First Citizens BancShares, Inc. (FCNCA) Q2 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to CIT's Second Quarter 2011 Earnings Conference Call. My name is Stacy, and I will be your operator for 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, Stacy, and good morning, and welcome to CIT's Second Quarter 2011 Earnings Conference Call. Our call today will be hosted by John Thain, our Chairman and CEO; and Scott Parker, our CFO. We will have a question-and-answer session following our prepared remarks and 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 our press release. And for more information on CIT, please visit the Investor Relations section of our website, www.cit.com. I'd like to now turn the call over to John Thain.

Thank you, Ken. Good morning, everyone, and thank you all for being on our second quarter earnings call. I'm going to provide some opening comments and then turn it over to Scott. And as you heard, we will then take questions. In our second quarter, we made good progress on our 2011 objectives. New business volume, in particular, was very attractive. We grew in all 4 of our core businesses. Our funded volume was up 30% to $1.7 billion in the quarter. Our credit metrics improved, charge-offs, nonaccruals and our inflow into nonaccruals all were lower in the quarter. We made continued progress in restructuring our debt. As you all know, we redeemed $2.5 billion of our Series A debt, which unfortunately negatively impacted the reporting on the quarter's results. We also announced repaying $500 million of our first lien term loan, that will get done this month. We also successfully completed our consent solicitation and exchange offer, and we now have a clear roadmap to addressing the remaining high-cost debt and the restrictive covenants that are in that debt. We continued to grow our originations in CIT Bank and we also were successful in moving our U.S. vendor platform into the bank. So we'll now be originating our U.S. vendor assets in the bank. And if you look at the full year, for the first 6 months of the year, about 2/3 of all of our U.S. volume was funded in the bank. We maintained very strong capital ratios. Our total capital is about 20%, our Tier 1 capital is 19%, and we continued to maintain very high levels of liquidity. We continue to focus on expenses. Our expenses, as you saw, are a little bit higher in this quarter. And Scott will make some comments about that. And we continued to focus on and make progress on the written agreement and satisfying as many of the written agreements as possible. I'm just going to make a couple of comments about the different businesses. In Corporate Finance, we originated over $1 billion in terms of committed volume in the quarter, most of that was originated in CIT Bank. On the trade side, domestic factoring volume was up about 4% versus the prior year's quarter. In terms of our aircraft business, our airplanes are 100% leased. And if you look forward of the 16 new airplanes that we expect to be delivered in the next 12 months, all of those are placed. I'm sure you saw, we ordered 50 new Airbus A320neos, new engine options. Those airplanes will get delivered in 2016 through 2019. And that follows our order for 38 new Boeing 737s, which we announced earlier in the year. We also closed our first Ex-Im financing, Export-Import Bank financing for some of the Boeing aircraft that were delivered this year. On the Rail side, our utilization of rail cars, if you exclude center beams, which are associated with housing, our utilization is almost 100%. If you include the center beams, it's about 96% overall. We see lease rates improving. We had previously announced that we bought 3,500 new rail cars. All of those new rail cars have been placed. And if you were watching the press this morning, we announced an additional 5,000 rail car order. So we're seeing improvement in that business. On the vendor side, as I said, we moved the U.S. origination platform into the bank. Vendor originated about $600 million of new volume in the quarter. And vendor is an international business, and so we're focusing on growth outside the United States and funding that growth. And in that regard, we successfully put in place a RMB 1.8 billion facility to Fund our China business. We put in place GBP 100 million U.K. conduit. And we're continuing to fund our Brazilian business out of our Brazilian bank using deposits in Brazil. And then just in terms of CIT Bank itself, beyond the progress I already talked about, we do expect to launch an Internet deposit capability later this year to give our bank greater flexibility and diversification in its funding. So with that as an overview, I'll turn it over to Scott to get into more detail.

Thank you, John, and good morning, everyone. I will review the drivers of our consolidated results, discuss the performance of each segment and update you on funding before opening the call for questions. We reported a net loss of $48 million or $0.24 per share on a pretax of $22 million. That pretax loss includes $163 million of accelerated FSA discount and fees on the Series A debt we prepaid in May. Excluding those costs, pretax earnings would have been roughly $140 million. Total assets decreased $3 billion to $48 billion as we used cash for the $2.5 billion Series A redemption. Finance and leasing assets declined about $900 million, $700 million in the Commercial portfolio and just under $200 million in the Consumer portfolio. With respect to the Commercial portfolio, as John mentioned, we funded $1.7 billion of new business volume, which largely kept pace with our net portfolio collections. And we sold roughly $700 million of commercial assets including our Canadian Dell portfolio, which we announced last quarter. Assets held for sale increased to about $1.9 billion and includes about $700 million in student loans, largely in CIT Bank; $500 million in vendor assets, most of those relate to the Dell Europe portfolio; and $400 million in Corporate Finance loans, largely nonaccrual assets. A little bit more color on the Commercial business activity. New commitments totaled $2.1 billion or 22% sequential increase and nearly doubled the volume from a year ago. I mentioned that we funded $1.7 billion. That included over $700 million in Corporate Finance, $600 million in vendor and about $400 million in transportation. As John mentioned, the important part is each of these segments reported double-digit sequential and year-over-year increases in new business volume. CIT Bank originated over 70% of our U.S. lending volume, up from 61% last quarter and 27% a year ago. And factoring volume held steady at around $6 billion. Now I'd like to take you through the income statement highlights. Reported net finance revenue was $69 million, down $128 million from the first quarter. Excluding FSA and the prepayment penalties, net finance revenue decreased less than $5 million to $141 million, basically reflecting the decline in average earning assets. These impacts are summarized in the non-GAAP tables on the last page of our press release. Net finance margins, excluding FSA and prepayment penalties, was flat with the first quarter, about 145 basis points. However, there were some changes in the components. Asset yields were up about 15 basis points, driven by Corporate Finance, where we had some interest recoveries on prior charge-offs; and Transportation Finance, which benefited from the redeployment of aircraft associated with a bankrupt carrier and increased rail utilization. However, the higher yields were offset by higher funding costs as the second quarter interest expense included cost related to the liability restructuring actions and reduced benefits from prepayments on a secured borrowing, the total return swap. On a run rate basis, margin was consistent with the first quarter, but continues to be impacted by carrying a high proportion of low-yielding assets such as cash, student loans and nonaccruals. Other income was $240 million, down $38 million sequentially, with the vast majority of the decline reflecting unfavorable fluctuations in our non-qualifying derivative marks. In addition, gain on sales remained strong at about $120 million. Fees and other revenue benefited from changes in our aircraft order book and recoveries on pre-FSA charge-offs continued, though at a slightly lower level. As I already mentioned, we closed the sale of the Dell Canada platform, which included about $350 million in receivables and 70 employees. That sale closed in June, and we received a premium on both the receivables and the business platform. We also sold about $200 million of Corporate Finance loans, roughly half of which were nonaccrual and about $100 million of leased equipment. Now turning to credit, the metrics improved, as John mentioned. Reported net charge-offs were $56 million, less than half the first quarter amount with lower net losses in all Commercial segments. Corporate Finance losses declined from last quarter's high level with improvements in U.S. middle-market portfolio. Net charge-offs also benefited from higher FSA -- post-FSA recoveries, $33 million this quarter versus $19 million in the first quarter and less than $10 million a year ago. Nonaccrual loans were also down in all segments, declining 19% sequentially to $1.1 billion. Most of the improvement was in Corporate Finance, where we have been very active on the risk management front in both terms of asset sales and workouts. And John mentioned that new inflows into nonaccrual continued to decline. The allowance for loan loss increased $22 million sequentially, largely due to provisions for new originations exceeding the reductions in specific reserves. At $424 million, the allowance equals about 1.9% of loans. And if you combine the on-balance sheet allowance with the remaining non-accretable discount of $121 million, we have 2.3% coverage against the $23 billion pre-FSA loan book. Operating expenses increased to $246 million. We have been focused on controlling expenses and have been successful keeping headcount and employee costs aligned with the asset base. However, in the second quarter, we had an increase in servicing expenses, some of which pertain to prior periods and higher litigation-related costs. On a year-to-date basis, operating expenses, excluding restructuring charges, are averaging about $225 million a quarter, and we are comfortable with that run rate. Finally, on income taxes, we provided $27 million this quarter, down from $66 million in the first quarter, which included $17 million of discrete items. The sequential decline principally reflects lower taxable earnings in Canada, due in large part to higher credit costs. In the U.S., as we've talked before, our federal NOL continues to grow, and we again recorded offsetting valuation allowances against the related deferred tax asset. I'd like to move on to a little bit more details about our business segments. I will focus on sequential trends because I think they are most relevant. Due to the significant prepayment of the Series A debt, interest expense was higher on each segment as we allocated the acceleration of FSA discount, but not the prepayment penalty which we kept at corporate. Corporate Finance pretax income was $51 million, decreased mainly because of reduced FSA benefits, lower gain on asset sales and fewer recoveries more than offset lower credit cost. New business activity was strong with committed and funded volume up 29% and 56%, respectively. Finance and leasing assets fell about $300 million as the $700 million of funded volume was offset by portfolio collections and about $200 million in asset sales. Provision benefited from a 66% decline in net charge-offs and a 20% decline in nonaccruals. New business yields fell slightly, but margins are still in line with our long-term target, as roughly 80% of the U.S. volume for this segment was originated by CIT Bank. Additionally, we are winning more agency roles, which improve the overall profitability of this business. Transportation Finance pretax income was $37 million, down $5 million sequentially. The decline reflects higher interest expense from the debt prepayments I talked about, partially offset by $19 million of nonrecurring revenue, the majority of which stem from a change in our aircraft order book. Net lease yields increased. Air benefited from aircraft redeployment, as well as lower maintenance costs. And as John mentioned, the aircraft business benefited from increased utilization, higher per diem rentals and lower depreciation as we have been actively scrapping older cars. Utilization is very strong. All of our planes are leased and rail car utilization improved to 96%. Quite a lot of progress from the trough of about 18 months ago. John mentioned that we had the order book or the order for 50 Airbus aircraft with delivery date starting in 2016. That follows our order book of -- or our order of 30 Boeing aircraft in the first quarter. So the total order book stands now at 148 aircraft or roughly $8 billion over the next 7 years. And CIT Bank originated $250 million of loans in the aerospace and defense sector. On Trade Finance, they had a slight pretax profit as the increased nonspread revenue offset higher interest expense. Global factoring volume was $6.1 billion. It was flat sequentially and down slightly from a year ago due to the wind down of the German operation. The U.S. factoring volume was up 4% from a year ago. Factoring commissions were down slightly on lower surcharges reflecting the gradual improvement in the retail credit environment, and we saw some of the improvement in our business. Recoveries contributed to both other income in the provision and nonaccrual balances declined again. Finally on Vendor Finance, they generated $22 million of pretax income, up from $14 million in the first quarter. Finance and leasing assets decreased about $500 million, but new business volume increased 10% sequentially and nearly 30% from a year ago, excluding the South Pacific business we sold last year. Moreover, the number of active vendors is increasing with good flow from our channel partners. The portfolio yield fell slightly, largely reflecting the sale of higher yielding consumer assets in Canada, but new business yields remained healthy in the low double digits. Credit has continued to show signs of improvement with net charge-offs down slightly and nonaccruals continuing to decline. We made considerable progress with respect to funding this global business operation in the quarter. We sourced nearly $500 million of conduit and other fundings in Asia, Europe and Latin America. And now that the U.S. vendor platform is in CIT Bank, we expect roughly half of future volume will be originated by the bank. However, the third quarter will be a transition period. As John said, we made a lot of progress advancing our overall liability restructuring strategy. We paid down the $2.5 billion of Series A notes in the second quarter. We also made significant progress addressing restrictive covenants and continue to access the capital markets for cost-efficient funding. The consent solicitation and exchange offers were extremely important and successful. Although they did not provide an immediate economic benefit, they position us well to execute the balance of our liability strategy focused on lower cost of capital, less restrictive covenants and a return to investment grade. For those less familiar with the transaction, we exchanged nearly $9 billion of Series A debt maturing in 2015 through 2017 for Series C debt with the same financial terms, but with covenants that are more investment grade-like. Concurrently, we completed the consent solicitation to amend the covenants of the Series A debt maturing in 2015 through '17 to more closely resemble the Series C debt, a critical step in ultimately unencumbering the balance sheet. As a result, the redemption of the remaining $1.8 billion of Series A debt due in 2014 is a high priority. There is roughly $145 million of remaining FSA discount on that paper. In terms of accessing new capital and renewing existing facilities, John mentioned most of these. We did complete the U.S. Export-Import Bank financing for $150 million for -- secured by Boeing aircraft. We established the China facility for our vendor business. And we also renewed our U.K. vendor conduit with a longer maturity and significantly reduced all in cost. We recently prepaid the $500 million in first lien term loan. Although the loan is carried at a slight premium on the balance sheet, there'll be a net charge of approximately $15 million on the prepayment that accelerated deferred debt cost more than offset the expected FSA benefit. For the balance of 2011, we will continue to advance our liability restructuring strategy, which may include paying down more debt, further diversifying our funding sources and accessing the capital markets if conditions are favorable. With respect to CIT Bank, John mentioned the progress we are making on the asset side. On the funding side, cash continues to remain strong at nearly $850 million. We issued over $600 million of brokered CDs in the second quarter at a weighted average cost under 2% and term over 3 years. And as John said, we will advance our deposit diversification strategy with a launch of an Internet deposit platform. Finally, our consolidated capital and liquidity positions remained strong. We ended the quarter with a Tier 1 capital ratio of 19% and over $10 billion of cash and short-term investments. So with that, I'll turn it back to Stacy, and we're glad to take your questions.

[Operator Instructions] Your first question comes from the line of Sameer Gokhale with KBW. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Just a couple of things. In terms of the litigation charges you referenced in your release, what was the amount of those? Was those about $20 million or so? I can't recall if you mentioned that number.

No, we didn't disclose the number, but it's up from the first quarter. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Okay, Scott. And then can you just give me an explanation of the benefit, the onetime benefit that you got? You referenced a change in your order book and I'm not sure if I understood what that was and what caused that $19 million, I believe or so, of income during the quarter to be recognized?

Yes. So we had some changes in the order book and there was some FSA associated with that, that was accelerated into the quarter. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Okay, I see. And then just the other question was as far as this tax dispute with Tyco, do you have a sense for the timing of the resolution of that issue and then where that stands as of now?

I don't have an answer on the timing of resolution. I mean, we have filed our claim with the bankruptcy court. Expected to kind of, hopefully, have kind of a hearing sometime in the second half. But in regards to final resolution and settlement, I think that's kind of hard where we are right now to answer that.

Your next question comes from the line of Moshe Orenbuch with Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG: Great. I wanted to kind of talk a little bit about the concept that you mentioned about Internet deposits. I mean, 3 months ago after the first quarter, you talked about potentially making acquisitions to buy deposits. Does this replace that? Is it supplemental to it? How should we think about that?

I think you should think about it as just another diversification step for funding the bank. It doesn't really replace any other strategy. It is a stand-alone strategy. We believe the Internet is an attractive way to diversify our deposit gathering capabilities. It's quite attractive in terms of raising significant amount of deposits at a relatively low cost. And you've seen various other people be very successful at it. And so it's the next step in the diversification of the funding, but there will be more to follow. As we've talked about in the past, we want at some point to be able to take commercial deposits, particularly from our customers. And it's certainly possible at some point that we would have retail deposits as well. So it is just one of the steps in diversifying the funding. Moshe Orenbuch - Crédit Suisse AG: Got it. And do you -- have you talked about what the size of the commercial loan book is at the bank right now?

No. But it's about $2.2 billion, $2.3 billion. So on that one, as the Commercial portfolio has been growing and as we've talked about the student loan portfolio will continue to decrease. So we have a mix shift in the overall bank. Moshe Orenbuch - Crédit Suisse AG: Would you anticipate selling those student loans this quarter?

As I mentioned, we have -- we moved $700 million of student loans into held-for-sale. So we do expect to sell those in the coming quarters.

Your next question comes from the line of Chris Brendler with Stifel, Nicolaus. Christopher Brendler - Stifel, Nicolaus & Co., Inc.: I just have 2 questions, actually. First questio,n, on the significant improvement in bank originations which I assume is mostly in the Corporate Finance business. Can you give us a little color on that improvement and what you're seeing from a competitive standpoint? Corporate Finance for you guys is a lot of different businesses, a lot of different segments underneath that. So maybe you can give us a little color on exactly where you're seeing the growth and the opportunities and how you fit in competitively given that so many banks are looking for loan growth these days?

Yes. I would say that as we've talked about in the past, we -- the middle market is a broad kind of terminology and kind of our, I think, niche that we try to stay in is those companies with EBITDA kind of below $40 million. The competition is still similar to kind of what it has been for many years. What we're seeing is kind of the core C&I, healthcare and certain pockets of the energy sector have been attractive for some of the volume we've been doing. It's been kind of broad-based. We've seen a little bit of pricing pressure mainly on the ABL side versus the cash flow. But again, we've seen some of the kind of competition that you're referring to, but it's still not having a significant impact on the pricing in the marketplace. Christopher Brendler - Stifel, Nicolaus & Co., Inc.: Great, Okay. And just a quick follow-up there. When you see pricing pressure, is that mostly just from traditional banks, sort of expanding their horizons into your middle-market area or is it other finance companies?

No. I wouldn't say it would be new entries, but yes, certain other financial institutions are -- would be the ones that are doing that. I don't think it's the new entries. Christopher Brendler - Stifel, Nicolaus & Co., Inc.: Okay. And my second question is for John. You mentioned a clear roadmap to addressing the 7% coupon debt. And can you just give us a little more color there? And that was a pretty, I think, positive statement. I just wanted to see if you had any additional thoughts on the strategies there and the timing.

Well, we're not going to comment specifically on the timing because it depends a little bit on the state of the capital markets, but it's pretty clear that one of the next steps that we really need to deal with is the 2014s. And the combination of refinancing the 2014s, as well as the consent solicitation and the exchange of the As and the Cs, we will be in a position to drop out most of the restrictive covenants that exist in the Series A, and have the covenant package look much more like the Series C going forward, which, as we've said, are for the most part investment grade-type covenants. Christopher Brendler - Stifel, Nicolaus & Co., Inc.: Okay. And then just last question in terms of market access in the unsecured markets. You did the transaction in March. You've done the exchange offer now. How are things looking? I don't -- the debt markets in general aren't quite as healthy as they were back then. But do you feel like you've made enough progress that accessing the debt markets is something that you feel comfortable that is on the horizon?

I think we definitely feel comfortable with that. As you said, we've had major activity in both the first and the second quarter. The market did back up as you're well aware of in June, and it's kind of started to kind of come back a little bit but still a lot of uncertainty related to the U.S. government and some of the kind of European issues. And our hope would be is that it stabilizes and we're able to access the capital market at attractive rates.

I think you should think about us as, we'll be opportunistic. We have no particular pressure, but if we do get an improvement in the market and there was the opportunity to access it, I think that it's likely that we would.

Your next question comes from the line of Bruce Harting with Barclays Capital.

Just if you could clarify what you just said, you said you'd refinance the 2014 maturities. Is that through prepaying or refinancing? But if I could just hold that for a second. You had 2 great slides at your last conference presentation. One that showed financial results versus long-term targets, with the finance margin going from first quarter actual of 2.24% to 3% to 4%. And then another slide showing your portfolio mix evolving with a target of $40 billion to $45 billion in terms of finance and leasing assets by segment. And it's interesting that the mix is Vendor Finance, 25% to 35%; Transportation Finance, 25%to 35%; Trade Finance, 5% to 15%; and then Corporate Finance 25% to 35%. You're at that -- at the low end of your target. You're already at the Corporate Finance, I'm sorry -- you're at $8 billion of Corporate Finance now. You're -- the low end of your target would be $12 billion. You're already at the Transportation Finance number of $12 billion, but Vendor Finance, you're at $5 billion relative to a goal of $12 billion. And those are not the stretch goals. Just wondering when you put that out, what kind of timeframe were you using for that in the margin goal. And for the margin goal, is that mostly changes on the liability side, Scott, or more getting to this mix of assets? And then just sort of an adjunct to that, if you were to -- I know you can't really answer the acquisition question, but would those targets still be the likely asset targets in the event you were to find an acquisition?

Okay. Well, why don't you deal with the margin piece and I'll talk a little bit about the asset mix.

So your question on the margin piece, I would say probably at least 50% of the improvement in the margin will come from improvements on the interest expense line. And then I think the other improvements will be a combination of the asset mix, which is you kind pointed out, especially on the vendor side, it has a kind of high yield. And so those are kind of -- the asset mix, as well as the refinancing of the debt. The third element that we have to kind of do over this transition period is to kind of reduce our, as I mentioned, kind of the low-yielding assets. So we have $10 billion of cash. And as we kind of do some of the efforts that we're doing that will reduce the amount of cash we need to carry, the student loans, as we've said before, will kind of wind down over time. And then the progress we're seeing in nonaccrual assets, all will benefit to getting to the margin lines that we've laid out there.

And then in terms of the question about the asset mix, I mean, you're obviously correct. In terms of looking at the portfolio mix -- and you have to understand that the portfolio does get impacted by opportunities in the marketplace. And so the vendor assets, because of the sale of the Dell portfolios, shrunk and we're certainly very actively looking at growing the vendor assets. And it is possible that from time to time, we would have the ability to buy portfolios in that business, which we would look at. And then in terms of the aircraft in particular, but also rail, there's -- that, as you heard about it in our results, it's a very attractive marketplace right now. We're able to deploy both airplanes and rail cars at very attractive rates. And so we're taking advantage of that and that's causing that area to grow. So that's an optimal mix, but it's going to be impacted by what the opportunities are in the marketplace and it will certainly change a little bit over time. And I don't know whether you actually asked a question on the 2014s or not, but the basic answer is we do have a lot of cash. We do build up a lot of cash. So whether we use cash or whether we actually access the capital markets, we could do either or both as it relates to prepaying the 2014s.

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

John, on the Internet deposit strategy, are you -- is it possible that you would make an acquisition there or would you build that internally? And then can you talk a little bit about the timing, the ramp-up, and would those expenses be in the guidance that you sort of alluded to earlier?

Yes. The thought right now is that we're going to build it up ourselves. The bank has a lot of liquidity, not only cash, but we've talked about before, the student loans are really cash alternatives. So we have the ability to monetize the student loans. So we're not really in a great need of cash in the bank. We believe that it's cheaper for us to grow our own Internet deposit capability, and we don't really feel that we need to buy any right now. And based upon the marketplace and our needs, I think it's very attractive and not very expensive for us simply to raise our -- raise the Internet deposits ourselves. And yes, those expenses are built into the numbers that Scott talked about.

Okay. And then on the Corporate Finance book, I mean, obviously, the new originations are strong but the portfolio looks like it continues to run down. Do you know when that might turn into growth?

Just in respect of the Corporate Finance book?

Yes.

I mean, again I think overall, we've been saying that we -- overall CIT, that we expect the Commercial portfolio to kind of turn kind of late in the fourth quarter. I think on Corporate Finance, we're getting closer to that, the gap between the new business origination and what I would call normal collections. The 2 items that we will have some variation on that answer will be around the prepayment speeds. So those have still been elevated in the first and second quarters as companies are refinancing in the market. And then number two is you'll see some, as I talked about, we're actively managing kind of the nonaccrual book. And if we find opportunities to leverage the markets to sell those assets, we will do that. So I think those are the 2 things in the second half that I think are -- one's market based, the other one is kind of our evaluation of the credit. But the trend has continued, over the last couple of quarters, to narrow. So we feel good about that.

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

My first question really kind of, specifically relates to that. I guess this is not to be skeptical, but when you look at some bigger and stronger competitors that are in the market, where do you see CIT stacking up from just a competitive advantage standpoint? I mean, obviously, the volumes speak to that to a degree. But if you could just really highlight where you see your competitive advantage in this market, that would be very helpful.

Well, I mean, that's a broad statement. So I think it's probably better to talk a little bit about the competitive forces for each one -- some of the business segments versus trying to do in aggregate because I think you're probably focused more on Corporate Finance, which is a broader, kind of a bank market. But on the vendor piece, I think the competition there has kind of been a lot of players that have been in that industry. As John mentioned, most of the shrinkage has been both some programs that have moved away, but the majority of the core business is continuing to grow at the market rate. So if you kind of use some of the industry benchmarks, we're kind of staying at those levels or above. So I think that's a good sign of our brand and competitive forces. On the transportation and rail businesses, I think on the air business, we're one of the top lessors. And in the rail business, we're 1 of the top 3 also. So I think given those dynamics, we are continuing to perform well. And on the Corporate Finance side, we're leveraging -- CIT has been in the Corporate Finance business for many decades and our relationships and expertise in the middle market I defined, kind of below the $40 million EBITDA, continues to be very beneficial for us in the marketplace. And we don't stray back up into the what I would call the more highly syndicated loan market, which is some of our larger competitors play in.

Just to complete those last business, on the trade side, we're the number one factor in the country. We have been for a long time and we're substantially above #2. That's a business that's going to be dependent on growth in retail sales and activity and -- because it's primarily retail-dominated. But we're clearly the leader in that business.

Okay. And just to maybe kind of follow up on that particular point. I mean, you'd mentioned that the volume levels now are effectively kind of beginning to eclipse the pay downs. I mean, do you think that you're really in a position for the balance sheet to grow aside from other asset sales, in the student lending side in particular? I mean, do you feel like you're at a point where the balance sheet can see net organic growth?

On the commercial side. So as you said, student loans will be something in aggregate. So that's why we kind of break it out for you. But as I said, based on our current kind of outlook and forecast, we see that turn happening late in the fourth quarter.

Okay. And maybe just one final question and I'll jump back in the queue if there's time. Do you have a target in terms of how much deposit financing you would like to ideally get within the bank subsidiary?

The answer to that is really dependent on the asset growth in the bank. We, as I mentioned, we have a lot of liquidity in the bank right now and we have a lot of cash equivalents in the form of the student loans. So we, as Scott mentioned, we are selling CDs in the bank because we want to maintain access to the marketplace. And we'll be rolling out the Internet deposit capabilities. So we're just going to balance the overall liquidity in the bank to diversify the funding and then use the liquidity we have there. But there's not a specific number of I want X amount of these type of deposits because we're going adjust it as we see asset growth.

Okay. And if I understood it right, you're expecting 50% of the new volume to be originated at the bank?

That was just for the vendor platform that we moved in, in the third quarter.

That was just vendor. It's a significantly higher percentage.

And so in total, we're currently at 70% of our U.S. lending volume is in the bank. So majority of our lending volume going forward in the U.S. will be originated in the bank. Probably there's going to be some transition in the third quarter in vendor. So we'll probably be at the full run rate kind of -- in the late fourth quarter, early first quarter of next year.

Your next question comes from the line of Henry Coffey with Sterne Agee. Henry Coffey - Sterne Agee & Leach Inc.: You talked about this number before, but when you look at your balance sheet, how much sort of corporate cash do you have? And I know, Scott, you ran through the numbers. But what would be the GAAP charge associated with paying down the 2014s? And what is the total sort of fresh start adjustment you have against your 7% notes?

Yes, so several questions. So we start with the cash. Our cash is about $10 billion in the second quarter. Part of that is restricted in our operating subsidiaries. That's about half. The bank cash, as I said, was about $800 million, $850 million. And then at the parent company, we're kind of over $4 billion. So I think, given that, Henry, as we continue through transition, like the vendor platform into the bank and some of the other platforms, as we extend the maturities on our conduits overall, the liquidity needs at the parent company will reduce over the next couple of quarters, which would allow us to use that cash to either pay down debt or to invest in growth. So I think that number -- the cash balance will continue to go down as we progress on the roadmap John laid out or talked about in regards to the liability side of our business. In regards to the 2014s, if we did that prior to January 1 of next year, we would have the 2% premium. And the FSA on that, I think I mentioned in my transcript, was somewhere around $145 million that would be accelerated. I guess the other piece was what's the FSA remaining on the remaining Series A? Henry Coffey - Sterne Agee & Leach Inc.: No, on the 7% notes, some of which are As. All the 7% notes. We can get that from the Q I'm sure.

Yes, well, the Q has the total debt so it's both the secured and unsecured. And so you're going to have -- on the 7%, you're going to have a combination of the As that converted to Cs, as well as the normal As. But I would circle back with Ken in regards to the specifics around that, but it's going to be a significant portion of the remaining discount. But it's not going to be 100% because we have some of that against our secured borrowings. Henry Coffey - Sterne Agee & Leach Inc.: Also I think the argument could be made that your lease portfolio was probably worth more like par than the current carrying costs. If we were to do our own analysis on that, could you give us some benchmarks to use in terms of how current lease portfolios are being valued and priced? I mean, obviously, there's probably nothing you can do on an accounting front to recapture that discount but it's obviously not warranted in this marketplace.

Well, I guess, the best avenue, if you kind of look at the rail business, which took the significant piece of the mark coming out of the 2009, if you look at some of the financings, secured financing and the appraised value versus what we're carrying on the books it is significantly above that mark. And as you said, it kind of amortizes it, through the depreciation line, kind of over 15 years or so. So on that one, we feel good that the asset valuations have come up significantly. And that's kind of some of the rationale for some of our recent orders. On the aircraft side, we see that in the sense that as part of our normal business model, we do sell certain aircraft on a routine basis to manage exposures and concentrations. And we've consistently had gains on those sales. So I guess that's the best barometer, other than the fact we do, do appraisals on an annualized basis that also give us confidence that the actual kind of market value exceeds our book value.

Your next question comes from the line of Mike Taiano with Sandler O'Neill. Michael Taiano - Sandler O'Neill + Partners, L.P.: I guess, my first question is on the loan sales on the quarter. Could you repeat -- how much were they in aggregate and how much of the loan sales were nonaccrual loans in total?

The total, on the -- the nonaccrual loans, I mean really was in the Corporate Finance side, which we said was about half of the $200 million that we sold. Michael Taiano - Sandler O'Neill + Partners, L.P.: Okay. So was that pretty much all the nonaccruals out of the total amount of loan sales?

Yes. So we sold about $700 million of assets. As I mentioned, the majority of that was the Canadian portfolio, right, which we -- which was not a nonaccrual asset. Right. So that was above -- a platform that we discussed in the last quarter. Corporate Finance, we sold a couple of hundred million. And I would say at least half of that was nonaccrual. And then other leased equipment, as I said just a minute ago, is just kind of routine, either end of lease residual gains or some portfolio management which is not, that they were nonaccruals. Michael Taiano - Sandler O'Neill + Partners, L.P.: Okay. And is it fair to say -- can you give us some sort of color on where the nonaccruals are being sold? Are they generally higher than where you have them marked?

Yes. Yes, they've been significantly higher than what we've been carrying them at. Michael Taiano - Sandler O'Neill + Partners, L.P.: And then just in terms of the repayment of high-cost debt, you paid down $500 million of the first lien debt subsequent to the end of the quarter. Is it fair to say that going through the back half of the year, that you may -- that you have a greater preference to paying down that debt as opposed to the Series A that have the 2% prepayment penalty? Or does that really not factor into your decision?

I would say it's a variable on the decision, but I think a lot of it is when John mentioned a road map, we have many different activities that we're trying to address in regards to our capital structure. And so what we're -- our kind of key premises are to, as we have excess cash to pay down the debt and also deal with some of the other kind of principles and objectives around covenants as well as kind of the debt maturities. So I think as we get in the fourth quarter, the prepayment penalty does become something where economically between that as January makes it tough economically. But we will continue to use our cash as we have excess liquidity. Michael Taiano - Sandler O'Neill + Partners, L.P.: Okay. Last question, if I can. Just on the student loan portfolio, the decision to move the $700 million into held-for-sale. Is that -- is the reason for that is you feel like you're going to need the liquidity for loan growth in the next couple of quarters? Or was there something specific about that portion of the portfolio that you no longer felt like it was economic for you to keep? Or just can you maybe give us a sense of what drove that decision?

I think it's just normal course. I mean, we've been kind of selling student loans, kind of periodically. And so there's no -- the assets, there's no issues with the asset quality and it was just a matter in regards to -- part of it is expectations of liquidity to fund new business in the bank, as well as feeling that we can get some good pricing in the marketplace.

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

My first question is around Corporate Finance new business volume. Just eyeballing it here, it looks like it's almost doubled every quarter for the past 3 quarters. I mean, part of that is sort of the growth in capital markets activity generally in new business volumes. But I mean you had a pretty impressive growth. How long should we expect these doublings to occur because clearly you had -- historical origination franchise was a multiple of where we are today. And I'm just trying to get your current sense for the trajectory of that segment of the business.

I'll take -- I'm going to say -- I'm sure our business leaders are listening to the call. But I would say that doubling from the current run rate of $1 billion is probably going to be challenging. But I think, as we've said before, the business has really kind of continued to focus on the niche market. We have benefited from some of the market activity around refinancing. But we have seen in the last couple of quarters an increasing amount of new supply from transactions, which has helped the overall growth of the business. And the tough part on that one is it is a little bit -- that business is a little bit dependent on kind of what's going on in the overall capital markets. And then number two is that the third quarter traditionally has been kind of a little bit seasonally slower because of holidays and vacations, those type of things. But we continue to see a good pipeline in that business, and our expectation is we'd like to continue to grow, but probably not at a doubling rate.

Fair point. And then switching gears to the international Vendor Finance platform that -- and you've talked about much more recently and specifically emphasizing China and Brazil and the associated different funding sources for those. Can you talk to us a little bit more about the types of vendor businesses that those might entail? And then remind me how big your Brazilian bank is, both assets and deposits, and how flexible that platform is to expanding liquidity. And then one final touch-up question on the capital, if you don't mind.

Okay. Well, I guess, so the businesses that we're doing in both Brazil and in China are very similar to our core U.S. business. So it's office products and technology. And so part of it is an extension of some of our global partners which was kind of the baseline. And then both the teams in Brazil and China have continued to diversify with local partners to grow the business. The Brazil business is a couple hundred million dollars of assets. The bank funding, we expect to kind of fund about a half of that. And we're continuing to look at other ways to grow that, but it's a sizeable since, I guess, 6 months ago it was pretty much 0. So I think it's been a good process and has been helpful to that business. In China, the facilities that we just put in place, as John mentioned and I think I talked a little bit about, is really significant in regards to the backing of kind of some major banks in China, which I think will help us grow that business and fund it very economically.

Okay. And then a touch-up question on capital. As I look at some of our public -- some of the public comps for the transportation business, and I think if I understand your slide correctly, the capital allocation you had was 15% for the transportation business. But if I look at some of the public comps that are out there and granted they may not be as big as you all are, but it doesn't -- it seems like they're running with more capital than the 15% target that you've alluded to. Is there a benefit that you guys have that maybe an independent stand-alone may not by being part of a broader organization? Or what's really -- can you maybe help guide me in terms of what I might be missing by just looking at the relative comps?

Well, I think you have to -- we put transportation, which is a combination of the rail business and the aircraft. So the aircraft would have a higher capital requirement than the rail car business. So we kind of showed a blended. So aircraft would be a couple points higher than that number and rail would be a little bit lower than that number. So on public comps, at least if you talk about the air industry, most of those are not -- they're kind of independent finance companies and are part of a larger organization. But as we've talked about, the capital that we put up includes risk-weighted assets for the order book. And so we feel kind of the metrics that we have calculated are consistent with kind of the industry and we can kind of follow up with Ken later to kind of go through some of that. And on the rail business, again there's not a lot of public comps that I think you can use. There's one big one. But I think our analysis, as we've said, was kind of preliminary. We continue to update it and adjust it based on new Basel II, Basel III kind of changes. But we feel pretty good with the kind of the leverage we have on those businesses.

Your next question comes from the line of Mike Turner with the Compass Point. Michael Turner - Compass Point Research & Trading, LLC: Most of my questions have been answered. Just wanted to find out, I know you can't transfer existing vendor or other loans into the bank. But is it a possibility to go out and buy portfolios and possibly put them in the bank, say, sell the student portfolio and buy another higher-yielding portfolio? Is that something you could do and would entertain?

Yes, and yes.

Your next question comes from the line of Sameer Gokhale with KBW. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Just a follow-up in your Aircraft Leasing business. You talked about the large order you've placed for the A320neos. Some of the other publicly-traded companies in this space have been talking about doing sale leasebacks rather than placing orders for the newer aircraft and the A320s and the like. And I was just wondering if you had a view as to the one versus the other? Why not enter into more sale leasebacks? Recently American had a transaction, one of your competitors in that business. So could you talk about your preference about one versus the other, why not pursue sale leasebacks versus purchasing new A320neos?

Well, one, the A320neo is not going to be -- first delivery I think is 2015. So it's -- I think some of the sale leaseback transactions are for kind of existing technology and existing aircraft. And so I think there's -- we do look at sale leaseback transactions also. So I think it's a piece of the kind of strategy of filling out an order book to have the new technology and those deliveries for our customers, balanced with, on the short term, some of the sale leasebacks help in regards to our portfolio risk management and diversification. So we do look at that, Sameer, it's just a matter of balancing kind of today technology versus future technology. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Yes, that's helpful. I mean, the reason I was asking the question, clearly, the A320neo deliveries won't start happening for a few years. It just seemed like what we're hearing is that the pricing on the sale leaseback transactions could potentially be more attractive for the lessors than purchasing new aircraft. And maybe that's not really true across the board, but that's really what I was trying to get some color for from you. And what sounds like is that really there could be trade-offs between one approach versus the other, would you agree with that?

No, I don't really think so. I think they're really different. I mean, we do, do sale leasebacks and we look at sale leasebacks. And so -- it's just a question of the economics of them. The forward order book is a valuable thing in its own right because our business strategy is to have the most technologically advanced, most fuel-efficient and newest aircraft. And so it's not really one or the other. It is -- we want to have a pipeline of new aircraft, which both the Boeing order and the Airbus order give us. And so that we have -- we can continue to maintain a very new and technically efficient fleet. But that's really separate from the attractiveness of the sale leaseback, which if we see attractive opportunities, we'll do them.

Our final question comes from the line of Moshe Orenbuch with Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG: John, you had mentioned that about $4 billion of the cash is at the parent. Could you talk about what the level that you would want to maintain and how much of that is available for the other uses you described, paying down debt or buying portfolios and the like?

Yes, I mean, it's Scott. I mean, I think the requirements is just a hard question to answer with respect to a lot of it is dependent on certain actions that we have and certain stress scenarios that we need to do. And as we transition the portfolio, we look at this on a kind of monthly basis in regards to what liquidities that we need to maintain with respect to the portfolio. And our goal is to continue to drive that liquidity down at the parent company and also to free up cash in other places to help with our liability restructuring. Moshe Orenbuch - Crédit Suisse AG: Okay. Any kind of insight as to the types of portfolios that you're looking at, at the bank?

I mean, there -- any types of portfolios would be consistent with the business we currently do and be consistent with the type of assets that the bank is familiar with and comfortable with buying, both in terms of the nature of the assets and the credit quality of the assets.

And at this time, I'd like to turn the call back over to management for closing remarks.

Well, we thank you all for joining us this morning and for all your good questions. As always, the Investor Relations team will be available for anything we didn't cover on the call. Thank you very much and have a great day.

Thank you, all.

That does conclude today's call. Thank you for participating. Have a great day.