet deposits and retail deposits, traditional retail deposits, are both available to us and being explored by us. Moshe Orenbuch - Crédit Suisse AG: Could you maybe just tell us how would you get retail deposits? You don't have a branch network, right?

Well, yes. I mean we're not going to get into that very much, but we probably wouldn't try to build it from scratch. Moshe Orenbuch - Crédit Suisse AG: Got it.

Your next question comes from the line of Fred Woollard from Samuel Terry Asset Management Group.

I have 2 questions. The first is you spoke about the differences in the covenants between the new Series C notes and the previous Series A notes. I was wondering if you could talk us through the main differences in covenants that are relevant to us as shareholders. Second question is, is there any progress towards getting a better credit rating from the big credit rating agencies?

Okay. Well, I'll start with the latter and work back. I think it's always easier. We just completed in the last month very constructive and comprehensive reviews with the rating agencies and walked through the progress in 2010 and the priorities that we have for 2011. And I thought those were very productive conversations where we covered a host of areas. And so we continued to, as we've said before, what we need to do is continue to focus on executing our strategy and our priorities and hope that, with that, we'll continue to make progress on our ratings. Covenants, so I would say, to kind of go through the specifics of kind of those. The way that the Series Cs are structured, we have to follow 8 covenants when we get to investment grade. And the biggest -- there's couple of restrictions that we had. One was the cash sweep that's in our current debt structure. And then I think the other piece, as we've talked about, is on kind of restrictions in regards to what we could do with our capital. So I think those are probably the 2 large ones, but I think the key piece is that -- as we improve our ratings, that it will kind of turn into an unsecured piece of paper.

Your next question comes from the line of Ken Bruce from Bank of America Merrill Lynch.

My question is first and foremost, stepping back, there seems to be some broad disagreement as to exactly what CIT needs to look like when it grows up and maybe what the best tactics are to get there. John, could you maybe elaborate on what your view is of the strategy for CIT going forward? And how has it evolved from maybe over the last year? And then my follow-up question is when we would you feel you're comfortable with kind of where you are in terms of your progress to be out in front of investors and basically describing your view of the longer-term opportunity for CIT? It seems that there's still very much kind of a view that this is a restructuring situation and maybe it is for some period of time here in the future, but at some point you're going to be in a more steady state and having a little bit wider dispersion of investors may require a little bit of better insight into the longer-term strategy.

Sure. So first I'll talk about the strategy. So we are a lender to small and middle market companies. We are a lender against assets and a lender against assets that goes all the way from very short-term receivables. As you know, we're the largest factorer in the United States, all the way to lending against airplanes and railcars. And so we are fundamentally lenders to the small and middle market and lenders against assets. And today, if you -- our Aircraft business is mostly outside the U.S. But excluding that, we're more focused on the U.S., so we have, we believe, great opportunities to, first, to grow our business in the U.S., but then second, also grow outside the U.S. So we believe that our lending expertise will be able to allow us to grow in places like Brazil, in places like China. And as we talked about, the Aircraft business as well as the Railcar business, is very attractive right now. As in the case of aircraft, we have all of our deliveries in airplanes over the last 12 months -- over the next 12 months are already leased. We put another order into Boeing. We bought these railcars and we found the lease rates on those very attractive. So basically, we are lenders to the small and middle market, lenders against assets and we see lots of opportunities both in the U.S. and outside the U.S. for us to grow. Just then slightly -- a little bit on your comment about the restructuring, yes, we are in a restructuring mode. And that will certainly continue at least through the end of this year. And when you're in a restructuring mode, it causes a certain amount of noise in your earnings and you see that as we pay off the high-cost debt and we have to pay the prepayment penalties and there's the FSA accretion. And so there is noise in our numbers, and that will, I think, persist at least through the end of this year. And I think you'll start to see us be more normalized as we get into 2012 and 2013.

And any thoughts around when you might be willing to kind of get out and better or describe the CIT story in a different light?

Yes. We are scheduled to start doing that in, I guess, the first time is June. And then we'll start to do it more at various conferences.

Our last question comes from the line of Mike Turner from Compass Point.

Most of my questions have been answered. Just wanted to find out maybe if you could talk about what you kind of see as an achievable ROE target for your consolidated business?

I mean I guess what we strive to be to over time?

Yes.

I think as we've mentioned several times before, we're shooting for mid-teens ROEs with the asset mix that we have. And as John just mentioned, we're kind of on this kind of continued progress toward that. And it will take us several years to kind of achieve that, but all the actions that we're taking we feel position us to get there. And that's kind of why we highlight some of where the new business volume is coming in those funding areas, the continued progress we make on the debt side and kind of using our expertise around kind of lending against assets to kind of build that -- kind of build the returns to those type of levels.

Okay, thanks. And also just for your Vendor business, it looks it was about $4 billion in loans. How much of that is U.S. versus international?

Probably around 50/50, yes.

I will now hand the call over to management for closing remarks.

Okay, thank you very much, Veronica. Thank you all for being on the call. To the extent you have additional questions or you need clarifications, you can talk to Ken and the IR team. We very much appreciate your support, and thank you.

That concludes today's call. Thank you for participating.