CIT Group Inc.
Q3 2007 Earnings Call Transcript

Published: 17 Oct 2007

[Operator:]

Good day, ladies and gentlemen and welcome to the Third Quarter 2007 CIT Earnings Conference Call. My name is Turlisha and I will be the operator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Ken Brause, Investor Relations. Please proceed, sir.

[Kenneth A. Brause:]

Well thank you, Turlisha and good morning everyone. And welcome to the CIT third quarter earnings call. Before we get started, I would just like to ask that during the Q&A session, in order to be efficient that we limit our questions to just one and if you have a second question, so please return to the queue and we will do our best to get back to you if time permits. Certain elements of the call are forward-looking in nature and relate only to the time and date of this call. We disclaim any duty to update these statements based on new information, future events or otherwise. For information about risk factors relating to the business, please refer to our SEC reports. Any references to certain non-GAAP financial measures are meant to provide meaningful insight and are reconciled with GAAP in the financial tables accompanying the press release. For more information on CIT please visit the Investor Relations sections of our website at www.cit.com. With that, it's my pleasure to hand the call over to Jeff Peek, our Chairman and CEO.

[Jeffery M. Peek:]

Thanks Ken and good morning everyone. I know we gave you a lot information to digest this morning. During an already busy earnings period. Joe and I are going to do our best to cover the highlights and put the pieces together in our remarks. And then, we can use the Q&A period to clarify, any remaining questions you have. With the benefit of all the information, we've given you, I think you can see that our actions represent an integrated solution to several issues. Mortgages, funding, debt ratings, and capital. We made significant process in re-inventing our home lending exposure. We are raising capital through the $600 million mandatory convertible issue and all four rating agencies affirmed our ratings and outlooks this morning, a very positive action for us. I'm confident that these solutions will benefit all CIT stakeholders over the long-term. Our strong balance sheet and solid debt ratings enable us to access competitively priced funding. So, that we can profitably grow the business and improve returns. With the benefit of hindsight, should we have predicted the fact pattern, that emerged during the quarter and particularly September. I really don't know. Between the pull back and market liquidity, credit market issues and the deteriorating housing market the fact pattern was very dynamic and changing rapidly. I know, that we visited with many of you in August. Now, a number of these factors shifted meaningfully much later in the quarter, if not after the end of the quarter. And this influenced our decision making. To me a successful franchise is one that can adapt the changes and as they occur and that is exactly what we have had to do over the past few months. I think, the results of our core commercial franchise businesses this quarter were outstanding, given the shifting market and other distractions we faced. Our commercial businesses grew revenues on asset growth and higher fee income. And commercial credit quality remain strong. Now, I want to come back to these franchise businesses. How they performed and what you should expect going forward. But first let me spend a few minutes, highlighting the progress, we made around the home lending portfolio. Our goal was to develop and execute a strategy that would maximize, the economic value and minimize the ongoing impact of the home lending business. So, that we could focus on our core commercial franchise and I really think we have done just that. In August, we announced that we closed our origination network consistent with our desire to get out of the residential mortgage business. With less liquidity and fewer interested buyers, we opted the whole and liquidate most of the portfolio over time, rather than execute a sale of the entire portfolio at distress market prices. Accordingly, we transferred about 90% of the mortgage receivables back to assets held for investment at the end of the quarter. We continue to believe that our portfolio will perform better than the industry averages. As Joe will discuss in more detail, we securitized a majority of this portfolio and raised over $5 billion in proceeds, which not only satisfied a substantial amount of our second half funding needs at attractive rates but also validated the quality of our portfolio and underwriting. And as you know, we have our own dedicated servicing function in Oklahoma for this business and we'll be intensely focused on using this great resource to ensure, we receive the best economic value from these loans. Now, we did read the riskiest 10% of the portfolio, a little over $1 billion in unpaid balances and held for sale... assets held for sale at September 30th. As the market bid for these loans aligned better, with our own internal valuations. This portfolio contains almost all of our non-performing loans and I am pleased to tell you, that we contracted to sell about 875 million of these non-performing loans earlier this week, at approximately the adjusted value of those assets at September 30. And we structure the sale, so that we will get additional upside, if the portfolio outperforms certain parameters, while eliminating any potential downside from the continuing deterioration and home prices. Now, I think as most of you know, accounting rules required us to mark to lower our cost to market, the entire home lending portfolio in the third quarter. As a result, we recorded $465 million fair value adjustment, which Joe will walk you through in a minute or two. Accordingly, this charge clearly had an impact on our capital. And I assure you, we remain committed to maintaining strong ratings and capital levels, which are critical to executing our entire corporate strategy. To that end, our $600 million mandatory convertible offering further underlines this commitment. Due to SEC regulations, I am not able to make any further comments on this transaction on this call, but more detail can be found in the press release. And again, all the rating agencies affirmed are single A termed debt rating in our A1, P1 commercial paper ratings and outlooks. By way of these actions, we've eliminated the downside exposure on the riskiest part of the portfolio. Enhanced liquidity, through the securitizations and have retained the upside potential on the entire portfolio, should market conditions improve. Further, I am confident of our ability to maximize returns through the liquidation process going forward with our Oklahoma City facility, and now we can turn our attention to our core commercial franchises. I would like to discuss the results of these businesses. Excluding the home lending segment, we earned $1.29 per share this quarter. We grew assets over $4 billion quarter-over-quarter, commercial credit quality remained solid and our expenses... our operating expenses declined. The benefits of our diversified business model, which should enable us to deliver earnings growth through all cycles, has never been more evident or resilient than in this past quarter. While risk was re-priced across a number of markets and there was a significant reduction in liquidity, CIT's businesses continue to be robust with new opportunities in a number of regions and businesses. And let me spend a few minutes on each of our segments. First; Corporate Finance, where the market dynamics are the most fluid. We had significantly lower loan syndication volume here as a result of the liquidity pull back, which you have all read about. I'm pleased to say that none of our deals got hung up in syndicate and we successfully worked through our pipeline avoiding the charges incurred by some of the competition. Finally, offsetting this contraction and syndication opportunity were strong M&A advisory fees reflecting the contribution from Edgeview Partners, the company we acquired in July. Prospectively, with reduced competition and better market dynamics, new loans are being priced at spreads which are at least a 100 basis points better in spread than three months ago. And with much better terms, much stronger covenants for the lender. In fact, in Corporate Finance, we grew assets by over $1 million in the quarter. The revenue stream however is different. Today's originate and hold approach, results and revenue recognized over the life of the loan as compared to the originate to sell model in which roughly 35% of the revenue is recognized upfront at origination. The trend is clearly toward more club deals in which strong relationships enabled us to get deals done. Building economics are shared more evenly than in a traditional lead agent and deal. I do feel very good about our opportunities in Corporate Finance as we leverage are industry expertise, our brand reputation and our strong relationships in the narrow market. The M&A pipeline remains quite strong and our restructuring advisory group is poised and ready to take advantage of market opportunities as they arise. Now, returns in Transportation Finance, our planes and trains business increased sequentially to 17% this quarter. The aerospace market remains very strong. In fact, every plane that we own today is on lease and all of our future deliveries into 2009 are spoken for, already committed. This length of commitment is unprecedented for CIT. In the quarter, aerospace financing volume was strong and we took delivery and placed on lease four new aircrafts. The order book is solid and well priced averaging a billion dollars of plane deliveries annually for the next 5 years. Relating to inflation remains historically strong at approximately 96%. However, softness in the residential construction sector is impacting demand for related car types. That said, our team has done an excellent job maintaining a very desirable fleet and pushing out lease terms in terms of renewals. We are in a great position to opportunistically add to our fleet based on market conditions. Returns in the rail business are strong and should remain attractive into 2008. Now, let's talk about Trade Finance. Factoring volume here was seasonally strong with assets growing over $1 billion during the quarter. Assets were up 6% from a year ago, with commissions coming in flat due to tighter spreads and competitive conditions. With oil prices high, the housing market influx and unseasonably warm weather impacting the sale of fall and winter merchandise, I would say there is definitely some conservatism in retailer outlooks for the holiday season. However, returns in this business continued to be well above hurdle and actually increased to 19% this quarter. We are a market leader in this business and expect it to continue to throw off significant cash and generate high returns. In fact, this is one business where demand and pricing for our services increases as the credit cycle turns and credit conditions deteriorate. Vendor Finance; we continue to invest in our global Vendor Finance business as it is a key driver of long-term growth. Specifically, we opened our Shanghai servicing center, expanded our Pan-European servicing center in Dublin, and increased staffing levels in Jacksonville to handle the added volume from the Citigroup acquisition. We are also in the midst of integrating the Barclays acquisition which has taken a little bit longer than expected. Current returns of 13% reflect these recent investments. Now, the good news is that the health of the underlying franchise remains strong. Volumes were up 48% from a year ago for all non-debt related businesses worldwide. And if you also strip out the volume from the Barclays and Citi acquisitions, we still grew 16% organically versus last year. We expanded our Sun Microsystems global program relationship to Mexico, Brazil and China. Additionally, we will realize some of the acquisition cost synergies from Barclay and Citigroup in the fourth quarter. And finally, an update on student lending. Our team did a great job delivering record new business volume and what is seasonally the most important quarter of the year. School channel originations were up 17% from a year ago and that is important because with the new legislation in-school originations are far and away, the most profitable for us. The legislation, it came in largely as expected. We are monitoring the competitive response to the changes in our... restructuring our business model to maximize profitability. For example, sourcing consolidation loans through select channels may no longer be economically viable or profitable. As a result, we stopped most of our direct marketing for this consolidation product and will be reducing expenses accordingly. In summary, CIT had a very productive quarter, we made decisions and took actions on our home lending business that should mitigate your longer term concerns. We also secured our funding and capital positions and at the same time grew our commercial businesses. We continue to advance our strategic initiatives to expand internationally, progress our asset manager initiatives and drive operational excellence. I firmly believe that our actions this quarter positions CIT for the type of continued long-term success we've enjoyed these last few years. With that, I'll turn it over to Joe for a more detailed review of home lending, funding and our third quarter financial results. Joe.

[Joseph M. Leone:]

[Operator:]

Thank you. [Operator Instructions]. And our very first question will come from the line of James Fotheringham with Goldman Sachs. Please proceed.

[James Fotheringham:]

Thank you. Jeff, could you give an update on your plans to IPO the aircraft portfolio; are there any changes with respect to timing, size or structure and also on the strategy for student lending. Should we be reading anything into your transfer of small business out of the consumer segment, where student lending now sits alone? Thanks.

[Jeffery M. Peek:]

Yes James, good morning. First, on your first question. I think I can say; no change. We are in a registration side, so I can't expand more than that. No change in market condition. On the second question, I wouldn't read anything more into that other than we frankly from a credit adjudication perspective found that the SBA loans fit better with the kind of the Corporate Finance credit environment as opposed to that there was... each deal was a little bit of individual analysis as opposed to flow businesses where we could scorecard the business. So we've moved it over the Corporate Finance and we think there could be some synergies. We've already done some financing for some of the franchise companies where we finance the franchisees through SBA. So, we just think it's a better fit. I wouldn't read anything more into that.

[James Fotheringham:]

Thank you.

[Operator:]

And our next question comes from the line of Eric Wasserstrom with UBS. Please proceed.

[Eric Wasserstrom:]

Thanks. Joe if... in terms of the capital do I understand that there's basically three unique capital events going on. One is the $8 million of common sold yesterday and the second is the $80 million piece that's related to that that you have some option early around or should say some flexibility and then the third is the $600 million convertible? Is that correct?

[Joseph M. Leone:]

Yes, let me be clearly because I don't think I was as clear as I could have been in my script, that's... Eric you have it right. We did issue $8 million of equity yesterday to satisfy the dividend due in December. As we look forward to the fixed charge coverage ratio calculations, we wanted to make sure that we put this issue out of investors concerns. So we have an agreement with certain underwriters where our option we can issue up to $80 million going forward over the next year to satisfy any other trigger issues that we would have over the next 12 months. So its 8, it's actually raised, 8 is a commitment we have from underwriters that we have not realized or actualized on yet. We will see how the next several quarters go, but that should dispel the fears of any problems with the trigger. And then lastly the other capital raise is the $600 million that you referenced, Eric.

[Eric Wasserstrom:]

Okay, so one quick... I may have misheard you but it's 8 and $600 or 880 and 600.

[Joseph M. Leone:]

Thank you, Eric. It is 8 done. 80 of forward commitment. We may or may not do that and 600. Three discrete events.

[Eric Wasserstrom:]

Got you. Thanks and if I can just get one more point of clarity, as you look back in terms of the... managing through this home equity, disposition, if you had... is there some way that that could have been accomplished that you can see now that might have avoided the capital hits and the violation of the coverage ratio?

[Joseph M. Leone:]

Well Eric, I think the economics are where the economics are overtime. Having said that, the classification as assets held for sale require slightly different accounting or different accounting than assets held for investment, so therein lies I think the answer to your question.

[Eric Wasserstrom:]

Okay, thanks very much.

[Operator:]

And our next question comes from the line of David Hochstim with Bear Stearns. Please proceed

[David Hochstim:]

Yes, just following up on the home lending portfolio, could you give us an idea what the delinquencies and some of the credit metrics would have been on a pro forma basis for the assets that were sold in the last week, you said those were I think the worst of the assets that have a material effect on credit profile?

[Joseph M. Leone:]

Yes. I would say that... what I can tell you is that the assets that we sold had significantly different characteristics, demographics than what we retained, the FICOs were lower, the LTVs were higher, the amount of full doc was lower and those are a couple of items. And I would say a substantial portion of our delinquents reside in that portfolio.

[David Hochstim:]

So roughly, I mean, of that $1.2 billion that you show as of September 30th how much would be that 800 or how much is sold?

[Joseph M. Leone:]

I don't have the exact number with me. David, I think it's about 60% or 70% of that I believe.

[David Hochstim:]

Okay. And then sort of related to that, could you just explain the decision to retain the entire portion of the assets investment, so is there someway... so Freddie Mac purchased... on their books they purchased the $4 billion plus, you are holding those on your balance sheet as well, if you account it for that as a sale and you just retained the other piece on balance sheet, would that have generated higher mark-to-market losses at September 30th or is there some reason you didn't want that another to stuff off the balance sheet to free up capital?

[Joseph M. Leone:]

Let me try this because I think since we did the Freddie Mac deal there has being some confusion on this. About $6 billion of collateral was pooled and transferred to a bankruptcy-remote trust. And in that trust these securities were tranched... were tranched. We hold all the securities. We sold the AAA level of the securities to Freddie Mac. We continue to hold the securities below that level. So well it was not a sale of the assets to Freddie Mac. The assets are in effect encumbered for there life. So, we have no flexibility on the entire asset pool to sell down those assets to any one else until the clean up call, they are in the requirement to move them to assets held for investments. The same is true for the transaction, we did in October.

[David Hochstim:]

Okay, thanks.

[Operator:]

And now our next question comes from the line Matt Burnell with Wachovia. Please proceed,

[Matthew H. Burnell:]

Good morning gentlemen. Just a quick question, in terms of funding needs for the next quarter or two. Joe could you give us an update as to how you see, your funding needs both the secured and unsecured over the next three to six months, sort of your thoughts about, how you are going go about financing that?

[Joseph M. Leone:]

Yes Matt. As we look at our funding needs, we made a significant amount of progress over the quarter. As we look out into the fourth quarter it... we were... it depends on what happens with asset growth. But we would... based upon our current thinking, we continue to look at additional student lending securitizations. We continue to look at equipment finance securitizations. We continue to think that certain of our transportation segment is eligible for secured financing. And we would continue to plan on doing our borrowing in the secured market. Having said that, the money will raise from the sale of the portfolio from the capital raised transaction that's in the press release. And hopefully some other sales, that we are going to... we mentioned in terms of holding some of the additional assets held for investment. I think between those that would satisfy our funding needs for the rest of the year. Having said that, we are still looking for the right opportunity till we get into the unsecured term markets, with a term dealer size, our expectation is to hold commercial paper at about where it is right now in the $3 billion or so level.

[Matthew H. Burnell:]

And in terms of your funding needs about the first half of '08 any thoughts on those?

[Joseph M. Leone:]

No... I mean yes. We would like to get back to a balanced way of doing, I don't have the numbers handy at my finger tips, you can follow up with IR, in terms of those needs.

[Matthew H. Burnell:]

And just one --

[Operator:]

And now our next question comes from the line of Chris Brendler with Stifel. Please proceed.

[Christopher Brendler:]

Hi, thanks good morning. There is some specialty around the segment such as these small business, I mean the Corporate Finance. But can you just comment in both Corporate Finance and Vendor Finance the NPAs and delinquencies were up pretty significantly, sequentially. I'm calculating that you actually took down reserves, the provision was actually less than the charge-off in both those segments. Can you just give me a little comment or color. How do you feel about the NPAs are this lower loss content NPAs. How do you feel about credit in those two segments?

[Joseph M. Leone:]

The noise in those numbers relate to the amount of assets that are in syndication or in assets held for sale. As I mentioned earlier, the credit provisioning overall at this company level was in excess of charge-offs by some $17 million. In terms of the specifics, I mentioned in Vendor Finance, we feel that the delinquencies for the most part relate to lower... higher quality receivables, that have delinquencies for administrative reasons that we need to have cleaned up relative to integrations. And on Corporate Finance based upon the amount of collateral and the observations we have on the FAS 114 or the loss element of those receivables. We still expect fourth quarter, credit quality to remain very, very stellar. So, to be briefer about or summarize the answer, while those delinquencies and NPAs are higher. We think that lower loss content NPAs. Secondly, overall you got to look at the overall company, we are at the top of the house. We've built the delinquency... I'm sorry we built the loss reserves, because of the increase in delinquencies.

[Christopher Brendler:]

Okay. A separate question if I may, a clarification, you said that in your outlook for the fourth quarter that you... the pipeline for fees, particularly good. Somehow, I am struggling a little is, just exactly how we should think about the syndication business, you mentioned, you didn't have any hung deals in your comment on the outlook for fourth quarter, sort of struck me it's encouraging. What do you see on that front, I mean, I would think, that you see a lot less deal flow, a lot less activity, lot less... as Jeff mentioned, less opportunity to lead managed deals. And that would put pressure on fee income. But it sounds like, that's not the case, can you help clarify that?

[Jeffery M. Peek:]

Chris I think one of the comments that Joe and I made, we are seeing a much better than projected pipeline of deals for Edgeview, which we feel take up some of the slat if the syndication market, doesn't continue to improve. We... as always, we see some improvement in the syndication market, over the last 3 or 4 weeks. So, I think in terms of higher fee income opportunities it is... the fourth quarter is always a good quarter for factoring. So, we get those commissions, I think Edgeview will have a better than projected quarter. And I think that fees for Corporate Finance will probably be better than where they were in the last half of the third quarter, with some projection of improved conditions in the syndicated loan market.

[Christopher Brendler:]

One final follow up, if I could, just in terms of the credit crunch and its impact on your business. Any signs of a slow down, as you went through the third quarter or broader economic slowdown?

[Jeffery M. Peek:]

Yes, I think, you are seeing it in the big retailers. My comments on where we saw the holiday season going for retail, we started the year at 99% utilization in rail cars. We are at 96% which historically is still above average for the industry. But it's a very interconnected economy, home building slows down and our center being rail cars become a little bit softer in terms of availability.

[Christopher Brendler:]

Okay.

[Jeffery M. Peek:]

I don't think it's dramatic. But I think we are seeing a gradual slowdown.

[Christopher Brendler:]

Thanks.

[Operator:]

And now our next question comes from the line David Nedson with LGIMA [ph]. Please proceed.

[Unidentified Analyst:]

Hi, did you release the actual fixed charge coverage ratio calculation. What it was or if you haven't, could you give us an idea of the magnitude of the miss?

[Joseph M. Leone:]

No, we did not disclose that yet. Clearly, it's below 1.1 and we will disclose that in our 10-Q.

[Unidentified Analyst:]

Have you disclosed it to the rating agencies, I am assuming given their comments today regarding the credit --

[Joseph M. Leone:]

Yes, we went over our numbers in details with the agencies, yes.

[Unidentified Analyst:]

The forward agreement that you have entered into over the next year to fund the preferred and the junior subordinate security, is it automatic or does it... is it triggered by the ratio point below 1.1 or if you could describe. How that actually gets executed?

[Joseph M. Leone:]

Yes the... the option is ours to sell the stock to the underwriters. Whether we breach the trigger or not, but the agreement is there. If we do breach the trigger and that's our intent to use it, if we breach the trigger.

[Unidentified Analyst:]

One last question with all the news of this MLIC, I wanted to understand your perspective as to how it will have impact CIT, is it a positive and that it provides liquidity overall for the ABC market and for... it's good for you or is it negatively. It's only for kind of the club that has putting it together, is it neutral. Does it really impact you.

[Jeffery M. Peek:]

I think it's probably a plus. I don't see negative for us, I think it adds liquidity to the markets, some of the participants they are being talked about it also sponsors for some of the multi-seller conduits that we are in. So, to the extent that, gives them liquidity that probably and directly helps us.

[Unidentified Analyst:]

Thank you.

[Operator:]

And now our next question comes from the line of Howard Shapiro with FPK [Fox-Pitt Kelton]. Please proceed.

[Howard Shapiro:]

Hi, I wondered, if I could just ask you a strategic question. It seems pretty certain that you have adequate liquidity through year-end and probably sounds like even into 2008. But I think you would admit that, the fact that your predominantly market based in terms of your financing is in a key less heel [ph] for you. And I am wondering if you've given any strategic thought to kind of solving that problem over the long-term. I'm not sure what that would be either maybe buying some kind of small bank or maybe a strategic sale of the Company. I'm just wondering if you could give us what your thoughts are on your funding vulnerability? Thanks.

[Jeffery M. Peek:]

Sure, we think about that, in terms of the model all the time. One aspect of our thought on that was kind of our bank light strategy which is to grow the deposits in our Utah bank as rapidly as we could and we have done a reasonable job with that. I think beginning of '06 deposits there were about $300 million, I think today they are about $2.7 billion down from $3 billion at the high. Our goal there would be to get that to 10% of liabilities and we are working on that. And the broader strategic question about, some sort of bank transaction. We think about that all the time. The sun and the moon and the stars haven't typically been aligned on that topic for us. But it's certainly a centre piece of our ongoing strategy, Howard.

[Howard Shapiro:]

Okay thanks.

[Operator:]

And our next question is from the line of Don Jones with Credit Suisse. Please proceed.

[Donald Jones:]

Great. Thank you. I just wanted to get a reminder on how often that covenants test is done for the 1.1 coverage ratio, is that quarterly?

[Joseph M. Leone:]

Yes, that is.

[Donald Jones:]

Okay.

[Joseph M. Leone:]

That is, and that's again just to be clear, because there continues to be confusion on that. And I want to try to be clear. The forward agreement of $80 million covers us for years worth of dividend payments on the preferred stock and hybrid instruments we have outstanding. It's totally the Company's option as to whether we issue that stock and that stock... that agreement is there purely for the use of procuring that trigger.

[Donald Jones:]

Right, okay. We had seen all three rating agencies come out earlier today affirming ratings. But have they given guidance as to how comfortable they are with your funding as it maybe rather heavily dependent upon secured financing rather than unsecured?

[Joseph M. Leone:]

I would refer you to their written reports. We had a very thorough review with all the agencies. And I have read those reports this morning, and I think there is commentary there is commentary there, I would prefer that you read that.

[Donald Jones:]

Sure, surely. Okay. Thank you.

[Joseph M. Leone:]

And before the operator turns on to another question, David Hochstim had asked a question before, as we look at what we are selling from a 90-day plus perspective about 66% of our 90-day test too would be included in the sale of the portfolio that Jeff described and about just under 60% I believe in the 60-day plus category. So, David hopefully that's helpful?

[Jeffery M. Peek:]

As you can see what we are trying to do here is kind of ring fence the exposure, so the fact that the sale that we contracted this week, we sold the majority of our delinquent loans to a third party, so we want to get that out and it just is a hedge against further deterioration in the housing market and the mortgage market. So, for us that was a big part of the strategy.

[Operator:]

And our next question comes from the line of Sameer Gokhale with KBW. Please proceed.

[Sameer Gokhale:]

Hi, thanks. Good morning.

[Jeffery M. Peek:]

Good morning.

[Sameer Gokhale:]

I guess, I had a question about the guidance, EPS guidance for that you had previously given and does that still stand as you had given it for the second half of the year taken into account the performance of the business in Q3. And also if you could give us a sense for next year, I mean, is it 15% ROE something that you guys are, I think you are shooting for it, but in your view given the performance of several businesses with being below that threshold, is that reasonable goal to assume given still higher funding cost expected at least for next few quarters? Thanks.

[Jeffery M. Peek:]

Yes, we don't... it's not our custom actually to give anything other than annual guidance, with the exit from home lending at the second quarter call we felt that we had give you some sense of what we... where we are going with that home lending, but what we gave you at the second quarter still stands in our book in terms of guidance for the second half of the year. It's a much changed environment, it's difficult environment, but we are working very hard to get to 260 to 270 from recurring operations. Next year in terms of an ROE of 15%, yes, I think that's the goal for us, ex home lending I think we are over 15% for this quarter.

[Sameer Gokhale:]

Okay. And just a quick follow up. Joe, if you could just talk about the provision for credit losses in the corporate and other segment, I am just unclear that number seems to flip around from quarter-to-quarter, can you just tell us what goes through there?

[Joseph M. Leone:]

Yes, what happened this quarter I think it was in response to Chris Brendler's question is that when we look at the overall reserve at the top given the asset growth we saw at the end of the quarter and some of the increase in delinquencies and NPAs we provisioned higher in corporate. Eventually as those loans become more severely delinquent and or will turn towards non-accrual and charge off, those provisions would flip into the segments. In the second quarter, I think there is some transactional noise in terms of the sale of the construction portfolio, so the reserves were released so to speak or freed up as a result of the sale of constructions, so that's why you see the ins and the outs.

[Sameer Gokhale:]

Okay that's great. Thank you for the clarification.

[Jeffery M. Peek:]

I might just say there have been a couple of questions on 2008 and we are currently in the middle of our planning process, so we will have a much better feel on that probably in a months time from now.

[Operator:]

And now our next question comes from the line of Meredith Whitney with CIBC World Markets. Please proceed

[Meredith Whitney:]

Good morning, so much for ladies first on the Q&A, but I had a direct question which was... which is given the dramatic decline in the stock price what amount of time was spent this week at the Board meeting on possible sale of the Company and from the Board's perspective what type of timetable have they given to turn around the Company and to get the stock moving again?

[Jeffery M. Peek:]

Meredith, our Board discussions are really a private matter and we've been working very hard to try and put the mortgage portfolio behind us and rebuild the balance sheet and focus on the go forward businesses and that's all we are working on and as I said where the Board is really inside the boardroom.

[Meredith Whitney:]

But don't you think the shareholders have a right to know given decline in the share price, what they are thinking?

[Jeffery M. Peek:]

I think we are pretty focused on long-term value and I would say is that the Board is fully supportive. We've been through this with them on repeated basis there, very much up to speed on what's going on.

[Meredith Whitney:]

Okay, thanks.

[Operator:]

And now our next question comes from the line of Satish Pai [ph] with Merrill Lynch. Please proceed.

[Unidentified Analyst:]

My questions have been answered. Thank you.

[Jeffery M. Peek:]

Thank you.

[Operator:]

And our next question comes from the line of Scott O'Donnell with MetLife, please proceed.

[Scott O'Donnell:]

Yes thank you, good morning. Quick question, I keep hearing the word ring fence thrown around related to the mortgage portfolio and if this was covered earlier I apologize I had a drop off the call a couple of times, but I am not wrong in thinking that with respect to the $7.5 billion mortgage portfolio, that's now encumbered, the Company is still in the first loss position as it pertains to those assets, is that correct?

[Jeffery M. Peek:]

That's right, that's right.

[Scott O'Donnell:]

Okay.

[Jeffery M. Peek:]

I think we feel that with the sale of majority of the delinquent loans and a higher reserve than we had at the end of the second quarter and the fact that Freddie Mac took almost all of our loans as to underwriting quality in that, we feel reasonably good about that going forward and once again it's serviced by our own people and we are very much focused on having them mitigate as much loss, pure delinquency just get as much out of the portfolio as they can. But you are correct in that, that exposure on the performing loans stays with us.

[Scott O'Donnell:]

Thank you.

[Operator:]

And now our next question comes from the line from George Sacco with J.P. Morgan. Please proceed.

[George Sacco:]

Hi, you touched on the bank, sort of bank light strategy you have. It's... my understanding was you are using the bank to fund the mortgage assets and I guess my question is now that the mortgage business is being worn down, do you need to get special approval to put new assets or fund new assets with those deposits and if so what assets would you target for that?

[Jeffery M. Peek:]

Well we think... we think that vendor, some of the Vendor Finance assets and also some of the bank loan participations that we generate and purchase would be ideal things to go under the bank and obviously it's subject to regulatory approval and those approvals are underway.

[George Sacco:]

So you are in the process of working on that with regulators now?

[Jeffery M. Peek:]

We are.

[George Sacco:]

Okay. And I assume that's why deposits have come down a bit from the peak, is it because you are serving transition with the assets?

[Jeffery M. Peek:]

Right, some of them are rolling off and until we have new assets to go in there, there hasn't really been a need to access that market although it's quite attractive relative to --

[George Sacco:]

Yes, under that exactly so. Thank you.

[Operator:]

And our next question comes from the line of Luvan Vanredin with High Key Capital [ph]. Please proceed.

[Unidentified Analyst:]

Yes. Joe, I just want to make sure I put the $600 million financing in perspective. If I think about the right way, is that more of an issue to kind of maintain our ratings or is this funding requirement because we have certain debt or whatever maturing currently or is this more of a to grow the business type of transaction?

[Joseph M. Leone:]

Okay. Good question. The $600 million and the reason for doing is that relates to as Jeff said and I reiterated as well. We want to ensure that we have the strongest capital position to maintain the ratings at the highest level possible which we got affirmation from the agencies, so with the capital raise, having said that as I said in response to I think Matt Burnell's question, clearly that gives us $600 million of liquidity that we will use to finance the business in the fourth quarter. In further response to that as I look at the fourth quarter I think Matt asked this. We continue to think we are going to stay mostly in the secured markets, but we are looking for the unsecured access. Additionally, in the fourth quarter we have a lot of cash flow from the portfolio on businesses like factoring and our retail businesses and commercial lending. So asset growth is in generally the biggest top in the fourth quarter. Having said that, we see some good opportunities there. So think about the $600 million as a capital raise.

[Unidentified Analyst:]

Okay, thanks.

[Jeffery M. Peek:]

And we've time for one more question.

[Operator:]

And now our final question comes from the line of Robert Gilbert with Standard. Please proceed.

[Robert Gilbert:]

Thank you. Of the $9.7 billion that's now held for investment, am I correct that that will no longer need to be mark-to-market and that the intent is to hold it to maturity? And then finally what would the average life of that portfolio be please?

[Joseph M. Leone:]

Yes, the $9.7 billion, that's moved to asset held for investment, we would liquidate it over its contractual life. It depends on the prepayment speed you apply to it, depending on the environment we have going forward but the average life has been in the three-year area or so.

[Robert Gilbert:]

Thank you.

[Jeffery M. Peek:]

I just want to thank everybody for joining us today and obviously the questions were quite thoughtful and we hope that we removed some of the confusion about this morning in terms of what we are trying to do. Just to recap, the key messages our program here has been to try and remove as much uncertainty as we could. We think the home lending solution we put in place works for us. We sold the riskiest papers that hedge against further deterioration. We still retain the upside and obviously we got quite a bit of liquidity out of that. More generally, the liquidity position we think has improved quite significantly over the last six weeks. We had about $10 billion of asset... asset backed issuance. And finally, with the capital raise and the forward commitment to handle our future trigger breaches, we are delighted that our ratings have been affirmed. Most importantly, we had solid results in the go forward businesses for the third quarter and look forward to that in the fourth quarter. I just want to thank the investors for their support and equally important all the CIT employees for all their hard work in the third quarter. Thanks very much.

[Operator:]

This concludes our presentation. You may now disconnect and have a great day.