Good morning, and welcome to the CIT is Second Quarter 2019 Earnings Conference Call. My name is Nicole, and I will be your operator today. At this time, all participants are in a listen-only mode. There will be a question-and-answer session later in the call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Barbara Callahan, Head of Investor Relations. Please proceed, ma'am.

Thank you, Nicole. Good morning, and welcome to CIT is Second Quarter 2019 Earnings Conference Call. Our call today will be hosted by Ellen Alemany, Chairwoman and CEO; and John Fawcett, our CFO. During this call we will be referencing a presentation that is available in the Investor Relations section of our website at cit.com. Our Forward Looking Statement disclosure and non GAAP reconciliations are included in today's earnings material and within our SEC filings. These cover our presentation material, prepared comments and the question and answer segment of today's call. I will now turn the call over to Ellen Alemany.

Thanks, Barba. Welcome and thank you for joining the call. I am pleased to report that we had a solid second quarter. We are making steady progress on the next phase of our strategic plan and delivered 128 million of net income in the second quarter or $33 per share. Tangible book value per share also increases by 3.6% as we work to create long-term value in CIT. Let me touch on a few highlights related to our strategic plan that help to drive performance which you can see on Slide 2. We continue to grow our core business with average loans and leases up 1% compared to last quarter and 8% compared to the prior quarter. Origination volume was solid across the division with commercial finance and business capital driving overall asset growth. We made continued progress in optimizing our balance sheet through deposit growth, a reduction in wholesale funded debt and returning additional capital to shareholders. We grew average customers deposits in the online bank by more than $2 billion, reduced average secured debt by 1.7 billion and repurchased a 158 million of common shares. As a result, deposit now comprise 85% of our total funding up from 77% a year ago and 95% of our funding in the bank is from deposits. Our operating efficiency also continue to improve and we achieved 58% efficiency ratio, which is in line with our target. We continue to reduce operating expenses while also balancing investment in technology which is critical to future market place success and our ability to streamline processes and get more efficient scale in the business. Lastly, credit remains strong and we remained disciplined in our underwriting. We ended the second quarter with a 10.3% return on tangible common equity. Let me share few highlights from the…

Thank you Ellen and good morning everyone. We had another solid quarter with net income available to common shareholders of $128 million or $1.33 per common share as we continue to execute on strategy and progress toward our 11% return on tangible common equity target for the fourth quarter of this year. We grew average loans and leases in our core portfolio by 1% in the prior quarter and 8% from the year ago quarter, which was driven by continued strong origination activity across all of our businesses. We stay disciplined in our underwriting, credit metrics remain stable, and we reduced non-accrual loans. Our net efficiency ratio improved as operating expenses came down from elevated seasonal levels last quarter. And we further optimized our balance sheet. We reduce our Federal Home Loan Bank debt repurchased $158 million of common stock below tangible book value, which contributed to the 3.6% tangible book value per share growth this quarter. Once again, there were no noteworthy items and I will now go into further detail on our financial results for the quarter. Turning to Slide 6 of the presentation, net finance revenue declined from the prior quarter, driven by higher deposit costs, which were partially offset by lower borrowing costs on secured debt. Interest income was relatively constant. Higher interest on loans was essentially offset by approximately $6 million from the accelerated amortization of the premium on our mortgage backed securities investments. The acceleration was driven by the reduction in long-term interest rates, which resulted in higher actual and forecast prepayments. Slide 7 is our net finance margin walk, net finance margin was 3.13%, down seven basis points from the prior quarter. The reduction was driven by higher deposit costs resulting from the full quarter impact of last quarter strong deposit growth partially…

Thanks, John. As John mentioned, we remain committed to creating long-term shareholder value and are focused on achieving a return on tangible common equity goal of 11% in the fourth quarter of this year, and at least 12% in the fourth quarter of next year. We are pleased with the progress in the first half of the year and are focused on continuing to deliver on the plan and unlock the full potential in CIT. With that, we are happy to take your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Moshe Orenbuch of Credit Suisse. Please go ahead.

Great. Thanks for all of that detail. I am just wondering John, if you could kind of talk a little bit about, how you see the moving parts within the net interest margins for the balance of the year because there is a lot of moving parts there.

Yes Moshe, without question I mean the biggest element of this is going to be our ability to actually manage deposits. I think we got ahead a little bit in the second quarter in May, we cut five basis points and then in July 1st, we cut our own 10 basis points. I think it remains to be seen how fast we can come down, I think obviously, betas were lower going up and I think most expected. I think we are going to be as aggressive as we possibly can. But that really becomes the linchpin. I think the other thing that is kind of out there is, we are starting to see some softness, a little bit of softness in parts of the rail portfolio specifically in freight, specifically in the stand. It is not a big problem for us, but it is an element out there that we are closely to watching. So I think those are the two wildcards. On the asset side of the balance sheet, I think, thus far, if you look at originations and origination rates, across our entire book of business, I think we have been pretty effective. I think there have been changes in the mix of yields, but we started last year in the third quarter in terms of business capital, which is our fastest growing business. And we have been able to hold on to that. I think that becomes an exercise in terms of understanding the difference between rates and price point. As rates come down, it will be interesting to see how much competitive pressure we can continue to maintain a business capital. In commercial finance, I think we are more than holding our own pockets of strength, they are still in health care, real estate, energy, aviation, that seems to be holding on. Real estate, again, we are not competing on terms and conditions and so it is unlikely you are going to see a lot of move there. In the consumer space, it is pretty new, because I think for the most part, it is launching will have small numbers. So I think going back to what I started with the big driver in the quarter is going to be our ability to manage rates coming down especially in the loan portfolio non-maturity deposits, which is hard to predict, especially since we just can't do in a vacuum, because it is a function of what is going on in the broader environment this competition.

Got it. Just a follow-up, I mean, as you are thinking about getting from what was 10.7% adjusted for the dividend in the quarter, but sounds like nominally between the tax rate and what your guidance for the margin is that maybe the numerator that is coming down. Like how do you think about actually getting from that 10.7%, but maybe on adjusted basis, something less than that, back up to 11% over the next two quarters.

Yes. So, look, I think we remain committed, I think in Ellen’s call script and my call script, we remain committed to the 11%. We have certainly got some leverage that we can kind of pull. It goes back to deposit rates and betas. And the question is, how fast can we do? Pull the rates back down. As I said before, I think, we were very early on in terms of the moves we did in May and on the first of July. I think there are elements within the way we fund the place in terms of a mix between deposits and Federal Home Loans Bank borrowers, we have an enormous amount of capacity there. In OpEx there remains some opportunities to take more cost out faster. And there are also opportunities to kind of delay spends. If you look over to non-interest income, we have been very aggressive in terms of growing the BOLI. We added some more BOLI in the third quarter and we have kind of up to our limit on that. Ellen kind of touched briefly on a new JV that we just launched, which was important. Our legacy consumer mortgage portfolio sale and rail sales continue. And I think we continue to strategically look at moving holdco assets into the bank which to the extent that we can do that that is generally worth about 200 basis points and funding the differential between senior unsecured debt and deposits. We have two levers.

Yes, I mean, I just want to add that, if there is a 25 basis point cut next week, and there is another one later this year, it would put pressure on our net finance revenue. But we still think that we could hit the fourth quarter target of 11%. And, we do have some drivers here, we do have some remaining capital return left. We do expect to now spread income to trend higher this year. We think there is a little more room as John said on the operating expense line. And we are going to continue to look at putting more assets in the bank and optimizing our funding structure.

Got you. Thank you.

Next question.

Our next question comes from Chris Kotowski of Oppenheimer. Please go ahead.

Yes, kind of expanding on Moshe's question. I mean it seemed like on the ins and outs on the margin, you mentioned three things to keep in mind. I guess, one is the amortization of the premium on the mortgage backed. And presumably that goes away if you just don't have long rates coming down further. And then secondly - question one is, do you agree with that, that that goes away just as soon as long-term rates stabilize? And then question number two would be, you mentioned the PCI loan sales and I think you said there was $200 million, but you are not taking that as an upfront gain. You are taking that as an ongoing benefits to the margin? And then thirdly, does your guidance envision further rate cuts in 2020 or is the is the guidance as we see it just based on two rate cuts and that has been - we are done.

Alright. So on the PCI gains, so yes, I mean, kind of to the extent that this is a sellout of the purchase credit impaired portfolio, that the gain which is kind of in the $20 million to $25 million range. It is spread out over the remaining portfolios. So if you think about it in the context that what is left in the LCM portfolio is essentially probably a 10-year life, it will be spread out over the 10 years. In terms of the 2020 cuts, I think, look, it is incredibly fluid. When I think back to the way we did the plan. We started doing the plan we had four hikes, then by the time we got through November, December, we got down to zero. And that is the way we modeled the plan, no hikes, no cuts. And now we are looking, I guess at potentially two cuts remainder of this year, maybe three. And I think a lot of it depends on when and how much, - some of the rhetoric around the 50 basis points coming in July is down, I think everybody is kind of baked in a quarter points July, but other quarter points sometime in the fourth quarter, whether it is at the beginning of the end who knows. And then two more in 2020. Is the way we are modeling, but I think the way we think about it is, we have got to be incredibly nimble and flexible. Because the one constant in this environment seems to be change. And it seems like the world remains incredibly fluid, even if for no other reason. And then I think was there another question?

Yes on the amortization of the mortgage backed NIMs?

So on the mortgage backed, we think, it will smooth out overtime, it will modestly be lower, it depends on the accounting, and I don't want to get into the weeds, I think we're on a retrospective basis of the accounting, which contemplates not only existing moves intends, but forward rates, forward moves, intends, and so we are following the curve versus a contractual basis. And that is why you might be seeing a difference in terms of the impact between us and other banks. Because I suspect there is a universe that is retrospect, and I think there is a universe that pulls on contractual, but for us, it should be relatively smooth on a go forward basis.

Okay. And then just, I guess, secondarily, I mean, you are flagging kind of a slowdown of activity on the rail front. Do you see that reflected in behavior or action or payment rates on the general commercial portfolio?

No. And look, I think it is early days, I think there is a lot of things that are going on in rail. I mean, as I said in my script, year-to-date rail loadings are down 2% driven by coal. We do have some coal cars, non-metallic minerals, which is sand and in agriculture and forest products. I think in the sand space, there is geological debate going on in terms of the virtue of Northern white sand and more locally sourced brown sand in terms of fracking and I think drillers have kind of transitions to cheaper to deliver brown sand and it remains to be seen what the geology is in terms of how that affects the efficiency and effectiveness and productivity of the drilling sites. So that is one pressure point. I think the other one is around PSR, which is kind of again at the margin. But historically, it impacts railroad service levels, forcing shippers to just conform some more ridged schedules. And so that is a little bit of a pain point. And then, you have got the overhang of tariffs and so to the extent you have got customers with import and export activity, I think that are generally more hesitant to invest in operations given trade uncertainties. And so that has lead a little bit to making get more difficult to gauge re-pricing. What I would say is if you look in the first two quarters of the year, we have actually had pretty modest levels of repricing. So in the first quarter it was about between 3500 car, same thing for the second quarter, which you would expect in a normal course, given you have got 115,000 cars and an average life of 4.5 years. You would expect about 26,000 cars to reprice every year, 6,000 cars a quarter. So we are a little bit under that. What we have seen thus far is the tanks continue to reprice well ahead of our plan albeit still below prior. And freights are continuing to reprice modestly below plan, but it is early days, and we will see how this all plains out. And maybe as the quarters go, we will get more visibility in terms of what the impact of PSR is and where tariffs go and the impact that that is having on imports and exports.

Okay, great. Thank you. That is it for me.

Thanks.

Our next question comes from Arren Cyganovich of Citi. Please go ahead.

Thanks. As we think about the deposits and the deposit cost obviously grows in the second quarter that was a bit of a catch up. But, even excluding rate cut that is expected for this quarter, if you kept everything equal would you say that your deposit costs have now kind of peaked?

I would say, yes. I think you know, typically in a rising rate environment, we modeled that it take six months for the entire portfolio to reprice, I think as rates have started to come down and we have pulled back on our offer rates on our savings builder account. I would say, yes on the non-maturity deposits in the online bank, that has clearly peaked at least in my mind.

Okay. And then I guess the expectation that there would be some pressure to the net finance margin for the next two cuts as you laid out, is that more of a timing aspect? I mean, I know we have to see what the rest of the market does in terms of online deposit, kind of resetting? But assuming it is a rational move, would you expect that there is just a lag between the repricing of your loans? Or would you expect that it is just not going to catch up as much as for loans reprice?

Well, look, I think we have tried to get ahead on the deposit pricing. So, we have done 15 basis points before the Fed has moved at all. And I think we are poised for more cuts. So, conceptually you could say that, this cut, if we did another 10 basis points in August 1st, would have a 100% beta, if they do a quarter point. If they do more, I think we will respond accordingly. But again, it depends. We are not the highest rate in the market. Right now we are at 2.30. There are still banks at 2.52, 2.45, 2.40, 2.35. And some of them were big banks. And so we have to be mindful of what the competition is doing. But I think we watch this very carefully. The other thing that is really important is to the extent that we have actually transitioned the customer segment this portfolio, the thesis was they were smaller balances and stickier balances. And so, as we have cut these rates, we have actually gone through two statement cycles and essentially seen no attrition. The left hand side of the balance sheet, again, the markets remain incredibly competitive. And I think specifically in business capital, we are very mindful of the mix between price and volume and the volume and the business has been absolutely terrific. But we are not toned as to the fact that at some point, there will be a tipping point that we are going to have to respond to you from a pricing perspective and so we watch that closely. but it is literally day-to-day in terms of what we are seeing others do in the market. It is just a tough place to be, it is a very fluid environment.

Okay. And then on the new asset management JV. Maybe just talk a little bit about and what is the potential size of that? Would you be adding additional partner's overtime? And then is this based on purely on volume? Or is there any kind of ongoing recurring fee income associated with that?

Yes. So we just announced our new structure project [Orion]. And basically if that allows us to offer expanded cash flow, revolving a term loan options through a managed financing vehicle by an A rated insurance company. So this is our cash flow vehicle and then we also have the Northbridge JV ABL in place. And right now in Northbridge, we probably done about three $300 million in volume, but it is basically allowing us to serve our customers better and increase our capacity to provide customer's financing that we would not be able to do on our own books, this is more type of business that is being done in the BDCs and also at a long-term recurring revenue stream. I mean, it is really early stages to project how much we are going to do, but it is just another outlet for us to book more business.

And just on to tap, is that the volume based or is it - or will you have some kind of actual recurring fees from that?

It is really both.

Okay. alright, thank you.

[Operator Instructions] Our next question comes from Scott Valentin of Compass Point Research. Please go ahead.

Yes, good morning. Thanks everyone for taking my question. I think Ellen, John, one of you referred to additional capital management going forward as one of the ways to hit the ROTCE targets. And you have $112 million left on the current authorization. Does that imply there is room for additional authorization before year-end?

No. I mean, our authorization was through the end of September.

Yes. So Scott, I mean, what we have done is, now that we are no longer CCAR bank, what we have done is we have aligned our - essentially request the Fed with our strategic planning cycle, which runs October 1st to September 30th. So on September 30th, we will have exhausted the $450 million that was approved by our Board and by the Fed. We would expect that over the course of the coming weeks that we would have an incremental request that would go to the Fed, that would cover the fourth quarter of 2019 in the first three quarters of 2020. And that would be necessary arithmetically for us to actually manage down to the 11% common equity Tier 1 ratio, which we have been messaging for the better part of the year.

Thanks, it is very helpful. And just a follow-up on credit quality, you know it improved linked quarter. I know you said the economy is slowing down. Are you seeing any sectors maybe that stand out in terms of any watch list issues or are you seeing increased delinquencies in any one sector?

No. I think overall, we feel pretty good about the quarterly provision and the guidance that we have put out of it running between 30 million and 40 million. We have been going through a major transition as a company over the last several years. I mean, we have exited businesses with higher credits, asset and regulatory risk, including Financial Freedom, Commercial Air, NACCO. Our strategy has been lending against assets that are higher quality and collateral based. And we have been meaningfully reducing our cash flow loans. I mean, our cash flow loans now are only 10% of our loan and lease commitments. We also, are a heightened standard bank, so we have, like, built second line defense and operate credit review and compliance. We are no longer SIFI, but we kept all of the robust liquidity and capital stress testing in place. And, even with our cash flow loans at 10% of our exposure - we have first lean positions, the average senior leverage levels are less than four times. The average total leverage levels are less than five times. We are lending by industry vertical, so we have a lot of industry expertise. So last quarter, we saw a tiny bit more in like small restaurants and a little in the smaller owner operator transportation and business capital. But other than that, knock on wood credits remained really solid for us.

Okay, thanks for that color. Thanks very much.

There are no other questions at this time. I would like to turn the conference back over to management for any closing remarks.

Thank you, Nicole. And thank you, everyone for joining us this morning. If you have any follow-up questions, please feel free to get to contact the investor relations team. You can find our contact information along with other information on cit.com. Thank you again for your time and have a great day.

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