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CIT Group Inc. (NYSE:CIT)

Q3 2010 Earnings Call

October 26, 2010 08:00 am ET

Executives

Ken Brause - Head, Investor Relations

John Thain - Chairman & CEO

Scott Parker - CFO

Analysts

David Hochstim - Buckingham Research

Brad Ball - Evercore

Sameer Gokhale - KBW

Bruce Harting - Barclays

Henry Coffey - Sterne, Agee

Mike Taiano - Sandler O'Neill

Mike Turner - Compass Point

Chris Brendler - Stifel Nicolaus

Operator

Good morning ladies and gentlemen and welcome to CIT’s third quarter 2010 earnings conference call. My name is Caitlyn and I will be your operator today. Participating in today’s call are John Thain, Chairman and Chief Executive Officer; Scott Parker, Chief Financial Officer; and Ken Brause, Head of Investor Relations.

At this time all participants are in a listen-only mode. There will be a question-and-answer session, later in the call. Please limit yourself to one question and a follow-up. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the call over to Ken Brause. Please proceed, sir.

Ken Brause

Thank you Caitlyn and good morning everyone and welcome to CIT’s third quarter 2010 earnings conference call. Our call today will be hosted by John Thain, our Chairman and CEO; and Scott Parker our CFO. Following our formal remarks we will have a Q&A session. As said we expect 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 relates 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 2009 Form 10-K that was filed with the SEC in March.

Any references to certain non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in the press release. For more information on CIT, please visit our website at ww.cit.com and now I’d like to turn the call over to John Thain.

John Thain

Thank you, Ken. Good morning everyone and thank you for joining the call. I am going to make a few opening comments and then turn the call over to Scott Parker, our Chief Financial Officer. I am pleased to report our third consecutive profitable quarter with net income of $131.5 million. We continue to make steady progress on our key priorities, our management team is almost complete now. We have one last person going through the regulatory approval process and I am very happy with how our team is working together.

As you have seen in the press, we made further progress on our debt structure. We have either repaid or refinanced our entire $7.5 billion of first lien debt and we have announced the redemption of 1.4 billion of our 10.25 Series B second lien debt. And I know Scott will talk a little bit more about this later.

We have continued to optimize our portfolio with $1.5 billion of non core and non-strategic asset sales and we are beginning to build our new business pipeline and our trade finance business, our volumes were up to $7 billion in the quarter. On the vendor finance side, we originated over $500 million of new business in the quarter and our corporate finance segment, our lender to small and middle market companies we committed over $400 million of new volume and we funded over $300 million.

In the transportation sector, we delivered 6 new airplanes in the quarter and we have all of our next 12 month deliveries already leased. We also improved our rail car utilization to 94%.

On the CIT bank side, almost all of our US corporate finance loans were originated by the bank. Our US Lenovo program, our new vendor finance program for Lenovo is been originated in the bank and we originated one transportation loan to a US airline in the bank. We are making progress on our written agreement with the Federal Reserve. We continue to focus on expenses which I think you can see in the quarterly results and we've continued to strengthen our capital base.

Our book value is over $44 a share, our Q1 capital is over 18% and our credit metrics are stabilizing which Scott will also talk more about. So all of which is working to restore the confidence in CIT as a lender to small and middle market companies and with over 100 years of expertise and asset base funding I think we are on the right track. With that I will turn it over to Scott.

Scott Parker

Thank you John and good morning everyone. I am pleased to be discussing another quarter characterized by strong GAAP earnings and improved operating trends. Before I get into the quarter’s results, I want to spend a minute on the prior period revisions as my comparative statements will be again to revise figures.

As part of the management’s review or the financial statements we identified several immaterial errors in the first and second quarters largely related to the application of fresh start accounting. Accordingly adjusting entries were made and this release reflects to revise results of the first and second quarter of the year.

In aggregate, the adjustments increased net income by $18 million and $29 million in the first and second quarter respectively. It had a minor impact on December 31st, 2009 balance sheet. The detailed revisions for each period are in this release and available on our website. In terms of the third quarter results, many of the trends we saw on the first half continued. Finance and leasing assets fell nearly 5% sequentially driven by continued portfolio optimization as John mentioned. Net finance revenues decreased as portfolio contraction and less FSA accretions, partly offset by our lower borrowing costs.

Other income continues to reflect strong gains on asset sales, but did fall sequentially as fewer recoveries on loans charged off pre-emergence. Credit cost were lower with charge-offs down and other metric showing signs of stabilization. As John mentioned our operating expenses were down 17% from the second quarter on lower employee costs. In aggregate net income was a $131 million and book value was over $44 a share. During the following remarks I will provide some additional color on these drivers, hit some highlights of our segment profitability and update you on our funding activity.

On the asset front, we continue to optimize the portfolio emphasizing the risk return characteristics of each business and using those proceeds from asset dispositions to pay down our high cost debt. Finance on leased assets decreased $1.9 billion sequentially, including $200 million of collections on our liquidating student loans.

With respect to the commercial portfolio, we funded $1.1 billion of new loans, trade receivables increased a $100 million and we had $600 million of combined portfolio accretion and FX impacts. This was more than offset by $1.6 billion of portfolio collections, $1.5 billion of asset sales and $400 million of combined FSA charge offs and depreciations.

New business activity is accelerating as John mentioned, with three of our four commercial segments up. Corporate finance originated $400 million of new lending commitments of which over 300 million was funded. Vendor finance volume was up slightly on a reported basis, was up 17% sequentially excluding the impact of the second quarter Australian portfolio sale.

Factoring volume was up in trade finance over 10% due to normal seasonal growth and we also placed six new aircraft in transportation finance. Importantly about 35% of our total US funded volume was underwritten by CIT Bank, that was up from roughly 15% in the second quarter. Despite the lower funding costs, net finance revenues declined sequentially due to a 6% reduction in average earnings assets and less FSA accretion reflecting slower prepayment.

The reported net finance margin was 3.28%, down 84 basis points from the second quarter. This was driven mainly by asset deals declining 110 basis points, 73 basis points of the reduction were due to lower FSA accretion with the balance reflecting lower yield related fees in a portfolio of mix shift. This was partly offset by 26 basis point improvement in our average funding costs largely due to the first swing paydown in refinancing John mentioned.

Excluding fresh start accounting benefits and the prepayment penalties on the first lien debt, margin was 92 basis points versus 59 basis points in the second quarter with the improvement largely reflecting the benefit of the first lien paid out. Prepayment fees were $29 million this quarter down from about $45 million in the second quarter.

Just to clarify the accounting on the first lien transactions, we entered the third quarter with about $4.5 billion outstanding. We paid out $1.5 billion with cash and refinanced the remaining $3 billion in August. And the $1.5 billion cash pay down, both the 2% prepayment fee and the FSA related gain on the debt redemption were recorded in the third quarter. On the 3 billion refinance portion, the prepayment fee and the remaining FSA premium along with all new debt issuance cost will be amortized over the 5 year life of the loan. The economic cost of the $3 billion facility is approximately 6.9%, much better than the 10.9% cost on the previous term.

Other income was down for the prior quarter, but still strong at $269 million. We sold 1.5 billion of assets including about 850 million of vendor receivables, most of which was the liquidating US consumer portfolio, about 575 million of corporate loans and roughly 120 million of transportation equipment. The average gain was about 8% in line with the percentage gains on the nearly 3 billion of asset sales we had in the first half of the year.

Outside of the gains, other income remains modest. Fee and other income increased in vendor finance, factory and commissions were up slightly on the seasonal volume and recoveries from pre-FSA charge offs were down for the second quarter to 52 million. As John stated, credit is showing signs of stabilization with dollar measures improving and percentage metrics showing the impact of portfolio contraction.

On a reported or post-FSA basis non-accrual loans were down slightly as reductions in corporate finance outpaced increases in trade and transportation. Net charge offs were off to down slightly. On a pre-FSA basis non-accrual loans decreased 15% to $2.6 billion as additions slowed and we transferred about 200 million of non-accrual private student loans to held for sale.

Provisions declined sequentially benefiting from slightly lower charge-offs and a release of about 45 million of non-specific reserves on the vendor portfolio as I mentioned previously. We increased the loan loss reserves by about $70 million to nearly $400 million, but roughly 1.5% of loans, increasing both specific and non-specific reserves. The specific reserve fill reflects the handful of communication, media and energy accounts in corporate finance and a slight increase in transportation finance, while the non-specific reserves increase was mainly from new business volume and loans pre-emergence.

Combining to nearly $400 million of on balance sheet reserves with the remaining non-accretable discount, we have about $1 billion of coverage against total finance receivable. Specifically on the commercial portfolio the reserves plus the non-accretable discount coverage has been fairly stable since emergence at about 4.7%.

You'll notice that the non-accretable discounts decreased close to $600 million this quarter driven by three main items. First, the transfer of the student loans to held our sale was about $400 million; the application of charged offs against non-accretable discount was about $120 million, and prepayments and other asset sales represented about $60 million.

Now turning to operating expenses, which were down nearly $50 million sequentially on lower employee costs. We reported a small restructuring charge in the third quarter related to staff reductions and facility consolidations. As we discussed in our second quarter 10-Q, we currently estimate restructuring charges of approximately $40 million related to facility consolidations in the fourth quarter.

Now I would like to move to some segment highlights for our business units. Corporate finance profits fell as we saw pure assets resulting in a lower gain and prepayments slowed resulting in less FSA accretion. Both pre-imposed FSA charged-offs and non-accrual loans were down and the group continues to make progress realigning operating expenses. From a business perspective, volume was up 29% and the business earned a handful of agency roles, a sign of building a market confidence. There is another good quarter for transportation finance.

Fleet utilization is solid with near full utilization in air and further improvement in rail utilization. We did have eight airplanes from a foreign career that filed for bankruptcy in August. Four have been returned to us, of which three have been released and we expect the four remaining planes to be return shortly.

Market rents are improving modestly but renewal rates remain below expiring rates leading to some spread compression, and credit costs remain low with no charge offs. Trade Finance performance improved narrowing its loss as the business saw a seasonal pickup in volume and benefited from the funding conduit put in place in June. Commission rates are down from recent highs but remain solid. We have added a few accounts in non-accrual, but we are comfortable with the net exposure after reserves as it is secured by inventory in receivables. Importantly, client retention has improved and we continue to win new business.

Vendor finance quarterly results have been impacted by portfolio transactions. This quarter we had roughly a $35 million pretax benefit from a disposition of over $500 million liquidating US consumer portfolio. Vendors operating trends include continued volume growth, double-digit yields on new business and lower expenses. And finally, consumer reported a slight loss for the quarter, larger that reflecting the charge on student loan portfolio as we move to held for sale. In fact, we signed agreements for the sale to private student loans yesterday.

Finally, on the funding side, cash increased approximately $500 million to $11.2 billion as the proceeds from portfolio collections in sales outpaced the $2.1 billion net debt pay down and $1.1 billion of funded volume. In late September we announced the redemption of $1.4 billion of our Series B notes, all maturities except for 2017. We completed the redemption of $537 million last week and we will complete the redemption of the $860 million next week. After these redemptions, our bank holding company liquidity remains strong. As always, we continue to look at the capital markets for additional opportunities to reduce our borrowing costs.

With that, I will turn it back to Caitlyn and we will be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of David Hochstim of Buckingham Research, you may proceed.

David Hochstim - Buckingham Research

I wonder, could you just run through the originations, the $1.1 billion by segment this quarter and kind of what the rates or terms look like on those compared maybe to last quarter?

Scott Parker

On the volume side as we mentioned we had about $400 million of commitments on the corporate finance side, and that was up from a little bit over $300 million in the second quarter. The yields on that one is kind of tough because we have a split between cash flow asset-based loans, as well as small business loans in that one, but as we talked about we have won and been part of some agency fees or agency roles which have increased the fee incomes on those particular transactions.

The vendor business as I mentioned is up 17% at around 550 million for the quarter and those new business yields remain above 10%. John mentioned that the factoring volume was up to 7 billion from about 6.3 billion in the second quarter, and on the transportation finance side, the funding volume was about 250 last quarter and about 210 this quarter.

David Hochstim - Buckingham Research

And the rates on Trade Finance, I mean, have those changed at all?

Scott Parker

The commissions are down a couple of basis points, but not material.

David Hochstim - Buckingham Research

Okay. And then could you just I guess give some color on I guess you've had some opportunities to assess credit and the provision's down a lot, non-accruals are stable or improving a bit. Should we expect that the provision can come down again in Q4 or are we at kind of a new temporary run rate?

Scott Parker

As I mentioned on the provision line we did have because of sale the US consumer portfolio that we had posted reserves in the second quarter did come down. So, the provision line is down from the second quarter, but not as much is flowing through the provision line in the third quarter. So I think it’s one way again as we’ve talked about trying to forecast the economic uncertainty. I think that on a run rate we have been in the 100 to 120 million of general reserves for the past couple of quarters.

David Hochstim - Buckingham Research

I already used up my questions, but guidance in terms of accretion, kind of well over your initial goal for I guess the initial forecast for the year. Is the Q4 accretion likely to look like Q3 or be lower again or is there a way to forecast that?

Scott Parker

It’s tough to forecast ,to put it that way I think because it’s on a level yield basis, as the portfolio has been contracting, the dollar percentage will go down because of that yield. The uncertainties that we have had in the previous quarters really was around the prepayments speeds and those kind of slowed in the third quarter, but again we don’t know how those are going to play out in the fourth quarter.

Operator

Your next question comes from the line of Brad Ball of Evercore, you may proceed.

Brad Ball - Evercore

Thanks. I think you mentioned that 35% of your total funded volume was in the bank and if you could confirm that. And just could it have been higher and if not, then what is the restriction? Is it still that the regulatory authorities are preventing you from originating certain loans through the bank? And if you could just give us an update on the progress you're making in talking with the regulators about moving more production into the bank.

Scott Parker

Well, I will answer the first part and then I will transfer it back to John, but as we said the majority of the corporate finance volume was booked in the bank and that was the one that’s consistently been in the bank since the beginning of the year. John mentioned that we will be putting new Lenovo business in there which we didn’t have any in the third quarter because of the ramp up of that program. We did put one transportation loan in there. So, as a percentage of the business, the programs that we wanted to put through the bank were through that and we will continue to work on other programs. I will turn that to John.

John Thain

On the regulatory front there are no regulatory restrictions on making loans in the bank. So the loans that were originating in the bank are those that that fit the bank’s credit profile and are approved by the bank’s credit processes, the bank cannot take non-US assets and so that's one of the reasons why the percentage can't ever get too high in terms of the total originations. But there is no regulatory constraint on originations in the bank, it’s just making sure that the assets fit the bank’s credit profile.

Brad Ball - Evercore

How is your progress overall in terms of meeting the regulators' requirements in terms of policies and procedures? You mentioned your management team is almost entirely intact here. How are things progressing there?

John Thain

Well, as I said in my comments we're making progress. There’s still lot to do, but we are making progress.

Operator

Your next question comes from the line of Sameer Gokhale of KBW. You may proceed.

Sameer Gokhale - KBW

The first question was you talked a little about loan demand and where you're seeing growth, but can you talk a little bit about the competitive environment as well. It just seems like listening to some of the bank conference calls, a lot of them have been talking about increasing and expanding in the middle market and small business space. It seems like there's more capital being deployed there by the larger banks.

Are you seeing any sort of effect on your business? You're growing originations, but that's off of a relatively modest base. So, at this point are you seeing that? Because loan demand utilization rates, the commentary from the banks has been that it improved modestly but not that much, and yet there is more capital chasing that market. So, how do you see that competitive landscape currently?

Scott Parker

Yeah, I mean, there has been some announcements. I think with our business we've been in the segment for a long period of time, we have established relationships in the middle market and I think we definitely are seeing competitive space in there and the demand as you pointed out in the third quarter is down over the second quarter, but as we’ve kind of announced in regards to some of the transactions we are doing I think our relationships and end market presence continues to show our competitiveness in the marketplace.

Sameer Gokhale - KBW

Just a follow-up on the OpEx. You talked about that a little bit. I was just wondering in terms of the retention plan benefit expenses, I believe you had $11 million in Q1, $20 million in Q2. Did you have any this quarter that you recorded?

Scott Parker

Yes, they are in our normal run rates. So the second quarter was just a timing item in there, but we continue to accrue for the retention and it’s flowing through our operating expenses.

Sameer Gokhale - KBW

So, the sequential decline in OpEx, though, could you parse that a little bit for us, like how much of that was due to reduction in headcount versus other items that float through there?

Scott Parker

I think as we mentioned in the press release our headcount was down about 200 people to about 3,800. And so I would say that as John and I have mentioned before the balance on the operating expenses we are building the infrastructure and investing in kind of the risk management and internal audit and client functions and trying to offset that with productivity improvements in the rest of the portfolio.

Operator

Your next question comes from the line of Bruce Harting of Barclays, you may proceed.

Bruce Harting - Barclays

Yes, just are you expanding the customer base in Trade Finance and vendor? The Lenovo deal obviously. Or is this more of a legacy customer base that you're tapping into for new growth? And then on the expense line, given the hiring you've been doing, but also the headcount, what should we see in terms of future quarters’ expectations on expense?

John Thain

On the first part we are seeing improvements both in terms of penetration with our existing clients and we are working on expanding on new clients, so we are really trying to do both on the business side.

Scott Parker

And I say on the expense side we are trying to kind of be in the third quarter probably a good runrate for the fourth quarter, in that area and then we will look at it for 2011.

Bruce Harting - Barclays

Then just as a follow-up, can remind us the schedule for continuing to work down the good work, continuing the good work you've done on refinancing debt over the next few quarters, just if you can outline a matrix for us a little bit on what's available and maturing?

Scott Parker

Well we don’t have any near term maturities with respect to any of our debt facilities, there is normal paydown on our secured financings that would happen. So with respect to kind of a framework for the rest of our debt structure, it’s something we continue our looking at and lot of that is dependant on market opportunities and also our assessment of our liquidity situations.

Bruce Harting - Barclays

If credit miraculously, just in theory, if credit improved dramatically from one quarter to the next and your own appraisal of non-performing assets was such that market improvement might impact the non-accretable discount or it doesn't work that way, how would that flow through? How would dramatically improved credit flow through your numbers? I'm not quite clear on that because you mentioned that the accretable discount, you went through three factors that impacted that, but I'm not completely clear how dramatically improving credit would impact either the accretable or the non-accretable?

Scott Parker

Improving credit would not impact your accretable, only in the sense that if certain loans that had accretable discounts, one in the non-accrual, we do stop the accretion. So that would be one factor, two if we have a non-accretable setup against an asset, if that became kind of performing again, that non-accretable would not be wiped out. And three, how we would mainly show up would be in regards to the non-specific reserves in the provision line.

John Thain

The only way that the non-accretable gets reflected into income is either because the loan is paid off or pre pays or we sell it and that’s the way we will recognize the non-accretable.

Operator

And your next question comes from the line of Henry Coffey of Sterne Agee. You may proceed.

Henry Coffey - Sterne, Agee

I was just going to try to clarify a couple of things. First, as regards to the bank, we've always sort of been of the view that it was sort of a business line issue, that you had permission to originate certain types of Corporate Finance loans and now you're going to put in Lenovo Vendor Finance and some transportation assets. Is that a major victory or just kind of a minor progress? Does this mean that the structure exists now for looking at other asset classes or how should we interpret that?

John Thain

I would say it is progress and it is that loans that fit the bank's credit criteria can go in there. And so the credit approval process in the bank is what determines, what type of assets can get in there. As you know, we cannot and will not transfer assets into the bank, but where the business is, originate loans that fit the bank's criteria new loans, we will originate those in the bank. So I would say, I would characterize that as progress. And to the extent we're continuing to originate US-based assets that fit the bank's criteria, we will seek to originate them in the bank.

Henry Coffey - Sterne, Agee

And is it a program basis or is it literally a loan-by-loan approval process with the Lenovo program?

John Thain

Well, Lenovo is a program, but there still a approval process that the bank has to go through.

Henry Coffey - Sterne, Agee

On a loan-by-loan basis or maybe you could articulate. I know given that's a high volume product, can you articulate how the process works inside the bank?

Scott Parker

I think it would go through just any normal underwriting process, so they would have each loan would have to go through a rest review, and if that is successful then the loan would be booked in the bank.

John Thain

And they have a set of credits. They have a credit box, a credit criteria that originations have to fit.

Henry Coffey - Sterne, Agee

Okay. And then in terms of the reduction in overhead, should we look at the second quarter as having a lot of sort of, I don't want to call them catch up expenses, but sort of a start of a lot of expenses including the retention program and then the third quarter and hopefully the fourth quarter is kind of more normal run rate?

Scott Parker

I think that’s a assessment. The only thing that I would cut that is as I mentioned in my remarks is that, we are expecting a restructuring charge that will flow through the expense line. So, excluding the restructuring I think that’s probably a good run rate.

Henry Coffey - Sterne, Agee

And the restructuring is related to?

Scott Parker

Some facility consolidations we are currently working on.

Operator

Your next question comes from the line of Mike Taiano of Sandler O'Neill, you may proceed.

Mike Taiano - Sandler O'Neill

Just a couple of questions. I guess just hitting on the question that was asked earlier about the competitive environment, more banks looking to originate middle market loans. I guess my question is are you seeing any of that in terms of pressure on pricing at this stage relative to the first and second quarter or do you see things, the new loans that you are adding right now, are the yields relatively stable with the prior couple of quarters?

Scott Parker

I would say that I think the yields are pretty comparable for the first and second quarter. So I think in regards to the competitive environment that’s probably going to be more of a 2011 kind of outlook.

Mike Taiano - Sandler O'Neill

Okay. And then just on the credit side, I think it was $450 million or so of decline in non-performers on a pre-FSA basis. Can you tell us how much of that decline was related to the asset sale?

Scott Parker

I don’t have that specific number in front of me, but remember, the decline about 195 of that was for transferring our student loans to available for sale. So, the biggest driver was a reduction in additions for corporate finance.

Mike Taiano - Sandler O'Neill

Okay. So, it was less or was it that the actual other asset sales had less of an impact on the NPA decline to the $1.5 billion that you sold?

Scott Parker

Yes.

Mike Taiano - Sandler O'Neill

And then just the last question, I mean, do you have a better line of sight at this point as to when you think you guys can achieve profitability on a pre-FSA basis? Do you think that's the goal right now for 2011?

John Thain

Without in anyway trying to be predictive we are making progress.

Operator

Your next question comes from the line of Mike Turner of Compass Point. You may proceed.

Mike Turner - Compass Point

Could you talk about how much do you have available to securitize right now. That's unencumbered and that you could?

John Thain

Well, the answer is a little bit hard because it depends on what the asset types you are referring to but broadly speaking the answer is a lot, because in today’s marketplace we could do a number of different types of securitization deals that would have the potential to raise several billion dollars.

Mike Turner - Compass Point

So, I mean, it's not $6 billion, probably 2 to 3 billion is realistically a potential number?

Scott Parker

Remember we put a lot of funding structures for new business volumes in place for most of our businesses so I don’t think we have an exact number but definitely a couple of billion dollars it would be reasonable for securitizations to the near future.

John Thain

I think that’s determined more by market availability in terms of how much you could put into the market at one point rather than it is by our own collateral.

Mike Turner - Compass Point

And then also, maybe longer term I think you've kind of mentioned before rolling out maybe an internet deposit strategy. What are your thoughts today on that? And then I know when I look at Allied Bank and how much they've grown their deposits over the last year. The growth has been tremendous. Any thoughts there?

John Thain

As I mentioned, we are still missing one member of our management team, that’s actually the bank person and so we are hopeful to get that person onboard shortly and once that person is onboard then I think we’ll have more to say about the bank strategy. But as we've mentioned before the bank currently has about a billion and a half of cash in it so there is no particular hurry on that front.

Operator

Your next question comes from the line of Chris Brendler of Stifel Nicolaus. You may proceed.

Chris Brendler - Stifel Nicolaus

A follow-up on the regulatory side. It just seems that some of these processes are taking longer than maybe we or even you would have expected, namely the approval for the bank hire, the SBA platform transfer. Can you give us any insight into some of these delays and if there's any color you can provide on basically making us feel better, there's not an issue here, it's more about dotting Is and crossing Ts when it comes to regulatory relationships and the approvals there. I understand the process can be slow and cumbersome. I just want to make sure that there's nothing I should be concerned about on the regulatory side. Thanks.

John Thain

Well, I think I said on one of our prior calls, this is a multi year process. So, we are making progress but there still lots to do. I don't think there's no real change in terms of the types of things we need to do to satisfy the written agreement in particular with the Fed and so it is a process, I don't think there's any reason for you to have any particular concern, but it is a process and it does take time and we still have lots to do.

Chris Brendler - Stifel Nicolaus

And I guess a bigger picture question in a related way, my understanding is that the bank, getting that ramped up and getting the approvals to get additional platforms in there is sort of a key priority in order to take advantage of the excess liquidity you have in the bank. The holding company cash is probably better used to paying down debt. If those processes take longer and it takes longer to get the bank ramped up.

Anything else strategically you can do to sort of give yourself a better ability to fund new business volume at the holding company, I guess I didn't hear on this call any specific plans for accessing liquidity and driving a lower funding cost outside of the bank if there’s securitization and the debt markets seem to be behaving better and trading your bonds higher. Any opportunities outside of the bank to do additional funding transactions that will give you a better ability to originate new loans?

John Thain

The simple answer is yes. And we’ve already taken advantage of the capital markets for something like $2.5 billion of much more cost financing. And we certainly could and we will consider using the capital markets at the holding company levels to do marketing.

Chris Brendler - Stifel Nicolaus

Okay and last question is, my understanding was that the Corporate Finance business inside the bank, that’s not like you flip a switch and all of a sudden the business comes flying in. It’s a process. It’s building a pipeline. It’s getting relationships back up and running, making sure that the market place knows you are open for business, especially out of the new bank platform in the Corporate Finance portfolio. How does the pipeline look today and any expectations for; you doubled volume this quarter. Can we see it double again next couple of quarters?

Scott Parker

Yes. I don’t think we want to go out and do that given some of the other comments in regards to the competitive environment. We would say the pipeline is definitely building and is strong and so now it’s a matter of closing those transactions and getting those underwritten. So I don’t know if we want to lay out another double. But I think you’ve seen steady progress from the first quarter through the third quarter and we are looking forward to that continued improvement.

Operator

(Operator Instructions). Your next question comes from the line of Edwin (inaudible), you may proceed.

Unidentified Analyst

I guess John you mentioned in response to some other questions that the bank can hold non-U.S. assets. I was just wondering is that a function of the charter that you have with the bank?

John Thain

Yes.

Unidentified Analyst

It is okay and then I know when Dodd-Frank was initially started there was talk about limiting some of some of the charters and things on those lines I don’t know if that’s a concern to you or as you look to grow the bank will you consider change in the charter if you could non-US assets into it?

John Thain

I think the simpler answer we haven’t really thought about that. I don’t think technically it’s actually the charter that restricts it, as a US bank it needs to originate US assets. It doesn’t have at least at the moment any foreign branches, if we wanted to think about that we would have to think about creating non US branches I guess. I don’t think technically the charter is the issue, it’s the fact that it is only a US entity at the moment

Unidentified Analyst

So really that would mean that if you can do the foreign branch that and you wanted the fund would you have to issue debt out of the bank to do that or could you still do with the deposit base or we don’t know at the present time

John Thain

I think what you would need to do is if it had a non US branch which again you are asking a very speculative question so there is no intention at the moment to do this, but if it had a non US branch it would have to raise funds in that local market place and you could raise funds in a whole bunch of different ways, but obviously one of the ways is it could raise deposits in that local market

Operator

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

David Hochstim - Buckingham Research

Could you just clarify what's happening with the both the private and the government guaranteed student loans that you had released close to sale of part of the government guaranteed loans and then you mentioned in your remarks that you signed an agreement to sell some private loans, so?

Scott Parker

Yeah so as we said the agreement was to sell the remaining private loans that we have and then the other ones that just we've had as we've done previously, sold some of the government guaranteed student loans.

David Hochstim - Buckingham Research

And is there a reason that someone would buy just sort of 5% of the portfolio or 10% of the portfolio or not want more of it? Is there some big difference?

Scott Parker

Well I think there is a multiple buyers out there that have different expectations and again as we look at those transactions, if they're acceptable economically to us then we work on that transaction.

John Thain

We have sold a couple a pieces in the last couple of quarters.

David Hochstim - Buckingham Research

Okay. So, I guess the remaining balance is just still available for sale or held for sale as you chip away at that will just come down.

Scott Parker

The whole balance is and there is only one that we transferred some in the third quarter and there is some that were in there in the second quarter. The majority of the student loan assets are not held for sale.

John Thain

You used an accounting technical term, which I am not sure you meant to use but, there is a technical term for held for sale which so that if you look at that portfolio it is not in fact held for sale. That’s a different answer then, could we sell them if we choose to.

David Hochstim - Buckingham Research

The ones that were reclassified were the ones that were basically anticipated to sell this quarter?

John Thain

Correct.

Scott Parker

Well, not this quarter, within the next…

David Hochstim - Buckingham Research

The fourth quarter, I'm sorry. Not the third quarter, the fourth quarter.

Scott Parker

Correct.

John Thain

Fourth quarter or first quarter of next year.

Scott Parker

There's basically, the ones we moved to held for sale are the ones we have an intention to such.

David Hochstim - Buckingham Research

Well and you said there's some anticipated to close.

John Thain

Correct.

Scott Parker

Correct.

Operator

Your next question comes from a line of Bruce Harting of Barclays. You may proceed.

Bruce Harting - Barclays

On the aircraft business, did you skip a year in terms of forward pipeline prior to your arrival there, was there a year that no orders were put in and can you just sort of refresh us on the next couple of your pipeline strategy?

John Thain

It's hard for us to answer that because we weren't here. I don't know for sure if they ordered any aircraft last year, I would be surprised if they did. But I'm not positive, and if they did it would be a small number, it doesn't particularly impact our pipeline because we're always kind of adjusting that pipeline. And so, we have the ability to move the pipeline around and swap one type of airplane for another and swap delivery dates around and so it's managing the forward book of aircraft orders is actually one of the skill sets of our aircraft team.

Scott Parker

So we still at John's point, we still have a significant amount of future deliveries and our pipeline and we'll continue to evaluate potential new commitments.

Bruce Harting - Barclays

So, Boeing and Airbus in any given year, I mean, you can go back to them or you just work through the secondary markets and you are able to fill your forward order book through other methods?

John Thain

Almost all of our aircrafts are new purchases from Airbus and Boeing and so we adjust and modify both the type of airplane and the delivery dates depending upon the market environment.

Bruce Harting - Barclays

And then John, at the breakfast that you hosted for analysts, I may have misunderstood but did you say that you hope to get a strategic plan out by some point before the end of the year? Did I misunderstand that?

John Thain

No. We have a strategic plan on file with the Fed and we will brush in the process of working on our 2011 plans now. That’s not a public document, but it exists.

Bruce Harting - Barclays

So from an Investor Relations perspective you are sort of getting out and talking about what the next three to five year plan is. Is that something that would follow the approval by the regulator?

John Thain

Well no, I think talking about the future and getting out and talking more is more us kind of getting on the schedule of the conferences and things like that. And Ken will be beating on both Scott and I to do that soon.

Operator

(Operator Instructions). Your next question comes from the line of Mike Taiano of Sandler O'Neill. You may proceed.

Mike Taiano - Sandler O'Neill

Just a quick follow-up. Do you guys expect any impact from the FAS B proposal related to lease accounting at all on your business?

Scott Parker

Well, we are currently evaluating. As you know, it’s kind of an early exposure draft. The kind of implementation date is 2013 and so we are continuing to provide our comments and feedback as well as looking at that, but it is pretty early to do that.

Operator

Your next question comes from the line of Sameer Gokhale of KBW. You may proceed.

Sameer Gokhale - KBW

Just wanted to follow-up on the aircraft leasing business, I believe yesterday there was an announcement by a company called Aircap, and they announced that they're getting an investment from a company called Waha that's based in Abu Dhabi, the Middle East. I was wondering if, I know at one point, this is before your time there was a plan to do an IPO of that business and that fell apart obviously.

But have you in recent months or periods, been in discussions with any of those companies as strategic partners for that business, would be hoped that maybe over time they could become buyers of the assets and then you can transition out of that business or is that still kind of premature, because you've been dealing with a number of other issues, primarily the debt pay down. So, I just want to get a sense for how or whether you've been having discussions along those lines, given recent developments in the space. Thank you.

John Thain

Well we normally wouldn’t answer those type of questions but the simple answer is no

Sameer Gokhale - KBW

And I mean is that something you could strategically explore at some point? I know you've talked about being committed to retaining that business in the near term, but I mean, is that something you might explore longer term or are you firmly committed to hanging on to the aircraft leasing business?

John Thain

As we said before we like the aircraft leasing business.

Operator

And there are no further questions in the queue at this time.

Ken Brause

Okay. Well, we thank you all for joining us today and as always if you have any follow-ups please call any of us in the Investor Relations team. Thanks and we will talk to you next quarter.

John Thain

Thank you ops.

Operator

Ladies and gentlemen, thank you for participating in today's call. You may disconnect now.

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