October 19, 2005 10:00 am CT

Good morning. My name is (Jenny) and I will be your conference operator today. At this time I would like to welcome everyone to CIT Third Quarter Earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad. If you would like to withdraw your question, press star 2. I will now turn the conference over to Ms. Valerie Gerard, Executive Vice President of Investor Relations. Please go ahead ma’am.

Thanks (Jenny) and good morning everyone. Welcome. We’re delighted that you’re here with us today for a review of our third quarter results. After formal remarks by Jeff Peek, Chairman and CEO and Joe Leone Vice Chairman and Chief Financial Officer, we will move into Q&A. Now as you know, elements of this ca ll are forward-looking in nature and relate only to the time and date of this call. We expressly disclaim any duty to update these statements based on new information, future events or otherwise. For information about risk factors relati ng to the business, please refer to our SEC report. Any references to certain non-GAAP financial measures are meant to provide meaningful insight and are reconciled with GAAP in our Investor Relations Section of our Web site which is located at www.cit.com. With that, it’s my pleasure to introduce Jeff Peek.

Thank you Valerie and good morning everyone. As you have seen from today’s announcements, our earnings, we delivered another outstanding quarter in which CIT demonstrated its agility in meeting both its immediate and long term objectives. This balance allowed us to produce solid quarterly results while also working on a variety of growth initiatives. Our diluted earnings per share incr eased 23% to $1.06 over the third of 2004. We exceeded our target return on tangible equity of 16% with a number of 17% for the quarter and 16.2% for the first nine months of 2005. Importantly, origination volume increas ed 34% to $8 billion from the third quarter of last year. Total managed assets were at 61.3 bil lion -- up 17% compared to last year. And asset growth was broad based this quarter and the new business pipeline remains solid. Now here are the business highlights for the quarter from my perspective. We saw important momentum in all of our sales initiatives which I talked about last quarter. We are making significant progress getting our sales organization mobilized and seeing very strong trends in new business. We also created a well resourced o ffice of sales and marketing at the CIT corporate level as well as chief sales officers in each of our business units. And we recruited an additional 133 salespeople during the quarter. We commenced the rollout of salesforce.com in September with an estimated completion date of November 1. As a result, virtually all of our sales managers are now trained in using these tools and forecasting capabilities to manage our client relationships giving us more detail on sales calls, conversion ratios and productivity. We continue to expand and establish relationships with companies such as Amazon.com, NEC Europe, Toshiba, Northrup Grumman, Arby’s and Under Armor all of which added to our business in the third quarter. Now during the quarter, we made furt her use of our risk adjusted capital model to improve the composition of our portfolio. We continue to look for ways to sell under-performing businesses and reinvest the capital in other areas with stronger growth opportunities. This redeployment of capital allows us to achieve better long term returns for our shareholders. For example, in September, we initiate d a program to sell a number of vintage out of production aircraft as part of our strategy to maintain a modern fleet of airplanes capable of contributing positively to our risk-adjusted returns. As the same time, we also announced plans to accelerate the liquidation of approximately $125 million in manufactured housing receivables. And finally, after prolon ged negotiation, we took advantage of the strong commercial real estate market by selling our interest in Waterside Plaza, a residential complex in New York City. Now the net effect of these actions will be positive in terms of enhancing ongoing returns and the overall quality of our portfolio. The third quarter also saw us open a new chapter in CIT’s long history of financing commercial aircraft. Having stipulated the new investment in the sector would require improved return, we were pleased to see demand from international aerospace clients strengthen and the rental rates rebound. As a result, we are increasing our investment in this portfolio to take advantage of these opportunities. In August, we signed a purchase agr eement with aircraft manufacturer, Airbus. The new order covers 24 A320 aircraft to be delivered in 2007 and 2008 and five of Airbus’s new midsized aircraft, the A350 to be delivered in 2012 and 2013. We also have options to acquire additional airplanes as part of this order. We anticipate that when leased, these new planes will exceed targeted returns and will help us capitalize on our established market position as a leader in commercial aviation finance. We expect the demand for commercial aircraft to continue to improve along with the outlook in the international aerospace sector. We were also able to deliver on better capital discipline, improve balance sheet management and increase shareholder returns. Our commitment to improved returns produced an enhanced return on tangible equity of 17% and internal capital generation of nearly 15%. Consequently, we were able to follow-up our 23% dividend increase in quarter two with a $500 million accelerated stock repurchase program which returned incremental capital to our shareholders. Now let me also provide some updates on several acquisitions which will become growth engines in our portfolio. The acquisition of healthcare business credit corporation was quickly and efficiently completed on August 31st and the integration of these operations has exceeded expectations. HBCC is a full-service healthcare financ ing company that specializes in asset- based and cash flow financing in North America. And this acquisition accelerated our plan build out providing efficient cost-effective core platform to support the strong growth we see in this sector. We now have 65 new professionals on CIT’s healthcare team which currently totals 140 members. We also continue to make solid progress with Student Loan Express. SLX improved quarterly results and it’s accretive to earnings ahead of expectation. And in the third quarter, total origina tions were $945 million with the school channel contributing 253 million -- a 49% increase from last year. During the quarter, we also ac quired over 16,000 new rail cars in a combination of discreet portfolio purchases and our normal deliveries solidifying our position with 81,000 rail cars as the youngest fleet in the industry. Operating at full economic utilization, we are benefiting from the strong demand to transport goods over the nation’s railway system due to the China effect as well as higher gasoline prices. Now I believe that CIT is off to a str ong start in the fourth quarter and we’re definitely on target to achieve our financial goals for 2005. We reiterate our guidance of operating earnings per share growing in excess of 20% from 2004 levels and return on tangible equity exceeding 16% for the entire year of 2005. The economic trends and business en vironment underlying our operations are favorable with a noticeable pickup in the month of October. Although we are working hard to reduce co sts in certain sectors to provide the necessary capital, our operating efficiency did not improve this quarter. While Joe will discuss the primary components of operating expense, let me just say that we are very focused on the need to reduce cost and increase productivity so that we can invest in some of our growth engines. We will eliminate additional expenses and streamline our infrastructure. In closing, CIT had a strong quarter and we remain confident about the execution of our strategy. We made significant progress on many of our business initiatives. I still see numerous opportunities to grow assets, improve efficiency and enhance shareholder returns. Now we will be providing additional insights into our business operations and information about our 2006 plan at CIT Investor Day on November 8 in New York City. And we look forward to seeing you all there. I will now turn it over to Joe, our Vice Chairman and Chief Financial Officer for a discussion of our financial results. Joe?

Thanks Jeff. Good morning everyone. Let me start by giving you some more color on some of the highlighted or noteworthy items in the quarter. We sold our interest as Jeff said, in the residential real estate investment in New York City. We have been analyzing the sale of this property for quite some time and formerly commence the process in the summer given the strength in the real estate market. We held the property for over 30 years so we were carrying at a very nominal book value. We also took other capital management actions that Jeff mentioned to better position the company to deliver stronger returns. Let me give you more detail. We initiated the program and now intend to sell about 50 out of production aircraft with a book value of about 190 million. The planes average 19 years, are less fuel efficient than our core fleet. It’s a mix of commercial, regional an d sub-business aircraft. And most are manufactured by manufacturers that no longer make planes. Some of the model types are (Donye) and Saabs and then we also had some MD 80s and DC 10s. Following these sales, we will have only two aircraft from - of these type in our fleet, both of which are with bankrupt carrier and our reserve (floor). The marketing process for these planes will extend into 2006. Jeff mentioned we accelerated the liqu idation of certain manufactured housing receivables and we wrote these receivables down to the estimated sales proceeds. With respect to Hurricane exposure, we set aside a $35 million reserve for losses and wrote down securitization retained interest by $7 million. This reflects our judgments, our best estimates of future losses that will result from these catastrophes and are based on the information we have currently available. Our gross exposure across all our businesses in the FEMA affected zones and other impacted areas is roughly $600 million including securitization. Our loss estimate related principally to 300 million of those receivables smaller ticket in home mortgages, vendor and equipment finance and factoring. In total, the loss estimate we put up was over $42 million. Additionally, we released an international tax reserve liability we had previously established as we have received a clearing opinion from local authorities. The EPS impact of the noteworthy items are as follows. Gain on real estate sale, about 34% positive. Release of tax reserves, about 8 cents positive. Write down of manufactured housing and air assets, negative by about 31 cents. And charges related to hurricanes to set aside of loss reserves and the retained interest, about 13 cents negative. My comments from this point forward will give you - will be based on the numbers excluding these items to give you a better view of operating performance trends. We had a very strong quarter. Asset growth was very broad based. Margins improved. Revenues were up 10% from a year ago with good topline growth. Credit losses were low and we had solid non-spread revenue, almost 40% of our revenues with low securitization (gates). Overall, very high earnings quality. Asset growth, as Jeff said, volume was up nicely from the prior year with higher volumes in all segments except equipment finance which we are reorganizing. Deal flow is strong in global vendor, communications and media, energy and our Canadian consumer businesses. We had over $3 billion of managed asset growth broad based. Factoring assets grew $1 billion. It’s a seasonally strong quarter as retailers build up inventories ahead of the holiday season. Consumer assets grew 800 million, 500 in home lending, 300 million in student lending. More on those businesses later. Healthcare assets, very important in itiative, grew 600 million including the acquisition Jeff described. And the new business pipeline there is very strong. Trains and planes grew 300 million, principally rail where we increased the size of our fleet, plus some regional air growth. Specialty finance commercial grew 200 million reflecting strong vendor finance volume both in the US and abroad. Actual year to date US Dell volume is up. And internationally Dell volume is up very nicely year over year. Vendor volumes excluding Dell were also up from last year. While we continue to see pricing pres sures in the market due to strong and liquid markets, our net finance margin increased five basis points. That was a real positive in light of the increasing short-term rates and the flat yield curve. I think that reflects the product mix changes we've been making, a disciplined pricing strategy and our capital allocation strategy, not to mention a very effective funding program that serves us well in all parts of the cycle. Non-spread revenue as I said before was very strong. And that provides some diversification away from the interest rate cycle. Credit -- charge offs were lower than I expected, 46 basis points down from over - about 52 last quarter. And this is the first time we've been under 50 since the late '90s. We had very low loss levels in all commercial finance segments and overall recovery continued rather strong. On the US airline our gross exposur e to Delta is about $100 million and $57 to Northwest. At this time we have reserves allocated to US hub carriers and we feel that the amounts of the reserves are adequate given our exposures and our estimate of collateral values. Non-performers -- they were up solely because of placing about $85 million of the receivables from Delta and Northwest on non-accrual. Some of the receivables to Delta and Northwest have equipment values in excess of amounts due so we did not put about $40 million or so of those receivables on non-accrual. If you take out airline non-performance our non-performing loans actually declined. Delinquencies were not impacted by the bankr uptcies of these airlines as of at quarter end they were contractually current. We did see a sequential increase in specialty finance, some due to seasonality and some due to season. Consumer delinquencies excluding the acquisition of Student Lending were actually down from last year. Loss reserves increased to $653 milli on principally due to the hurricane provision. Twenty-eight million of the $35 million of the hurricane reserve ran through the provision and $7 million was a reallocation of existing reserves. When I look at the reserves in total of 153 basis points, that includes our hurricane loss estimates, our US sub-carry exposures and we feel are very strong given the portfolio mix and the credit performance we've had. Expenses -- Jeff gave you some overview. Expenses increased $9 million sequentially. That includes about $2 million in additional restructuring cost we set up this quarter. So the net remaining increase was about $7 million. Where did it come from? About $5 m illion was for increased incentive based compensation accruals, reflecting our strong income growth, good volume and return on equity performance. Those are the metrics we measure management on. Sales and marketing expenses increased about $5 million, $2 million of which reflects the build out of healthcare including the acquisition. Offsetting these increases was a bout $5 million of savings from our restructuring. Headcount was up about 55. We closed the healthcare acquisition and added sales personnel but we continued to streamline back office operations. Taxes -- our operating effective tax rate - our effective tax rate on operating results was about 34.6% and that's down from 39% last year and that reflects the international aerospace initiative and improved profitability overseas, particularly in global vendor finance. We expect our Q4 fourth quarter effective tax rate to be in the 35% area and that's in line with our overall year expectations. Update on our stock buy back program. As of September 30 we have received slightly over 10 million shares and we could receive an additional million shares plus depending on the stock price performance in the fourth quarter. For EPS calculations, our average share count declined almost 7 million shares this quarter. I anticipate another 3 million plus reduction in average share count in Q4. We issued the preferred. Jeff mentioned it. We talked about it on the last call. It's about our thoughts. We had a $500 million issuance of non-cumulative preferred - perpetual preferred. Three fifty was fixed at a rate a little over 6% and 150 is fixed for five years and floating thereafter. Both traunches are perpetually with par full options after five years. I think that's excellent pricing. And the net impact of these capital tr ansactions was replacing common stock with the cost of capital in the area of 12% to 15% with high equity preferred at a cost of 6%. This resulted in accretion in the quarter in EPS and a 1% improvement in ROI. Jeff mentioned internal capital genera tion remains strong and our capital ratio at 9.4% is in excess of the 9% our bottoms up analysis yields. So we continue to have available capital to support growth from strong earnings and a strong balance sheet. Let me comment on some businesses th at you frequently ask me questions on. First let's talk about aerospace. That's included in capital finance. Capital finance which has both planes and trains had an ROE over 12% this quarter with rail exceeding our target. Returns on the commercial aerospace fleet, while still below target, were up significantly from a year ago. Lease rates are up. Our tax structure is improved. And returns that we expect on new airplanes deliveries exceed 15%. All of our remaining 2005 deliveries and half of our scheduled 2006 deliveries are placed. We only had two aircraft on the ground and one had a letter of intent. Equipment finance -- equipment finance re turn on risk adjusted capital is over 12% in the quarter and that's up from 8% a year ago. So we're making progress. The business is now focused on its construction and diversified manufacturing industries and is making good progress also on streamlining infrastructure. Actually our expenses are down significantly from a year ago and the productivity of our sales force is improving and the new business pipeline is getting better. Home lending -- a strong quarter. Home lending volume from our network was strong at about $750 million .We had whole loan purchases about $650 million and whole loan sales of about $300. Portfolio margins were flat sequentially but at the end of Q3 we saw pricing trending higher. Let me talk about quality. Credit qual ity here remains very good with owned charge offs in the area of 80 basis points. The interest only product in our portfolio is 10% of the portfolio but we have - I average FICO scores on the segment of the portfolio above 650. We do not offer negative amortization products. We have a very - we had very experienced operators running this business and we have a very disciplined approach to managing it. Student Lending we outlined three obj ectives for 2005 for this business after we have after we made the acquisition. We wanted to grow the school channel, bring servicing in house and do better than an initial earnings guidance. Let me give you the report card. We signed almost 250 schools this year and third quarter volume from the school channel is up 49% from a year ago. Consolidation loan volume also continued strong. We are now servicing $1 billion of loan in CIT servicing center in Cleveland, up from just $200 million or when we acquired the business. And we're putting a significant amount of new volume into that center. The Student Lending acquisition was earnings neutral in Q1, accretive in Q2 and again accretive in Q3. And all of that is much better than we model. With that I'll turn it back to Valerie.

Thanks Joe. In an effort to run an efficient Q& A session we are asking that callers limit their questions to just one. If you have additional questions you can return to the end of the queue or call Investor Relations once this call is completed. With that (Jenny), could you please instru ct the callers on how to dial in their question?

Thank you. Once again if you have a question press star 1 on your telephone keypad. Please hold for your first question.

(Jenny) are we getting technical difficulties there?

Your first question is from Michael Hodes.

Good morning guys. I guess I'll try to limit it to one question. In terms of the ongoing initiatives fo cused on kind of improving your return on capital, it was seeing a lot of activity in recent quarters. I was just wondering, you know, if there are other kind of clear parts of the portfolio that you are focused on potentially exiting and what kind of time line - how should we think about that?

Well Michael I think two things. One is I think there will be continuous activity .We're going to continue to try to upgrade the portfolio. And so our strategic planning and capital planning discipline is, you know, every year we're going to be reevaluating the business as we have the amount of capital we have behind them and seeing if they make the returns. You know, we have a corporate hurdle of 15% today and maybe that goes up as the ROE goes up. Secondly, I think that you know, the two businesses - and Joe I think was very specific on it. The two businesses in '04 that didn't meet the hurdle rate, we've been working very hard on them. In capital finance particularly aerospace, you know, we see the light at the end of the tunnel there and the team has done a very good job there. And equipment finance is making very significant strides. So we're working hard on those busine sses that don't make the hurdle rate but, you know, you shouldn't be surprised from time to time, you know, to see us trade out of a business where we've determined that we can't fix it and the rates don't meet our criteria over time.

And just for clarification, the sales in home equity that you make seemingly every quarter, that is more credit risked oriented? Or is that fee generation oriented? What's the thought process there again?

You know Michael we sold this quarter approximately $300 million of assets. Last quarter it was higher. It's a combination of things. But overall the overall objective we have and the team that runs that business has is to get the portfolio to a certain set of demographics that we're comfortable with from an overall risk perspective, whether they are credit metrics and or interest rate sensitivity metrics.

Thanks Michael. Can we have the next question please?

Your next question is from Chris Brendler with Legg Mason.

I' guess I'll try to wrap it into one question. Looking at trends in new business volume relative to your asset growth and then sort of looking at the business lines, I'm still calculating a relatively high level of prepayments Can you just - is that correct and if you could just talk about prepayment trends in the quarter. And then maybe also address that relative to competitive conditions?

Yeah I think prepayments are I'll say normal Chris. You know, whatever normal means. It's not the heightened level of prepayments we may have seen a year or so ago. We still see relatively high velocities in a lot of portfolios but we've seen that historically. For example, equipment finance, home lending for sure and a lot of our portfolios that we look at of that type -- vendor finance I'll throw into that category --have average durations in the two to three year areas. So we do have, you know, assets that turn relatively quickly and I think you're seeing that in the results. But I don't think the prepayment activity has been anything out outboard the norm. Now turning over to the bigger ticket ar eas I think that's more of a risk management analysis that maybe you're seeing being factored into the numbers, is we have been building our syndication function in the commercial side in a very robust way. We always had the capability. We have drawn it all together under one basket and one leadership. And with credit costs where they ar e, with economy where it is and the liquidity in the market that we see, we take the opportunity - probably took more of an opportunity in '05 than we did in '04 to manage the risk side of the portfolio in that way. So syndication sales.

All right just a quick follow up and a suggestion if you could start, since that is getting to be a greater part of your story, if you could start disclosing - add sales and syndications in terms of the dollar amounts in the release that would be helpful.

That’s' a great suggestion. We will put that on the to do list for the next quarter. Thanks Chris.

Thanks Valerie.

Next question please.

Your next question is from Joel Houck with Wachovia Securities.

Okay thanks good morning. I guess the resiliency in the margins is probably most impressive this quarter, but toward the end of the quarter, you know, I guess the Fed kind of came out and made comments indicating that maybe there was a lot more tightening remaining. In light of that how do you guys think of product mix and pricing strategy going forward if we're going to go to a 4.50% or 5% Fed funds raise as opposed to maybe stopping at 4% like we thought maybe at the end of last quarter?

Well I think our discipline on pricing has been pretty good and I think that was part of it. You know, as you know we're like 95% match funded. So I think the question really is if they continue to raise what's that going to do to the flow of business? Right now actually we're seeing a pretty good flow of business. I think people came back from the summer and decided that they wanted to move forward on a number of fronts. But I think you know, we're - if the rates go up we'll have to work on pricing. Joe do you want to add anything to that?

You know we have a portfolio of businesses and - Joel and, you know, some of them - if rates go higher and the economy is somewhat a little bit more a little weaker than the steam it has right now, we have other businesses that kick in in a more interesting and more profitable way, including our businesses that look at supplying capital to mid-sized businesses for restructuring or balance sheet improvement. So we think of it as a portfolio of businesses with some businesses getting a little weaker in higher rate environments and many businesses getting stronger.

Okay, thanks.

Thanks, Joel. Next question please, operator.

Your next question is from Eric Wasserstrom with UBS.

Thank you. Joe, did I understand you correct that the issuance of the preferred and the replacement therefore of some of the common added one percentage point to ROE and if that’s the case, wouldn’t that suggest that actually ROE declined sequentially?

Yeah. It ended about 1% return on common equity. I guess the, you know, basic - overall basic earnings trend is higher. We do have the preferred dividend expense running through the earnings. So let me look at that one, Eric, and I’ll get back to you, but that’s basically what the finance is. We have - instead of the dividends running through the capital account, now they’re running through the earnings stream. So let me look at that arithmetic for you and we’ll get back to you.

All right. Thank you.

Thanks, Eric. Next question please.

Your next question is from Lehman Brothers. (Chris):: Joe, just a clarification on the tax. You know, there’s permanent improvement from moving some of the leases over to the Dublin location, right, but it sounded like you said it may jump back up to the low 30s in the fourth quarter. I just wondered if you could, you know, break that out and then…?

Yes. The reported tax rate is about 30% and that includes the reserve release that we identified as a highlighted item. Taking that out, the tax regrade for the quarter was a little less than 35%. And we’re thinking about the tax rate for Q4 and all of ’05 to be in about the 35% area. So think about it as basically flat, excluding that one-time reserve release that we profiled as noteworthy. Okay? (Chris): Thanks, Joe. And I can’t get another one in I know so I’ll come back in.

Thanks, (Chris). We’ll take the next question now, (Jenny).

Your next question is from Laura Kaster with Sandler O’Neill.

Yes. I thought it was overall a really solid quarter. One area that kind of was just (really) relative to my expectations was operating expenses. Now I have no problem with them going up if you’re investing in your infrastructure but you had said before that operating expenses would drop (finesse) or the efficiency ratio would improve. Can you give us a direction of where we might be seeing that going from here?

Well, we’re - I think as we’ve said, we’re - operating expenses is probably one area that we’re sensitive about. We’ve been trying to streamline the backend, probably identified $40 to $50 million in cost savings this year. And as you saw in our second quarter charge, took charges to really locate about $25 million of those cost savings. And much of that is going into the front-end, whether it’s the cost of bringing on salesforce.com or I think at last count, we hired over 40 group leaders and senior originators in our large ticket business. So I think we continue to work hard on that and - but we are investing in the growth businesses and we’re investing in the sales force.

Okay. Thank you.

Next question please.

Your next question is from Meredith Whitney with CIBC World Markets.

Good morning. I have a question that I hope you guys did not address in your opening remarks, related to fee income as a percentage of your total revenues. And I wanted to know, this quarter was the - relatively smaller component of (seed) income related to narrow margins on your fee products or is it seasonal in nature and can you give me some guidance in terms of where fee income as a percentage of the whole pie goes over the next several quarters.

Sure, Meredith. No, we didn’t talk about that explicitly. I think the fee and other income, I call it non-spread revenue number, is very strong. It logs down a bit from Q2; Q2 was exceptionally strong. And we have some fees that are core that we carve quarterly, like factory commissions is, a varied annuity like component, that actually goes up seasonally as in the second half of the year. But other fees, some have some episodic nature to them. Having said all that, some of our new initiatives are intended to build that non-spread revenue component of our earnings. And I mean it in a - you know, in a value-added way. You can see that leasing gains were relatively stable quarter-to-quarter, securitization gains were relatively stable quarter-to- quarter. But the new business initiatives, whethe r they’re healthcare, advisory on the M&A side, syndication, are all designed to continue to improve our overall level of spread - non-spread revenues. So my expectation is as these business build-outs take hold, that that fee component will grow. But having said that, not apologetic for Q3, I think it’s a very solid core performance with very strong baseline fees.

:

Your next question is from (Bob Napelli) with Piper Jaffray. (Bob Napelli):: Good morning. (Bob Napelli) from Piper. A question, I was wondering if you could give a little more color on your healthcare business, on the size of that business, and maybe the makeup of the assets and the growth that you experienced in the quarter?

Sure. Sure. You know, when we entered 2005, we had kind of one healthcare business which was vendor financed. We did finance cat scan machines. And we’ve steadily grown that by bringing in people to cover various sub- segments, you know, such as large hospitals, skilled nursing centers, extended care. So we now have three or four different teams and our headcount grew to about 50 to 60 people and then with the acquisition of healthcare business credit, we added another 65 people. So we’re up about 140 people. I think originations in the third quarter were about 125 million, which is - and they’ve been running - I think the second quarter they were maybe 150 million. I think with the acquisition of HPCC, I think total assets in the healthcare sector are up a little over a billion dollars from about 300 this time last year. So, you know, this has been one of the growth engines we’ve built in the portfolio and, you know, we’re excited about it and love the quality of people we’ve been able to attract as well as the leadership of HPCC. (Bob Napelli):: What kind of return on equity are you getting and what kind of growth would you expect to get? Is that going to be one of the fastest growth businesses that CIT over the next several years?

Well, we’re cautious but we think it will grow steadily. We’re - you know, it’s 18% of the economy and it was less than 1% of our assets. So we thought we had a lot of headroom on that. And, you know, this is the first year they’ve been together so they’ll be profitable this year and we anticipate that they’ll make the corporate return, you know, in a reasonable period of time. (Bob Napelli):: Thank you.

Thanks, (Bob); appreciate the question. Our next caller, please.

Your next question is from Craig Maurer with Fulcrum.

Good morning.

Good morning.

Hi, Craig.

My question is regarding the home equity business. With rates continuing to rise, I was hoping you can discuss your expectations for that business going into ’06. Thanks.

Sure. There’s been a lot of obviously news on home prices, home lending businesses specifically. We had a very strong third quarter. Clearly, lending volumes in the market could come down and I think many financial institutions have said that. We think we’re well positioned here. As I said, we have a very experienced management team that’s been with the company a while. I think we have a very disciplined approach to doing - to look at our portfolio demographics, some of which I gave you and many of which we put in our Qs. And we think that as interest rates ri se and some of the more exotic products sort of get priced away from the marketplace, we have a core strategy that fits in very well in the marketplace. So having said that, overall, you know, refinancing boom could be over and home sales could be lower so we build that into our expectations. But the other side of it is we think we have a very competitive cost structure, a very smart credit screen, and a very experienced management team. So I think it could perform well in just about any environment.

Okay, thanks.

Great. Do we have any more callers out there?

Yes. Your next question is a follow-up from Bruce Harting with Lehman Brothers.

Excellent.

Welcome back, Bruce.

Hello. Thanks. So I guess on the expense side, as the initiatives - is the timing on this such that you bring in more talent, you create new incentives, and you’ve changed the comp structure somewhat from last year. So the good news is we won’t see that fourth quarter bulge that occurred last year with bonuses and things like that. Is it more spread out over the year, is that one of the takeaways we should get from this?

Well, I think - that sounded like a number of questions. But I’ll try - maybe I should pick the one I want to answer. You know, I would say Joe and the other folks are very much on top of the accrual and, you know, if you followed it during the year, you know, we have a fair amount of compensation in terms of restricted (sot) that we call performance shares. And part of - frankly, part of the increase in operating expenses has been us truing up every quarter what those performance shares are going to look like. So, you know, we’re watching the accruals quite closely. I think that if you look at the third quarter, you know, several of our businesses have some seasonality to them but what we were encouraged about was it was very broad-based in terms of asset growth coming from, you know, almost all of the portfolios, you know, with the exception of equipment finance where we’re - have done some… ((Crosstalk))

…and they’re doing well. So we felt good about that and we think - we spend a lot of time focusing on sales and, you know, we think some of this coming through is the beginning of that focus and the beginning of the investments we’ve made.

Great. Thanks, Jeff. Could we go - or before we go onto the next caller, I think Joe wants to say something.

Can I go back to Eric Wasserstrom’s question regarding ROE? The net impact after preferred dividends and the buyback of the stock in the quarter was about 75 basis points on the ROE. So if you look at it quarter-to-quarter, then you get to a flat ROE. Why is that? If - for those of you who remember, la st quarter we had an abnormally low core tax rate because we had to true-up the tax rate for the full year in that quarter. So apples to apples, if you normalize the tax rates, the core ROE in the quarter is slightly better this quarter, excluding the highlighted - noteworthy and highlighted items versus last quarter. Eric, I hope that helps an d I hope you’re still on the phone; if not, IR is going to follow-up with you anyway.

Great. Thanks. Do we have another caller?

Yes. Your next question is from (Bob Napelli) with Piper Jaffray. (Bob Napelli):: Can you give a little more color on your Capital Finance business? I was wondering if you could - it looks like - you know, just looking at the segment data that the income, if you back out the $86 million, was up substantially quarter-over-quarter. I was wondering if that’s a clean look? And I was wondering if you maybe could give some discussion on - or some color on the pricing trends? Like would the lease prices on rail cars - I know they had gone up quite a bit from the trough a few years ago. Have prices continued to come up? And are you benefiting significantly from (low) of these rates running off?

Well, I think we - lease trades both on rail and aerospace, you know, have come up quite a bit anecdotally on both claims and rail. We’ve seen 100% increases. Now you’ll have to remember, we price maybe 20 - we repriced maybe 20% of the portfolio on an annual basis but lease rates for airplanes, as we’ve said, have been probably year-over-year up 25% for your best plane. And in the rail segment, it would be probably a little bit less than that but certainly 15% to 20%. So - and as Joe said, we’re at 99% ut ilization both on rail and aerospace. So - plus we’re stretching out the terms of the lease when we reprice. So we like both of those businesses as well. Joe, do you have a comment on the numbers?

Yeah. The ROE has improved significant quarter-over-quarter, you know, on an operating basis. And the rail business has had an outstanding year. Jeff, you know, mentioned some of the pricing trends. But we added portfolio in the quarter, we made some equipment acquisitions to fill out the fleet, as I mentioned earlier. So that’s a plus. The airplanes, we’ve mentioned the trends there. The other item in the quarter is we transferred some of the other plane businesses we had around the company like financing of the (Net Jets) business into Capital Finance in the quarter so we have some of that benefit. Having said all that, the core ROE, apples to apples, quarter-to-quarter, continues to improve, driven by the commercial aerospace improvement. (Bob Napelli):: Thank you.

Great. (Jenny), could we have the next caller, please?

Yes. Your next question is from (Jordan Heimowitz) with (unintelligible) Financial. (Jordan Heimowitz):: Hey, guys. Thanks for the pronunciation. A couple quick questions; one, did you have any gains on sale of mortgage loans in the quarter, like you shifted some sub-(pry) mortgage loans last time (in and out)?

Sure, I’ll take that. As I mentioned in the - in my opening comments, (Jordan Heimowitz), we sold $300 million of loans in the quarter. And generally, the pricing we see now and we see pricing, you know, somewhat lower than we did a year ago obviously we sold them for prices of over 2% or so. So there were some gains in the earnings from that. (Jordan Heimowitz):: Okay does that…

Hopefully that was responsive. Did I get you (Jordan)? (Jordan Heimowitz):: That was real good. Second is can you comment on the credit quality in the healthcare finance portfolio or is it too soon to kind of make an estimate as to how that’s going?

:

:

: I’d be happy to tell you how they’re going. They’re going great. The delinquent - just about all of the receivables are current. We have less than 20 basis points of delinquency in the portfolio and obviously that includes the loans we acquired in the acquisition. (Jordan Heimowitz):: Thanks a lot guys and great asset growth, best quarter in a long time.

Thank you.

We appreciate that (Jordan). Do we have another caller?

Yes your next question is from David Hochstim with Bear Sterns.

Hi I wonder if you can just clarify the out of production aircraft that were sold and how those numbers show up between the June and the September break down of the portfolio? And I wonder how much of the value of those planes changed over the last 12 months as lease rates have gone up on desirable air craft? And did you not need to mark those to fair value because of the kinds of leases they were in or financings or and are they’re other aircraft that are still in the portfolio that might not be marked to market?

I think that’s four questions, David, I’m going to stop right now.

I think that’s really one.

Which one is it? I’ll try to remember it all David, I don’t know if I remember it all. First of all in the schedule - I think the first question you asked was in the schedule the airplanes where are these planes?

Yes.

And I’ve got two answers for you. One in the schedule of managed assets they’re in assets held for sale. So look there under capital finance. On the schedule where we break out all the planes they’re where they were. So, you know, if they were narrow body, they were in the narrow body; if they were in the US, they were in the US. We thought we’d show you all the metrics apples to apples, that’s two. Three, I don’t know the specific answer in terms of the values of the planes versus a year ago. Rental rates have improved somewhat so that would have to factor into our analysis.

But even on these they’ve improved?

Yes -- less so, though. Less so and the going forward look as they would improve even less so. I’d say lastly as you know and we talk about our accounting policies on this the long life asset policy is that undiscounted cash flow test. Our intent on these 50 aircraft is now changed so we have to value them at a lower of cost to market or, you know, or a current value standard. So that’s what happened.

Okay.

Hopefully I got all those pieces of that one question.

Yes thank you.

Great next question please.

Your next question is from Joel Houck with Wachovia Securities.

Yes just wanted to follow up on the big increase in tangible book value per share in the quarter. I think it went up a 1.50. You know you only earned 1.06 is there market to market adjustment for the balance sheet that I missed that maybe you talked about earlier?

You got me on that one. I think the share count is lower that should, that may enter into it. But I have to think about the arithmetic there because the share count is lower. I think, I mean the book value, you know, is changing but it may be the share count. But we’ll get back to you so you got me on that.

Okay great.

Great I think this’ll be the last caller operator.

Your last question is from (Mark Sherlomo) with Barclays. (Mark Sherlomo):: Good morning guys.

Good morning. (Mark Sherlomo):: Just a quick question about sort of geography and the aircraft portfolio with, maybe with the disposal of the this quarter and it looks like international growth is certainly ramping up. Do you expect your portfolio to diminish in the North American market from kind of the 21% level going forward? I mean are you specifically targeting that or is it just sort of where the demand develops?

The answer is we clearly anticipate that going down. So I mean the North American component I think will continue to decline as we deliver new aircraft. (Mark Sherlomo):: Okay great. No specific target though or anything?

No I think it’s really a resolved of better credits elsewhere as well as a stronger growth market. (Mark Sherlomo):: Great thank you very much.

Thanks for your question (Mark). With that I’d like to thank everyone for attending our call today. As always investor relations will be posting the prepared remarks to today’s call on our website in about an hour. And we’ll have a complete transcript hopefully by tomorrow. So with that please free to call Pam, (Steve) or myself with any questions and we look forward to seeing you on our investor day on November 8. Thanks have a great day.

Thank you for attending today’s conference you may now disconnect.