CIT Group's CEO Hosts 2012 Investor Day (Transcript)

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CIT Group Inc. (NYSE:CIT)

2012 Investor Day

June 14, 2012 8:00 am ET


Kenneth A. Brause - Executive Vice President of Investor Relations

John A. Thain - Chairman and Chief Executive Officer

Peter Connolly - Co-President of Corporate Finance

James L. Hudak - Co-President of Corporate Finance

Matthew E. Galligan - Executive Vice President and Group Head of Cit Real Estate Finance

John F. Daly - President of Trade Finance

Jonathan Lucas

Ron G. Arrington - President of Vendor Finance

Jeffrey Knittel

Robert Rowe

Joseph M. Leone - Former Vice Chairman and Chief Financial Officer

Glenn A. Votek - Executive Vice President and Treasurer

Raymond Quinlan

Scott T. Parker - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Nelson J. Chai - President


Michael Turner - Compass Point Research & Trading, LLC, Research Division

Kenneth Bruce - BofA Merrill Lynch, Research Division

Kenneth A. Brause

Good morning, everybody. For those that don't know me, I'm Ken Brause, Head of Investor Relations here at CIT. On behalf of the entire management team, it's my pleasure to welcome you to our Investor Day for 2012. It's a great turnout, great to see so many of you. I know we have many other folks listening on the webcast. We're very pleased to be hosting our first Investor Day since 2006 and actually the first one since I joined in 2007. CIT has obviously gone through many changes over these years, and we designed this event to help bring you up-to-date on all the progress we've made and how we're positioned to grow in the future.

So before we get started, I'd like to just do a couple of housekeeping matters. As always, please remember to turn off any cell phone ringers, BlackBerry ringers. We appreciate that. Very important, please keep your security pass that you got to come through the turnstiles so that you can actually get out of the building after the event. We're going to have a question-and-answer session after most of the presentations, and again, we'd ask you to please wait for someone to bring you a microphone if you'd like to ask a question. We're going to take a break, probably about a 15-minute break around 10:15, and we should be concluding at around 12:45, between 12:45 and 1, at which time we invite you all to stay for lunch with the CIT management team.

And of course, my job would not be complete without the honor of sharing these legal and other important notices with you around forward-looking statements and risk factors. They're in your handouts. I encourage you to read them and take it from there.

So now it gives me great pleasure to introduce our Chairman and CEO, John Thain. I've had the privilege of working with John for nearly 2.5 years now, and I consider John to be one of the most accomplished CEOs in financial services. It's been great working with him and the entire CIT team as we're positioning the company for the future. Please join me in welcoming John Thain.

John A. Thain

Thank you. Well, good morning, everyone. Thank you all for coming. Ken, thank you. This is a great event for us. It really is an opportunity for us to give you a much better in-depth knowledge of our businesses, and I'm personally very proud of the management team that we've put together to present to you today.

So I'm going to go through the schedule for you. We're going to go through our businesses and then some of our infrastructure side. First, after I speak, it will be our Corporate Finance area. This is our core middle market lending business where we lend to small and middle market companies. Pete Connolly and Jim Hudak run that business. And then Matt Galligan is going to talk about our commercial real estate business, which is a business we had been in then got out of and have reentered in a very positive way. And just to give you an idea of the experience level of our business leaders, between the 3 of them, they have over 75 years of experience lending into their respective business space.

Then we'll have our Trade Finance business, which is our factoring business. We are the #1 factorer in the United States. And you're going to see a transition there because John Daly is retiring at the end of the month with almost 40 years of experience in the business, and you'll get to see him. And then you'll also get to see Jon Lucas, who is taking over that business going forward.

After that, we'll have our Vendor Finance business, which is run by Ron Arrington. Our Vendor Finance business is where we provide financing to typically small and middle market companies for computer equipment, telephone equipment and copiers. It's a global business, and Ron can talk about that for you.

And then we move to our Transportation business, where Jeff Knittel has run that business for over 30 years. And the Transportation business is both commercial aircraft, business aircraft, railcars and then a leverage lending business.

Following that, we'll have Rob Rowe, who's our Chief Credit Officer. And credit and the management of credit is one of the key differentiations of how we conduct our business. Rob has 20-plus years of experience. He was the Chief Credit Officer for Nat City. And the management of our credits is really critical to our success going forward, and so Rob will talk about that.

And then we'll move to funding and liquidity. Glenn Votek is our Treasurer. Ray Quinlan runs CIT Bank, so he can talk about the growth in the bank.

And then Scott Parker, of course, is our CFO, who you hear about with me quarterly. We'll give you a financial update. And then Nelson Chai, our President, will conclude. And then, as Ken said, we'll have lunch, and I would encourage you to stay for lunch because it will give you a chance to interact with a lot of our management team.

So what do we want to accomplish today? We want to try to answer a number of questions for all of you. First of all, how do we compete in our businesses? Why do people do business with CIT? And I really want to -- in each of the different businesses, hopefully, you'll come away with the answers to why do people choose to do business with us, how do we compete.

Second of all, where are there opportunities to grow? So we do see great growth opportunities in our businesses. Our commercial assets are growing. In spite of a lot of the difficulties in the economies in the world, we see a positive, good opportunities for our businesses, and so we want to answer where and how we're going to grow.

The third is, what are we going to earn? How do we measure our earnings power? And we want to break that down into the individual businesses’ profit models. So each of the businesses will talk about how do they make money, and then ultimately, we'll talk about how do we create value for our shareholders.

Hopefully, we'll take away from this session today the following conclusions: first of all, that we have good businesses with good leaders with a lot of knowledge and experience in their businesses; second, that we have and we do have very high levels of capital, and we have opportunities to deploy that capital; third, that we have opportunities to grow, and I think that's going to be a theme you're going to hear throughout the course of the day.

And then the last point, which has always been one of the complicating factors since I've been at CIT, is FSA, and what we really want to do is, over the course of this year, get rid of the last remaining piece of our old debt. So there's about $4.6 billion of debt left, and that's got FSA built into it, and we hopefully will be able to retire that over the course of the year. And then we can move to a much more simplified GAAP basis of earnings, and I think that'll help with the story of what our earnings actually can be going forward.

In terms of the company, we are a 100-plus-year-old company. Actually CIT, the predecessor company, was founded in 1908. It was originally called the Commercial Credit and Investment Company. It then became the Commercial Investment Trust in 1915. And in 1921, it was reorganized in a corporate form to become CIT Inc., and it was listed for the first of actually 4 times on the New York Stock Exchange in 1924. We are a commercial lender. Our businesses are all in the commercial space, again, mostly small and middle market companies, and we're a leasing specialist. We own assets that we lease. Most of our businesses is small and middle market companies, and one of the attractions as a business is we generate high-yielding assets. And so our assets, especially in this market environment, are particularly attractive because, and you'll hear this from the different businesses, we tend to be a little bit further out in terms of credit risk, but we protect ourselves by having collateral.

Our servicing capabilities is another differentiating characteristics; it’s one of the ways we compete. We're very good at providing servicing and collections and processing of our various different loans and lease assets. And of course, as we'll talk about and you'll hear about more, in particular, we do have a very strong capital base and we have significant amounts of liquidity.

So what have we accomplished over the last 2-plus years that I've been here? Well, first is we built out a very, very talented executive team, and you're going to hear from many of them today, and you can make your own assessment of them but I think we have a very, very confident management team, both on the business side and on the infrastructure side. Then in terms of the balance sheet, we have restructured both the asset side of the balance sheet and the liability side of the balance sheet. On the asset side, we sold over $10 billion of non-core assets. We have focused on our core lines of business, and we're now starting to see growth in our commercial assets. On the liability side, we have repaid or refinanced over $26 billion of debt in the last 2 years, and we brought our funding costs down over 200 basis points. And on the risk management side, and I think this is particularly important, we have built out a risk management, credit risk management, compliance, control, internal audit infrastructure. We've successfully gotten the cease and desist lifted at the bank. And you'll hear Rob talk specifically about the credit side, but our risk management infrastructure that's in place now, and I talk about risk management broadly, so it includes internal audit, it includes compliance, I think is in very good shape. You know that the written agreement with the Fed had a lot to do with the risk management and the risk controls. As I've talked about before, we have, in fact, satisfied virtually all of the requirements of the written agreement. We are still waiting for an answer from the Fed on lifting the written agreement. We're still optimistic that that will happen, but that's still in process, and that's really inside the Fed. So to the extent -- I mean, I will answer questions, but I don't really have anything else to say about the timing of that because that's really a Fed internal process. Really, we have done what we can do, we're now waiting for the Fed.

And then we are going to hear more about CIT Bank because CIT Bank is one of the important changes in how we fund ourselves. We have been expanding the bank both on the asset side and the liability side. We are originating most of our U.S. assets in the bank. You can hear Ray talk about how we're expanding the funding base of the bank, but our goal is to have our U.S. business be primarily financed and originated in the bank going forward.

So in terms of our priorities, we are focusing on growing our core businesses. We see good opportunities to do that. We are focused on improving our profitability. That will, in particular, come from the origination in the bank and improving on our financing margin. As I said, we want to reduce the impact of FSA going forward, so we have a cleaner P&L. We will grow our banking assets both on the asset side, and then we'll grow the liability side to match that. And I think we're in good shape from a regulatory point of view. As you know, our bank is regulated by the FDIC and by the Utah State Regulators, where we're in good shape there. And on the Fed, we have good relationship with them. We have, in fact, satisfied most of the written agreement items, and so now it's really a question of getting that written agreement lifted and moving forward in terms of expanding our business. So that's kind of the overview of the day. I'm happy to take a few questions now, and then we'll move into the specifics of the businesses.

Question-and-Answer Session

John A. Thain

Yes, if you could just hand out the microphones. If you kind of raise your hands, we’ll pass out the microphones in advance. Yes.

Unknown Analyst

You, when you were talking about the written agreements you said, "We’ve satisfied virtually all of the requirements," so what’s the "virtually" leaving out?

John A. Thain

Well, so -- whenever you have issues with the Fed, there’s an ongoing set of reviews. And coming out of those reviews, there’s an ongoing set of what they call, MRAI, which are matters requiring immediate attention, and MRA, matters requiring attention that come out of those reviews. And there's a little bit of a tendency to have a creeping of what was in the written agreement versus some of those ongoing exams. So they would concede with the point that we have satisfied virtually all of them, but there will be little pieces or little things that, well, you can do a little bit more here, a little bit more there. But it's really nothing particularly subsident. So there's little bits of things that we still need to do, but for the vast majority items, the Fed would, in fact, agree that we've completed them. And then there is an ongoing set of things, so it never stops. So there's always an ongoing set of things you have to keep working on. You can hand out the mics, and we'll pick them up. Yes, go ahead.

Unknown Analyst

The online bank launched back in October of last year raised about $1.1 billion of deposits or so, I believe, since then as of the end of Q1. Is that kind of where you see the majority of the deposit growth coming, or do you see it kind of in the other sides of the banks as well, too?

John A. Thain

Well, I'll let Ray talk more about that. We're north of $1.5 billion now in internet deposits, but over time, we want to continue to expand the deposit base of the bank. So we want, at some point, to be able to take commercial deposits from our commercial customers. I think that'll be a good opportunity for us. And at some point, we'll have the opportunity to have more traditional retail deposits. And so Ray can talk more about that, but we will expand the deposit-taking capability of the bank.

Unknown Analyst

With Basel III out for comment now and obviously, a little more clarity in terms of future capital requirements, does that open any doors for CIT in terms of returning capital measures like a dividend or a buyback earlier than 2013, or is it still sort of a 2013, 2014 part of the clock?

John A. Thain

Yes, so it's not really a Basel III question. We have excess capital under any measure, and so it's much more a question of the process you have to go through with the Fed. So we're not technically a CCAR bank, but to return capital, we will need to submit a capital plan to the Fed that is CCAR-like, so we'll have to stress test our capital base in a similar fashion to CCAR. And that capital plan, for all banks like us, not just -- it is not very specific to us, gets submitted at the beginning of the year. So at the beginning of 2013, we will submit a plan. I expect that, that plan will have some form of return of capital and then that has to get approved by the fed. And of course, you've seen different financial institutions have greater or lesser success with that. But once that plan gets approved by the Fed, then we will be able to return capital, assuming we get the approval. Other questions? Yes?

Unknown Analyst

Just curious, how does CIT potentially approach acquisitions?

John A. Thain

So the idea of acquisitions, I think the place that is the most interesting to us is can we become more bank-like through an acquisition. So is there an opportunity to acquire deposits? That's really the place that we see the most interesting opportunities on the liability side. So we do look at and we will continue to look at the ability to acquire deposits. Second of all, we are looking at portfolios coming out of primarily the European banks. Now so far, there haven't been that many that have actually been traded, but the European banks have been looking to divest themselves of portfolios of assets. We did buy a small portfolio. And so I think we will be opportunistic, and we'll continue to look at things as they become available and if we can buy them at returns that are attractive to our shareholders and fit our return criteria, then we'll try to be opportunistic in that. All right, well, look, I think we have put together a really good day. I really think this is a great opportunity to get into greater depth in our businesses, and it's a very good opportunity for you to see the people who run our various different businesses. So thank you all.

Kenneth A. Brause

Thank you, John. So when people hear CIT, I think the tendency is to just think middle market lending. And a frequent question we get is how do we compete against the big banks. So here today to address that and other questions are Pete Connolly and Jim Hudak, who are the co-heads of Corporate Finance; and Matt Galligan, who runs our Real Estate Finance business. I have the pleasure of working with Pete and Jim since I joined CIT. Pete joined about a year before me in 2006 to head up our syndicated loan group after about a dozen years with another middle market lender based in Connecticut that I think you may be familiar with. Jim has a long history with CIT that dates back to 1991, when he joined AT&T Capital, which was acquired by CIT in 1999 as part of the Newcourt deal. Jim's a career lender and previously headed our communications media and entertainment group. Matt's a newer addition to the CIT team, having joined late last year from the Bank of Ireland to restart our commercial real estate activities. I sit down the hall from Matt, and I can tell you that he and his team have certainly hit the ground running. So with that, let me turn it over to Pete.

Peter Connolly

Thank you, Ken, and thanks to all of you for your interest in hearing about what we think is a great opportunity for growth at CIT Corporate Finance. Now there are a few key messages that we'd like you to take away today. The first is we're very well positioned for growth. We made tremendous progress in regaining market share over the last year, which is best evidenced by our entering into greater than $4 billion in new loan commitments in 2011. We accomplished this by being a reliable and consistent lender to the middle market. Now feedback from our customers has been great. They're happy to see us back and lending at these levels again.

We also recently added to our product offerings by bringing in an expert team of commercial real estate lenders headed by Matt Galligan, who's going to come up and talk to you about the opportunities in that business shortly. And we relaunched our equipment leasing product, which is still a very strong brand recognition in the market, and Jim's going to take you through that.

Third, CIT Bank is a great asset for Corporate Finance. It provides us with a sustainable funding source and a competitive cost of funds. Now our U.S. business operates within CIT Bank now, and we expect that nearly all of our loans originated in the U.S. will be in CIT Bank going forward. I have a slide later to discuss the fact that the more loans we do at CIT Bank, the better our net interest margins are going to be.

Now at Corporate Finance, we seek to provide our customers with senior secured lending and loan and leasing products to meet our customers' financial and growth needs. Customers use the proceeds of our loans for several reasons, including mergers and acquisitions, working capital facilities, refinancings of existing facilities, recapitalizations, project financings, capital expenditure lines for growth CapEx, to name a few.

Now our go-to-market model is one of the industry specialization. We focus on 7 major industry groups: first, industrials, where we focus on general industrials, chemicals, manufacturing companies and distribution companies, to name a few; energy, where we focus on high-growth companies in the value chain from drill bit to light switch, which includes power, oilfield services, oil and gas production, transmission and storage; in retail and restaurants, we seek to leverage our long-term expertise in providing retailers and restaurant chains with innovative financing solutions; in healthcare, we cover healthcare services industries, medical technology companies and pharmaceuticals, among a few; communications, information services and technology, we target providers of value-added voice, data and video services; in entertainment, sports and gaming, we provide financings for film and television production, sports teams and franchises and Native American casinos; and in commercial real estate, as I mentioned earlier, Matt will take you through in a while.

Now it's no coincidence that the industries we focus on make up a significant portion of the U.S. GDP, in fact, 2/3. We wanted -- the reason we’ve focused on these industries as we wanted to have sufficient deal flow to support our level of investment and deal flow needed to be enough that we could grow in a safe manner. You'll see here that there was over $200 billion worth of loan demand in 2011 in these industries. I will point out that this the overall loan market, not just middle market, so it includes larger loans as well.

The other thing I'd point out here is that CapEx is significant in these industries, and we have seen companies getting back into reinvesting in growth capital, so that bodes extremely well for our equipment leasing.

Now at Corporate Finance, we have 4 major types of loans we provide our customers. The first is an asset-based loan, which is typically revolving line of credit, where we take current assets, such as accounts receivable and inventory, as collateral. These are best suited for companies with high working capital needs such as retailers, oil and gas production and certain industrials. Now the pricing for these types of loan tends to be lower than their cash flow counterparts as the collateral is liquid and the historical losses giving default are very low at this product. Project financing is used by our Energy group for power-related projects such as gas-fired cogeneration facilities and wind projects. These loans typically have strong asset coverage and stable, strong cash flows with minimum offtake agreements from investment-grade utilities.

In capital equipment finance, we look to provide loans and leases against mission-critical assets, which means that the assets are key revenue generators for the company. And when we look to underwrite these, we don't only look at asset values, we also look at the company's ability to generate cash to service the debt.

And finally, cash flow lending. This is where we provide senior secured loans that are generally based on a multiple of EBITDA and generally have all the assets of the company as collateral.

Now credit analysis is at our core. When looking at cash flow loans, the lending decisions are based on several criteria, including size of company, their competitive position in the marketplace, barriers to entry for the company's products, EBITDA size, et cetera.

Now we feel very good about where we're -- the part of cycle we're lending in when it comes to cash flow lending. If you think about it, we just got to see how the companies we're financing today, went through this previous recession, how did they behave, how did -- if there was a financial sponsor, what did they do if they need there to be a restructuring, what were the baseline revenues the companies were able to sustain, how did they cut costs, et cetera. So we feel very good when you look at what your downside scenario in today's companies, when you just went through a recession, we're able to see exactly what happened.

Now the middle market makes up a significant portion of the U.S. GDP. It's estimated there are 30 million jobs across 100,000 companies in the middle market. And we frequently get asked, what's your sweet spot? Where do you guys typically play in the middle market? Well, for us, it's companies that have revenues of $50 million to $100 million, the EBITDA size from $10 million to $50 million and they're typically private companies with a credit profile from B to BB. The typical exposure is from $15 million to $30 million per credit, and that's based on several factors, including what's the asset coverage in the loan, the EBITDA size, the company's position in the market, et cetera. In small business lending, we target companies with $100 million of -- I'm sorry, $100,000 to $5 million of revenues, and the typical hold size is $1 million.

Now diversification is the cornerstone of prudent risk management. Obviously, it's something we take very serious along with our risk management group. As a matter of fact, when looking at our growth plans, we always take diversification in mind. The good news here is our $7.4 billion portfolio is well diversified in over 330 different SIC Codes.

We think this is a very important chart. It helps explain the transformation of CIT Corporate Finance. If you look back in Q1 of 2011, 78% of our U.S. assets were at the bank holding company level, which obviously has a much higher cost of funds than does our bank. In the past year, we've been successful in growing the assets of the bank by $2 billion, and now 52% of our U.S. assets are in CIT Bank. Now as we continue to grow the assets in CIT Bank and the balance sheet continues to shrink, our net interest margin should improve. Now we do view this growth in the bank as a significant accomplishment as you cannot transfer assets from the holding company to the bank and there are certain restrictions on refinancings, so most of the new business in the bank are new customers, so again, a significant accomplishment.

Now we always get asked, how you feel about your competitive landscape? Well, I'm here to tell you we feel very good right now. A lot of the middle market lenders that started up in the 2006 to 2008 time frame have shut down or are severely challenged right now. Many of the large commercial banks that came down to play in the middle market have exited or back focused on the larger loans and bond transactions. The pullout of the European banks has created a significant opportunity for our Energy business. In the past, European banks had a significant share of the power market with very large holds that we weren't able to do. While their exit has created significant opportunities for us, we're relevant and we're already seeing progress in that market.

Now we've provided at the bottom of this page a chart of our competitors and the products that we compete in. So let's take commercial banks. We clearly compete with commercial banks in the asset-based loan and equipment finance lines. However, commercial banks tend to focus on the larger, more liquid ABL transactions, whereas we focus on the smaller under bank companies that CIT is always focused on, and we believe we get premium pricing for those companies.

In equipment financing, the commercial banks tend to go after investment-grade and higher revenue companies than where we focus, which is in our core middle market and we have a good existing customer base to draw from. Regional banks compete with us across all of our asset classes. The good news is we significantly narrowed the cost of fund advantage of the regional and commercial banks via our CIT Bank. Now regional banks tend to go to market with a footprint or generalist approach to originating loans. We think our industry expert approach will win the day, and we've been in this market for 100 years. Regional banks have come in and come out of the market, a fact that financial sponsors are well aware of.

Now, non-bank financials, our cost of funds are at least as competitive, in many cases, more competitive than the non-bank financials we compete with. Business development companies, or BDCs, we frequently get asked what's the competitive impact that they've had. Well, they tend to focus on more risky, higher-return business than we do, so they tend to actually be investors in another person's lead agent transaction, filling out a second lien or a mezzanine-type part of the capital structure rather than competing for a lead agency on a senior secured financing. So they tend to be investors, not competitors.

So to summarize, I really do feel like we're in a very good competitive position, the best we've been in a long time.

And with that, I'd like to hand it off to Jim Hudak, who I've had the pleasure of leading Corporate Finance with for nearly the past 4 years and is really been a true partner and friend. Thank you.

James L. Hudak

Thanks, Pete. Pete's been a great partner and friend as well. He tells the story, the Corporate Finance story extremely well and makes my job a lot easier on a day-to-day basis. So I had the privilege about 6 years ago to present at the last Investor Conference, much different time in the market, very frothy, we had a lot of growth ideas. A lot's changed, a lot's changed in those 6 years. And in getting ready for this, thinking -- having a perspective of what went wrong, what we were able to hold onto, what we were able to change, I think, was very important. I actually believe the story that we're going to tell today or we're telling is much more compelling, as well as a lot more sustainable.

So Pete talked about our products, our portfolio, our industries of focus. I wanted to further supplement your business understanding of CIT Corporate Finance with our market coverage model, and this is very important. There are 3 primary ways we go to market, which I think make our products sticky and it's a good franchise. The first is we cover the private equity channel. And when I talk about that, we line up very well with certain sponsors, and it's very deliberate effort when we go out and we talk to private equity sponsors, we're going out, we're either talking to people who've gone out and raised the fund in areas of focus or industries that we're in. So there might be somebody who's gone out and raised their fund just for healthcare deals or there's an entity that's gone out and raised money for communication deals. So we line up our industry areas of focus with those funds.

We also got a private equity sponsors who have specifically gone out and raised money to finance companies in the middle market and more specifically, companies that line up with the size that we're looking at in terms of revenue and EBITDA, so more of a generalist approach. We don't try to go after the big blue-chip firms. They're very well banked. We don't compete well there. We're just a commodity. We're not going to add any value. But the middle market funds and the funds that have an area of focus, it's a good fit. So if you're doing a right job there, it's about execution and delivery. And if you do that -- you do the job right, it becomes an annuity stream in terms of business.

If you look at the other half of our business, it's more direct, and certain industries lend themselves very well to that direct model, so a lot of things on the health care side, the entertainment side, the energy side. And because of the size and complexity of the transactions, we're generally talking with the CEO or the CFO of these companies, a very good real dialogue and probably the best type of business wherein we're actually mining our portfolio. So these are companies that we've lived with, we understand, we want to try to grow with them, a very good source of business, and that's what we do, we try to protect our portfolio.

On a secondary basis, we do deals through different intermediaries, and primarily, those intermediaries are other financial institutions. And we might buy into somebody else's deal where we think the risk return profile is very well balanced. That's a good way of getting good deals and building the portfolio. But sometimes, those intermediaries could be a restructuring firm, and we're talking to a law firm or restructuring firm and their good, dip opportunities, for instance. So I think the takeaway from this slide here, it's pretty clear. We've created some serious momentum over the last 5 quarters as we've consistently delivered through our various channels.

So number one question we always get, whether it's in this type of form or with other customers with other sponsors, is how do we, as CIT and specifically, in Corporate Finance, as a relatively small organization, what's our value proposition, how do we win business, how do we differentiate ourselves. So we always found that simple, consistent explainable strategies, they always win the day. So I'm going to try to do that. So number one, we're focused on key industries where we actually feel we can make a difference and we take a very long-term view. Now that last fact alone knocks out a good chunk of our competition around the fringe. Now people come in and out of the market, where people have raised funds to go out and do debt financing. And basically, the life cycle of that fund is shorter than an economic cycle.

Second is industry specialization and product expertise. I feel very strongly about this. So again, the way that we've lined ourselves up, Mike Lorusso, head of our Energy group, he started out as an engineer in the nuclear power facilities. If you take a look at Bob Bielinski, Bob Bielinski runs our restaurant group. He spent time as a treasurer of a public restaurant company. If you look at Wade Layton, who runs our entertainment group, very long-term banker but he was also a CFO of a media company. If you look at the average tenure of the people who run our business and you look at their areas of focus, their industries of focus, it's over 20 years. I've actually had a few people in the group worked at CIT, left CIT, went to work for some of our portfolio companies and then came back. So this is much akin to a good private equity model, where they go out and they hire operating partners. So we actually have the operating experience in our stable. And this is a very powerful thing when you go to talk to clients and when you talk to sponsors. They have adult conversations.

In terms of deep relationships with sponsors and clients, I know this is something that gets overused. Everybody talks about those deep relationships and what a differentiation it is. I can absolutely guarantee you that nobody has put those relationships to the test like CIT. We had a near-death experience. We had days when Pete and I were trying to figure out how we're going to fund our customers. So we've been dealing with people for years. We've given good advice, good support, and we've been very well rewarded with customer loyalty.

The fourth is high-quality servicing and portfolio management team. We don't take our deals and put them on the shelf. Our best business is repeat business. It's great when you can live with the customer and you look at their business plan over several years, you see how they're growing, how they hit it, what they need to hit that business plan. They might need a different product. We might start financing somebody on an ABL basis, and they can actually grow into a cash flow loan.

Last point here in terms of value proposition, I really do think when we talk about the creativity, creativity of a finance company. We've been around for over 100 years, most of that time as a finance company. So we have people on the portfolio side, on the origination side, on the underwriting side, they’re steep and structuring experience like a finance company, and now we've blended it with a bank model, a bank funding model.

I would be very remiss if I try to make the argument to you that we're making traction as a business just because our commitment volumes are going up. Here are some examples of some middle market companies that we've led or co-led. They're in various industries. They're very recent. The deals were extremely profitable. There's no better validation of a lending platform than having a CEO or a managing partner of a firm give us the car keys to drive their bank deal.

In terms of a case study, I'm going to back to my annuity example, and I think this is a very good example. So Odyssey Partners is a great middle market private equity firm, and what we love about these guys, in addition to doing deals in our space, they pride themselves on never having paid a dividend to themselves. So they take a very long-term approach. They take the value they create in companies, they take that money, they plow it back in. We love to line ourselves up with people like this. This is a long-term relationship. So in 2011, we did 4 deals with Odyssey, and this culminated in Odyssey awarding us an underwriting of $175 million senior secured transaction with BarrierSafe, very successful transaction. We underwrote it. We syndicated it. We brought in other financial partners. We got down to a reasonable hold position, and this was a very lucrative deal for us. So it's a great example of getting more market share with a sponsor, and it's very, very repeatable.

I want to talk about a growth opportunity, and this is a great situation where we're actually building on past success. This is not a big leap for us. This is actually a fairly short putt. So I want to give a little history about equipment finance. At one point in time, CIT had a dominant position in large ticket equipment leasing. I think we were $8 billion to $10 billion of assets at one point in time, and roughly half was in the construction side, so a lot of yellow iron, and the other half was in a lot of different industries. So it got to a point where there's a lot of price compression on the construction side. We were competing with the captive finance companies, so we're competing against Caterpillar, John Deere. We weren't going to compete on price, so we made the strategic decision as a firm to basically sell that portfolio. We sold it off to Wells Fargo. We have non-compete for 3 years.

The other part of it, as we went into our problems as a firm, we didn't do any new financing in equipment, in equipment finance. We kind of left that language. We certainly kept hold of the portfolio, but we weren't generating any new business. So as things got better for CIT, a few people in the organization had a lot of experience in this, we put our heads together, and a good driving factor here, a gentleman by the name of Vince Belcastro, who's now the head of equipment finance, we got together and said, how are we going to do this? How are we going to attack this? How are we going to do this a little bit differently? So we decided to really narrow our focus, not try to be all things for all people but go after the industries, the areas that we knew well, and we're going to take that product and we're going to layer it over the industries that we're already in, the huge economies of scale. So we weren't going to run it like a silo. So a perfect example where I feel very strongly from a competitive situation. So Vince, if he's looking at a deal, let's say it's oilfield services deal and involves some equipment, another bank, another institution, another equipment lessor, they'll be in a vacuum. They'll be looking at that piece of equipment. Vince can walk down the hallway, talk to Mike Lorusso, his whole gang of folks in the energy group. We could talk about commodity price. We can talk about cyclicality. We can talk about the secular changes going on in that industry, and we can underwrite that deal, having a much better appreciation of the value of that equipment a few years down the road.

This is a slide I love. This is -- when you talk about a large addressable market, this is a great slide. So we tried to delineate the amount of finance equipment that we expect in 2013. We took a huge cut off of this. We said we're not going to be doing the really investment-grade. We're not going to compete on price. We're not going to do the tougher credits. We're going to stay in our sweet spot, so we kind of cut out for that. So now we’re saying, going back to example of not being all things to all people, we're going to focus on just the industries that we feel that we're good at and we've got some knowledge. So that takes out 75% of debt financing need. So even with those 2 very large cuts, it's $50 billion worth of equipment financing in 2013 that's projected. We're going to get our good slice of that.

So speaking of growth, before I bring Matt on, I just want to throw my two cents' worth in on this. So we decided to get back into real estate about a year ago. We figured the best way to do this is to jump-start it and go out and buy a portfolio. We look long and hard, particularly at Bank of Ireland's portfolio, liked it, liked the credits, felt very strongly about it, bid on it, didn't get there on pricing, but we actually got a much better trade. We got the people who developed that portfolio, and that's very repeatable under our platform.

So I'd like to bring on Matt to talk about real estate at CIT.

Matthew E. Galligan

Thank you, Jim and Pete, and thanks for all your support and allowing us to grow this business more quickly because we use their operating platform. We are rebranding CIT within the commercial real estate space. As you know, CIT was a finance company and did highly leveraged transactions. Right now in this space and time, we can do moderate-risk debt transactions, all senior secured with a lot of equity behind us. Generally, we're doing no greater than 60% loan-to-value. We're getting paid for that very significantly compared to prior markets and to be candid, probably more appropriate than prior markets.

We have 8 professionals with a lot of experience in the real estate business. With me here today is my deputy, Meggan Walsh. We've worked together for 5 years. We make a great team. She looks at the world through a lens of an MAI, an appraisal perspective, and also kind of a real estate brick-and-mortar perspective, whereas I look at it from a credit and structured finance perspective. And this allows us to have a lot of different views on credits and frankly, get to a better decision.

Also with me here today is John Monaghan. He was with us at Bank of Ireland, and John comes to the world with an accounting background, 20 years of experience. He's the consummate pro. He's a utility player. We use him in a lot of different areas, and he's done a fabulous job.

Another professional that was with us at Bank of Ireland was Chris Niederpruem. He's a young guy, 37 years old. He's got 15 years of real estate experience. Just a terrific guy and a great guy to work with.

We also have another Managing Director, Steve Reedy, who has been with CIT 12 years, and this has helped us to navigate our way through CIT and allow us to get to market more quickly than if we didn't have him.

One of the things we pride ourselves on, and this worked for us in a major way at Bank of Ireland, we have clear and direct communications not only with our clients but internally with our credit constituencies. And Rob Rowe, our senior credit officer, has been incredibly supportive of us in this space and encouraged us to expand our business plan in a very supportive way. We also have the benefit of a great relationship with CIT Bank. Ray Quinlan is here today. We're working on funding strategies that could be very attractive to us, and the bank has been incredibly supportive as well.

One thing that we're -- one way we're different, other than the fact that we have a growth initiative in the time where most people are slowing down in the real estate space, is we have a cradle-to-grave concept. We are not functionalized, and this really is beneficial to us in the eyes of our clients. They want a deal with a real estate professional that has negotiated their deal with them. And Meggan, if she brings in a deal, stays in the transaction the entire life cycle of the transaction. She knows the documents. She knows the client. She knows the hot buttons because she negotiated the deal. This is incredibly powerful in the space with our clients.

We target what we call bilateral transactions. These are direct financings with developers. We'll give you an example of that. We're also playing in the syndicated loan space. We find with the major transactions today, $150 million or more, it's hard to cobble together the capital, and as such, we're able to play in that space at very low leverage levels with great pricing. So we've got done about 4 of those transactions to date. We also do what we call club transactions, where we'll split $100 million deal or something a little bit less than that with one other bank and we'll co-underwrite it. So effectively, we're doing something very similar to the direct transaction with one partner.

Again, these are conservatively structured assets, much more conservatively than I've seen over the course of my career, 50% loan-to-cost. The market has been repriced, and we're, in many cases, at a debt level in that marketplace that is far below our competition, which allows the developer to be able to compete in the marketplace with other transactions at a much lower cost basis.

Our transactions generally are in 24-hour cities. Those would be New York, Boston, Washington, D.C. We also operate in healthy U.S. markets. We're looking for infill locations. One aspect of today's market that's very different than the 1990 downturn is there's a lack of supply in today's market. We did not overbuild the transaction. We did over-leverage the transactions. That's working itself through the system. Right now, according to the Urban Land Institute, there's $1.4 trillion of debt coming due in the next 4 years. Morgan Stanley recently released a report that indicated that there was $50 billion of money through the European banking system that had to be repatriated. This has provided a tremendous opportunity for us.

Our portfolio is roughly split 70% cash flow in what we call investment loans and about 30% construction loans. This is what commercial banks do. They're interim lenders. We operate in the multifamily residential space, in the multi-tenanted office space and in the retail space.

This slide addresses our competitive set. You'll see that we compete here in the middle market space with Sovereign, Capital One, M&T, TD, which, in this market, is a middle market lender, U.S. Bank, CIBC and PNC. We go head to head with them every day of the week. Foreign competitors, there's very few still remaining. The major European banks and specifically, the Germans, over the last 15 years, really ran this marketplace, and again, they're repatriating their capital. There's 3 examples of people that are staying here and working their portfolio through. The larger competitors, we can't and don't compete with. But because they have such large portfolios, in some cases, $90 billion and up, we find that they're facing off against a different set of clients than we are, and they have to work through the portfolios that they have today. So they're in a different space.

This is a great example, and I'd like to show you the picture here. This is a loan that we made to National Resources. It's the first phase of 2 phases, $25 million loan, as you can see, senior secured, very conservatively leveraged transaction. There's 70 condominiums that we're financing here. It's 30 yards from the Hudson River. As you can see, there's glass curtain wall here, with very large windows, loft-style apartments and the glass curtain wall allows for light to get deeply within the units. So the key to condominium finance has been and will always be light and views. If you look out at these views, to your left, you'll see the George Washington Bridge, which is very pretty at night, as you know. And to your right, you'll see a panorama of Manhattan. You're also very close to Manhattan. So it's a well-structured deal with a team, a client team that has very good experience in this particular marketplace.

Thanks, and I'm going to turn this over to Jim.

James L. Hudak

Thanks, Matt. So I've spent my entire career financing companies, smaller companies, middle-market companies, mostly private. That's where the fun is. That's where the capital need is. It's harder for those companies to raise financing, so you have to be a little bit more creative about it. I think looking back over that time, the challenge has always been the demand is there, but you don't always have the platform to deliver. And I feel very comfortable after about 12 or 13 years at CIT that we've gotten to the point where we have the right platform to deliver on that demand.

So some key takeaways here, right-sized platform, retain the key talent. So Pete and I have spent the last 2 or 3 years getting to that point, getting to that area of focus, and we've been able to retain really solid folks. They're battle-tested and they're psyched for growth right now in terms of significant niche experience. So we're in certain industries we have certain areas of expertise, and you can look and say it's a niche model, but guess what, when you take those niches and you add them together, it actually gets to be a significant business and it's very well diversified.

In terms of our middle market products, we talked about cash flow, ABL, equipment finance, project finance, the important thing is we have the products that the middle market needs. And the last point here in terms of sustainable bank funding, a lot of people ask us how your bank now, you're going to go out and try to go upmarket, that's not the situation at all. We feel very comfortable in our space. We've lived there for a long time. Now we actually have a funding model that makes that space much more profitable for us.

So last thing I'd like to do is show -- I ran a communications and media group for years, so I have plenty of videos, most of them inappropriate, but I actually have an appropriate one today. This one, I'm very proud of Steve Warden, who runs our healthcare team, and the people that work with him in delivering this type of -- the person who runs this company, the company itself, the deal, I feel great about that. They did a wonderful job. So I'm going to show a customer testimonial. It stars Darby as well as the people that his company services, his healthcare provider, Ernest Healthcare. Again, I love showing tangible examples. This is a very human element to what we do every day in terms of providing financing, and you've seen a lot of words here, a lot of PowerPoint. This video helps the story leap off the page. So if we can show this.


James L. Hudak

So industry expertise, product knowledge, relationships and a client who appreciates all of the above. It really doesn't get better for us at CIT and Corporate Finance.

So with that, Pete, Matt and I will be delighted to take any of your questions.

Unknown Analyst

A question that often comes up is how does CIT compete with, let's say, Wells Fargo. And I was wondering if you could sort of compare and contrast in your ABL and Corporate Finance business what you do compared to Wells and how you win a deal and what they don't do that's in your targeted zone?

Peter Connolly

Yes, so I think Wells Fargo is a perfect example of someone who is focused on the larger transactions, right? So we're really not competing with them for a $1 billion ABL transaction that they're going to price it at LIBOR 200 and sell out to other banks. That's not really what we're competing with them against. They do come down into some of the smaller transactions that's our core, and I think that's where our customer relationships and a lot of the people that we're banking or people we banked before and we've had relationships over years and years. So I think it really comes down to relationships and then our industry experience. Whenever you can walk into a customer and not just have a conversation about here's money, right, I can finance your business, but how does your business work, what do we see is going on in the marketplace, what do we see is the competition for them out there and their products, it's a much better conversation

[Audio Gap]

our deals and leverage off of us.

Unknown Analyst

Two questions, please. Jim, you mentioned that there were mid-market startups in lending in the mid-2000s, who have fallen by the wayside and I was wondering who those were specifically. And then for Matt, is real estate lending a startup business within CIT? I mean, what was it when you arrived here? You said you were rebranding it. What was its previous identity? How many people do you have working for you? How big is the portfolio? How big would you like to make it?

Peter Connolly

So I'll take the first piece of that.

Matthew E. Galligan

So the portfolio to date, we've closed 6 transactions. We've been in the market since January 25, so we think that that's a really good startup. We have $275 million in commitments closed. That would be consistent with the rate of volume we think we do. There's no legacy here, and I'm sorry I didn't emphasize that enough because we're entirely focused on growth. And our competitors such as Wells Fargo, which is a great real estate bank, one of the best in the country, they've got such large portfolio that they're nursing along that portfolio in this particular time and have, for their size, a relatively small allocation of new money. For us, it's all about speed, reliability of execution and, as Pete said, industry knowledge.

Peter Connolly

And on the middle market side, to answer that piece of the question, there were several folks that were at former places like Heller, Merrill Lynch Capital, et cetera, that were looking to start up their own middle market lending shops, and a bunch of them actually got started up and started lending. And then when the financial crisis hit, their financing structures didn't allow them to survive, so a lot of them went out of business. What attracted them was the middle market was quite large, and that obviously attracted some more competitors. But it wasn't sustainable. So I feel very good that there's not going to be a lot of those coming on the road again because the financial sponsors and companies saw that they weren't dealing with the lenders they thought if there was a workout in one of their accounts.

James L. Hudak

And actually, a good situation, and even the guys that have remained and are putting dollars to work, that's actually good for us because a lot of those guys who -- not long established track records are really just trying to put dollars out as a financial investment. We use those guys to syndicate to, so they're not necessarily interested in leading the transaction. They're trying to put some dollars to work in a portfolio. So that actually helps our liquidity in transactions that we can go to some of those guys who are not threatening us to lead deals but want to come into our deals.

Unknown Analyst

I have 2 questions. One is on what you just mentioned, which is your ability to lead deals that generates more fee income rather than just spread income. Looking at your income statement progress since bankruptcy, the fee income line seems to be one where there's been relatively little progress relative to other parts of the income statement. So what has held that back? You've obviously given some examples today where you're doing some, but what's held that back and where could we see more progress there? And then the second question is as a regulated bank now, do you feel that it's necessary under the regulatory oversight to maybe take somewhat less risk than historically was your sweet spot? And if so, does that put you more in competition with regional banks than you historically were?

Peter Connolly

Sure. On the first part of your question, look, we're still largely in a club environment in the middle market, where financial sponsors say, we'll pick 5 of their favorite lenders to close a transaction and not necessarily have a lead agent with a syndication capabilities, but that's starting to shift. As you can see from the page we showed before, in the past year, we've made progress in getting and winning lead agent transactions. We just brought in a new head of capital markets, Neil Wessan. He's got over 25 years of experience in middle market capital markets, and we think that Neil's going to help us win a lot more share of lead agent transactions. We feel like we're in a great position for that. As M&A things -- M&A picks up a lot, there's going to be the request to underwrite more transactions, so we do expect that, that will start to shift a little bit, and that's what we're gearing up for. We retained a strong capital markets team behind Neil, so we clearly have the ability to do it as evidenced by the last video that we just showed you.

James L. Hudak

And in terms of the second part of that question, dealing with the regulatory aspect, yes, definitely, there's a fine balance there. John touched on it in his opening remarks about being a little bit further out of the risk curve, and we didn't emphasize this enough in the presentation, but -- and that's one of the reasons that we're going to some of the equipment finance model as well. So it might be a little bit further out on the risk curve, not a lot, but again, just a little differentiates. But we're trying to look at things that are a lot more asset-heavy. And Rob Rowe, when he gets into the credit side of things in his discussion, will talk about this different types of products. But we're looking at things where it might be a tougher transaction. So when I talk about equipment finance, you really have to underwrite the industry, not just the asset. And we look to get out of that deal through success of the company. And as a secondary layout, we actually have the asset. So we're looking at things that are a little bit more asset-rich, and I think we make a lot of headway with the regulators in terms of looking at our past history, where we're as a finance company, and our recoveries and deals like that.

Unknown Analyst

[indiscernible] Just trying to step back a little bit. I mean, you talked about the businesses, some pretty helpful color there, but we can see your competitive positioning. You talked about some people going out, falling off the wayside. But if you just step back and look at demand for commercial loans, one of the things that's been a bit of a puzzle is that the consumer is arguably in pretty weak shape. So what's really driving all this macro demand for C&I loans? And if the health of the consumer is kind of shaky and that continues, at what point does the party end? Is it like 2 or 3 years on out? I mean, are you seeing now, it's currently reinvestment demand because people add investment in equipment or in deals? I mean, what is really driving the underlying demand in all these commercial loans?

James L. Hudak

It's not necessarily a lot of M&A activity. What we're seeing in terms of driving demand, look at over the last 4 years, people starved their capital budgets, and they figured out a way. We look at -- every month, we're looking at financials that come in. We've got a huge portfolio across many different industries, where I think we have a pretty good look when we say the middle market and the economy. And things look better, not necessarily from a top line perspective, it's not like someone has blown the doors off in terms of revenue, but they manage their companies a whole lot better. And so when we look at earnings, we look at EBITDA, it's actually been a good trend because people are operating much more efficiently, but there's only so long you could starve the capital budget and you have to start reinvesting back in your business. So we haven't seen necessarily in jobs growth but we've seen it in people starting investing in property, plant and machinery, and that, right now, is a primary driver.

Matthew E. Galligan

And like Jim said, M&A has been slow. I think what's going on there is there's just a large bid ask between what the seller wants and the buyer wants, right? And I think anytime there's uncertainty, like what's going on in Europe now, that can tend to slow up the M&A market. But one of the things to think about is there's a lot of capital in the private equity hands right now. And as soon as some of the uncertainty goes away, we do expect M&A activity will pick up, and that's something we want to be ready to take advantage of when it happens.

Unknown Analyst

If I heard you correctly, Pete, I think you mentioned that most of the loans that are being made into the bank right now are from new customers.

Peter Connolly

Of the U.S. loans, correct.

Unknown Analyst

Yes. Could you talk about the customer turnover you've seen in recent years?

Peter Connolly

Yes, I mean, I think we haven't had a lot of customer turnover from the respect of them not wanting to do business with CIT. We've actually had none of that. They're very happy to see us back, so we've maintained relationships. I think where we've had turnover, it's where we've had, for example, something that's on our holding company, and we've decided we don't want to go into it because it wasn't economic as we had to reinvest it back on the bank holding company because wasn't eligible to go in the bank, right? So that's where, if there's been customer turnovers where we've actually had to step away because of the profitability because in the end, we're here to make money, right? So unless we feel like there's a lot more future economics coming out of that transaction, we've walked away from something like that. So that's why you'll see holding company balance sheet shrinking and bank balance sheet growing.

James L. Hudak

But there was a situation where, about a year ago, the bond market was on fire and most of those deals were getting done, and the use of proceeds and the raising of those bonds was to take out senior secured debt. So we weren't losing that transaction to a competitor. We're just losing it to a different product.

Kenneth A. Brause

I think we have time for one more question.

Unknown Analyst

If we could dig into the competitive dynamic a little further, you talked about how a lot of the larger regional and super regional banks sort of play at client levels above yours. But in a world where they’re all starved for loan growth and have excess deposits, why aren't they going to dip down into your arena and take a lot of that higher-quality business?

James L. Hudak

Let's talk about the same. So when some of the larger commercial banks came down in, the way that they would execute transactions is they would take those loans and sell them off into the institutional market. So they selling off to people like CLOs and people who are, what I'll call, hot money. So as soon something goes wrong, they’d either be trading in or trading out. Those have higher execution risks than they do with your existing group of core middle market lenders, right, because you got to go out, syndicate them. If something happens, if Greece, suddenly there's an issue, you got to go back to your customer as a bank and say, hey, you know how I told you it was going to be LIBOR 300, well, now it's LIBOR 600 because that's where I can sell it, right? When you do it with your club of commercial lenders, who are, by the way, going to be in this transaction with you and stay in this transaction, so they are investors in this transaction, versus some of the other banks that are going to sell off the whole thing and be an agent in name only, it's much harder sell for them. A lot of financial sponsors got burnt by that. If they had an issue where there was a hiccup in their company and they now have to sit down with their banks, they weren't sitting across the table to people that they were when they first did the loan, right, whereas in the middle market world, a lot of us are still there. We're working out with our customers, and we have a long-term relationship in mind. So there's that dynamic of the way of executing in the past hasn't worked. And look, I think when you're a sponsor of a company, do you want people who are going to come in and out of the market, or do you want people who've been in the market and you know they're going to stay in the market? And that's part of the message we have to them is that we've been here, we're going to stay here and we're going to be there with you through the good times and the bad. So that's how we compete. We're not competing -- price is not the key differentiator, right? It's relationships and it's industry experience.

Kenneth A. Brause

Please join me in thanking Pete, Jim and Matt. Thank you. So as John Thain mentioned earlier, we're about to witness a historical moment as John Daly, who, some know, is the Dean of factoring, is going to pass the baton to Jon Lucas, who will take over Trade Finance at CIT when John retires at the end of the month. For those that don't know, John Daly has been in the factoring business and effectively with CIT for about 40 years. He joined when we were part of Manufacturers Hanover. He was named President of the business in 1999. Actually, I think if you Google factoring, John's picture shows up now. He has a tough act to follow, but Jon Lucas is certainly up for the challenge. He's been part of CIT Trade Finance now for 15 years, and he joined after spending some time both at chemical and fleet. When we started planning for today's event, I told John and Jon that their goal for today was to help make everybody who shows up an expert in factoring. So let's see how they do, and just to warn you, there might be a couple of questions or quizzes later. John?

John F. Daly

Thank you, Ken. I'm feeling older by the moment, so show a little mercy on the questions, please. As Ken said, I've been President of a factoring company for about 15 years. And basically, my job this morning is to introduce Jon Lucas and to make an attempt to explain factoring one last time. Many of you may be new to covering CIT, and it's kind of an undefined word to many people, so I'll do my best.

Just to spend a minute on Jon, we've worked together for about 15 years. He has done a wonderful job in helping me build the team to run the company for the future. We have a very experienced management team. Every key job is filled by a person who’s experienced. Jon has been in the banking business for 30 years, 15 years in the middle market before factoring, and he will be an outstanding leader for our company in the future.

In spending a minute on factoring, which has been described as the second oldest profession, it really is a Latin word which means bill or invoice. And in its simplest form, we purchase invoices on a nonrecourse basis. We bookkeep ledger and collect them, and we give the money back to the people who sold them to us. We also provide advances up to the collateral value of the invoices, so that person can take advantage of borrowing money to enhance their working capital to grow their business on an accelerated basis.

Okay, why CIT? What makes us different from the competition? A variety of things, little things like we've been in this business for 80 years. We have very long-standing tradition of having a detailed understanding of the industries we serve. We've spent many, many years building extensive credit files with detailed information, much better than we believe our competition has. Based on the size and scale of the business, we have direct access to every major retailer and senior manager in those companies in the country. We've done a wonderful job building our systems. And most importantly, we understand the value of speed to service. Clients that want to make deliveries, they want the business production. We've spent a lot of time being very active and being very focused on the point of contact where we can have a single individual, which you'll see an example of later on this morning, who can react and service their needs on a realtime basis.

We have put together a small video, which we think you'll find entertaining and informative. And after that, I'll introduce Jon. Won't you roll the video, please?


John F. Daly

Okay. It gives me great pleasure to introduce Jon Lucas, the new President and leader of CIT Trade Finance. Thank you very much.

Jonathan Lucas

Thank you, John, and good morning, everybody. Now that we're all experts on factoring, let's take a little deeper dive into the business. Let's talk a little bit more about our business. So our clients are with us primarily for the factoring service. Factoring service includes the credit protection piece on the customer side, the professional bookkeeping of the invoices, the cash collection of the invoices.

Many of our clients request advances against the ultimate collection of those receivables which we provide. You may not know that we also lend against other forms of collateral, so we are in the asset-based lending business. We lend against inventory. We occasionally lend against intellectual property. We also provide our clients commercial letter of credit access, the obvious reason being many of our clients are importing product from overseas into the United States. As you probably all know, much of the manufacturing of furniture and textiles and apparel, footwear have gone offshore.

One of the questions just a few minutes ago was, well, gee, why do people come to CIT for factoring? And I really think it's a couple of reasons. The first is we really do provide tailored, pardon the pun, financial solutions for our clients. Some of our clients are with us just for the collection feature of our bookkeeping and factoring service. Some are with us just for the credit protection piece. They only want to have peace of mind. They want to know that if there's any risk of nonpayment by financial reasons, that they will get paid by CIT. And they also are with us for the liquidity aspect. We do provide working capital financing for these companies. But I really think the reason why clients are with us is for our experienced management team, our account executives, and they're really with us for what's up in here and what's in here.

And I'm here today with a guy by the name of Marc Heller, who's sitting in the back. Marc is a perfect example of the type of experience that you get when you come to CIT. He's not only working with his clients to provide these services, he's working with them to find other business opportunities. We very often put companies together. We tell our clients about different licenses for products that might be available. Marc is out there all the time. He's on the street. He's listening. He's got his eyes open. That's what clients come to us for. It's not only the best-in-class financial factoring products that we offer. They're here with us because they know that we're thinking about them. We're thinking about ways in which they can grow their business, and we're looking for ways that they can combine with others and grow their businesses together.

Now how do we compete? I look at our business, we compete basically 3 ways: price, risk and service, okay? And we compete against all 3 categories here, commercial bank loan factors like Wells, a privately owned factor like Milberg or Rosenthal, and we also compete with credit insurance companies. Now again, these are not mutually exclusive competitors. We may be up against a regional bank on an asset-based loan transaction in our space. We may be up against Wells or Rosenthal on a deal that involves factoring, lending and asset-based lending. If we're competing just straight on a credit protection program for one of our larger clients, which typically take advantage of that, we might be competing directly with a credit insurance company like Coface or Euler.

So who are our clients? Pete and Jim described a marketplace in the small to medium-sized market, the middle market. We tend to be a little bit on the lower end of that market. Most of our clients are entrepreneurial in nature. They tend to be relatively leveraged. They don't have a lot of alternative financing sources. They're typically very good at 1 of 2 things: they're either design-oriented, merchandise-oriented, they're really at good product; or they're really good at sourcing the product. Many of our companies are run by the original founder. They start with us as a startup, and we take them right through their entire business cycle. And you might be surprised to know that the sales, we go down all the way down to a couple of million dollars in sales very often.

So what drives the profitability of our business? It is a fee-based business. But we're really all about risk, and you need to remember we're about risk on 2 sides of the coin. We've got the client risk and the customer risk. So it's all about risk management for us. We're making opportunistic credit underwritings both on the client side and on the customer side. And I really like to think of our business as really a very steady business, and it has been historically. And with this being U.S. Open week out of the Olympic, you need to think of us as the golfer who's hitting the ball down the fairway, getting the second shot on the green, 2 putts for par. Par is good in our business. We're dealing with leveraged companies. These are virtual companies. Frankly, I think our client base invented the whole concept of a virtual company because they're importing goods, they're designing the product, they're bringing the goods in and they're selling them.

One thing you need to take away also is that our factoring volume is tied to moderate- and better-priced goods. So when you read that retail is up or retail is down, I think May, the last report I saw, retail, total retail, if you will, was down a couple of points. But that was held up by, I think, very strong automobile sales. The automobile industry really doesn't do much for our clients, okay? When you read about Middle America and consumer spending by Middle Americans buying basics, that's what drives our business. That's what drives our business.

Now for all of the accountants and mathematicians in the audience, this is a very high-level breakdown of how we derive our gross revenue, and you can see that the number one factor is our commission income, our factoring volume, which is really, you take factoring volume, multiply it by our average commission rate and you get commission income. We do enjoy a whole host of other fees. As I mentioned before, we are in the commercial letter of credit business. We earn fees off of that. To a lesser degree, we have deal fees, surcharge income. Surcharge income is an important driver of our business. Why? We typically underwrite all facets of retail during their credit cycle. So you may remember back in '08 and '09, retail was a little dicey. If we're going to underwrite our retail credit risk, that's, we believe to be, more risky, so it's a below-investment-grade credit rating. We charge extra for that. So we're going to charge a higher commission fee on the risk of that retailer that we believe to be a little more up the ladder on the risk curve. And of course, we earn net interest income on the advances that we make, whether it be advances against receivables or a straight asset-based loan.

We are committed. We're well entrenched in these industries. We have been for a long time. The factoring business is a very accepted product and form of financing in these industries. We've been here a long time, as John said, 80 years. You'll see on the next slide that we have had some success diversifying away from apparel into these other areas. There's room for growth in these other industries. I'm happy that apparel is 52%, but it would be great if we could even drop that number down more and get more product out into some of these other industries.

Now as we said, clients are with us for a number of different reasons, one of which is credit protection peace. Now one might say that, well, gee, Walmart's not a big risk. It's a AA- or A-rated credit. Why would a client come to you to get checked, get their credit checked on Walmart? Well, number one, they have other customers that they sell to, and we're not just going to do their bad customers, if you will, and not take Walmart. We take the whole portfolio but the collection of those receivables.

We think we do a better job collecting that receivable from Walmart than our clients do. And as I've said, a lot of these guys are virtual account, they're virtual clients, they're virtual companies. They don't have an in-depth credit infrastructure, okay, or collection capabilities within their firm. That's why they're with us. They're with us for the professional management of those receivables.

If you look all the way down, anybody who live in Chattem? Summit? Recognize Nee Dell’s Shoes? Okay. Squires family, anybody from Katona? From Katona, New York. Anybody from the Bedford Katona area? Squires is a local store in the Bedford Katona area, just like Nee Dell's Shoes.

I'll tell you a funny story. One day, I went into Squires, and I found the owner and I was having a conversation with him and I said, gee, factoring gets a bad rap, what do you know about factors? And he said, well, factors just taught me a lot of business. And I said, I do a lot of business with CIT, and I said, oh. He had no idea who I was. And I said, Oh, really? And he said, yes. And I said, well, what do you think of the firm? He said, well, they make collection calls. I said, oh, that's a good thing. And he said, well, you know I'll tell you, I learned from CIT to pay my bills on time. And I said, that's good. That's really good.

And I said, how come factoring gets a bad rap then? And he said to me, well, the only people, the only customers that don't like factors are those that either don't pay their bills on time or don't pay them at all. And that's kind of cool. I then handed him my card. I bought some really expensive stuff that my clients had sold him and it was a good day. It was a good day.

Here's a clip. Now one of the other things I want to point out here is -- and Ken will get into this a little bit in the video. Whenever you are in the market and someone talks about CIT Trade Finance, there's always a person's name associated with it. It could be John Daly. It could be Mark Heller, Pat Rowan [ph], Jon Lucas, any number of us. There's always a name associated with CIT Trade Finance. And that's critical, because we are all about relationships. It's all about the people. And Ken will take us through a little bit of that. So you can hit that.


Okay, so Ken mentioned that there was a test question. I do have a test question. I do have a test question. What's different about this particular client than most of the other clients I've been talking about this morning? Come on guys. This is factoring. It's not that hard.

Close. Close.

That is different. And that's kind of cool. I'll get to that. But that's not right.

Yes. He is selling to subcontractors. So we don't only check retail credit. We go well beyond that. Okay, we're well beyond that. We have all those credit files that you saw on earlier slide, talk about 300,000 names, of which 50 or 60 are active at any one point in time. But we checked the credit of not only retailers but all of Kenny's subcontractors. The interesting thing about Ken is at one point in time, he did sell into more of a retail channel at one point in time. And he did do about $40 million in sales. And he's lived through some very difficult times in the manufacturing business. I think he does around $10 million in sales today. But it's a great story and it's typical of CIT. It's not unusual to see a client with us for 30 years.

So what is it that we're focused on in terms of our business priorities? It's really kind of basic stuff. We're focused in our markets. We're focused on growing our traditional factoring business. We're focused on making advances against factored accounts. We're focused on making asset-based loans into these companies.

For us, it's all about client retention and winning new clients. As many of you know, we went through a restructuring a few years ago. It hurt our business. We're trying to rebuild it and get it back to where it was. And growing our international factoring. Basically, international factoring, we need to rebuild that business as well. It's a 2-factor business, where we are working directly with an international bank-owned factor or an international bank facilitating the trade flows from Asia into this country.

So I hope you've learned a little bit about factoring today. I hope you've learned that -- in my opinion, we're the best factorer in the country. We have very strong brand recognition. I didn't talk a lot about our operations capabilities. We have an operations receivable facility down at Danville, Virginia where we do all of our processing. It's a very scalable operation. We have excellent employees down there. I think we're the first, maybe the second largest employer down in Danville, Virginia. It's a great facility.

We have long-term clients. Average client relationship is in excess of 10 years. It's not atypical for us to have a client for 10, 20, 30 years.

The whole aspect of having a seasoned management team, it's really about deep industry knowledge and relationships, both with the retailers and with the clients and with the industry people. We have retail credit expertise as you know.

What I think what's really needed and I'd ask you all to do is next time you're out shopping, next time you're out at Macy's or shopping for a pair of jeans or what have you, I'd really like you to think back to today, because it's likely that the goods that you are buying, we had something to do with getting them to those shelves. And for me, that's really where the business hits home. That's really the cool part about the business is when you walk around the department stores and you see your clients' goods there and you know that you were at least somewhat responsible for getting those goods to the floor.

With that, I will turn it over to questions for John and myself.

Unknown Analyst

I would say that the retail chaining and you did sort of bring this up. What sort of growth opportunities are there sort of in I guess you'd call an alternative factoring areas like staffing, government contracting? And then I had a second question, which is you talked a lot about Macy's, et cetera, but what portion of your business is really the small 1-in-2 and 5-and-10 sort of retail chains?

Jonathan Lucas

Well, I'll answer, I'll try to answer all of those questions. About 80% of our business is with the top 30 or 40 or so retailers in the country. I think the real question is we're doing -- 70% of our clients do less than $30 million in sales, so we're dealing with small companies selling into retail channels and distribution. In terms of growth outside of the retail area, we have made some inroads in technology. We do have a couple of programs with some well-known technology companies here in the United States, where we're basically buying excess credit risk. So they have internal guidance lines for the amount of credit that they want to have with a particular customer of theirs. And when they get above that, they sell us that risk. So again, we're opportunistic. We're always looking for ways in which to grow the business. Consumer electronics is another example. Couple of years ago, when everybody was buying flat screen TVs, we had a huge influx of factoring volume associated with that business. So we're always looking for different ways. Again, if the customer credit risk, if there's an ability to underwrite that risk and by that, I mean, there needs to be public credit information. If there's public credit information, we can underwrite the credit risk. There's one over here or yes, sir?

Unknown Analyst

Yes, given the long-term stickiness of the relationships in factoring and the amount of business that you lost due to the Chapter 11 filing, how confident are you that you're going to win that business back? And then, can you give us a sense of who you lost share to and how much share you lost in the last few years?

Jonathan Lucas

I don't really get into market share data. But I think you could probably figure out those that took some of the clients away, I mentioned some of the names. We are very focused on winning back the clients. It's been a tougher road than I would have expected. One thing you need to keep in mind is when a client, when we sign business, we tend to sign clients to long-term client, to contracts, and there are penalties for breaking those. We've had a lot of success bringing some clients back from some of the competitors. We -- why do we get them back? Because after they leave, they realize that the client service that they're getting at the other provider doesn't match to what we have. They don't get the customer credit underwriting and the other competitors don't have the client service in terms of the operations, the access to the data on a 24/7 basis.

Unknown Analyst

Two questions. I guess number one, just you brought a point on consumer electronics and I don't see that in the pie chart that you showed here as to kind of break out a risk and that's a big -- seems to be a big area of concern now for the market with some of the more stressed companies like the Radio Shacks or Best Buys of the world, which seem to be going through some issues. Can you just comment on the exposure to that space now? And then I have a second one also.

Jonathan Lucas

I don't have our actual -- first of all, we don't really get into individual customers, so I don't really comment on a Best Buy and Radio Shack. We do have relationships with them. I thought that I had consumer products. Can you run that, run the pie chart back a minute? I could be wrong.

Unknown Executive

Consumer products, Jon.

Jonathan Lucas

Okay. The consumer product would have consumer electronics in it. We don't have a lot of clients today that we're doing in that space. Most of it -- we are really heavy on the flat screens. I haven't seen an influx yet of some of the new technology that's out there, whether it's the new BlackBerrys or the iPads. We haven't seen a lot of that yet. We do have some -- some of our international business is with those types of companies, but we have no exposure on the client side. All we have exposure is on the customer side. And typically, those sales are coming into a Walmart or a Best Buy.

Unknown Analyst

Got it. And then just very simple example. Just I understand like a simple transaction in the video. That little clip was great. But so, I come to you, I've got a $10 million receivable. How do you make money factoring that? And like just if it's like walk through, so it's a 30-day payment kind of what you advance against that and kind of how you make money out of that?

Jonathan Lucas

Well, I'm not going to do a $10 million standalone receivable. So let's assume you have a $10 million business, if I may. You come in and you say, I've got a $10 million business. I want to factor my receivables. We look at your customer portfolio. We credit underwrite all of that customer base and then we take a step back and say, what is the risk profile of your client, of your customer base? We will then assign a commission rate to that factored volume. So when you start factoring sales with me and you do $10 million, and I assign let's say a 50-basis-point commission to that, it's going to cost you $50,000 for the factoring product. Okay? And for the $50 000, I ledger your receivables, I collect your cash and I remit the cash to you. Okay? And then you might say, well, gee, Jon, I need my money ahead of time. So I will say, okay, I will make available to you 80% of the receivables that I factor. So on your first month of business, you factor $1 million of sales. You now have the availability of $800,000 that you can draw on. When you draw on that $800,000, I now charge you a rate of let's say prime plus 1. So you would pay interest on that $800,000 to me, as you would on any other loan. And as I collect on that $1 million of invoices, I'd pay down the loan. So as the collections come in, the loan gets paid. And to make it real simple, at the end of the $800,000, I take out my fees and my interests, obviously. And then I would remit to you whatever is left over.

Unknown Analyst

But the 50 basis points, is there a credit risk on that 50 basis points?

Jonathan Lucas

Oh, yes. I'm buying the credit risk of all the customers that make up the invoices.

Unknown Analyst

Oh. And then the other 80% advance, that's on top of that. I can see that you can just speed up the cash flow?

Jonathan Lucas

Well, the 80% is an advance against the factored receivable. So that's a loan. Think of that as a loan, just like any other loan.

Kenneth A. Brause

I think we have time for one more question.

Unknown Analyst

Yes. What is our exposure or how does it work if a large retailer were to go bankrupt? Are we regular unsecured creditors of them? And what actions do you guys take to protect CIT against a significant bankruptcy?

Jonathan Lucas

Well, there's a couple of things. One, we are an unsecured trade credit risk, okay? The idea is that we don't like to make a lot of big mistakes. And in the event where we have large exposures, we do have other risk-mitigation options available to us. We don't disclose what those are. But typically, we are ahead of the schedule. So we are looking out at the retailer and the retail industry, at least 15 to 18 months in advance. So we like to think that we have advance notice. And by the way, we are getting detailed credit information if we have a large exposure. So we're ahead of the curve. And what do we do? We begin to stop checking the invoices for our clients. We have to explain to the client that the credit risk is no longer acceptable. So we start declining the orders and we start to bring down our exposure. And we've been very successful over the years of doing that very well. And that's not to say that we don't have customer credit losses, we do. But we obviously try to avoid the major ones.

Kenneth A. Brause

Well, in the interest of keeping on schedule, I think we're going to break here to move on. John and Jon will be around.

[Audio Gap]

global servicing capabilities and generating assets with strong yields. I think our Vendor Finance business fits that description perfectly.

For those of you who were here at the 2006 Investor Day, I think you're about to hear how this business for CIT has evolved and diversified over the past 6 years. When I joined CIT, Ron Arrington was running the Americas business for Vendor and he now is the global president running the entire business. He has 30 years of experience in equipment financing. Not quite as many as John Daly, but still quite respectable.

So please join me in welcoming Ron to talk about our global leadership and vendor financing.

Ron G. Arrington

Thanks, Ken. Good morning. During my recent visit to China, where we're one of the oldest foreign-owned leasing companies having established a presence there in 1997, I was encouraged by the rapid pace of development of the leasing market there.

The leasing market in China is relatively small in an otherwise huge economy. But with the high rate off investment, particularly in supporting the infrastructure spend there, we feel it's a great opportunity. And as a global player, vendor finance is well-positioned to capitalize on the growth opportunities by targeting regions with significant and scalable growth.

Now we're in 4 regions of the world and are supported by regional platforms that are consistent and best-in-class. Our business model is to originate profitable volume across diverse industries and we create value for our vendor partners and our customers. In the U.S., we have a bank-centric funding model that provides us with a competitive funding cost. And internationally, we utilize local asset bank facilities, as well as bank deposits in Brazil. We're also investing in upgrading our platforms and our capabilities to enhance our future growth.

Now vendor finance provides solutions, mostly to small business and middle market companies, as well as larger enterprises. We lend to businesses across all industries to acquire essential-use type of equipment. You can walk in any business, large or small, and you look around you'll find telephones, computers and copiers. These types of equipment are really the backbone of the company.

We are a global player having a presence in over 20 countries that cover the majority of the opportunities worldwide. Our assets stand at a little over $5 billion, with roughly about 50-50 split between U.S. and international.

Our assets are also growing in the bank since we transitioned the U.S. vendor platform into the bank in July of last year. We would expect to see, however, a shift towards -- the assets towards international given the opportunities in those regions, particularly in China and Latin America.

Now in 2011, we originated $2.6 billion in volume. That was an almost 30% increase over the prior year when you exclude the platform sales. And in the first quarter, our volume was up 25%.

Now relationships are core to our business. And I'm very proud to say that our average tenure with our major relationships stands at 11 years. We have -- overall, we deal with 2,000 vendor partners and we have about 400,000 customers worldwide.

Now the business model. We have a proven business model that leverages the vendor partners' presence in the marketplace. More simply said, we provide financing programs and services to our vendor partner, which may be manufacturer, a distributor or a reseller, as well as we provide financing in the equipment to the customer. Again, mostly small business and middle market companies.

Now we'll establish a program that outlines the products and services and financing programs with the vendor partners, and then they go to market with their products, they will present that leasing opportunity at the point-of-sale. Then they quite simply refer that customer to us, whereby, we'll control the customer experience after that through the rest of the life cycle, providing the leasing and value-added services from application all the way through asset disposition.

Now I talked about we leverage our vendor partners in the marketplace. What we do is we leverage their sales force. Again, as they present the products in the marketplace, then they're referring the customer to us. This is a very efficient way for us to go to business by leveraging their sales force.

Now if you look at the industry diversification, we have a very diversified portfolio of customers. As you can see, most of the major industries are represented here. Now the services sector is our largest at 37%. But keep in mind, this is made up of 13 subcategories with business services being the largest at only 11%. So the way we view this is that we target essential-use equipment on our customers across several industries and this provides us with a firm foundation to base our growth on.

Now you may ask what are the benefits of our vendor partners and our customers? Let me start off with the vendor partners. It allows them to sell more equipment and also close the sale more quickly, it's one-stop shopping effectively. It also has the ability to increase the revenue, either through product margins or program fees.

Now a major benefit and a key selling point for the vendor partners is that it creates a footprint, if you will, of their customer base. So for instance, they acquire their customer's sell-in product. What they want is they want a repeatable customer footprint or install base. By having the constant contact of leasing to that customer, then they have the opportunity to be the first in to sell when that customer wants to upgrade or purchase additional equipment.

Also oftentimes, the vendor will provide other services to the customer and then we have the ability to bill and collect on their behalf because that's a core competency of ours.

Now for the customer, it preserves the capital. So they can acquire the equipment now and pay for it over time. But more importantly, it provides them the ability to upgrade their equipment. So when you're looking at an equipment, particularly the technology equipment, it has a rapid refresh cycle. So the customers must have the capability and the flexibility to upgrade to that next generation of equipment.

Now how do we go to market? There are multiple channels where we source business. One is the manufacturer. The manufacturer relationships, which are typically more customized and have greater business opportunities given their size and a geographic presence. Oftentimes, we'll support their go-to-market through their own branches, as well as through independent resellers of their product. Now key to the manufacturer is our relationship, as well as our innovation because manufacturers view leasing and financing relationship much more strategically. They go-to-market multiple forms. Now we have to make sure that we're able to support that with regards to the various products, as well as to channels that they sell to.

Now another are the resellers and distributors, which tend to be more standardized structures and with multiline products, meaning they sell multiple brands. Key to these relationships is our speed and consistency of service, as well as our broad product knowledge.

Then there's a direct. We will lease on behalf of our existing customers in our portfolio. Now this is important because once we have invested the money to acquire those customers and have them in our portfolio, the additional volume that we do is purely incremental and it leverages that existing cost.

Now this is an important slide. The basic tenets of sustainable growth is making sure we're maintaining the proper mix of our vendor partners. We view our Vendor partners as global, major and local. Now global accounts are the ones that present significant opportunities for us for business and they also have the ability for us to export that business into other geographies. The major accounts, while also presents significant business opportunities for us, we'll look at that in the ability to export this relationships to other geographies is limited. And then also, we have our local customers, our local vendors. And the locals are smaller and to a specific country.

Now the global accounts typically bring more business opportunities, are more complex, and a local accounts are smaller, but the structure is fairly consistent. And more importantly, they provide a good diversity to our vendor portfolio.

Our business model has changed many years ago. In other words, we're shifting to a better mix between these global, local, as well as major relationships. It's very important that we maintain a balanced mix.

Now if we talk about revenue opportunities and they follow the lease life cycle. So if you start at the top left, when we originate leases, we have the ability to earn documentation, as well as syndication fees. Then turning to firm term or the normal term of the lease, we earn interest to rental income and we also have the possibility of earning Vendor subsidies, as well as customer service and portfolio fees.

Next, and this is very important, when you go to the extended terms, so what this means is that the customers elect to keep the equipment and use it beyond the normal term of the lease. So there, we're earning renewal income, as well as portfolio fees. And then at the end of the lease, we will have the ability, depending upon the customer who purchases that equipment or returns it to us, to earn gains on that activity.

Now if you look at the mix of revenue, it will shift from time to time. For instance, oftentimes in a down economy, customers elect to keep their equipment longer. So this means that there's less volume because they're not out buying new equipment now. So that means less interest in revenue from the rental incomes. But on the flipside of that, it allows us the opportunity to earn more renewal income.

So you can see we had the opportunity to earn income throughout the lease and the economic cycles. Now our competitive position is strong and service is job one for vendor finance. When we look at the business, there are attributes that we feel that are critical to the success of the business. One is the vendor alignment. Meaning, can your business support the manufacturers' go-to-market strategy and can you have the relative relationship touch points to make it successful? Also global capabilities: are you able to support the manufacturers in the key geographies where the majority of their opportunities exist? And then I've talked about service, yes, there's service excellence. And this is not only servicing the portfolio. What I mean by service excellence is that you're providing that during your origination, that means working with the vendor partners and the customer, but then just as important is during the course of that lease, is making sure that you are servicing those customers in such a way when they want new equipment or to upgrade to their next generation of equipment, they want to come back to you to do the financing and leasing.

Now also, this is very important, our credit and risk management teams. I think we have some of the best credit risk management teams in the business. They understand our marketplace. They understand our model, which is very important and they understand the middle market and small businesses that we deal with. This is a key differentiator for us in the marketplace. Now this is especially true in asset management. Now I talked about earlier, with regards to our ability to earn renewal payments. So we're one of the best in the marketplace at residuals, because residuals is just about -- is not just about looking how much residual you can take in a piece of equipment, but it's understanding the behavior, not even down into the asset class whether it's technology or copiers, but it's the types of equipment within technology and copiers and how their behavior acts over time.

Now the vendor finance market requires a high-volume, small ticket type of process and capabilities. And you also have to have the skill and experience to understand the residual behaviors I just spoke about. These are attributes that are not easily replicated in the marketplace today. So if you look at it, the service, expertise and innovation are why we don't have to compete on price.

Now oftentimes, I'm asked how do we compete in the marketplace. And my answer is fairly consistent. It's the service we provide to our vendor partners and our customers that wins our business. We don't compete on price, never have. Now price is important, don't get me wrong. But it's the relationship and service that wins this business on a day-to-day basis. And I can't think of a better example than Lenovo.

Programs of this size don't come along every day. So with Lenovo, the fastest-growing PC manufacturer in the market, came in and presented the opportunity, all the key players in the marketplace participated. Now this was a very involved process. It involved having interviews, written responses, as well as meeting with their senior management team. The program was awarded in the second quarter of 2010, only a few months after CIT coming out of its restructure. And CIT won that program.

Now I can't think of a better example to show you or talk to you about as to how we can win business. To quote Lenovo, "It was our tremendous perseverance and our overall compatibility that won the day." So now, I'd like for you to hear directly from Lenovo. Can you roll the tape?


So you can see Pete's my day-to-day contact. But we also have quarterly meetings where we meet with other senior management within Lenovo to talk about the overall strategic direction of the financing and leasing relationship, as well as the performance of the relationship.

And then this is a part of our vendor alignment. In addition to those types of meetings, we also have a global account manager who oversees the entire program. Okay. So you can see it's this vendor alignment and the support of the vendor, but it's also the relationship and how you support them on a day-to-day basis that's critical to the success.

Now this is an approach we take with all of our global vendors. We basically think global and we execute locally. Now our growth has been driven by increasing business with our existing vendors, as well as expanding the vendor programs that we do business with. Now the foundation for the growth is built on our people, our relationships and our overall offerings. We have our sales forces focused on share of wallet. Meaning, of the addressable volume of a particular vendor partner, how much of that can we win? Also we've invested in the business development resources, expanding the number of vendor partners that we do business with. And to support these initiatives, we created a sales recognition program called the Growmentum Club [ph], where we recognize the overachievers in both the categories of share of wallet, as well as new business development opportunities. And on the relationship side, we will work to export the major relationships, the global relationships that we have into other geographies, as well as we have the incremental business of newly signed vendor relationships and as that relationship matures, the volume will increase as well.

Now an increasing amount of product sales now includes some form of a service component. This began with the bundle-type services then it moved to a managed services-type style and now it's also involving cloud-based programs. All of these include equipment, but require a different form of structure and service, which we provide. The investment in our people, relationships and our offerings is what's going to strengthen our foundation for growth.

Now in my opening remarks, I spoke about China and my recent trip there. China is one of the largest economies of the world and the leasing market there is evolving, although it's evolving at a rapid pace. This, combined with the build of the infrastructure in China presents a great opportunity for growth. And we're well-positioned there, being one of the oldest foreign-owned leasing companies in China, and we have very strong vendor and reseller relationships and extensive industry coverage, including such markets as technology, healthcare, printing, as well as industrial-type markets. And we have a local funding capability there to fund our new business growth.

Another strength is our scalable, regional platform that we have in Shanghai that supports our Greater China business. This is a full service center that includes origination, credit, legal, as well as servicing. We're also expanding the products that we offer and very similar to products that we have in other regions. For instance, while in China, I attended a signing ceremony where we obtained additional license that's going to allow us to expand the type of financing that we're doing in China.

Now we're also expanding the products. So as I talked about, in addition to that, we're looking at other new products and programs that we'll be able to expand into the marketplace there. For our new business, China was a highest growth country, almost doubling our volume from last year and the portfolio performance has been very good. In fact, it's at historical lows, so we are very well-positioned for growth there.

Now another country I'd like to highlight is Brazil. It's one of 5 countries that we cover in Latin America, and it's the #1 leasing market in the region. Now the market fundamentals combined with the leasing market opportunities there make it attractive. The opportunities also supported by investments in manufacturing infrastructure, particularly with the upcoming 2014 World Cup and the 2016 Olympics. CIT has been a long-term player in the marketplace, having been there since 1995, and we have strong reputation for expertise and reliability in the market there.

We also have a deposit-taking bank that supports our local funding needs and the portfolio performance there as well has been very good. Now we have extensive industry coverage here as well. And in some of the same markets, technology, healthcare, but also construction, printing and industrial and we have a very robust sales coverage model.

So we see Brazil as a great international growth opportunity, and it's a country that we're focusing on.

Now the markets are evolving in a familiar cycle, with each region, different phases of the evolution. And CIT is positioned to anticipate and capitalize on the shifts in the marketplace. I spoke about our position in Asia, as well as in Latin America, but we're also seeing shifts in our more mature markets.

In these markets, we're seeing more utility and service-based products that I briefly spoke about earlier that are being sold along with the equipment. Now utility being a usage-based model, where basically you pay for what you use and then the services-based model, which, there's a charge for the overall service, of which a component of that is the equipment. Now the copier business is the best example of usage-based model, it's been around for a long time and we've been in the copier business for over 20 years. They have a product that's called cost per copy. So it's effectively -- for each copy that you use, you pay a certain amount and the more you use, of course, the more you pay.

Now this type of concept is also evolving to other asset classes as well. Now managed services and cloud-based programs are more recent events and they take various forms, but basically combine the service and the use equipment together, to one cost to the customer. For instance, we have a relationship with one of our vendor partners. So they provide the services of procuring the equipment, installing the equipment, training, break fix, as well as the helpdesk support for that equipment and then we do the leasing. Now this is presented to the customer as one cost, a service-based cost, but then we're earning the revenue off of the leasing and they are earning the revenue off of the servicing. This type of partnership is gaining momentum in the marketplace today.

So you can see we have the experience and innovation to move with these markets and have invested in our platforms to capitalize on these growth opportunities. Now as we look at our position to grow the business, we clearly see that there's a formula for success. This includes making sure that we're on track. We have metrics in place to make sure that we've established to ensure that we're staying focused and on goal. Now also, we're going to continue to invest in our people. We've added sales and business development resources that will drive deeper relationships and expand our overall vendor program base. Now we will also continue to innovate, being a leader in the services that we provide by adding value to our vendor partners, as well as our customers.

Now all of this combined is a formula for continued growth, not only for CIT, but also for our vendor partners and the customers, as this is critical for the continued growth in the various economies that they serve.

So I want to leave you with a few thoughts. Now we're going to continue to target our select markets that present us with significant and scalable growth. We're going to keep to our fundamentals of originating business across multiple countries and diverse industries. And we'll continue to create value for our vendor partners, as well as our customers.

Now we're going to also enhance our proven business model to achieve our growth objectives through new programs, through investment and through our effectiveness in the marketplace, because vendor finance is very well-positioned as a global leader and we have a roadmap to get us there.

Thank you. And I believe we have some time for questions.

Unknown Analyst

Yes, I think you mentioned you have a target of potentially growing to $8 billion to $10 billion of assets. Can you just talk about how quickly you can get there and whether it's going to be all organic?

Ron G. Arrington

Clearly, we're focused on the organic. However, if inorganic acquisition type of opportunities did present themselves, then of course, we would look at those opportunistically. But if you look within the markets that we play, we have significant headroom for growth, not only in the geographic markets, but also in the industrial markets that we're in, whether that be technology or the copiers or the phone systems, telecommunications. And in addition, we're evaluate new type of industry markets where we can leverage our core competencies and make sure it's a large and scalable growth opportunity for us.

Unknown Analyst

Could you tell us what percentage of your portfolio consists of consumer loans versus commercial loans in the U.S. and globally?

Ron G. Arrington

Our consumer loans are virtually 0. We had a consumer with the Dell platform in Canada that were sold early part of last, last year. So that was really all of the consumers. So we have the commercial portfolio now.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Mike Turner with Compass Point. When you look at expansion opportunities in Asia and Brazil or Latin America, are you looking at expanding relationships with your current manufacturers that you're not doing business in those regions or are you also adding new manufacturers and resellers? And then also, are you taking -- or what actions are you taking to mitigate currency risk?

Ron G. Arrington

Well, first answer is yes. So we're expanding our relationships with our existing vendor partners that we have, but we're also adding new vendor partners in the marketplace that will help us fuel additional growth. And with regards to the currency, so we have the proper -- we better serve with Scott or Glenn, but we have the proper hedging in place to make sure that we're taking care of the currency risk.

Unknown Analyst

If you could just walk us through the business model from an income statement perspective? I mean, how do you make money?

Ron G. Arrington

I'm sorry, I couldn't...

Unknown Analyst

Can you hear me now?

Ron G. Arrington

Yes, I can hear you now.

Unknown Analyst

Can you walk us through the business model from a profitability perspective? I don't understand the income statement, how do you make money?

Ron G. Arrington

Okay. So once we put the lease on the books, so we originate a lease, now sometimes we have fees during the origination process that we'll earn or for certain times, for exposure and so on, we'll actually syndicate out a piece of the exposures. So of course, we can earn fees there. Now during the course of the lease, we'll earn both interest, depending on the type of the lease we put on the books, we'll earn interest, as well as rental income during the course of the regular term of the lease. So for instance, let's say you have a 5-year lease, so during those 5 years, okay, going back to the slide, during the course of the 5 years, we will have rental income and interest income, okay, as well as you have portfolio of fees during the course of that -- from the customer. Then if you go to the extended term, that's what I was talking about, so you have a 5-year lease -- let’s say I have a copier, okay? Because majority of the copiers are leased in the marketplace today. And so you keep that copier beyond the 5 years and you use it, then you're making additional renewal payments or rental payments beyond the regular term. Okay? So then that's where it comes that you're taking the residuals. So in addition to paying back the residual, you're earning income on those additional renewal payments that come during that period of time, all right? Then once at the very end of the termination of the lease, if you will, they either will buy that piece of equipment outright or they can return it. And so then you dispose of that equipment, you have the opportunity to earn gains on that activity as well. Does that answer?

Unknown Analyst

Can you put any numbers to that? I mean, what it comes down to in terms of a margin or an ROA?

Ron G. Arrington

I don't think we disclose those overall, but maybe we can talk offline afterwards. Okay.

Kenneth A. Brause

Any other questions, we have time for one more. Yes?

Unknown Analyst

On the International business. Just to be clear, are you -- is most of your International business with companies that you built a relationship in the U.S., and now you're financing their consumers in foreign geographies, or do you have significant business where the vendor is based outside the U.S.?

Ron G. Arrington

We have both. So in some of the geographies, a little bit different. So for instance, in Latin America, a lot of that business is done via the U.S. manufacturers that do business in Latin America, right? But on the other hand, for instance, in China, a lot of the business are done with local manufacturers or resellers of the type of equipment, in addition to U.S.-type manufacturers. And then also, you have the ability for large manufacturers there to ship abroad to have a relationship with them there to do financing and leasing in other countries as they export their business as well.

Kenneth A. Brause

Well, join me in thanking Ron and thank you.

We're to point of break so I'd recommend we all get up, stretch our legs, have a drink, there'll be some food out there and we're reconvene back here in about 15 minutes. Thank you.


Kenneth A. Brause

Okay. So while a few more people are finding their seats, let me just do a couple of housekeeping announcements before we get started. Once again, if you did use your phone or BlackBerry and turned on your ringer, we ask you to please turn it off.

I want to call your attention that in front of you should be a piece of paper that wasn't there when you left your seat, which is a 1-page survey, which will give you a chance to give us some feedback anonymously about today's event. We would really appreciate it if you could take a few minutes and fill that out before you leave today or if you don't fill it out today, you could do it later and send it back to us. However, we have an incentive, so that if you turn in your survey today, at either the table out in the lobby here or the one in the main atrium, in exchange for your survey, you will get a very special CIT mug, that is designed around our new advertising campaign and I know you may say what can make a mug special? But I will promise you and I can't tell you what it is. I don't want to ruin the surprise, but it is not like any other mug that you have. So back to business.

So for almost the entire time I've been at CIT, I've worked at an office very close to the Transportation team and Jeff Knittel. And so what he doesn't know is some of those late nights before an earnings call or getting ready for this, I actually get to play around with all those model airplanes and railcars that he has. I always put them back in the right place, Jeff. So anyway, Jeff has about 30 years of experience in Transportation Finance. He was initially with Cessna Finance, and a manufacturer at Hanover where he joined the CIT team in 1986. He became President of the Aerospace business in '98 and has led our entire Transportation Finance business since 2006. Jeff has actually a few businesses that he's going to talk about today so I don't want to take up any more time. Let me introduce Jeff Knittel.

Jeffrey Knittel

Thanks, Ken. Good morning, everyone. I'd like to take a few minutes this morning and speak to you about during my 30 years, how we put together a terrific team and how we built, in my view, one of the premiere Transportation Finance franchises in the world.

Now in building that, what are the key factors for success? Well, obviously, the macro is very, very important to what we do. We look at the industry fundamentals. And we'll show you today that we believe the fundamentals are very favorable for all 4 of our businesses in this space.

We've a quality fleet. We'll talk about asset management, the keys to asset management and how it drives [ph] profitability.

Utilization and yields, obviously a major part of how we make money. The other channels for growth because we'll talk about our order books in both rail and air. But there are other ways for us to use those valuable relationships to help us succeed.

Cost-efficient financing. You've heard John talk about refinancing our balance sheet. You're going to hear Scott, Glenn, Ray, talk about the bank. Lowering our cost has created numerous new opportunities for the Transportation Finance business, in addition to improving our profitability.

And then finally, the Aerospace and the rail space have some cyclicality, but they are opportunities for us. And I want to talk to you today about how we manage through those.

Now the business overall. Let's talk about some of the basic metrics of the business. It's under $14 billion overall.

Lending and leasing, primarily a Leasing business, about 87% of the business today is Leasing. We're going to show you how we have a plan to shift that and use some of the core competencies that we have to a lending model also.

International U.S. You can see primarily international, driven by our Commercial Aerospace business. The Rail business, as you'll see is a North American-centric business. Total revenues, approximately $1.6 billion. And as I talked about before, utilization, a major driver of our profitability is terrific in both of our businesses.

Employees. This is not an employee-heavy business. We need quality employees. We need employees that understand the industry, understand the assets, but we don't need lots of them. Again, $14 billion approximately in assets and only 225 employees.

Now what does the Transportation Finance business look like overall? The Air business, which is really 3 businesses: the Commercial Air business, the Business Air business and then finally, the Transportation Lending business add up to approximately $10 billion. And then the Rail business, a business we've been in for close to 40 years in various forms, is a $3.7 billion business.

Now let's start with the Aerospace business and the industry overall. Clearly, we are a leading aircraft lessor. We buy airplanes from the manufacturers and we lease them to airlines around the world. In doing that, we have one of the most modern and fuel-efficient fleets in the world. That is a major driver to what we do.

Now we've talked about the team, but this is one of the most seasoned and talented teams in the industry. Most of these people have been at CIT in the aviation business for many, many years and went through many, many cycles.

Now we've global operating platforms. Obviously, Aerospace is a global business. We have offices here in New York, Fort Lauderdale, which covers our Latin American operations, Dublin, Ireland for Europe, and then finally, Singapore for Asia, which is our fastest-growing geography.

Now in building this business, we like to -- everyone likes to talk about customer relationships. For us, they come in a number of forms. They come in the form of customer themselves, and we'll talk about that a little bit more, but also the manufacturers, building the relationships with the manufacturers, helping them with their product and helping them succeed to put more of their product in this industry. Now that's true on the airframe side. You'll hear names like Airbus, Boeing and Brarum [ph] and we'll talk about that a little bit more, but also on the engine side. You have GE, you have Pratt & Whitney, you have Rolls-Royce, IAEA. We build relationships with all of them to optimize our position, in terms of profitability, but also to help them, in terms of a marketing channel.

Now in the middle box, you see our Business Air group. It's about $0.5 billion today and growing. Now we think that opportunity is terrific and we'll talk about that a little bit more and a little more detail.

Now also, we have a Transportation Lending business. And we believe that is a natural extension of the core competencies that we have. And we believe that we can succeed going forward in taking those core competencies, in terms of relationships, in terms of industry and working with the CIT Bank team, put together a terrific product to offer.

Try that again. Now obviously, if you're in the Commercial Aerospace, the macro is important. And when we look at the business, what do we see? We see long-term growth, in the 3% to 5% range, over a very big number. Now international traffic is growing at a pace twice that of the domestic traffic. Now that's fairly obvious, right? We're in a market that's fairly mature. We'll show you how that works and how that drives growth.

Now the world fleet, in terms of both growth and replacement will double over the next 20 years. That's a multi-trillion-dollar opportunity that we expect to participate in.

Now I alluded to the growth in emerging markets. This is a little bit of a complicated slide. But when you think about it fundamentally, it's pretty simple. It really talks about the propensity to travel as you have more money in your pocket. And you can see, let's start on the right, the U.S., the U.K., Germany, France, what's the common denominator? Fairly mature markets, fairly mature countries. When you move to the left, you see lower GDP, but you also see that they travel less, big numbers of people. These people clearly are going to have more money in their pocket over time and travel more. The opportunity from countries like India, China, Brazil, are huge. And that's the growth market. And that's why you see us growing internationally. The U.S. market is really a replacement market. It's a relatively mature market. The Western European market. It's a replacement market. But the growth markets around the world are so significant, they dwarf the rest of the mature markets.

Now let's talk about the product for a second. Specifically, the operating lease product. When I got into this business somewhere around 1980, a long time ago, it had a very small share. And really, the lessor’s share at that point in time was long-term leases. Now why? Well, the reality was the growth wasn't phenomenal yet in the overall market. And the fact of the matter was that a lot of the carriers still were national. Deregulation hadn't taken hold. Well, over time, what you've seen is that the capital structures of airlines have not been wonderful. I'm sure some of you have had the opportunity to look at the balance sheet of airlines. They are not terrific overall. And they needed other sources of capital. They also needed flexibility. The operating lease product fills both of those. And there were carriers 10 years ago that had no interest in operating leases. Yet today, a 1/3 of their fleet are under operating lease. So what do we see? We see a continued growth in this specific product.

Now competition. Obviously important. We're aware of them every day. We fight every single day to win. Let's start with the left for a second and I'm not going to go through every one of these. GECAS, obviously owned by GE. Terrific company, but tends to be GE-centric in products. You've heard me talk about different engine types. We tend to be the Switzerland of engines. We'll do what's ever best for our customers.

And so when they go to GE, more than likely, they're going to end up with a GE-powered airplane. When they come to CIT, we will give them what we believe and hopefully they believe, is the best product to fulfill their needs.

Now ILFC, as many of you may know, is going through a bit of a retrenching. It's been shrinking. We believe will continue on in the industry in some form or fashion, but is a little smaller than they have been, but a significant competitor.

BBAM has been historically more of a Japanese operating lease player and really a pure asset manager for fee. That may be changing. But that's where they have been driven historically. And then AerCap, just to add one more, is a public company based in the Netherlands and they are a broad-based lessor. We feel comfortable given our history and our experience that we can compete with any and all of these.

Now when you talk about relationships, I can tell you about all the great relationships we have. And in the Aerospace, we do business with over 100 airlines in 50 different countries. But really, I think the customer speak better than I do about what we can do for them. And Mark Williams of Sunwing was a CEO of an airline at another airline before Sunwing. And we've known him for years and years. And when he moved to Sunwing to start it up, to bring it from no revenues essentially in the late 2005 and 2006, to close -- to a little over $1 billion this year, I think he'll tell you how we helped him and some of the things that CIT does to help our customers succeed.


I think that tells the story better than I could. Mark is successful, so we are successful. And that's how we build our relationships every day.

Let's talk about the portfolio itself and the geographic breakout. As you can see, operating leasing is about 92% of the Commercial Air portfolio. The Loan business is obviously relatively small at this point but growing. With the help of our team at CIT Bank, we've been able to go out and find debt opportunities, loan opportunities for airlines in the U.S. and hopefully in the world, around the world someday.

Now in terms of the customer base, I've talked about that this is a non-U.S. centric business and you can see that from this chart. 36% of the business in it is in Asia. By the end of the year, that number will approach 40%. You saw the demographics before. The alignment is fairly obvious. Now when you look at the European model as an example, several years ago, that number was close to 40%. We're down now to 28%. A more mature market, obviously the economy there is stumbling a little bit and we've shifted accordingly. Latin America in my opinion is an underappreciated economy. There's a lot of potential growth there. The infrastructure, the road infrastructure, is not as good as it could be in places like Brazil, and that's really the opportunity for airlines like Gol in Brazil. That was a bus company. They took people from Northern Brazil to Southern Brazil and then they started an airline. And for the same ticket price, people found that they ended up thinking they were getting on a bus for a 2-day ride and an hour later, were at their destination. The bus yields were huge, they took that opportunity and turned it into a profitable airline opportunity. And there are more of those around the world.

Now we talked about Asset Management. Now Asset Management is obviously driven by high-quality diverse fleet. You can see 98% of our fleet is in production. What does that mean? That means those airplanes are produced today by the manufacturers. They're not old, they're newer aircraft and that's one of our goals. The average age of our fleet is approximately 6 years. We want the newest and latest technology that we can bring to our customers. Now how do we do that? We do it by working with Airbus in terms of the 320s and 330 product; with Boeing with the 737-NG, 767 product. And we'll talk about our order book and some of the ways we help them. But we're a disciplined asset manager and we'll walk through how that discipline drives the P&L.

Now the order book. I just alluded to it. We have an order book that gives us a baseline growth but more importantly, it allows us to have the latest technology for our customers. Now 320neo, some of you may have heard about that, it's a re-engine, new technology engine that goes on a 320, we were a launch customer. The A350, an all-new composite airplane, we were a launch customer. The 787, we were on that airplane in a major way. We continue to invest in new technology and we will do that in the future opportunistically when it is appropriate. Now in terms of delivery schedule and in terms of when those aircraft come due, you can see we've placed all our airplanes through 2012 and made good progress in 2013. We are where I think we should be at this point in time.

Now asset management, it's really key to what we do in this business and it's key to what we do in the Rail business. Utilization is a major driver. Now in doing that, in making sure that we have the right utilization, how do we do that? Well, we balance our expirations. Individual economies, macros change, airplane types, the values are driven at different points in time in different ways. So we balance our expirations. So we don't have all risk at one given point in time. We move it out. Now in terms of new yields, you can see this business has very attractive yields between 10% and 15% and we're able to do terms in this business between 7 and 10 years. And our renewals are also for significant periods in most cases.

Now let's talk about growth. Growth is obviously important, but there are various levers, and we have specific levers in this business. Now you'll see from 2001 to 2007, we had pretty sizable growth. Now we all know what happened in 2007 to the financial markets. So what did we do? Well, we started to pull the levers. We started to defer some airplanes when appropriate. More importantly, we sold a number of airplanes in early 2007 when our team came back and felt that the values were at the maximum point in specific airplane types. We took advantage of that. So we have levers that we can pull and we'll continue to pull to manage our growth appropriately.

Business Air. Now this is a business that I believe we bring terrific core competencies to. One, it's a large market. We're looking at a market of in excess of $17 billion of aircraft that are less than 10 years old. We are not going after old aircraft, we're not going after small aircraft. We're going after mid-cabin airplanes and typically, we're going after the international market. There are opportunities in that space. These are high net worth individuals and corporations that are looking for financing. This is primarily a debt product. When you think about our aviation expertise and our international expertise, this is a very logical place for us to go.

Transportation Lending. What is that, and why is it a natural extension for us? The reality is we believe we have excellent expertise in aerospace space. But you've heard a lot about us talking about operating leasing, debt against specific airplanes, against something we're going to grow. But we think this business, which looks a lot like a corporate finance business when you think about it, using our expertise, we can really win. We are the customer for a lot of these products. When we go to a manufacturer and they say, what do you think Boeing is going to do? What do you think Airbus is going to do? What do you think IAE is going to do in terms of their engines, as an example. We tend to have as good or better visibility than anybody. We understand the end markets because we are the customer. So we use that expertise to help our clients and to help them succeed. We're looking at the supply chain here. We're not looking at financing Boeing, we're not looking at financing Airbus. But if you think about it, there's a lot of people that get involved with making an airplane. The seat manufacturer, the rivet manufacturer, you can go on and on. And we're taking that expertise across the entire transportation platform, Rail, Business Air and others and we think there is a huge opportunity in this space.

Now when we look at the aerospace space, hopefully I've shown that the game for us is to make sure we have the right airplanes at the right price, at the right time. Building relationships. This business, like the Rail business, is not a transactional business in terms of relationships. These are businesses that are built not in 1 trade or 1 month or 1 year. They're built over a career. The people in the air business, and you'll hear me talk about the Rail business, they have been in this space for their entire career. And there is a trust when you're sitting across from somebody that you've known for a long time and they have executed for you. You've heard Mark talk about it. That is a trust that hopefully we've built and will continue to build.

We talked about risk, we talked about maintaining discipline, geographic, customer and equipment diversity. It's important in what we do. Our funding costs, you'll hear more about that, but it has been a huge plus for us. And when we talk about diversity of funding cost, you're aware of all the progress we've made in terms of the capital markets. But we've also had significant bilateral relationships with banks and also the XM and ECAs. These are all funding relationships for us, and we will continue to build those every day. And then finally, we've talked about growing the loan portfolio selectively. The right opportunities at the right time with the right customer and the right equipment. And that's how we're going to succeed in that business.

Now let me turn to the Rail business. We have a terrific team leading that business, and as I've said, we've been in it a long time. It's run by George Cashman, who's in the back of the room. He's been in the rail space for a long time. He understands the customers and his team understands the customers. That has allowed us to become, again, a top 3 lessor. He's built the relationships, those trusted relationships that we've talked about. His team has built those relationships. They built them with the customer, and similar to the aerospace, they built them with the manufacturer.

Now we have over 100,000 railcars. That means we're out there every single day with new cars, we'll talk about that a little bit more, but also releasing our used cars. We have a terrific team doing that. In addition, we have 450 locomotives, and we are one of the major players in the locomotive space. Again, we want a quality fleet that is young and well-maintained, similar to the aerospace. There's a lot of commonality in terms of some of the core things that we do in both of these businesses. And then we have over 500 clients and we'll walk through what they look like.

Now the macro, the market itself. Obviously, the correlation in the Rail business is tied to the North American economy. When the economy went down, there was pressure. Now what are we seeing and what have we seen in the last year or so? Well, one, manufacturing has picked up. If you look at the chart on the left, you can see that the PMI survey is showing improved production. That is important. It's a driver of how the Rail business does. And it's been driven in a lot of ways by energy markets. A lot of the energy markets have performed very well for us. Now that being said, the coal markets have been under pressure. And we would expect they'll be under pressure for some time. You see the price of gas, a lot of people are flipping from coal-base to a gas-base, especially when you start looking at $2 to $2.50 a unit for gas. That can change. Coal is not going away, but is under a little bit of pressure today. We do think it's flattened out at this point and may actually have some upside if we get a hot summer, there will be more demand.

Utilization and yields have been very strong in this business and we're very happy with where they are today and there's been limited activity on the manufacturing side. But we have got into that and that team got ahead of the curve and we'll talk a little bit how we got there.

Competitors. We are, as I've said, the #3 player and a major player. But we are a general purpose diversified lessor. If you look to the left you see GATX, primarily a tank car lessor. You look to the right, you see Union Tank, again primarily a tank car lessor. We are broad-based. We have a young fleet, and that's how we differentiate ourselves in this business. Now the quality of the fleet drives a lot of what we do.

Now you can see the various types of cars that we have, covered hoppers, tank cars, these all go into various industries. But the key is they're well-maintained and they're young. Look at our fleet age relative to the North American fleet age. The average age of our fleet is 11 years. Now you need to put that into context. A freight car could have a useful economic life of 40 to 50 years. There's not a ton of technology there. There's some, and you want a car that's efficient, doesn't require a lot of maintenance and carries a lot of weight on wheels. But the fact of the matter is it is not a high-technology business. We want the youngest fleet, we want a fleet that allows us, in a downturn, to displace older fleets. Because if you think about it, when you go through a downturn, what does the client want? This is their opportunity for the best fleet possible. What falls out the bottom is the oldest fleets. So that's why we believe there's safety in having a young fleet.

Order book. Similar to the Air business, this business has an order book, and I am very proud of the team because about 2 years ago they started working on thinking about an order in this space. Now why? At that point in time, if you are reading the Wall Street Journal or The New York Times or any other publication, you wouldn't have done this. But our team, talking to their clients, realized, one, they were seeing an uptick in the economy and the Rail business has been known to be an economic barometer, and the customer demand, they were seeing that opportunity both for replacement and for growth. So George and the team put a plan together to capture that opportunity. And what we did is we ordered approximately 9,000 railcars delivering this year and next. And as you can see, we've already placed 85% of the cars this year and in this space, the placements tend to be relatively close. It's not in the aerospace where it can be longer. In the Rail area, placements tend to be close. So what that tells you is a lot of demand and in '13 because of a lack of new cars, people are coming to us now. Again, great opportunity for us, a great job for the team who listened to their clients and understood what was happening ahead of what many of us thought was happening in the world. Now in terms of profitabilities, the CIT Bank has been a huge plus. These cars are actually going into the CIT Bank, and you can imagine how that helps our overall profitability.

Now I talked about the client base and it's an excellent client base. It's got people like DuPont, ConAgra, Cargill and others. When you think of the rail space, it's easy to think about Class 1 railroads and a lot of people actually think that's who our major customers are. But they're really the shippers. That's not to say we don't have major relationships with the Class 1s but you also need to think about us in terms of leasing to the shipping community and look at some of the industries that we're involved in, mining and minerals, agricultural, coal, steel, it's very, very diverse. And for us, that's the whole idea, we are a diverse, general-purpose lessor.

Asset Management is a huge driver to what we do. It was in there and it certainly is in this. What does this show you? Continuing improvement in utilizations. It's actually closing in on historic numbers. There continues to be demand for railcars, whether it's for replacement or growth, there is demand.

Residual realizations. We opportunistically sell assets and we do it to keep our fleet young, and we do it because we need to be disciplined. And we'll talk about that a little bit more.

Lease expiries. You've heard the story in air. It's no different in this business. It's important for us to make sure we spread out our expiries. You don't want everything coming at one time and betting that the market is going to be great for that car type at that time. We spread it out, we spread risk. And then finally, the new business. You're seeing terms of 5-plus years and gross yields of 10%. Again, a profitable business for CIT.

We have a disciplined Rail strategy similar to the strategy we have in air. Maintain a modern, cost effective and in-demand fleet. We do not want rent-a-wreck. This is -- we want the best equipment out there and we will continue to take that tact going forward. We are not investing in every car type. We've talked about our new orders. In this case, there tends to be a propensity for tank cars because that's what is in demand today. We look at specific car types, the quality of the manufacturers and we invest accordingly.

Client service. Now client service comes in a number of different forms. We've talked about the great relationships that the team put together, and I wish we had the time to be able to show you some of our customers in the rail space and have a video because they would tell you that they enjoy dealing with CIT, and they've been in their positions for years and so have our salesmen and that is a huge plus. We also have the systems and we have invested in the systems. When you have 100,000 railcars, you better have good systems, and we believe our systems are best-in-class. We've talked about how we manage risk, how we're proactive. We're not letting it happen to us. We go after it.

And then finally, we've talked about CIT Bank. We think that is really a unique opportunity for Rail, and it's a great opportunity in terms of the profitability of the business.

Now in terms of the bank, we continue to build that relationship. Ray and his team have done a great job working with us in transportation finance, understanding the business, understanding how we go forward, all the factors involved. Now what has that allowed us to do? In Commercial Air, we bought a big portfolio. We're doing certain loans, aircraft secured loans, in the bank.

Rail. We've talked about the new purchases going into the bank and the positives that are involved in that. And then finally, the 2 businesses at the bottom, the Transportation Lending business and the Business Air business, are focused on the bank also. Again, we're utilizing a terrific resource in the CIT Bank, along with utilizing our Capital Markets Group and the entire treasury team who have done a great job in financing the Transportation business.

Now as we look into the future, what does that mean? Well, we've just talked about more efficient financing. That's every single day. We look for more efficient financing. The treasury team works at it and has come up with some great ways to build that, whether that's ECA, banks, EXIM, we continually build that relationship and we look to excel. Now portfolio optimization. That is critical for us. It's really nice to have assets and hear the whir of the jet engine spooling up or a railcar going by. But to me the most important sound is the ching-ching of a cash register because reality is we're in this business to make money. And every single day, we look at ways to make money with our portfolio. And that means we analyze the customer every day and we analyze the asset every single day. And we have no problem in selling assets. You saw the gains, the residual realizations. That's all about optimization. And we will continue to do that going forward to make sure we have the right fleet at the right time.

We talked about building a loan book, a quality finance receivable base. We think, and hopefully I've shown you, that we have the core competencies to do that. You will see us continue to work with Ray and the bank to build that relationship and to build that portfolio selectively and opportunistically. Expanding our organization and distribution channels, we're always looking at ways to expand that. Now obviously, we've shown you an order book, we've talked about the loan book, and a logical extension in a place we've been many times a sale leasebacks, whether it be in the Rail space or in the aerospace, going to our customers, buying the asset from them and leasing it back for a period of time. That's an obvious lever we can pull and we will continue to do that along with looking at other products in the future. And then finally, we continue to evaluate adjacent industries. We've talked about Business Air, we've talked up about transportation lending. They were logical extensions. We think there may be other logical places for us to go in the transportation space and we'll continue to evaluate those over time.

So hopefully I've shown that when you add up all these things, all the fundamentals in the business, our ability to retain clients, generate clients, utilization, the quality of our fleet and our understanding of the industry, we believe we have all the factors to build a world-class transportation finance team, which we believe we have one of the most premier teams in the world and to create value for our shareholders. So with that, I have some time for questions if you like. Why don't we start with the microphone back there. There are microphones that will be coming around.

Unknown Analyst

I had 2 questions. One is can you help us understand your real competitive advantage? I mean, an Asian airline that had to buy a lot 320s, why wouldn't they just price shop with you and your competitors? What's your real advantage?

Jeffrey Knittel

Well, okay, let's talk about that. They may be able to buy the airplanes themselves, but the reality is the production lines are sold out in the aerospace. You don't see availability in most cases of size till '14 and '15. So what that means is if they want what I would term as real estate, they have to come to a lessor. Now there's limited production. If you need an airplane in March of 2013, there may only be 1 or 2 lessors that have aircraft at that point in time that helps us. And then beyond that, obviously the relationship, what we can do to help them succeed. And obviously, every airline is different. But there's over 100 airlines that we've proven to with our relationship we can help them succeed going forward. Why don't we go here on this?

Unknown Analyst

Two things. One is I can see why start-up airlines need a lessor, but in the Rail business, if I think about big shippers like ConAgra or Class 1 railcar leasers, they all have higher credit ratings than you. Why do they need a lessor?

Jeffrey Knittel

Think about flexibility. These railcars are -- some people keep them for 40 years. Do you know that you'll need that specific car for that entire time? There's about -- and correct me if I'm wrong, George, about 1.6 million cars in the North American fleet. Of that today, 50% are leased. What that tells you is that all of these customers look for various forms of financing, and a major part of that today continues to be the lease. It gives them the flexibility. It also helps them in terms of their budgeting. A number of these people look at budgeting, and they also have huge capital needs, especially the railroads, in terms of trackage and other investments.

Unknown Analyst

How do you finance those out of the bank? Because mean, does that mean that the CIT Bank has actual physical railcars on its balance sheet?

Jeffrey Knittel

The bank has physical railcars on its balance sheet and the expertise via the transportation group to manage that. Here, if we could.

Unknown Analyst

When you kind of continue along that lines, really just 2 questions, really 2 questions neither of which are related. First off, continuing along the lines, lease commitments, obviously from a capital point of view, in a regulatory point of view, is that something that's funded at the holding company or funded -- held at the holding company?

Jeffrey Knittel

Yes, that is correct.

Unknown Analyst

The physical planes are also...

Jeffrey Knittel


Unknown Analyst

And then the Rail business has found its way into the bank.

Jeffrey Knittel

That is correct.

Unknown Analyst

Completely unrelated question. As outsiders looking in both at the Rail and the Air business, what would you recommend we look at to kind of track trends, lease rates, risk factors, residual? I know it's hard because all planes aren't created equal.

Jeffrey Knittel

Sure. A couple of things. Let's start with Rail because I think you said both Rail and Air. I do think that a number of people, including Warren Buffett, within the last year have said that the Rail business and the loadings in the Rail business are a terrific barometer of how the U.S. economy is performing. So obviously, rail loadings, and we showed you that they were moving up have been a very good barometer and we think will continue to be a good barometer going forward. In terms of the air space, when I look at the business, we are obviously looking at the macro in terms of how the economies of the world are doing, but also the replacement market. This isn't all about growth. This is about efficiency. And airlines are looking for efficiency every single day. The Airline business, and you heard Mark talk about it, is a low margin business. They need to put together the pennies here and there. So that's where they look, and we help them define those pennies. So I'd look at the macro. In our specific business, I'm always looking at making sure we have the latest technology at the right time. And we invest a lot of time with professionals, making sure we have the right technology.

Unknown Analyst

So even though the airline industry is a very low return business, the leasing companies have been successful, very successful over the years, and some would say in large part because of the robustness of residual values. So now we've got these demographic trends that you pointed out in your slide and you obviously have an optimistic view about the future of air travel.

Jeffrey Knittel

I do.

Unknown Analyst

A lot of the carriers agree with you, a lot of the leasing companies agree with you, they have really big order books. Boeing and Airbus can't manufacturer fast enough. But there's a school of thought that there's an aircraft bubble developing. And so at the margin, the global economy is slowing. But you have an order book that looks like it could grow by 20% over the next 6 or 7 years. So how do you become comfortable with the possibility of a bust, and is that on your radar screen at all?

Jeffrey Knittel

Well, first of all in the Aviation business, you need to make sure that you're always thinking about what can happen. And we can talk about what happened after 9/11, 2001. It was a downturn. But still when you looked at utilization, it stayed above 95%, 96%. It didn't stop. That was as bad as things could get and it didn't stop. Now there's a lot, obviously, what's going on in Europe, it's going to put some pressure overall on the market. Now it puts pressure on the European market, and that will have certain effects on the global market. But this is a long-term business and a long-term asset. Now when you think about bubbles, think about one, we're always looking at the delivery stream to make sure we feel it fits. Now what you see is, and you heard me allude to the fact that in a downturn, we slid some of our positions. We would imagine that others would do the same thing if things got bad enough. But our view is that there's a lot of growth in the market. And by the way, one of the core competencies that we believe we have comes via our treasury team, the ability to finance these assets. It will be interesting to see if all the assets that are ordered out there can be financed. And that's our opportunity. And by the way, if they can't be financed, they won't be built. So we'll see. Second of all, you have to look in this at the stream over time. Now we have 50 orders for the Neo, sizable order, it was a launch order. The reality is those airplanes don't come until 2016, 2017. So it sounds like 50 airplanes today, but it's 50 airplanes in '16 and '17. We spread out our orders to make sure just like we spread out our expirations that we manage the risk going forward. And the order book today when I look at it, you've seen Airbus because of what's going on in Europe pull back on what they thought was an expansion. They thought they were going to go up to a higher rate, and they didn't do it. Typically, the manufacturers are fairly disciplined in how they manufacture airplanes. They want the airplanes to go into a space that's profitable so they can continue to sell airplanes.

Unknown Analyst

I'll take the other side of that question. You talked about how the secular growth in aerospace coming from the international markets. There wasn't much of a discussion on the rail presentation of where the secular growth is going to come from beyond kind of a replacement or taking some of the risks off the balance sheets of the shippers. So where are the growth opportunities in rail?

Jeffrey Knittel

Well, I think when you talk about the Rail business, it is -- we've talked about the correlation to the economy and specifically the North American economy. Now we can take share, you talked about that, and clearly it's our intent to take share. We think the product may have some upside to it in terms of it's at 50%, it may grow. But the reality is the Rail business today is not as fast a growing business as the Air business. It's fundamentally not. It's a terrific business, cyclicality is a little bit less. But it's not as fast-growing. Now given that, we continue to evaluate opportunities around the world in that space. We're not doing anything today, but there are growth opportunities that we need to be aware of and we'll continue to monitor those.

Kenneth Bruce - BofA Merrill Lynch, Research Division

I think we can take 2 more questions.

Unknown Analyst

You talked about the new Rail car order book that you're taking delivery of in '12 and '13. Can you talk about whether those deliveries in '12 and '13, which you mentioned, are going into the bank? I was under the impression that there are some limitations from percentage of operating leases...

Jeffrey Knittel

There is. There's a percentage of the total bank assets that -- there's a limitation in terms of operating leasing. We are nowhere near the limit and Ray can talk about this, but that limit is approximately 10% of the total assets, and we are nowhere near that at this point.

Unknown Analyst

Can you give an indication of where you are and also can you hold capital against that order book?

Jeffrey Knittel

Say that again.

Unknown Analyst

Can you give an indication of where you are and also do you have to hold capital against that order book?

Jeffrey Knittel

We do hold capital against the order book, as appropriate. And in terms of deliveries, you can see that we would expect to be in the 4 to 500 and I think we showed that, range by the end of this year. And obviously the bank's growing and that will create more opportunities for us in the Rail business to put more assets in there as it grows in proportion obviously the absolute number can grow, to, proportionally.

Kenneth Bruce - BofA Merrill Lynch, Research Division

One last question.

Unknown Analyst

So in commercial air, in Rail, can you characterize a current pricing environment and also the dynamics around pricing about where you think pricing might be heading?

Jeffrey Knittel

I don't want to talk about where pricing would be headed because I think it's maybe a little bit too directional. But I would say this: We're very happy with where we are in the rail space in terms of pricing. We talked about the pressure that the business was under a few years ago. The team has done a terrific job in terms of utilization and in terms of lease rates. And they are fundamental to what we do. And when you add the CIT Bank to that, we are very, very positive in where that business is going directionally. In terms of the commercial aerospace, the market's a little bit mixed, quite frankly. And that has to do with airplane type. I don't want to get into individual airplane types, given our relationship with the manufacturers, but I would make a general comment and say, the smaller the airplane generally the more under pressure it is today, a little less demand. And the reason for that is people are driving seat mile cost. And you drive down seat mile cost by having more seats. So you're seeing people up gauge and you up gauge from the bottom, obviously. And what that means is airplanes like the 330 have been terrific, we had a great experience with that. And even some larger airplanes. That does not mean that the small end is in a bad place. It just means is not in the same place as the other airplanes and the market changes, by the way. It will change, I guarantee it, over time.

So with that, thank you very much for your time.

Kenneth Bruce - BofA Merrill Lynch, Research Division

And thank you, Jeff. And Jeff and George will be around if you have further questions.

So you’ve heard several of our team talk about the fact that credit is is at the core of CIT. And our next speaker, Rob Rowe has been at the core of Credit Risk Management since he joined the company in June of 2010.

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Has over

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years’ experience

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Nat City adding through their combination with PNC and about 2/3 of his experience has been on the business unit side and about 1/3 in credit and planning functions. So I think it's his combination of both the transaction and oversight experience that makes Rob such an effective Chief Credit Officer and appropriate for where CIT is looking at future growth.

So here is Rob to talk about how we take risks but we get return on those risks.

Robert Rowe

Thanks, Ken. Ron Arrington spoke about a trip that a number of us took to China. And during that trip, we had the opportunity to meet with all the business folks and the credit risk folks that work with CIT. And in the middle of the week, we had a lunch with a number of the young people, and during that lunch, I was asking them when did you start at CIT, how have you enjoyed your period of time. And a particular lady who had grown up in Beijing, now living in Shanghai, said that she joined in 2007. And I said, oh, that was an interesting time to start, something that you will carry on with you for the rest of your life. And she said, yes. When we went bankrupt she went home to Beijing and she cried with her parents. Now that tells you a little bit about the culture of China. It also tells you a little bit about that individual. Now my heart dropped and it still drops when I think about her statement today. But it’s what we're trying to build at CIT, we're trying to build an accountability in a culture that we take outcomes and we are all responsible for those outcomes.

At CIT, I would describe that we have a very strong credit organization. It starts right at the business unit chief credit officer level. The 4 business unit chief credit officers all got into their roles in 2007. I think that is absolutely the best time to have started as a Chief Credit Officer of a business unit. As you know, what they went through during a 2- to 3-year period of time, they also will carry those experiences with them forever. The resiliency that they had to endure and prove out on a day-to-day basis is nothing less than unbelievable. Because, quite frankly, there's never been a financial service organization that went bankrupt and came out of bankruptcy and exists in the same state that it once was.

At CIT we are very, very focused on risk-adjusted returns, and I will provide you a chart that will reflect that. But basically we grade every single credit at the company. We are a manual shop. We do scoring on the lower-sized credits but even those have a manual touch. And when I describe lower-sized credits, I'm talking around $250,000 and less in the Vendor business. Everything else is manual and it is judgmental, and we have tools that we use to help make the right decisions.

As you know, John and Scott have been describing the portfolio, and we have been saying now for a few quarters that the portfolio has improved. That is true. The portfolio definitely has improved. The expected loss in the portfolio is lower than it was 2 years ago, 1 year ago, 6 months ago. We believe that we are close, if not at credit cycle lows for most of the metrics that all of you and I look at. It's hard to know with precision because the economic environment can change, recoveries could be greater from one quarter to another. But nonetheless, the performance has been very strong and we believe we are close to cycle lows.

This is a chart that I happen to like a lot, partially because I and a couple of others got together and decided when we were going to set the guiding principles for the firm in terms of credit risk. That was good fun work, but it also didn't cost us a whole lot of money to do it and we passed out cards to everybody at the firm when we go talk to them and it's something that they can carry with them. So when I look at and I think about credit risk, it's not necessarily just about the people and people making decisions. I think we could all look around the globe, and we can know that there were very sharp people that were making decisions. But did they have the right process in place to know exactly what was going on? Did they have the tools in place and the right type of tools to aid in making good decisions? I've talked about -- a little bit about the Chief Credit Officers and how we think highly of them, we have strengthened our teams in many positions, we established a credit control function, which is not loaner-view function. It's a control function inside the credit shop to help us grade our credits better, to help us look at specific industries and all sorts of things. The process is something that I would suggest at CIT given its legacy as a commercial finance business that needed significant strengthening. And we have done that. As John Thain will describe and has described, there are many activities that we have done over the last 2 years, some of them at the direction of the Fed, some of those that we wanted to do on our own that we have labored to do and have proven to be very productive. We are done with building out the process at the firm. That process will last us for many, many years to come. And then the tools that we use would be things such as grading the credit and using some quantitative models to help us do that. It actually is not that effective in terms of the individual deal-by-deal grading, but rather it's effective when you're looking across the entire portfolio.

We wanted to develop a playbook that would be something that we would utilize in all our business units, and we would utilize for a 10- or 15-year period of time. We wanted something sustainable. We did not want something that would be -- that we would have to tweak every 2 to 3 years and that would change the inner workings of the firm. And so we focused on 4 particular areas, corporate governance, portfolio strategy, staffing and training and credit control, which I've alluded to a little bit.

So when you think about corporate governance, one of the areas that we're very focused on, and I would say most financial institutions weren't good at this prior to the last meltdown of the global economy but are all working to be better at it, is understanding what are the risk appetite of the company? What are the risk tolerance levels? A gentleman asked about CIT's risk tolerance in essence by saying, have you moved more towards what banks are doing and we will talk about that later on. What's most important to me is that when we meet with the business units every quarter, we are talking about what was the expected risk tolerance we wanted and did we do that during the quarter? And if we are outside of it during the quarter, why? Okay? So as an example, Ron Arrington will come in and he will literally have for the next 6 to 12 months what do we want to do in terms of probability of default and expected loss in the portfolio? What are we willing to accept? And then we look at it and say, did we do that, or did we go further out on the risk curve? Okay? And then we measure what we did and we look at the delinquency curves and the migrations and the loss curves, and we see is it performing as to what we would expect. That's a highly disciplined process and it allows conversations to be happened at the top of the house, not at the middle levels of the house, at the top of the house if we would decide that we're going to change our risk appetite posture. And at the size firm we are at 40 billion, 45 billion of assets, those conversations can be had pretty often and are very fruitful.

In terms of the portfolio strategy, when a group of us came to the firm in 2010, one of the things that did jump out were our hold levels, specifically if you were to look at the top 25 hold levels were the top 10 hold levels. In my opinion, they were too large for the size firm that we are and so we did endeavor to move those down. So if you were to look at the top 10 hold levels from the summer of 2010 to today, they have dropped in total by 30%. So we're at a place now that our portfolio is more granular and we can build off of that going forward. We certainly have a big enough balance sheet to compete in middle-market transactions when we want to lead deals, even if we're competing with GE or Wells Fargo or Bank of America.

Okay. In terms of the staffing and training, we've moved all the credit decisioning professionals into the credit shop of the house. So at what point in time at CIT, they did report directly into the business unit heads. Now they report into the credit shop of the house. The most important thing to me is that we expect that the business unit heads are signing on the deals as well. They're not recommenders, they're not originators, they're not salespeople. They own the risk. And they sign on the deals and the credit professional signs on the deal. So it's dual signature authority. I would never accept, nor would they ever accept, that it's throwing a deal up, that if the credit team is willing to sign on it, then it's good to go. That's not a level -- that does not inculcate a culture of accountability, what we're looking for.

And then credit controls. I talked a little bit about the group. But one of the things that going from a commercial finance entity and into a banking environment is that we put a portfolio concentration limits in place. Those aren't meant to be restrictive. They're meant to be guidelines as to what we want to be today and going forward, okay? So I'm not going to talk about the specific portfolio concentration limits, but they definitely looked like what we are today. And when I talk about the pie chart later on in our conversation, I will give you a couple of examples.

So this is a chart that has a couple of themes to it but because CIT plays in a pretty wide swath of commercial asset classes in terms of the risk profile and the pricing profile, we've decided we were going to have a consistent underwriting process no matter what the asset class was at all. And so you can see in terms of asset-based lending, we would tell you that prices could be anywhere from LIBOR plus 200 to LIBOR plus 300 depending on the nature of the collateral; the cash flow business could be LIBOR plus 300 to LIBOR plus 500, particularly good pricing at this point of the market when you contrast it with other cycles that we've gone through and then the vendor finance business would have fixed returns that are very healthy at 750 to 1,000 basis points.

But regardless of the asset class, we want to have a consistent underwriting approach. And so we start with industry white papers and that includes in Ron Arrington's Vendor business, and basically every $25 million to $50 million of exposure at the firm has a white paper around it. And that white paper is looking at the industry risk profile and the business risk profile. And so if the industry risk profile is high, we would say that has to be collateralized lending. If the industry risk profile was moderate or low, we might be willing to engage in cash flow lending. So we start there and we work our way through a series of processes to get to the ultimate deal level we were looking at the pricing for the risk of that individual deal.

So this is a slide that I don't know that we've shown you in the past, but when you think of CIT, we get fairly healthy yields compared and contrasted to our commercial bank peers. Now to be sure, many of our commercial bank peers will play in investment grade credits and crossover credits as well. And so by virtue of them playing in that space, that will bring down the overall yields of their portfolios. We don't play in investment grade lending, so we have a more pure play in noninvestment grade lending. But what is interesting, when you look at this point in the cycle, the yield differential and then the bars, the lighter blue bars of the net yield, you can see that the charge off rates that we're running at are not that much greater than charge off rates of the commercial bank peers and yet, our yields overall are much, much higher. The true test, obviously, comes in a downturn and how we perform during that downturn. And our goal is to perform as well as we possibly can to have charge-off rates that are not dissimilar from what the commercial bank peers would have and to do that by our industry expertise that we've talked about and then through our focus on security, and in particular hard collateral.

So this pie chart shows the overall $28.4 billion of loan and owned assets exposure. So this includes the planes, this includes the railcars. And as you can see, almost everything we do is for a purpose of owning an asset that's physical in nature or lending to a company that is doing something that they need financing for that's physical in nature; receivables, inventory, property, plant and equipment, real estate. The slides that we brought out for you is the cash flow piece, which is 15% of the overall bucket. A couple of things about that: As many of you know, the cash flow space caused anxieties for CIT and many financial institutions during the last downturn. Well, first of all, a couple of things, that was not near garden-variety recession that we went through. The growth at CIT in the cash flow space was very significant during the last decade. CIT started the decade with very little cash flow exposure at all, ended with almost $15 billion of cash flow exposure. That would be a very hard ask to perform well in a tough downturn after the growth of that type of pace. We would never try to endeavor to grow at that pace, okay? I'm not saying that we'll be at 15% forever. We might take it up to 20% because the risk-adjusted returns are very, very healthy today in that space.

This is another swath of looking at the overall portfolio by industry type and also includes the planes and the railcars, although the railcars we broke out into the individual segments because we do have data, obviously, on the counterparties and so if they were a gas player shipping sand for frac-ing, we put it energy and utilities whereas the airlines, that's the planes themselves. It's a pretty diversified portfolio overall. Jeff Knittel did a great job taking you through the airlines space. What I would tell you is that airlines as counterparties, when you look at their balance sheets, you look at their income statements, it's not what a credit person would love, okay? But there's a couple of things going on there. One, they typically have very, very good liquidity, okay? So if there's choppiness in their markets, they can usually handle those situations because they're carrying a lot of cash. That's very important to airlines. Number two, many of our counterparties are national carriers of the countries that they operate in, and if you are a national carrier in a country that wants to be tethered to the global economy, even if there is a recession, you will do everything you can as the state to support that national carrier through those tough times. Nobody wants to go off the grid in a global economy.

In terms of the overall concern, I’m not -- so this is a question that's come up a lot, what do you have in Europe, okay? We have $1 billion basically in Europe in loans, okay? Those are mostly in the Vendor Finance business, which means lending to small- and mid-sized enterprises that were using the money to buy PCs and copiers and essential equipment. We know how that portfolio performed just a few years ago in a very difficult economy in Europe. Did the losses go up? Of course they did, but they weren't too bad. We don't expect that to happen in Europe, but as you can tell, it's not a huge portion of the overall enterprise and we feel comfortable with the exposure that we're at today. And I would want to highlight that we don't have any sovereign exposure.

So this is the good news chart, and I joined in the second quarter of 2010, so if you were to look at this chart, it was even -- the NPAs, I think, peaked around $2.1 billion in the summer of 2010. And it's been a straight shot down. And it's been a straight shot down on delinquencies as well. You might ask why would you have $0.5 billion or $500 million of nonperformers at the end of the first quarter, and then you only have $216 million of 30-plus delinquency? It doesn't seem to make sense. Well, the reason why is that it's our job on the credit side and on the business unit side to determine if a loan is not going to be able to repay but yet, is still being able to do it for a short period of time and if we think that, we will put it on nonperforming. Obviously, during the last recession, many loans were put on nonperforming because of the recession and the margins going down and all of that, that ended up -- that actually did repay in full and never missed a payment. If you looked at the fourth quarter of 2010 you can see that a ratio between our nonperformers to our 30-plus delinquency was are over 3x. That's come down to where it's over 2x. I would expect as we go through the cycle that, that ratio will compress a little bit more than where it's at today.

The charge-off’s pretty close to cycle lows given where we're at, at $22 million. But like I said, you never know when you're going to get a recovery. That is very difficult to predict. And we're not in the prediction business. But all of our experience will tell you that $22 million of charge offs, 56 basis points pretty close to cycle lows.

The reserves. They look very steady and they are very steady. But we don't -- we are not trying to come up with a specific percentage of the loan book or a specific percentage of NPAs for our reserves. We grade every single credit. Every single credit will have an expected loss attended to it. We aggregate all those expected losses, and that's the reserve, okay? When you look at the $420 million of reserves we have today and given our 2 year loss emergence for reserving, obviously the reserve is greater than the most recent performance that we've had in the book. If we were in a traditional middle cycle stage, and there wasn't any choppiness around the world, it would be my job and Scott's job to assess, okay, if you you're $420 million in the last couple of quarters, you took those x 8, we're nowhere near $420 million, it would be our jobs to look at the loss factors for the individual deals and bring them down. But like I said, we're not in a typical mid-stage cycle, and we wouldn't make that type of move until we saw more comfort in the overall global economy.

So finally, CIT is 104-year-old organization that had a history of success almost during that entire period of time where it financed hard assets for companies midsized and small in nature. When I got into the company, I thought that there was going to be a significant amount of rebuilding that needed to be done. We didn't need to do significant rebuilding. We needed to do strengthening in specific spots. This company's history, this company's purpose, this company's execution was very, very strong, almost throughout the entire company. As I alluded, growth in a cash flow business, going from 0 to $15 billion and having a business model that didn't have a bank, those are challenges in a tough time. But we've addressed both of those today. So we believe we positioned the company for growth going forward. It's my job as the Chief Credit Officer to position us for the future. If growth is available and at the right price, we will go get it and serve our customers well. If the choppiness became more than just choppy, we will manage that situation also.

And I would be glad to take your questions.

Unknown Analyst

So when you look at that chart that had the yields versus the banking industry, if they were similar credit grades, would there still be such a large difference or do you think that you're comparably priced for comparable credit grades versus what banks are offering?

Robert Rowe

So I'm going to try to get us back to -- I would say it depends on the business and I'm not going to go through all the businesses. But I do believe that the more entrenched you are with your customer, either through a vendor relationship or through your service model, you do have the ability to get better pricing than if you are just more transactional in nature. I would also tell you that even in the cash flow business today, and I did spend a fair amount of my career, as Ken said, on the cash flow side with the sponsor business, if you have a relationship focus with the particular private equity firms, they will pay and they have learned through this cycle, they will pay for good bankers to be involved with them because they know how difficult it is when people take a transactional approach to their business.

Unknown Analyst

Just as a quick follow-up, if you think about prior to, let's say, the very late '90s or beginning of 2000, I think, it's probably fair to say that CIT actually achieved what you were talking about, which was to kind of perform in line with the banks from a credit perspective during the downturn, maybe even a little better. Subsequent to that, whatever that is, a dozen or 13 years, that probably wasn't true. I mean, how do you kind of separate those 2 time periods and what do you think -- what have learned from it and doing differently?

Robert Rowe

Well, so we look hard at this, okay, because I wouldn't expect that CIT, if our yield is 7.2%, right, and our commercial bank peers are 4%, I would not expect that we should think about our loan losses in a cycle that would be exactly the same that a Wells Fargo would have or a P&C would have, right? I mean, if we're going to get an extra 300 basis points over a 5-year period of time and we only give back 75 basis points during a downturn, I think that's been a very good trade for the shareholders, the bondholders and everybody at CIT. So that's how we think about it. But to me, the important point is that we have to have the rigor at the firm, that executive management is involved in all the risk appetite decisions, right, and we're looking at that stuff very rigorously on a quarterly basis as well.

Unknown Analyst

There's always a pull between the credit side and the sales side. So you pointed out that the credit guys report to you 2 signatures on sign offs. What happens when you've got a big gray area? It's not a clear win, it's not a clear turn down, the credit guy doesn't like it, the business guy does. Who wins here?

Joseph M. Leone

So what you try to do when you're thinking about running a credit shop, you're trying not to have that culture where every single day there's a discussion that's a difficult discussion like that, okay? And the reason why is it does not lead to good morale and it's actually not a well-run shop if you're doing that. So the reason we put in place with all the white papers and the process when I took you through that chart, is that we're very focused on our specific industries, we're focused on specific private equity firms, we're focused on very specific vendor relationships, and we know the type of risk we're looking for, okay? So we don't have a huge amount of conversations that are that difficult in nature. However, if business units that came up and maybe it was because the Chief Credit Officer of a particular business unit didn't have experience as much as you'd like in a specific subsegment of an industry, it would bubble up to me, I would take a look at it and then I would make the decision.

Kenneth Bruce - BofA Merrill Lynch, Research Division

I think we have time for one more question.

Unknown Analyst

Kind of a follow-up to prior questions. If I look at historical, really C&I lending spreads, they're probably 75 basis points to 100 basis points above historical averages over the last 34 years. If they come back into historical averages, how would that change your view on the risk/reward in a number of these loans, would you patch aside, we're just going to take lower returns or are there areas you feel like you might have to cut back? How do you think about that?

Robert Rowe

So it would vary much depend on particular product type and business that if that was to happen in. So obviously, ABL lending, that this the highly structured stuff, that's at LIBOR plus 175. If that was to go to LIBOR plus 100, you wouldn't even think about it, okay, versus if you had a vendor finance deal that's in China that's supporting one of the provinces because they want to build out computers for the kids, right? And the province is getting money from the central government and it went from 10.75% to 10%, you'd still do that deal. So what I'm saying is it depends on the asset class. I would say your point is a very good one because you're recognizing that there's pretty good pricing in the market today. And I agree with that, there's very good pricing in the market today.

Kenneth Bruce - BofA Merrill Lynch, Research Division

Please join me in thanking Rob. Okay. So that brings us into the home stretch, and to take us there, I'm going to ask Glenn Votek, Ray Quinlan and Scott Parker to join me here. Many of you know Glenn, who’s been treasurer since 1999 when CIT acquired him as part of the Newcourt acquisition Glenn had been part of the AT&T Capital team, which he joined in 1989 after working at Amerada Hess and Westinghouse Credit. I’ve had the opportunity to get to know Ray Quinlan, our Head of Banking since he joined in late 2010. Ray, who has a very impressive list of degrees, and you should check out his bio, spent more than 30 years at Citi in a wide range of roles before, as I say, agreeing to drop the I and come join us at CIT. CIT Bank is an important part of our future. Ray's been instrumental in the progress that we've made in just a short period of time, and he's going to focus today on the bank's deposit strategy. And Scott Parker, our CFO, will conclude by -- have a financial discussion that pulls together, I think, much of what you heard from the different business units today with a review of our profitability targets and how our path is to achieve them. And many of you already know Scott, who joined CIT in July of 2010 from Cerberus and prior to that, 17 years at GE. And I think it’s been Scott's deep knowledge of all of our businesses that's really been incredibly helpful and invaluable to our accomplishments.

So let me start with Glenn.

Glenn A. Votek

Thank you, Ken, and good afternoon, everyone. When I was walking over here to the conference this morning, I was thinking I probably have the easiest story to tell here today, given the significant progress that we've made on the funding and liquidity side. But after hearing Rob Rowe, I think I'm going to have a bit of a challenge here and maybe some convincing to do because Rob, I think, has done a great job on the credit front. But in thinking where we were beginning in 2010 versus where we are today, it is quite unimaginable as to how we've gotten here. And just thinking back in the beginning of 2010, we had laid out a long-term funding plan. That plan was, at the time we felt, quite aspirational. It was going to serve as our roadmap to rehabilitating the liability structure of the company, and it contained numerous components and elements, multiple phases and multiple years to execute. And as we think where we are today in contrast to that original plan, I would say we would expect it to be where we are now, perhaps in the 2013 to 2014 timeframe, so it's been significant progress.

So where are we today? Beginning with liquidity, we have very solid liquidity position, both in terms of liquidity on the balance sheet, cash, short-term investments that's been supplemented by a number of different forms of committed liquidity, which I'll get into in a moment. We've also largely unencumbered the balance sheet. And we've demonstrated diversity in our access to various funding sources at economically attractive cost, including bank deposits, which Ray will get into in a moment.

And as well, I think we're on the right track as far as the credit ratings go. I think we're making good improvements, good progress there, albeit perhaps slower than some of you are expecting, but nevertheless we're making good progress. So I'll spend the next few minutes going through a bit more detail on both the progress we've made as well as what we see as some additional opportunities, and then I'll turn it over to Ray, and Ray will explore for you some of the next phase of our funding evolution, which is really getting into deposits.

So beginning with liquidity. Cash and short-term investments really serves as the primary source of liquidity for the company. You see the numbers have been going down over time, and that's based on the greater efficiency in the utilization of our cash, which I'll get into in a second. But the sizing of our overall liquidity complement is really driven by what we expect to be the funding needs over a 12-month plus period of time. Now the liquidity position also obviously needs to be resilient for unexpected events, whether they'd be numerous types of stress-induced factors, whether it be, for example, a disruption in the capital markets, elevated line activity of our customers to name a couple of things. So we really need to make sure that we have a liquidity mix that can withstand any of those types of pressures.

As far as the better efficiency and utilization of our cash, we've done a number of things over the past couple of years, beginning with modification of our debt indenture covenants. If you look at our covenant package now, it's very consistent with an investment-grade issuer. And as part of that, we were able to eliminate a cash sweep provision that had existed in the legacy debt coming out of the restructuring. That had the effect of restricting certain portions of our cash. So we've been able to eliminate that as well, and that's allowed us to -- when you look at the slide, you can see that our restricted cash balances have declined. And likewise, the reason for the overall cash positioning declining is based on the fact that we've been able to introduce other forms of committed liquidity and most notable there would be our bank revolver, which gives us immediate access to cash and therefore it's a much more efficient sourcing of our liquidity. We don't need to incur the negative carry of taking cash and earning 10 basis points on it, for example, if we're investing in government securities these days. So it's a more efficient way for us to source our cash. And speaking of our committed liquidity facilities, these are multiyear facilities so they provide term liquidity for us. They aggregate over $6 billion. These are, as they said, term liquidity and that the average remaining committed term on these facilities is about 7 years, and they're also efficiently priced. If you look at the funding, LIBOR plus 250 basis points is quite attractive as a source of funding for the company.

This slide perhaps best portrays the progress that we've made over the last couple of years, beginning with our funding cost. As John had mentioned in his opening remarks, we have been able to drive our funding cost down by over 200 basis points in the past couple of years. Likewise, we've introduced greater financial flexibility on the balance sheet and that we've largely unencumbered the balance sheet. Right now, we have about 1/3 of our funding in secured format, the rest is either unsecured or deposits. And in fact, you can see the deposit growth has been quite attractive as well in that we have over 20% of our funding now coming from deposits.

This next slide, I think, also demonstrates the success we've made. When you look at the maturity profile of the liabilities for the company, coming out of the restructuring, we were confronted by some pretty substantial maturity stacks, as you can see on the left side of the graph, with some years having $7-plus billion of maturities. That's some fairly significant refinancing risk that we were subject to. Now the good news was that we had a number of years to be able to address it, which we have done. And so when you look at the right hand side of this chart, you can see that we've been able to both level out those stacks, we've been able to spread them out over a longer period of time. And our target, which we've largely accomplished, is to have no more than $3 billion of maturities in any one annual time frame.

So what's next? Well, John had mentioned the $26 billion of high-cost debt that we've taken out, and now we have $4.6 billion of 7% debt remaining. That debt is callable at par, so we are very much motivated to eliminate that as well. Now the elimination of it will take time, and the form as well as the timing will be somewhat fluid because it will require us to access incremental financing for a portion of it, whether it be unsecured issuance or secured financing, as well as the use of asset portfolio cash flows. So to give you an example, when you look at the chart, we've got about $14 billion worth of unencumbered nonbank assets. Now, portions of that are in our International businesses. So we believe that's a portion of that could also likewise be financed through various secured structures that we would endeavor to put in place. Likewise on the Domestic front, we have assets that relate to businesses that we are now originating new product through the bank. So as a result, those new originations are being funded with deposits, which means that the assets or those legacy assets, the cash flows being generated by those assets can be used to pay down debt further. So that would be another opportunity for us to do that.

Now we've all had to cope with the volatility in the capital markets over the last couple of years. So it has been challenging to finance any business, and ours is no exception. But notwithstanding that environment, we've been able to drive down the marginal cost of our funding, and what I mean by that is what is the cost for us to attract that next dollar of financing in the door? And you can see, based on the 3 broad categories of our funding, whether it be unsecured issuance, whether it be secured ABS or deposits, we've been able to reduce the amount of that margin of funding costs over time. Now there will be a floor that it will hit eventually, but we do think that there are some opportunities yet for us to further reduce that funding cost. For example, I mentioned earlier our ratings progress. Obviously, to the extent we can continue that improving ratings trend, I think that, that should also bear out as far as potential improvements in the financing cost over time. And so I know on your minds is ratings. So what about our ratings? Well, to begin, we very much continue to aspire to restore the investment grade ratings that the company had historically operated under. We think it's going to take time, but we do believe that the strategy and the targets that we've laid out are consistent with the type of a profile that would be necessary to regain investment grade ratings. Now with that said, we do take comfort in the way in which the markets are viewing the CIT credit, and that's evidenced by the line graph that you can see here. We're not trading where our ratings would suggest our paper should be trading, but rather we're trading somewhere between a BB and investment grade-rated category. So that's obviously benefited our funding costs and so we're quite fleet pleased with that. But nevertheless, we do believe investment grade ratings do have value for the company, both in terms of potentially driving further improvement on our funding cost but also equally importantly to be able to provide consistency and depth and reliability of our access to various funding sources, so it is important.

And then finally as we look back at the long-term funding plan that I mentioned that we had put together, we had laid out a balanced funding profile that we're looking to achieve over time, which would consist of a balanced mix of unsecured, secured, as well as deposit funding. Now if you look at where we are today, which is the pie on the far right, from a secured standpoint we're about where we need today, we're at about 1/3. So the proportional shift that we still to need to undergo would be moving some of the unsecured percentages into deposits. And with that, to talk about the progress on that front, I'll turn it over to Ray.

Raymond Quinlan

Thanks, Glenn. Good morning. We've heard a lot about people doing business with CIT Bank this morning, all of our business partners. So right now will shift gears a little bit, look at the same relationship from a mildly different facet, which is how does the bank look. And I want to stay with 3 themes in regard to the bank. But before I get to those, as we think about CIT Bank, I think it's instructive to point out how divergent it is from the trend in the industry on several key points. First, as you all know from looking at banks, if we look at recent performance, growth has been, for the most part, either low or no growth. Secondarily, as was mentioned earlier in one of the questions, the struggle to gain quality earning assets by all banks has been ongoing and probably will continue. Thirdly, as we look at the future and as the recent past, we see that the capital ratios required by rating agents -- required by regulators, I should say, are an increasing challenge for the industry. CIT Bank is wildly different from that. CIT Bank has grown significantly. CIT bank has -- is blessed with a rich portfolio of quality earning assets, as you heard from Rob and others. And thirdly, our capital ratios are well in excess of any guidelines from any regulators and will be for the foreseeable future. Having said that, now going to the banks specifically, the 3 themes I'd like to focus on are steady progress over the last 18 months or so. As Glenn alluded, we are the supplier of low-cost reliable funding to the overall institution, and we are very much at the beginning of this journey. These are early day chapters for the bank, so in some sense today's communication is off to a good start.

On now to being a little more specific. In this chart, we've listed some of the accomplishments that the bank has realized over the last 18 months. They break into several categories: First is the movement of the business franchises into the bank. And so we've had, if you were to add this up, 6 major -- I'm sorry, 6 major business moves over the last 15 months. They include small business lending, vendor, equipment finance, commercial real estate, Rail and core corporate finance. And in many of those cases, the entire platform came, including the employees. These are housed in the bank, working through bank employees, it's a full integration. It's been a significant accomplishment. And as John and others have alluded, we're now originating over 80% of U.S. originations for the entire company in the bank. As was also mentioned, there are some restrictions on moving the inventory of preexisting loans into the bank, the 23A propositions extant in banking for many, many years, which were frequently used as bridges between one legal vehicle and another, have effectively been shut down by the regulators. So as Pete Connolly alluded, you start with an inventory, first day you start to open in the bank, we start to build that, has rapid growth in the bank. And there’s a diminution of assets remain at the holding company, we are in midstream on all of our portfolios in regard to that progress. Second piece here is we launched the Internet bank. We have a very successful launch, we did it as a pilot through the third quarter and into the fourth quarter of last year. And starting in the first quarter of this year, we've expanded that effort to what we think is a reasonable but aggressive growth rate for that, that is not hair-on-fire type of acquisitions. Thirdly, on this chart we see improving regulatory relations for the bank. The bank had a cease-and-desist order on it, which we all know is severely restrictive. That was lifted over a year ago. Since that time, as John Thain alluded, with the primary regulators for the bank, the FDIC and the Utah Department of Financial Institutions, we have excellent relationships, working partnership, very close communication. And so that's been a good connection for us over the last year.

Last piece I want to mention on this chart is the growth. As I said, most banks are not growing in the United States, but when we look at the numbers at the bottom, we see the word [ph] move from roughly a $7 billion institution to roughly a $10 billion institution over a year and a quarter or so, point-to-point growth of about 35%. Within that -- let's look at 12/31 to today, all right? So 12/31 to today, being 3/31 for last official numbers, is a $600 million increase in assets. Well, play that through the year, that's still consistent with our 25% growth rate, thereabouts. However, in moving along with that, it's $600 million in new assets in the bank in the quarter. We'll also note that the Internet was launched. It moved from a very low balance at the beginning of the year to over $1.1 billion at the end of the quarter. More than 100% of the marginal increase in assets at the bank were funded by bank-generated deposits. Also, as John Thain mentioned earlier, we've continued on that trend as we stated here today, we're well in excess of $1.5 billion for that franchise.

Okay, on the Internet, there are several keys to having a successful business. First is you have to have a good product, the right product for the customer at the right time. Our Achiever CD, which allows people to bump up their rate during a term of that CD, once, has proven to be very popular. Secondarily, you have to have competitive rates. We do have competitive rates. We're not out in front by leagues, we don't intend to be, we're not desperate for this money. It's a balanced, competitive position that we expect and/or able to, based upon our model, maintain for a long period of time. So this is not in high-rate pullback, that's not our plan. Our plan is to build an Internet franchise, being competitive and taking advantage of the efficiencies that are inherent in this market. Third, as it says in the upper right hand quarter here, it's very important that independent rating agencies rate your bank so that people can judge it. If we all go to Bankrate, they have a 5-star rating. We're still a relatively new institution, so we have the maximum for that, a 4-star rating. Bauer rate says it is 4-star. IDC has quadrants that they rate banks in. We are in their top tier. And so we have good product, competitive rates, very good ratings by individuals and then, of course, we have to back that up with good customer service. We have partners in Jack Henry, we're leveraging their infrastructure. And we've already had quite a bit of success in that over 20% of the customers who have opened up an account, brand-new bank, have gone to a second account and now our account for about 1/3 of our total deposits. So 1/3 of our total deposits belong to customers who have more than one account with us. So we all know any Internet work after customer relationships that are reliable, that can grow over time and that can leverage the original acquisition costs associated with the marketing. We're well on our way to that.

The Internet, what's the story behind this in a more macro sense? All this data is provided by the American Bankers Association. Now what it says, if we look at either the pie chart or the histogram at the upper right-hand side, is that when we ask Americans what is your preferred method, your preferred channel for dealing with your bank, they respond the Internet 62% of the time. The more traditional ways of interfacing with bank -- you hear many who was like, "Oh, the only time I'd go to the bank is when I'd go to the ATM," so that might be a high proportion. "I don't go to the branch very often, open and closing account, maybe I have some awkward transaction I have to talk to someone on." But if we add up those 2 traditional channels, let's look at the pie chart, branches plus ATMs x 2 are still less than what people say they prefer for the Internet. This is no longer an insipient trend; this is the fact while we're sitting here. Next thing is in the lower right hand side, how does it feel for people who are a particular segment, those big savers of United States, the 55 plus, in fact, one of our target segments. The answer is excellent. They like the Internet. But we can't miss the fact that the upper right hand side of that particular graph is an accelerating curve. This is something that not only is here, not only is a large pool of savings, over $300 billion in the United States, but is accelerating rapidly, and looking at the histogram, has the same message. Those of you who read popular business books, this certainly looks like a tipping point.

Okay, so what is our evolution here? We started up very simply. We said we wanted to have the simplest product in order to minimize operational risks, come up the learning curve for a business that had not been in the deposit gathering business before, we chose to have CDs only. We did that first. We've now expanded our CD offerings to multiple terms and characteristics. We offer, as I said, the competitive pricing, but we're expanding into other savings products. We've launched high-yield savings in the spring. We've been very successful at it. That's a good turn of events for us. We're then moving into customer-consumer transaction accounts, which are also being done routinely on the Internet and can -- keeping with the CIT preexisting franchise, we will introduce business banking as we motor along here. In addition to the product offerings, we also are enhancing all of our Internet offerings with both safety features, identity theft protection, things of that ilk, as well as convenience features. You can access things on your mobile, at your ATM, these are all in process. So better product expansion, better ways to introduce how you interact with that product.

So we're on a solid path here to diversify the funding of both the bank as well as the holding company, talk a little bit here about consumer banking. Obviously, we're about 15,000 customers while we're talking here. Our goal is to expand our business with those customers. So far so good as I alluded to. We want to have richer relationships with them for a variety of reasons. Second is institutional funding. We've been very successful in gathering some institutional balances, and that has also been a very attractive segment for us. The third is other funding sources, including structured finance in the sense of funding for the institution. At 7:00 a.m. this morning, there's was a release from CIT that I'm sure most of you saw, that says, "We're happy to announce, in cooperation with all of our friends here, that we closed on a $1 billion committed vendor conduit, which will increase the liquidity profile of the bank again." Remember $10 billion bank, another $1 billion in liquidity. Good story so far. Thanks very much.

Scott T. Parker

Good afternoon, everyone. Before I get started, it would be nice, since Ray just went through that conversation, to ask how many people have a CD with CIT Bank, some hands? Okay, it looks like we got some work to do, so hopefully we can work on that.

Raymond Quinlan

I'm available to collect...

Scott T. Parker

Exactly. So Ray will be set up outside if we can kind of do that when we leave. But I know we're in a home stretch, so I just wanted to take you through some slides. I think many of you have heard John and myself talk a lot about the competitive advantage that we have in the businesses. I hope after listening to our business leaders today, you'll go away with a much better appreciation of how each of them defines our marketplaces, what our competitive advantages are and how we're positioned for growth. Today, I'd like to kind of pull it all together at the end in regards to how all of these things fit into our profitability targets. We've talked a lot over the last 2 years, we've really made a lot of significant progress in restructuring our balance sheet. We sold a lot of nonstrategic assets over the last 2 years, and that's helped to pay down our high-cost debt. We think most of that is behind us now. Going forward, we're very focused on continuing -- to continue to grow our commercial assets. As Glenn just mentioned, we made a huge improvement on our liability profile, and we refinanced our debt at lower costs. Rob Rowe talked a little bit about what's going on in credit, and as we said, we're near cyclical lows in regards to charge-offs. On the balance sheet, let's remember, we marked to market the balance sheet at the end of 2009 and we've been accelerating the FSA discount on our debt as we prepaid that, which is a better economic improvement. But we still have a net $2 billion of remaining FSA, as well as a $4 billion NOL that is fully valued that will come into the book value over time. So again, I think you can see that we've made significant progress over the last 2 years.

Last June, we laid out some profitability targets. I think we've made considerable progress on many fronts. The bottom line has been unchanged. We still believe the earnings power of this company is between 1.5% to 2% return on assets and a low double-digit return on equity. We've made a few adjustments for those that haven't seen this in a while, mainly because of business mix and the economic environment. On the credit side, you'll see that the credit cost that we have here is a little bit lower than we had in our original targets. And just to be clear, that's really because of a shift in mix of leasing assets versus loans, but it's not a change in our expectations for loan losses as Rob mentioned. This benefit offset a little bit of our lowering of other income, and I'll get into the drivers of other income in a little bit.

These targets also assume that we're able to get our capital levels down to somewhere in the neighborhood of 13%, which is consistent with our regulatory commitments as well as our economic capital analysis. I think when you heard from the team today that you see we're positioned to achieve these targets. I just thought I'd step back a second in regards to the questions of Vendor Finance. So on Vendor Finance, as we've kind of laid out this target, we also said each one of our businesses have a little bit different mix in regard to how the P&L works. On the Vendor Finance business, we tend to have a higher net margin, higher yields, and again, what's funded in the bank or in some secured financings. The credit provisions is about the same as what we show here. Operating expenses is greater than we show here because as Ron mentioned, we have a global platform and that platform has an infrastructure cost. So one of the key drivers to the profitability of Ron's business going forward is we've been selling some of these nonstrategic assets in his business, he has a ton of asset leverage. So every dollar of asset leverage he can put on the platform, the cost will not go up, which will help drive down his overall cost. So again, getting to kind of the targets we have here in regards to return on assets.

Now I've talked a little bit about the profitability targets, I thought I'd show you the asset mix we assumed to achieve these returns. This is again a little bit different than what we showed last June as transportation makes up a larger proportion of the total. And just to step back on that, as Jeff just went through, transportation encompasses a lot of different items, so it's not just the operating lease business, but he also talked a little bit about how we're trying to grow out some of the lending products within that business. So the real big difference between this is that consumer will continue to come down. We announced that we -- we talked about we sold some student loans after the earnings call, so another $1.1 billion of student loans were sold that were held for sale in the bank further to Ray's conversation about providing liquidity to grow our assets. And then number two is the growth in vendor that Ron talked about. But we still expect each one of our commercial businesses to grow over the next couple of years.

Sorry about that. So with respect to the asset mix, Glenn talked a little bit about our balanced funding model. And if you look at the chart here, a majority of our businesses and product lines can be funded by CIT Bank. In the first quarter, over 60% of our funded volume, in our 3 commercial business segments were funded by CIT Bank. As Jeff pointed out, we fund most of these businesses in the bank except for the operating leases and in the legacy railcar business. In Corporate Finance, we showed that virtually all of the U.S. lending and loans are originated by the bank. In Vendor Finance, again the domestic business went into the bank and we're originating the majority of that. And then we also have a smaller bank in Brazil that helps run -- fund some of the Brazilian business we do. But Ron also mentioned that a lot of his growth is outside the U.S. And so one of our big focuses is to continue to establish local facilities to support that growth. We already have those in place in China, in the U.K., and we expect to continue to grow those. And we talked a little bit about trade in the past, as we're currently -- we're continuing to work on that process, and in the meantime, it is also efficiently funded with secured financing. So the bottom line is that the target portfolio mix aligns with kind of our profit targets and our funding profile.

So with respect to commercial asset growth, we've had strong committed lending volume over the last couple of years as a testament to the businesses that talked to you today about our value proposition and how -- why customers come to do business with CIT. On this little [ph] chart, I broke out a little bit the aircraft deliveries. As Jeff's chart showed, these are kind of variable, but if you look at the general trend, each one of our businesses have been growing on a year-over-year basis very strong. In the first quarter, our committed volume was up over 50% from the prior year. I think this gives you a little bit of sense that the commercial franchise that we have, and we're building on a strong foundation for growth. And it validates our value proposition, how we'll continue to deliver results.

The new business volume is translating into organic growth. In the last couple of quarters, we've had sequential organic growth, and in the first quarter, we had about 2% sequential growth. And the key drivers has been the volume that we're originating as well as of our portfolio collections have kind of come back to a more normalized level. So we've talked about in the past some of those were elevated, especially in the corporate finance, as part of the refinancing of some of the assets at the holdco. However, we have experienced an elevated level of asset sales that I've talked about previously, which, one, repositioned our portfolio and helped us pay down the high-cost debt. Most of those asset sales were low-yielding assets, nonstrategic assets like consumer assets in Ron's business, as well as the student loans. But going forward, we don't see any meaningful asset sales other than the portfolio management discussion we had both in Vendor and in Transportation around end of term or off leased assets. So I think we're positioned well for continued commercial asset growth.

John mentioned earlier today about FSA and our reported margin is impacted by the activities we do in regards to FSA and creates some quarterly variability. That said, we continue to focus our efforts as a management team on the economic finance margin, which removes all the impacts of FSA. In the long run, this is what drives the earnings power of the company. If you look at the margin, despite some variability over the last 2 years, the trend line has remained on a positive upslope. And again just for some of you; that is actually the regression line, so just that we didn't draw that chart. And it shows that, that trend continues, and that's what we're focused on. And we're trying to get back to the 300 to 400 basis points we have on the profitability targets. So I thought it'd be important to kind of break out a little bit around the portfolio yields and the cost of funds, which drive economic margin. If you look at 2010, really the changes that happened there is we were in the portfolio optimization. So a lot of the asset sales that we had in the Vendor business or Consumer that had high yields but also had a higher cost to serve and higher losses that we sold. And number two, Rob talked a little bit about how we had elevated nonaccruals, which kind of impacted our margin as those were not earning income on the P&L. And when you looked into going forward on the yields, since the end of 2010, really it's been growing as a testament to the increase that we have in the commercial assets. Also, we've been selling some of our low-yielding assets in the student loans side, and the nonaccrual balances were coming down, so those all positively trended. And in the first quarter of the year, you see a little bit of a dip in '12 and that was because of a onetime item that I'll get into later. But the key piece is, if you look at the funding side, it's been a very steady decline down. And the paint on this one, when we talk about the 3.93 that Glenn mentioned, that's really a pro forma, so you'll see that as we go back into the second quarter.

We've been very active so far in 2012 in regards to the funding side, so I thought it'd be helpful to pull all the pieces together and help you kind of understand how we think about it. As you know, we redeemed about $10 billion of our 7% debt so far, and that was -- the sources of funding for that was balanced between secured debt, some unsecured debt as well as cash in a revolving facility. In the first quarter, as I mentioned, our economic margin was just under 200 basis points, and we thought that, that was impacted by a 15 basis point one-timer. So as I look into the second quarter, we expect the benefits of these actions specifically to contribute about 40 basis points to the margin. So based on these actions and kind of normalizing the first quarter, we expect the economic margin to be north of 250 in the second quarter.

With respect to nonspread, I mentioned a little bit before in some of the conversations where nonspread, noncore spread income -- or core nonspread income is very critical to the business model. Last few years, we've had a lot of elevated gain on sale as well as recoveries from our pre-emergence marked to market. So with respect to the core, it's been very stable over the last 9 quarters. And so going forward, the key drivers to our nonspread really come from each one of the business units. So in Vendor and Transportation, as Ron and Jeff both talked about, it's really around residual realizations. So off-lease equipment is a key driver of the business model as well as other fees that come out of that process. Jim Hudak talked about in corporate finance, as a we get more agency roles and other positions within our customer relationships, that will drive more fee income that will come through. And then Jon Lucas, in the Trade business, talked a little bit about how we make money in factoring. And as I think you take away, it's not just the commissions in the -- or the factoring volume and the commission rate, it's also other fee income that he can generate, which will again come through the P&L as a core piece of our business. Now I'm not saying the others items on this chart are not going to happen but those are going to be much more market- and event-driven and will continue to contribute to our earnings.

Since -- I just want to touch a little bit on the credit side. What our credit team has done has been so tremendous in rebuilding the culture of credit at CIT. I think Rob took you through that and the experience that we have there and the performance we've had and continuing to use that as we move forward. This is very evident in regards to the metric he showed, and this is kind of you overlay the funding, and as Glenn mentioned, as 2 big accomplishments. Again, a lot of that was done by some of the portfolio management actions that we took in regards to selling certain assets. It's a discipline that Rob and the team have put in with respect to our new business origination, as well as we've gotten some benefit from the economic environment the last 2 years. As you see, the chart values [ph] are below our target expectations, but I think Rob mentioned that given where we are in the cycle that, that would be expected.

I'll touch a little bit on operating expenses. I think we've been prudent on our expense management. But as John mentioned earlier this morning, we've really had to build out our infrastructure from a bank holding company perspective in order to position ourselves for growth. So that was a big investment that we did, and I think we're starting to see the benefits of that, and we need to focus a little bit more on getting more efficiency out of that infrastructure build. We just recently hired Andrew Brandman as our Chief Administrative Officer. And one of the key things for him is to help us drive our operational efficiencies going forward. He has extensive experience in doing this in his prior jobs, and most recently, he was at the New York Stock Exchange. Since probably the end of 2011, we started to transition a lot of the expense investment from the infrastructure into the growth platforms. So a lot of the initiatives that we talked about today required addition of people as well as expertise in order to drive that. And if you just look at our model, we feel that we're at a stage where we have a lot of operating leverage. So for every incremental $1 billion of assets we can add onto the platform, we think we can improve this ratio by about 5 basis points.

Sorry about that. Okay. So the next piece is really around our tax position and tax considerations. Get a lot of questions about this. But coming out of the restructuring, we were impacted on several fronts. The Series A debt had covenants in there that were very restrictive, as well as part of the restructuring, we eliminated -- the parent company funding of the subsidiaries were eliminated, especially our foreign subs. So as we redeemed the Series A debt at the end of 2011, it really gave us the opportunity to address these balance sheet items. So we've been very focused over the last couple of quarters on 3 major projects. One, is repatriating cash from our foreign subsidiaries that we can use to pay down high-cost debt. We had to reestablish a lot of the debt funding for each one of our subsidiaries to make sure that they're capitalized properly. And then we also focused on enhancing the management of our intercompany activity between the parent company and each of our subsidiaries. While we've made a lot of progress, there’s still a lot to do. So also the pieces in regards to our U.S. profitability, all the actions we're taking on the economic profit in regards to lowering the cost of funds and the new business will get us to a point where the U.S. has taxable income, which we then can offset with our extensive net operating loss. And over time, if we show predictability and a trend and a forecast that is reliable, it is potential -- there is a possibility that we would be able to reverse the valuation allowance at some point in time.

So to summarize kind of the actions in order to get to the profitability targets, kind of have 3 key focuses. One is we need to continue to grow our business with new opportunities and initiatives. We talked about several today. So Jim and Matt talked about the equipment finance and the real estate finance as additional growth opportunities for us. Ron talked about the international growth opportunities we have in China as well as in Brazil. In Transportation, Jeff talked not only about the new orders we can place for both the railcar business and the air business, but also growing some of the lending activities leveraging our expertise. And as Jon Lucas mentioned in the Trade business, we have plenty of opportunity to leverage our expertise to grow in some other segments that are outside the retail side. We are very disciplined, though, in regards to making sure we're allocating our capital to those businesses and products that meet our return expectations. As well as with Andrew's addition, we're going to be very focused in regards to optimizing the infrastructure build that we've done over the last couple of years. And last, we still need to continue to drive down our cost of funds. We've made a lot of accomplishments. But between what Ray talked about in regards to growing the deposit base as well as some of the other activities that Glenn mentioned in regards to furthering the reduction of our cost of funds, is really critical to us. We want to earn back our investment grade rating and also, we're going to continue to expand the bank's capabilities. So we believe all those actions will bring us closer to the long-term targets that we've laid out.

So next, I'd like to move onto capital. As you see from this chart, our capital position is very strong at the bank holding company as well as at CIT Bank, particularly when you compare that to our peer group, as well as some of the commitments we have made to our regulators. Our capital is predominantly common equity. So in terms of capital allocation, at the end of 2010, we went through an extensive process on economic capital for each one of our business units. The output of that you see on the lower right hand side, each one of our businesses have differentiated capital based on a risk profile, as well as other attributes. And again, within those business segments, each product within that also gets a different capital allocation, so this is really the summary. And the excess capital that's not allocated based on those businesses is dissolved at the parent level. Now, with respect to when we went through this, we report on a Basel I perspective, but we have taken into consideration all the tenants and all the expectations around Basel II and Basel III, even though we're not required to at this time. But we thought it was prudent and it helps us in regards to our thinking.

So around capital, we get a lot of questions about how you think about capital allocation. I know this is kind of fairly simple, but I just think it helps in regards to how we think about things. Again, our primary focus, and I think what you've heard today, is we want to deploy the capital into the those assets that generate the returns that we have across each of our 4 core commercial businesses. On the capital generation side, as we continue to improve our economic margin, that will drive our earnings and build capital. Jon mentioned this morning we still have about $500 million left of FSA discount on the $4.6 billion of high-cost debt we have. And so that -- based on the timing of retiring that debt, that FSA discount will come into the P&L, which will kind of take down our capital at that point in time. So looking forward, as we've talked many times about between the net of our capital deployment and our capital generation, if we're in an excess capital position, it's our responsibility to make sure that we return capital to our shareholders in the most efficient way.

So in summary, we've really positioned the company for growth over the past 2 years. I hope you feel that way when you walk out today. Our key financial metrics are trending towards the long-term targets we've put out there. We have solid capital and liquidity, and we've made good progress building out and diversifying our deposit-gathering activity. With that, our last presenter is Nelson Chai, who is named President of CIT last year. Nelson and I joined CIT about the same time in -- he joined in June of 2010, I joined in July 2010, and he has been a great partner to work with. Nelson has held several leadership roles at Merrill Lynch, the New York Stock Exchange, as well as Archipelago. So with that, I'd like to introduce Nelson and have his concluding remarks before we take questions.

Nelson J. Chai

Thank you, Scott. So as Scott mentioned, as soon as I’m done with my remarks, we will take questions, both Ray and Glenn and Scott and I. On behalf of the management team, I do want to thank everybody here for their interest and their support of CIT. I know it's been a long day when we shared a lot of information, but we're I'd like to start is actually where John started, in terms of what were our objectives today. And it really was to share our story, to show you our business leaders, to have them tell you where -- how well we're positioned today. We shared a lot of information. I hope you got from our management team both our experience, but importantly, the enthusiasm that our business leaders have for our business. If you think about how CIT competes and if you think about the business presentations you heard, the couple of words that you heard mentioned frequently were expertise and relationships. We hope they all offered you insight in terms of how they're positioned for future growth. And with Scott's presentation, you got a better sense of how it all comes together in terms of both delivery earnings power, profitability and most importantly for us, shareholder value. This is an interesting chart for us because it really kind of takes shape of where we are today. And you heard a couple of times today that CIT is over 100 years old as a company. It's interesting for us because the most recent chapter really began in 2010. That both marked the emergence of the company from bankruptcy as well as the arrival of John Thain as our Chairman and CEO. John talked this morning about the progress we've made against the initiatives on the left and they very much reflect the company that is rebuilding. We largely rebuilt much of the corporate management team. As Scott mentioned and John mentioned, we restructured and optimized many of our businesses and believe they are now positioned for growth. The progress we've made on the funding front, led by Glenn and Scott, has been tremendous, and the ability to refinance or restructure $26 billion of debt in a little over 2 years, I think, exceeded anybody's expectations. You heard -- you listened to Rob Rowe talk about the advancements we made in our credit organization, and I can tell you that we've also done the same throughout other major control organizations throughout our company. And lastly, in terms of expanding the CIT Bank, I think Ray was very enthusiastic in terms of talking about the progress we've made there. I think the important things really are both the rollout and the successful rollout of our Internet offering as well as our ability to initiate almost all of our U.S. loans and leases out of the CIT Bank today. I think that's a tremendous accomplishment.

And while we're very, very happy with the progress we've made today, we recognize there's a lot more to do. But for us, we believe we're heading towards a new chapter. And if you think about with how John started today with what our objectives are and you see them up here on the right, they truly are a company that has turned a corner. Our focus now, and if you talk to all 3,500 CIT employees, is really on how we grow or profitably grow our businesses. You heard today from our business leaders today how they plan on doing so. We are focused now on improving our profitability. For us, that means a combination of maintaining our attractive yields, continuing to improve our funding costs, make sure that we have the most -- the best credit process around, and as Scott alluded to, we are going to focus much more in terms of overall productivity for our company now with the hiring of Andrew. We will continue to work on our regulatory relations and continue to enhance our internal control functions. And we believe we will make progress against the financial targets that Scott just laid out.

If I just take a quick summary of our -- the businesses, I'll start in reverse order. I think Jeff did a great job of talking about the Transportation business and the success that we've had. We truly believe we have the best management team in the business. It's predicated really on the ability to manage through the different economic cycles that they've faced over their long tenures with the company. And if you look at the utilization rates, whether it'd be on our air business or our rail business, you can see here that it really is the cornerstone of our success. In our largest business in our Transportation -- the commercial air business, Jeff shared with you the inherent growth that's coming from air traffic in developing countries. And I think the best way to describe kind of the way Jeff runs his business is really his comments, not mine. He talked about the fact that they're not married to building their assets, they're actually married to making money. And I think that's what's proven for their success.

This thing right there, sorry. Ron spoke a little bit about the Vendor business, and in there, what's really important here is really our global reach. For us, it's really about managing our global partnerships, augmenting them with local programs. That allows us to have the operating scale to profitably serve our clients. He highlighted 2 specific growth opportunities; Brazil and China, and in both of those markets, the markets are growing incredibly fast and offer attractive yields. What's interesting about those markets, and Ron alluded to this in his comments, was that in Brazil, it's really the global programs that are driving the growth, whereas in China, it's local programs driving the growth there, and again I think it shows the strength of our program there.

On the Trade Finance side, I think everybody enjoyed learning a little bit more about factoring today. We're very proud of our leadership position. I also want to congratulate and thank John Daly for his over 38 years of service and leadership to our company. We're very, very proud of the leadership position we have. We know the important role that factoring plays in driving small and middle market businesses in the retail sector in this country. We are very confident that Jon Lucas will continue in the great leadership path that John Daly has set. And to use his analogies, not mine, and having played golf with John, I think it's both literal and figurative, we are very confident in Jon's ability to keep the ball in the fairway, hit the greens in regulation, and make a lot of pars for the company.

And finally on Corporate Finance. Earlier you heard Pete and Jim and Matt talk, and what you heard them talk about was industry expertise, strong and deep sponsor relationships coupled with strong underwriting, and that's our formula for success. And we know and we're very proud of the fact that we are playing a critical role in providing financing for aspiring middle market companies who are the cornerstone for this economy. And while we do and are focused on making money, we take a lot of pride in the fact that clients like Ernest Health are doing not just doing good things for their shareholders and for their borrowers, but also in terms of providing service to their community.

So when people ask me, why CIT, why -- a few people actually have to stop me in the hallway and what do I think of the story? It really boils down to 4 things. And these are the 4 things that I hope that you walk away with. We really do have the ability to originate high-yielding assets. I hope that you got a sense of the culture of credit we have here because we do believe it's differentiating and it permeates our whole company. In many companies, credit is a middle office-type position, I promise you at CIT it's in the front office. And you heard Rob say that he breaks ties. We continue to improve our funding profile, but we know that there's more to do here and we are focused against that. And we do believe our strong balance sheet and capital position is a competitive strength in today's environment. As I think about the world in which we operate today in, in a low interest rate environment, the benefits of originating high-yielding assets is clear. Every day, we read news about what's going on in Europe, and the fact is, is that our European exposure is very manageable. And finally, the -- we all, every day, live with volatility in the trading world. Well for us, we don't run a trading book and we do believe that our assets are more than prudently marked, and really what that allows us to do is really focus every day on just serving our client needs.

So again, I'll steal one more on John's slides in terms of my close here, which is really what I hope you walked away with. And I do hope that you met and having met and spoken and heard from all of our business leaders that we really are well positioned for the future. I do encourage you to stick around for lunch. I know it's been a long day, but you'll have the opportunity to interact some more with them and learn a little bit more about them as well as the businesses we're in. The one thing I do want to apologize for is John Thain will not be able to be at the lunch today. This meeting was set some time ago and fortunately, and I think this is a great thing, he was notified very recently from the National Father's Day Committee, which is actually a long-standing organization that this year is going to honor 5 dads in the 71st Annual Father of the Year luncheon, which is going on right now as we speak. The proceeds of the luncheon actually benefit Save the Children, which is a great charity, and last year Save the Children touched lives of 147,000 kids in the U.S. through emergency programs, through enrichment programs. And so as a father myself, I can think of no greater honor, but again I do apologize on his behalf. So with that, I'd like to open up to some questions first before we get to go eat.

Unknown Analyst

You highlighted 2% growth in the core assets in the first quarter, sequential growth. Can you kind of give us maybe what expectations of the -- what kind of asset growth you can experience over 3- or 4-year time frame in a normal economic environment and what might be some of the macro indicators that would help accelerate or put that asset growth at risk?

Scott T. Parker

Well, I think the overall macro environment, as we've talked about is we're lending to the small, medium-sized companies, so GDP growth and other economic indicators would be a key driver of that. I think in the operating lease business, I think Jeff gave you a little bit of insight in regards to in the rail business, it’s around rail loadings, as well as in the aircraft that's really kind of air traffic. So I think those are the macro trends. So our viewpoint would be -- and each one of the business, different segments -- in the Vendor business, they're kind of growing greater than GDP right now. There's a heavy capital -- CapEx spend. And so as Ron mentioned, the growth rates and the volume is much greater than kind of it was several years ago. But I would say in general, in order to get to our targets, we need to kind of grow -- outpace GDP growth and outpace some of the industry growth rates in order to achieve those asset targets.

Unknown Analyst

Scott, 2 questions. One, when would you anticipate becoming profitable in the U.S.? And post written agreement, what do think is an appropriate capital ratio?

Scott T. Parker

On the one about the U.S. profitability, it's a little bit harder to forecast that. I think -- as I mentioned, around where we are, we have a lot of activity going around reestablishing a lot of the subsidiary structures that we have. I think we've made tremendous progress over the last 2 years in regards to the loss in the U.S. as we've brought down the funding costs as well as transitioning more of the originations out of the bank. I would say that we're on a track. I don't have an exact date for you, but I think we're moving in the right direction. I would just like to clarify this for you that when you look at our book earnings, the one big difference between book earnings and tax earnings is our operating lease book does have depreciation, so there's a delta between the reported book income and tax because of the accelerated nature on the tax side versus on the book side. Second question, sorry?

Unknown Analyst

Capital ratio post written agreement.

Scott T. Parker

Yes, I think as we've said, I mean, how we get there and how much we can -- the trajectory of that going down I think is going to subject a lot to kind of the environment that we're in today. Our economic capital is at 12%. We said that kind of our agreement with the regulators were around 13%, so it kind of gives you the delta. How that comes back and the timing of that is going to be dependent on kind of our capital submission that John mentioned. Some of the stress scenarios that we're doing and also it's a very evolving process right now around capital. But we do believe that we have excess capital, and so we're either going to focus -- we're focused on deploying capital and then also being put in the position where we can get our capital down to where we want to over time.

Unknown Analyst

Scott, when you mentioned that you're overcapitalized as it is and using this $8.5 billion of equity, which is GAAP. If we add back the FSA discounts, that adds another $1.5 billion or $2 billion to your equity base and then we go forward and maybe start to pull the valuation allowance against the NOLs back in, we're really talking about an equity-based substantially above the existing GAAP basis today. And obviously at a 12% capital ratio, that your equity base could support, theoretically, say an $80 billion or $85 billion asset base, which your current growth rate is going to take a little while to get to. So when we look and say what are the priorities on capital allocation, I mean, theoretically, you could, with the FSA gone, you could dividend out or repurchase upwards of half your equity base and maintain the asset base that you have today. I'm just wondering what -- obviously, there are issues around getting capital out of the business right now, but we look at 2, say, 2 years from now, what -- how dramatic would you be willing to act on that?

Scott T. Parker

Okay, so I'll just make one clarification. So, yes, the FSA I talked about, the -- if we've paid back the -- or bought back the 7% debt, that's where that discount would come in quicker. The FSA -- positive FSA I mentioned is mainly on our operating lease portfolio that kind of is fairly straight line over the next 10 years. So that piece you can kind of calculate, we have about $2.8 billion. It’s about 10 years. So if you look at our financial statements, it's about $280 million a year that comes in. With respect to the regulatory risk-based RWA, which is really how capital is determined on a regulatory point of view, is -- someone asked the question in our operating lease business and Jeff, we do put up capital for those future order commitments. We also have to put up capital for some of the unfunded commitments that we have on our asset base. So it's not a one-for-one correlation between our on-book assets and really what our risk weighted assets are. So I think if you looked at the first quarter number, you'll get a multiplier effect between on-book and the kind of our RWA. So over time, you're right, if the growth rates that we're able to achieve will have to look at what the capital we have, we have to go through the process, the regulatory process, in regards to returning capital. And our viewpoint would be is if we don't see the growth opportunities or -- that meet our return hurdles, that we would have to seriously consider at that point in time was the best way to return capital. It could be a buyback, it could be dividend, there's other forms. And two, we mentioned that we're -- today, we're all common equity. So there's also -- as you've seen since the CCAR process had been done, there's been a lot of issuance of kind of other forms of capital outside of equity. So those are all the leverage we have. How that all pulls together in the next couple of years, all we can do is do our best to be prepared for that, and then the amount of that will be dependent on many factors.

Unknown Analyst

Just a quick follow-up. And given what the equity is trading, the overall gist of this presentation today has been growth and growth, growth. You're talking about making portfolio acquisitions out in Europe. How do you look at volumes, say, at $0.90 all around the European loan portfolio versus buying back stock at 2/3 of sort of tangible book? And just what is the governance structure or the shareholder focus at this point of the organization?

Scott T. Parker

So as you know, given where we are today under the written agreement, it's kind of the key item we have is making sure that we're putting assets on the books that meet acceptable returns to our shareholders. And as you've seen, we've pruned assets that have not been at those levels, which has built up our capital base. So with respect to that is we got to keep focused on making sure we're using our capital that we have today to achieve returns that our shareholders expect. And the timing -- John was here, at these levels, yes, if you were below tangible book value, it would be great to be able to buy back your shares. But again, that process is not something that we have the ability to do today, and our process would be, as he mentioned this morning, would be to have a discussion as part of our capital plan in 2013, and then it's going to be just a matter of how much capital can be returned and the timing of that versus we're not very focused on this.

Unknown Analyst

Just a couple of questions. One, just thinking about your net margin and your target is, I guess, 3% to 4%, so you're about 150 basis points under that currently, and then you had a chart looking at the 2 components, portfolio, yield, cost of funds -- well, you've obviously done a herculean test on the liability side, your asset yield has been relatively flat. So if I think about the focus that you guys have on your credit controls, I don't think you're going to be stretching to underwrite riskier portfolio loans. So how do you basically get that asset yield off from where it is now?

Scott T. Parker

Well, as we've mentioned, if you look at the chart that's up on the -- we were going -- we went from 5.8% to 6.5%, and as we said in the first quarter, we had that onetime true-up that was in that line item. So let's just say that, that was at 6.5%. We just sold some more student loans, so we still have a large proportion of our assets. Even after the sale of the student loans, we have over $4 billion of low-yielding assets. So I think that's one opportunity to improve our yields. I think Jeff mentioned in the rail business, we've continued to see improvement in our overall yields in the rail business. And then I think part of it also is the growth in the Vendor business. So I think there's opportunities for that. It's not -- there's going to be competitive forces there. So the one that we have a lot more control over is driving down our cost of funds. But the range of 3% to 4% is also a combination of our business mix at that point in time.

Unknown Analyst

And sorry, just on the liability side, the funding mix going forward a lot of the shift is into the deposit base. And you showed a bunch of charts about online banking and all that, but everybody is looking at the same charts that you are, and I know there's been a lot of other entrants from big companies, I think GE, American Express, everybody is starting an online bank. So how do you get the growth that you need given that competitive landscape?

Unknown Executive

Ray, you want to cover it?

Raymond Quinlan

In this case, first of all, that if you look at industry as a whole and then split it into Internet and non-Internet, which is an increasingly porous dividing line, that industry as a whole you would say is overfunded with deposits. And so as I said at the start of my talk, we are atypical on a variety of ways, and the organizations that you've mentioned who are either announced or just had launching of Internet efforts, you look at their share of the overall marketing in the United States, there's about $6 trillion in savings, are really quite small. And the growth of the Internet deposit base, which as I said is increasingly permeating into what's Internet versus what's physical, as people think about those 2 things as interchangeable, has been growing at over 12% per year. And so the market is still, in aggregate, overfunded, and whether the Internet will take deposits from the physical world, which it has been doing and will continue to do, at what rate in order to fund our competitors, that's one thing. But secondarily, the players that we're talking about are the exception, not the rule.

Scott T. Parker

I think we have time for 2 more questions.

Unknown Analyst

Scott, I guess, John mentioned again this morning acquiring a bank could be interesting -- you've mentioned that in the past. What types of qualities would you find interesting in an acquisition first or potential?

Scott T. Parker

So I guess we would be looking for companies that have good deposit basis, and we're interested in ones that actually have good business origination. And so the challenge in today's world, as you know, if you look at all the different banks out there is the ones that actually have that formula are trading at 1.5 to 2.5 to 3x book value, and so we also are cognizant in terms of shareholder value and dilution. So I think the challenge is going to be trying to find one of those. And so we -- I think there will be opportunities. There are things that are out there that you hear about, but again, we are focused really on just getting through the written agreement. We're focused on a lot of the growth that we talked about and continue to build the company out. But we do think over time that there may be an opportunity.

Unknown Analyst

Can you hear me? So after today's presentation, I'm even more convinced that guys you have a terrific franchise.

Scott T. Parker

I'm sorry?

Unknown Analyst

Can you hear me?

Scott T. Parker

Yes. I'm sorry, could you repeat it?

Unknown Analyst

Yes. So after today's presentation, I am even more convinced than before that you have an incredible franchise, yet the stock is trading, as someone mentioned before, to serve a value depending on what adjustment you make. So as you -- to think about creating value, you can continue obviously as the business plan as a stand-alone company or you could also try to maximize values through, I don't know, by selling the company. And when you think about time value of money and you think about the execution of risk [ph] , it seems to me that selling the company to larger institution with deposits -- these very cheap deposits create a huge amount of value for shareholders. Just curious how you think about these issues and these [indiscernible].

Scott T. Parker

So I think we've always been shareholder-focused, and I think the whole management team is, and I think even -- and John and I have worked together in the past, and I think we've proven even during the most challenging times to think about our shareholders first. And so I think, a, we have that track record. The second thing I would say is that if you look at the landscape today, there just aren't a lot of things going on in the M&A world. And so to the extent that someone came to us, we would have -- it would be our fiduciary obligation to consider something. But in the meantime, I think what we're going to do is we're going to continue to build our business. And by the way, all the actions we're talking about only continue to enhance shareholder value over time. And so you can't control certain things, and so we will just continue to build our business out like we're doing and we think that, that is the best use of shareholder time today and we continue to. To the extent something came down the line, yes, we would have to. But again you're talking very theoretical, and in today's world, I think in terms of bank acquisitions, at least to folks I speak to, I think a lot of people are wading through the new regulatory construct and how it actually resolves. I think you have people working through their CCARs and making sure that things can get done there. And then -- but so I think in the meantime, we're going to continue to rebuild our company. As I said in my comments, we think we've turned a corner and we are really just focused on continuing to build out our business, and we think that, that path alone will deliver good shareholder value.

Kenneth A. Brause

Well, I know there's still some more who are interested, but in the interest of time, we've already run over. I think we're going to have to end the formal program here. I want to thank Nelson, Ray, Glenn, Scott and the rest of the team. I hope we achieved our objectives we bring today. I also hope that you will join us for lunch, which is going to be available at the atrium. I will have 2 rooms set up and the management will be divided between the 2. And also just one final plug, too, is if you could please fill out those anonymous surveys, both sides and hand them in and to get your CIT mug. This concludes our program. Thank you very much.

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