Good morning, and welcome to the CIT's Third Quarter 2019 Earnings Conference Call. My name is Keith, and I will be your operator today. At this time, all participants will be in 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, Keith. Good morning, and welcome to CIT's third 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 Statements 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 session segment of today's call. Thank you and I will now turn the call over to Ellen Alemany.

Thanks, Barbara. Good morning and thank you for joining the call. I’m pleased to report that we had another solid quarter performance and delivered continued progress on our strategic plan. We posted net income of $143 million or a $1.50 per diluted common share for the third quarter. We had a few noteworthy items in the quarter as a result of their strategic initiatives, then improved our net income by 20 million and John will take you through those in more detail. Excluding those items, we posted income from continuing operations of 123 million or $1.29 per diluted common share. On Slide 2 of the presentation, we highlight some key drivers of performance. Our core business continues to post steady growth with average loans and leases up 2% from last quarter and 8% from the prior year period. Our deposit cost remain relatively flat from the prior quarter as we optimize pricing and continue to grow our non-maturity deposit accounts to about 65% of average total deposits up from 55% last year. We remain disciplined on expenses, and are on-track to achieve our goal for the year and credit performance remains strong, reflecting our strategic steps towards more collateral based lending. We ended the quarter with tangible book value of $55.60 per share, which is an 11% increase compared to last year. To further accelerate our strategic plan, in august we announced an agreement to acquire Mutual of Omaha Bank. This transaction will diversify our funding profile with scalable lower cost deposits through the addition of a market-leading Homeowners Association banking business. And it will also expand our middle market commercial banking capabilities with additional products, technology and a broader geographic footprint. The transaction continues to move forward as planned. We submitted our application to the OCC on September 26th,…

Thank you, Ellen and good morning, everyone. We had another solid quarter with net income available to common shareholders excluding noteworthy items of $123 million for $1.29 per common share. And we continue to make steady progress on our strategic priorities. We grew average loans and leases on our core portfolios by 2% from the prior quarter and 8% from a year ago quarter. Credit metrics remain stable and we remain disciplined in our underwriting. We reduced operating expenses slightly despite higher costs related to the Mutual of Omaha Bank acquisition. We have launched our bank note program and issued our first unsecured note which had an investment grade rating from S&P, a six non-core five year term in pricing just inside 3%.And we grew up tangible book value per share by over 2% to $55.60. On Page 5, we had a few noteworthy items this quarter related to strategic priorities that resulted in a net after-tax benefit to earnings and an increase to tangible book value for $20 million. Firstly, recognizing $53 million tax benefit related to our reassertion that earnings from our operations in Canada would be reinvested indefinitely, which resulted in the reversal of accrued tax charge. If you recall, in 2016, we took the charge for a similar amount when we decided to sell our commercial and equipment finance businesses in Canada. With the restructuring completed, we have analyzed our remaining operations in Canada and had concluded that we expect to reinvest our earnings there indefinitely. Second, during the quarter, we entered into an agreement to sell our Livingston office building and move our New Jersey operations, which is mostly corporate functional staff to Morristown, New Jersey, where we entered into a 15 year lease. We took a $22 million after-tax charge, reflecting the impairment of…

Thanks, John. Moving forward, we are focused on advancing our strategic priorities, growing our core businesses, optimizing our deposit costs, managing our expenses and maintaining credit discipline. In addition, we are focused on completing the Mutual of Omaha Bank transaction pending regulatory approval. We believe this field will drive significant value for CIT and unlock potential for our customers, communities and shareholders. With that, we are happy to take your question.

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Scott Valentin with Compass Point.

Good morning, everyone. Thanks for taking my question. Just trying to look out into 2020 on the cadence of the margin. Obviously, not looking for exact guidance, but obviously depends on what the Fed does. But if we assume the Fed cuts rates again in the fourth quarter then kind of holds off with the margin then drop again in 1Q 2020 and then with Mutual Omaha Bank closing at the end of 1Q potentially margin could improve in 2Q given the lower cost deposits, is that kind of a fair cadence?

Yes. I think it's a fair cadence, Scott. I mean the reality is look, you are going to have a series of rate cuts that happen this year, they are going to continue to flow through into 2020. So you will have July, September and we are modeling October and who knows what happens in December. With your point spot on in part of the value of Mutual of Omaha Bank transaction is obviously the lower cost deposit that are then scalable and so that provides us an instantaneous benefit of 20 basis points in terms of deposit funding and more important than that, I think from our perspective, is the fact that it's actually scalable. So yes, I think for the rest of this year, you expect July, September, October to work through impact rest of 2020 with the benefit of Mutual of Omaha banks coming in hopefully early in the first quarter. And then I think the other lever that we have to play is on the deposits and so if you look at what we have done already, so we have had to rate cuts, we have pulled down the online rate on our savings builder product by 35 basis points. We expect that we would move again very early in November to kind of keep pace with the fed actions and so that becomes the wildcard, but again as you look at the change of what we can actually do in the deposit space, you have to levers, you have rate which is in large part driven by competition in the marketplace. And you have advertising and marketing, which we have also try to be very circumspect around. And so, you don't want to cut too quickly and I think so far, we have hit a pretty good note, because we haven't seen any meaningful levels of attrition in the savings builder product.

Thanks, that is very helpful. And just one follow-up question. The average core loan growth is a little better than I expected as I think 2.3% linked quarter. I know you mentioned factoring seasonality. Is that a primary driver or are you seeing broad based - a little better outlook, maybe in terms of core loan growth?

Scott, this is Ellen. We are seeing, we had a really solid quarter and we are actually going into the fourth quarter with a very, very strong pipeline. And that is me despite customers being cautious with capital spending, fears of an economic slowdown, et cetera. But I would say that in business capital, that is probably the strongest growth in the business. In commercial finance, the key verticals that have been performing include aviation lending, healthcare, real estate, and renewable project finance. In real estate, we are not expecting any significant growth and as John mentioned, we had a lot of prepayments, but we have also been - we had some really good capital markets fees from syndicating more deals in real estate. So overall, it wasn't just the seasonality in factoring business and pipeline is very strong.

Okay. Thanks very much.

Thank you and the next question comes from Eric Wasserstrom with UBS.

Thanks very much. Just two points of clarification please. The first just on the NPL trend, you have mentioned the NPLs that you sold but then you know it looks like the NPL ratio also increased in the absolute level also sequential increased. Can you just walk us through what is occurring there?

Yes. So the NPLs are basically you know have been for at least the time that I have been here $300 million plus or minus 25 or so. I think there is probably a little bit of confusion around the impact of the LCM portfolio. So LCM portfolio, which is about a $205 million. Those were for the most part not included in non-accrual loans at all. So it's not like, we came down and went back up. Most of the LCM portfolio was purchased credit impaired and never included in non-accrual. So, what you are seeing is non-accrual is kind of trending right around 1% of total loans. So nothing has really changed in the last probably eight to 10 quarters, and I have been here.

And I just want to reiterate that we don't see any specific indicators that suggests any type of a credit downturn and I think we have been talking about this a lot this year, how we have really transformed the whole credit profile of this Company. But just right now criticized loans at the end of the third quarter totaled $3 billion, which is just like 9% of commercial loans and leases. This is kind of the lowest level that I have ever seen this at the Company here. It is down about a $1 billion from a year ago and also we have, at the Company less exposure to consumer debt. We are underweight on residential mortgage. We are not in the credit card business. Cash flow loans now are only about 10% of our total exposure. So, I feel we are in really good shape here on the credit line.

Yes. Thank you for that. And so just to follow-up on the NIM. I think just sort of extrapolate with the short-term trend is, let's say heading a bit lower, factor in potentially the impact of Mutual of Omaha, and then look out into next year it seems that the consensus expectation is for let's say a 30 or 40 basis points rise from the current level and maybe some of that is reflecting the expectation of the benefit from the lower funding costs from the acquisition. But not pushing for guidance, but just directionally how do we think about the roll forward of the NIM into over the next few periods let’s say?

You know look, I think it is the same analysis I went through with Scott. I mean, the reality is that we are in the midst of our planning process right now and it is a little bit of a juggling act, because we are trying to do is dimension exactly when we think the Mutual of Omaha Bank transaction is going to close. And we think it will be in the first quarter, hopefully sooner rather than later. But that will have a huge bearing on the NIM guidance. And so, as I said, we are in the midst of our planning process right now and so I really can't say much more than that. I do expect that we will come through in the fourth quarter with more comprehensive guidance and hopefully even have some perspective from the SEC in terms of when we might expect the trade to close.

Excellent. Thanks very much.

Thank you. And this question comes from Chris Kotowski with Oppenheimer & Company.

Yes good morning. As I was reading this kind of in a hurry this morning, I noticed you said in the text somewhere that RWAs went up because you increased the rail order book. And I guess that particularly makes sense since the share buyback is being suspended and you have excess capital right now. But how long does it take? A, how material is it in terms of the, uptick in the risk weighted assets and how long does it take before those, the order becomes an earning assets and how much is involved?

Yes, look we have a fairly rigorous program around portfolio management. So I think Chris as you know, we have been taking cars out of the HoldCo which is subject to fresh start accounting and realizing gains and we have probably been doing $15 million to $20 million a quarter. When we buy new cars, which is on a fairly regular basis you know they come when they come, most of the - I think we took 600 delivery or 600 cars and a quarter, but I want to say about 400 of those cars were in the tank space. And so it's not really a special event. The extra thing I would say about RWAs is that we are going to be very circumspect in terms of managing RWAs across the fourth quarter, just because it's going to work into the calculation of the amount of shares that we are actually going to deliver to Mutual of Omaha. So I think we are going to be very mindful in terms of the way we think about risk weighted assets in terms of the assets we put on, the kind of returns they are generating, the importance they are, they might have to the customer. And where we have an optionality probably a little bit less. So that we can kind of provide a little bit less common equity to Mutual of Omaha, which is part - which is you know we can deliver $250 million in shares to the Mutual of Omaha parent.

Okay. alright, that is it from me. Thank you.

Thank you. [Operator Instructions] And the next question comes from Vincent Caintic with Stephens.

Hey thanks good morning. I appreciate the fourth quarter guidance and the details there. Just kind of when you think about 2020, I know it's early and you are still planning, but kind of broadly speaking, when you think about the fourth quarter is that a good jumping point for 2020, are there particular items there that we should note. And then kind of focusing on the NIM again, remember the last time, we had low interest rates, you had floors and I was just kind of wondering, if there are any other mitigating factors to asset yields that we should be thinking about for - asset yields declining for 2020?

Listen again. I think we are in great shape going into 2020. One is, we have further strengthened the management team. One is we have one really experienced individual, who has done a lot of integration work running the Mutual of Omaha integration for us. And then on the commercial banking side, Bob has brought in to run the Commercial Finance Group, very seasoned. And Phil Robbins to run the asset management capital markets and Jim Gifas is to run treasury management. So what you are going to see on the commercial banking side is more traditional thinking model as we integrate Mutual of Omaha, which is leading transactions, more asset management strategies. We have Orion and Northbridge both up and running. Those are JV structures that allow us to originate deals that wouldn't be our like credit appetite, but we moved them into these joint ventures. And then Jim Gifas running treasury management, so that we can generate more merchant card, commercial cards, treasury management revenue from our customers. So all that is kind of in place up in running now. And I think the Mutual of Omaha deal is going to be game changing for us, because the 20 basis points drop in deposits is going to allow us to play in space from a probability default to not just below where we play today, which will put us in regular more commercial banking land, in terms of the competitive landscape. So I feel really positive, we got our application in Mutual of Omaha in 30 days. We are in the common period now, which ends on Saturday and as John said, we are hoping that this deal gets approved in the first quarter. Obviously the earlier we can get approval on this the better for us, but we are in good shape.

And Vincent, just to hit your questions of Q4 being a good jump off point, I would say it is definitely not. We are going to continue to aggressively manage our deposit cost down, I think as we have thus far. And as Ellen said, the Mutual of Omaha bank transaction is a game changer for us. It just gives us an enormous amount of optionality. So on a go forward basis, we feel very good about the trade and I think the more time we spend looking at it, the better we feel.

Okay, great. And I guess on the asset yield side, just following up on that the asset yield side, are you close to your floors or is are there other mitigating factors on how we typically think about LIBOR or declining and that just directly translating or is there other factors to that?

You know it's a contract-by-contract things. So I think a lot of the relationships have floors, a lot of them don't. So it depends. As go low at LIBOR or so goes the net interest margin. I think the other thing too is, you wonder at some point, our spread is going to start to widen out a little bit to offset some of that, but it's just incredibly hard to forecast. 50% of our loans right now are floating. So if you look at all of commercial finance, that is essentially all tied to one and three month LIBOR. If you looked at commercial real estate, that is a 100% floating that is tied to largely one to three month LIBOR, which were down I think 31 and 27 basis points in the third quarter. And then essentially half of our consumer mortgage book is floating rate. So it's a big part of the book.

Okay, got you. And then switching gears on the just kind of broadly, as you are talking to your customers. Is there any sort of things you are hearing? I know, when we read these reports people are concerned about a recession and maybe a slow down. Just kind of what your - wanting to get a sense of what you are hearing from your customers, since probably good read into the U.S. economy. And then any sort of watch list industries you are looking at. I know credit has been a concern for - or sorry energy has been a concern for some banks, just nuance there. Thanks.

So you know I would say just in general, what we are observing is that customers across just with capital spending, I think that there are kind of indicators in the market of a potential macro slowdown. There is obviously the geopolitical risk out there. We are hearing anecdotally that tariffs are affecting some of our customers. I mean, we had actually some of our leasing customers, the used equipment market is really, really strong right now, because new orders and some equipment like material handling equipment is taking six to 12 months, some consumer electronics are taking much longer order book because of the impact on tariffs. So we are seeing some of that. In the factoring business. I think what we have heard from customers is the tariffs aren’t affecting the Christmas season, but it may impact potentially the spring season. I think in terms of energy, I mean, obviously we finance oil and gas exploration and production companies through our rail car leasing business. But as energy production in the U.S. has moved to really greener and cleaner, so as our lending business and we have been doing a lot of project finance in the renewable energy space. E&P midstream and services energy loan exposure is like less than $1 billion dollars, I think its $945 million, or less than 3% of our total loans. And so I think that we have reduced our exposure substantially in the energy space. So, I think on the credit side, we have been - and really if you think about everything we have done over the last several years we have derisked the Company from certain businesses like financial freedom, NACCO, which would be international rail, the commercial air portfolio. We are now a heightened standard bank, we have stress testing in our portfolio et cetera, we have kept all those processes in place, even though we are no longer a CCAR bank. We have build out second line of defense, we have credit review in place, these were all things CIT did not have several years ago that are in place now. So I think we feel we are better prepared to withstand challenges of a downturn in the market than we ever have in the Company's history.

Great. Very helpful. Thank very much.

Thank you. And the next question comes from Arren Cyganovich with Citi.

Thanks. One of the things about the Mutual of Omaha acquisition that seem to come up and I'm coming at the sort of view that I view this as a positive deal. But some of the pushback I got from speaking with investors after this was how many of these do we expect in the future and should be concerned about this management team, diluting shareholders further by future gears of deals with kind of longer earn back period. So what is your view post this requisition of your appetite for additional deals in the future?

We feel that Mutual of Omaha was a really unique opportunity for CIT and that it enhanced our deposit funding and it really helped us build out a middle market banking franchise. And although on a short-term basis, it was dilutive, we think it's going to have a positive impact of like 80 basis points of ROTCE in the first 12 months and hundreds thereafter. But if you, any feedback that we have ever had on CIT is. You need more long-term source of lower data deposits and secondly more earnings and this deal solves for both those issues, so we thought it was a really good opportunity for us. And we think that the benefits of this deal is going to have really long-term implications for the Company in terms of kind of fixing those two challenges that we had. And I would say that this management team has time and time again said that we are always open to opportunities that are going to help accelerate or create more value for the shareholders. But right now, this team is really focused on executing this deal as quickly as possible and really showing the market that even though we made a long-term decision here for the Company. We took a little short-term pain to do it, but this team is going to execute this deal and show the market that we have really created a lot of value here.

Thank you.

Thank you. And at this time, I would like to return the floor to management for any closing comments.

Great. Thank you, everyone for joining this morning. If you have any follow-up questions, please feel free to contact the Investor Relations team. You can find our contact information along with other information on cit.com. Thanks again for your time and have a great day.

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