John A. Thain - Chairman and Chief Executive Officer Scott T. Parker - Chief Financial Officer, Chief Accounting Officer and Executive Vice President Kenneth A. Brause - Executive Vice President of Investor Relations

Good morning, and welcome to CIT's Third Quarter 2011 Earnings Conference Call. My name is Modesta, and I will be your operator today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Ken Brause, Director of Investor Relations. Please proceed, sir. Kenneth A. Brause: Thank you, Modesta, and good morning, everyone. And welcome to CIT's Third Quarter 2011 Earnings Conference Call. Our call today will be hosted by John Thain, our Chairman and CEO; and Scott Parker, our CFO. We will have a question-and-answer session following our prepared remarks. We do ask that you limit yourself to one question and a follow-up and then return to the queue if you have additional questions. We'll do our best to answer as many questions as possible in the time we have this morning. Elements of this call are forward looking in nature and may involve risks, uncertainties and contingencies that may cause actual results to differ materially from those anticipated. And these forward-looking statements 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 our business, please refer to our 2010 Form 10-K that was filed with the SEC in March. Any references to certain non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in our press release. And for more information on CIT, please visit the Investor Relations section of our website at www.cit.com. I'd now like to turn the call over to John Thain. John A. Thain: Thank you, Ken. Good morning, everyone, and thank you for being on the call. Despite a difficult economic environment and volatility in the marketplace, CIT had a good third quarter. Our volume was up sequentially across all of our business segments. We originated $2.3 billion of new loan commitments, of which $1.9 billion was funded. Our credit metrics improved. Our charge-offs, nonaccruals and inflows into nonaccrual all were down. We continue to make progress on restructuring our debt. We repaid $3 billion of the first-lien term loan. We put in place a new $2 billion revolver with a much lower cost. And we redeemed all of the 2014 maturity Series A debt although a piece of that was done in October. But with the reduction of that 2014 debt, most of the restrictive covenants were released. And we also took advantage of the disruptive market and repurchased about $0.75 billion of our Series A debt in the market at a discount. As you all know, we launched CIT's Internet bank that went off very successfully. It's only been 5 days, but it's been raising deposits. And we originated 80% of our U.S. volume in CIT Bank. Those of you who would like to make a deposit, please go to bankoncit.com. We're very happy to take your money. Our operating expenses were in line for the quarter. And if you go across our businesses, Corporate Finance, we originated $1.2 billion of new commitments in the quarter to over 65 borrowers. So we are, in fact, lending to small and middle-market companies. Our Vendor business, which is also mostly just small and middle-market companies, funded over $600 million in new volume. Our Trade Finance business, which is our factoring business for very small companies, our factoring volume was up in the quarter. And in the Transportation side, our commercial aircraft, 100% of our planes were leased and all of our new deliveries in the next 12 months are leased. On the rail side, our utilization of railcars was 97%. But if you excluded centerbeams, which are the cars that are used for hauling lumber, the utilization rate was over 99%. So if you look at our businesses -- and our business is, obviously, just a snapshot but it's a mix of businesses on the commercial side, if you look at our businesses, we do not see a double-dip recession in the U.S. We see slow growth in the U.S. but still positive. And then in our businesses outside the U.S., particularly Asia and Latin America, we see faster growth. We do -- we are continuing to make progress completing the written agreement items. We're continuing to work to complete the vast majority of them by the end of the year, and our -- we're happy with the progress that we made in the quarter. With that, I'll turn it over to Scott. Scott T. Parker: Thank you, John, and good morning, everyone. We reported a net loss of $16 million or $0.08 per share on pretax income of $14 million. Pretax income included $169 million of costs associated with our liability restructuring actions. Excluding these costs and the net FSA accretion benefits, pretax earnings were $89 million, up from $17 million in the second quarter on the same basis, with the improvement driven by lower funding and credit costs. First, I'd like to make sure everyone understands how the costs related to the debt actions impacted the P&L. We added a table in the last page of the press release in the non-GAAP disclosures that I'd like to walk you through. It starts with reported pretax income. The next line is net FSA accretion. Excluding the impact of debt prepayments, which is trending down as the remaining accretable discount on loans declines. The accretable discount on loans was just over $800 million at quarter end. Next, the negative impact of accelerating the FSA discount on debt we repaid last quarter was $113 million. Remember, we prepaid $2.5 billion of Series A debt in the second quarter. This quarter, the cost was only $2 million. The negative impact of accelerating the discount on the Series A debt was offset by the benefit of accelerating the FSA premium that remained on the first-lien debt. Prepayment penalties, which also float through interest expense, were $20 million this quarter. 2% of the $1 billion we prepaid down from $50 million last quarter. The last line, titled Loss on Debt Extinguishment reflects the write-off of unamortized original issue discount and fees associated with refinancing the first-lien debt. So as you can see from the table, pretax income, excluding FSA accretion and debt-related items, improved. Total assets decreased $3.5 billion, largely reflecting the use of cash and short-term investments to pay down debt. Financing leasing assets declined over $0.5 billion, about $400 million in the commercial portfolio and $150 million in the consumer book. With respect to the commercial portfolio, as John mentioned, we funded $1.9 billion of new business volume, which effectively offset collections and depreciation. However, we sold more than $700 million of assets including $300 million in transportation equipment, $200 million of corporate finance loans and $200 million of vendor finance assets. Turning to the income statement. Net finance margin, excluding FSA and prepayment penalties, was 160 basis points, up 15 basis points sequentially. Lower funding costs were clearly the most significant driver of economic margin improvement. While our liability restructuring actions reduced our cost of debt, we also had reduced benefit from the Total Return Swap. Pre-FSA asset yields were stable benefiting from lower depreciation expense, since depreciation is suspended on equipment designated as held for sale. The benefit to the margin was largely offset in other income as we marked down the value of the equipment. Other income was $235 million, down slightly from the second quarter. The decline was driven by lower fees and other revenue including the equipment write-downs I just mentioned. Non-spread revenue continues to benefit from strong gain on asset sales, but lending-related fees remain challenged given the economic environment. Credit metrics continue to improve, as charge-offs, nonaccrual loans and inflows to nonaccruals were down from prior quarter and prior year. These positive trends were reflected in the provision line. The allowance decreased modestly to $414 million, but remained unchanged at 1.9% of financial receivables. Combining the reserve with the remaining nonaccretable discount, coverage against pre-FSA receivables remained flat at 2.3%. As John mentioned, operating expenses decreased to $220 million in line with our stated expectations. And finally on income taxes, we provided $31 million this quarter, which is down slightly from the first half run rate. International earnings declined due to the sale of Dell Canada in the second quarter, and we had an $8 million of discrete benefits. In the U.S., we continue to grow the federal NOL and record offsetting valuation allowances against the related deferred tax asset. That is why it's more meaningful to look at the amount of the tax provision as opposed to the effective rate. My key business takeaways are the commercial portfolio stabilized; this funded volume effectively offset collections and depreciation; credit metrics improved; CIT Bank is originating a greater proportion of total funded volume, 80% in the third quarter, up from 70% in the second quarter and about 50% a year ago; and margins continue to benefit from our liability restructuring actions. Now I'd like to get into the individual business segments focusing on sequential trends. Corporate Finance pretax income decreased to $37 million as lower FSA accretion and gains on asset sales offset lower credit and operating cost. New business activity was strong in a typically slower period. Committed volume increased 9% with funded volume of roughly $700 million despite a significant decline in the overall middle-market volume. Finance and leasing assets fell $240 million due to asset sales and the impact of foreign exchange translations. And the assets held for sale remained at $400 million, of which roughly 75% are nonaccrual. Committed volume was evenly split between cash flow and asset base loans. Most of the deal flow was to a diverse group of commercial and industrial companies including JWC Environmental, which makes waste processing equipment; Woodcraft Industries, a cabinet manufacturer; PMC Group, a chemical manufacturer; and Steak 'n Shake, a popular restaurant chain. These are very much main street America companies and deals in the center of our strike zone. Also, we are seeing good results from the investment in our energy team. Volume this quarter was $230 million including a good mix of project finance and ABL. New loan yields are fairly stable although mix does matter. Pricing on cash flow loans improved over 50 basis points from the prior quarter while ABL pricing experienced some pressure. We are winning more agency roles, but syndication activity in the middle market is limited as many transactions are still club-oriented. Margins continue to be strong as CIT Bank originated over 90% of the U.S. committed and funded volume. Turning to Transportation Finance. Pretax income increased to $100 million on lower interest expense, higher gain on sales and proceeds from an insurance claim. Financing and leasing assets were up about $100 million as we added a net of 6 aircraft to the fleet, including scheduled deliveries and some sale-leaseback transactions. Portfolio lease yields were fairly stable as improvements in Rail mitigated some slight compression in Aerospace. As John mentioned, utilization is strong. All aircraft are leased and rail utilization improved to 97%. Moreover, the next 12 months of aircraft deliveries are fully placed and we also placed all of this year's and over 3/4 of next year's scheduled railcar deliveries. Trade finance pretax income increased to $11 million. Factoring volume was $6.8 billion, up about 10% from the second quarter, which is a typical seasonal increase, and domestic volume increased slightly from a year ago. Commission dollars reflect the increased volume while commission rates were essentially flat. Credit quality remained stable. Net charge-offs were only $2 million. However, nonaccrual-s increased $20 million and recoveries were down sequentially, impacting both the provision and other income lines. Finally on Vendor Finance, which generated $77 million of pretax income. Finance and leasing assets decreased about $270 million driven by asset sales. The largest of which was $125 million of underperforming European assets that we sold at a sizable gain. Credit metrics further improved with nonaccrual and net charge-offs down. The latter of which benefited from some unusually large recoveries. The average portfolio yield increased benefiting from the suspension of the depreciation on assets held for sale. New business volume exceeded $600 million, up 10% sequentially and nearly 25% from a year ago excluding the Dell Canada business we sold last quarter. While the average yield of new business volume was down slightly, CIT Bank originated about 75% of the U.S. volume in the third quarter, which helps the margin. We continue to see strong growth in Asia and Latin America, mainly China and Brazil. In fact, in the third quarter, we booked nearly $200 million of volume in these regions; and year-to-date, we have done nearly $0.5 billion. That's roughly 1/3 of new business volume. And as John mentioned, these regions are growing significantly faster than the U.S. Moving onto funding. We continue to make progress advancing our liability restructuring roadmap. In addition to the debt repayments we discussed previously, we closed a $2 billion committed bank facility, which was a significant milestone. The new first-lien facility is at a much lower cost currently LIBOR plus 275 with no floor, down from LIBOR 450 and 1.75% floor. Since it is also a revolver as oppose to a term loan, it enables us to more effectively manage cash and reduce negative carry. And finally its covenants are similar to the Series C debt whereby the general lien on collateral falls away when the Series A debt is repaid. We issued about $580 million of U.S. CDs at an average cost of 150 basis points with an average turn of over 3 years. We also raised some additional deposits in Brazil and renewed $0.5 billion committed conduit at a lower cost and longer tenor. Bank holding company liquidity remains strong with $4 billion committed and available, including $3.2 billion of cash and short-term investments and $800 million of undrawn revolver capacity. Since the beginning of 2010, we have eliminated or refinanced over $15 billion of first- and second-lien debt including the $7.5 billion of first-lien debt, $6 billion of Series A notes and $2.1 billion of Series B notes. We have lowered our cost to debt and improved our funding flexibility and are well positioned to execute the balance of our liability restructuring roadmap. For instance, now that we have eliminated the 2014 Series A debt, we have removed most of the restrictive covenants and can realize the benefits of the consent exchange offers. We can now address the capital structure of certain subsidiaries to lower costs and improve operational flexibility. Furthermore, all the $15 billion of the 7% Series A and C notes are callable at par starting January 2012. Refinancing the $6.5 billion of remaining Series A debt is a priority because once it is repaid, our balance sheet largely becomes unencumbered. We have made a tremendous amount of progress over the past 18 months, and we'll continue to advance against our roadmap. With that, I'd like to turn it back to Modesta and take your questions. [qa/>

[Operator Instructions] Your first question today comes from the line of Mark DeVries with Barclays Capital. Mark C. DeVries: Can you talk about what your target deposit growth strategy is over the next few quarters and also what your maturity schedule is on your brokered CDs? John A. Thain: Sure. So the deposit growth will be dependent on asset growth. So in the third quarter in terms of bank-funded volume, it was about $835 million. That got funded with a combination of cash, the bank has about $800 million of cash; brokered CDs, which Scott just gave you the average maturity of the brokered CDs almost about 3 years. And then now with our Internet deposits, our Internet deposits, we only have been raising them for 5 days, but the Internet deposits are running a little over 1 year weighted average maturity. And their weighted average cost is about 1.2%. So we'll use a mixture -- and we also have student loans for sale. So it will be a combination of those four funding sources. Scott T. Parker: Yes. On the brokered CDs, our weighted portfolio is just about 3 years to match up with some of our asset classes. Mark C. DeVries: Okay. And you also saw some pretty consistent across-the-board credit improvement in the quarter, and I think, John, you commented on that you're not seeing sign of a double dip in the U.S. Could you give us a little bit more color on what you're seeing on the credit front? Scott T. Parker: Well, I think on the -- what we've -- remember, we marked our book down so we've been kind of working through some of those. On the new business, we've really been focused on the structure of the deals and transactions. And I think that we're kind of staying firm in regards to making sure the structure and pricing are consistent with our underwriting parameters. John A. Thain: And then overall, the -- as I said, I think the U.S. economy is growing, it's just growing slowly. It's not creating a lot of jobs, but when you look at the utilization rates that we see in Rail, when you look at the kind of volume that we're originating across the board, the -- I'm more optimistic about the U.S. economy than you would get if you were watching the market or watching CNBC. Mark C. DeVries: Okay. And can you provide us any kind of sense of what we should expect for the provision line over the next couple of years? Scott T. Parker: We don't kind of look at the -- give guidance around that, but I think we're trying to get to some of the long-term targets we have already laid out at several conferences. So we'd like to be in the provision line somewhere around 100 basis points depending on mix of business.

Your next question comes from the line of Mike Taiano with Sandler O'Neill. Michael P. Taiano: I guess given that Series A note paydowns are sort of the priority. I mean given your expectation for cash flows going into next year, do you expect that to be a 2012 event when -- for the full $6.5 billion or do you think that more than likely it would spill into the following year? Scott T. Parker: I would say kind of regular cash flow won't be enough to pay down the $6.5 billion, so it would have to be a combination of some capital market issuances. We do have alternative liquidity on certain conduits and other structures that we're looking to fill up with assets and then we will have some of the cash proceeds from some of the asset sales. That would be available for kind of Series A debt repayments. But I can't say that -- it's kind of hard to figure out whether we can do it all in 2012, but we're focused on doing as fast as possible as well as maintaining a prudent cash balance. Michael P. Taiano: Okay. And then I guess just to follow up on the Corporate Finance segment, you'd said the fundings were down a little on the asset base revolvers. What was the primary drivers of that? Was that just the yields there are getting more competitive or something else? Scott T. Parker: I think it's really on the ABL. So we had a little bit more ABL than we did in the second quarter. And with those, based on current economic, the start-off funded rate is kind of not at what we've seen historically. And so what you're -- we're going to do is, hopefully, with economic growth that John talked about and people becoming more confident that those revolvers will be drawn down for building inventory to kind of building inventory or to finance growth. And we just haven't seen that in the last couple of quarters yet. But I don't think it's a -- it's not a kind of a concern for us because we like the kind of the credit profile and having a good balance between cash flow and asset base. Michael P. Taiano: So in other words, it's more customer confidence that is the driver of that than necessarily pricing at this point? Scott T. Parker: Well, I mean -- yes, I mean, it's definitely on the funded nature of that, it's really what the customers feel they need to draw when we do the original underwriting. But in regards to pricing, pricing is definitely tighter in the ABL given the credit profile that versus some of the cash flows I've mentioned that the pricing kind of went up a little bit versus the second quarter.

Your next question comes from the line of Moshe Orenbuch with Crédit Suisse.

You mentioned in the release that you had about a 15 basis point improvement kind of in your core margin. What would that look like kind of at the end of the quarter if all of the repayments you had done were fully in place and maybe you can give some comments about what that might look like in Q3 -- in Q4? Scott T. Parker: In Q4, well, I think we're still -- as we talked about in previous quarters, we still have some items running through the pre-FSA margin line that kind of distort and put some noise in there. The main one is the cash collateral, prepayments we've experienced on our TRS structure, Total Return Swap. That will continue to decline in the fourth quarter or declined significantly in third quarter as prepayments have slowed down. And as such, some of the improvements from the debt refinancings and payoffs that we've had are going to be muted into the fourth quarter. And I would say that going into 2012, some of that noise will be out of there and will get to more of a kind of steady state.

So the amounts that declined in Q3 and will decline further in Q4 would be about how much? Scott T. Parker: I'd say 25 to 30 basis points.

Each quarter? Scott T. Parker: No, just in the third quarter. So I think it will kind of -- it will go down a little bit more in the fourth quarter in regards to the percentage.

But by the same token, you had -- you refinanced debt across Q3, so some of that benefit wasn't there yet so... Scott T. Parker: Yes. Well, that's -- so if you look at kind of the actions, you're going to -- we got some of that benefit in the third quarter somewhere around 45 basis points or something. And then, given the payoff of the Series A at the end of the quarter and some of the stuff that we did in October, my sense is that, that will continue to flow through in the fourth quarter, but again be offset by the lower benefit from the Total Return Swap.

Your next question comes from the line of Henry Coffey with Sterne Agee. Henry J. Coffey: I just wanted to piggyback off of the last question. When looking at your opportunities for the fourth quarter, you're obviously starting at a very low -- a lower cost of funds basis. If you are doing kind of an end-of-period analysis, what would your cost of funds look like right about now, I mean, given if everything that had been done and what are the opportunities in the fourth quarter? Scott T. Parker: Yes. So if you just look at the kind of the -- only the coupon not any of the deferred fees amortization, but if you just look at the coupon based on the actions we've taken to date, it's going to be somewhere in the -- below 5%. And so that's come down from over 6%, 12, 18 months ago. So I think there's been a lot of progress, kind of on that front. And so as we continue to grow, the business and the bank and then pay off some of the Series A, that will continue to decrease the overall borrowing costs for the company. Henry J. Coffey: And John, you mentioned that you are making a lot of progress with your regulators. What is the final implication of that? I know when we look at your slide, you have a capital ratio that's significantly lower than your current capital ratio. Can you give us a sense in 2012? Do we see buybacks? Do we see more asset growth? Do we see dividends? Can you give us a sense of what getting a greenlight from the regulators means in terms of your ability to change things on the capital side? John A. Thain: So the likely change from the Federal Reserve, which is where the written agreement is, is that the written agreement would be replaced with some form of memorandum of understanding. And that memorandum of understanding is typically private. There would still be restrictions in that memorandum of understanding and it's not totally clear exactly what they would be, but I would not anticipate that we would be able to pay dividends or buy stock back in 2012. We would, I think, likely need permission to be able to do that. But I think we would have a greater degree of flexibility in our business.

Your next question comes from the line of Ken Bruce with Bank of America Merrill Lynch.

My question gets at some of the earlier questions, and I'm hoping just for a little additional color, I recognize that this is a little bit of a chess game as can you look forward. But if I understand properly, you've got -- on your asset yields, you've got an acceleration or I should say a better use of asset backed loans relative to cash flow loans that's having a downward affect or having some pressure on the asset yield. And as you can look forward, the best expectation you have is that as the confidence increases, you'll start to see some shift, a mix shift away from the asset-based loans. Could you give us a sense how you think about that? Scott T. Parker: No. I don't think we're going to shift away from doing that. I think you're right from a pricing point of view. Right now, if you have an asset-based loan that's 30% utilized, you're making kind of LIBOR 300, 350 on that balance and then some unused lines. Commitment fees, if that gets drawn up to 50%, 60%, the yield on the asset becomes greater than the unused line fee. So I think that would be an asset growth perspective. But from an overall portfolio, we want to keep a balance from a risk profile of kind of the -- whether it's 50-50 or 60-40 kind of cash flow ABL kind of mix is something we want to maintain.

Okay. And just as if you pull back a bit, obviously, there was quite a bit of consternation in the third quarter related to the capital markets. Was that you think impacting the market from your perspective? And it seems like you've accelerated fundings and commitments maybe a little counterintuitive to what we saw in -- across many other businesses. So I'm trying to appreciate kind of if the, if you will, the dislocation that occurred in the third quarter was playing to you or if it's just organic growth that you see as you kind of reposition the businesses is offsetting that and just get a sense as to the general market environments you're operating in. John A. Thain: Yes, I mean, I think we ended the second quarter with a pretty good pipeline of transaction in the Corporate Finance business, and those closed kind of prior to some of the August events. So a lot of that business was already in the pipeline and the customers kind of move forward those transactions. I think post some of the activities I think September in our current pipelines is a little bit down from kind of what we had in the second quarter, but it's still pretty good. And so we still see good activity out there around that. But in respect to the third quarter, definitely some of that was closed in July and early August. Scott T. Parker: And also we're seeing a little bit better pricing on the cash flow side, which is positive.

Right. Yes, it seems like there was enough dislocation that actually it helps out the pricing in that particular area, it just -- it seems that there's quite a bit of competition where the banks are involved and I think that's what you indicated through the pricing on the asset-based loans and cash flow-based loans where there is little less competition has eased up. So if there's a return to, I guess, the volume on that side that, that could be beneficial for your margins overall? Scott T. Parker: Yes.

Your next question comes from the line of Brad Ball with Evercore. Bradley G. Ball: Just as a follow-up to the regulatory question, John, you mentioned that you expect to be substantially complete with the written agreement by year end, which is what you said in the past. But just what exactly does that mean? What remains to be addressed in the written agreements? And also just to clarify your response to the prior question, you don't expect any restrictions on the business or specifically the business within the bank once the written agreement issues are addressed, is that correct? John A. Thain: So let's go backwards in terms of the set of questions you asked. Just in terms of the bank, there is no restrictions on the bank now. So the written agreement applies to the holding company. The bank did have a cease-and-desist on it, which was lifted. So the bank itself is not restricted in terms of its business. The written agreement has a laundry list of items, most of them relate to credit, credit grading and the management of credit risk compliance and the whole compliance process, and then what I would categorize as problem loan management and dealing with nonaccruals, charge-offs, et cetera. And all of those items, we will have substantially completed the issues that were raised in the written agreement. Bradley G. Ball: Great. And then specifically to the bank, you still have in the bank for a sizable student loan portfolio. I wonder if you can give us a sense as to the plan. Will that just continue to run off or do you expect to sell that? And if so, what kind of cash proceeds would you expect from that and could those proceeds be potentially used to help pay down the Series A debt you discussed earlier? Scott T. Parker: No, that's so separate. So the cash and the assets in the bank, we don't dividend up to the parent company. So really, we see these student loans in the bank as kind of a source of funding as we continue to grow our commercial business in the bank. So I think the -- as we've kind of demonstrated over the last kind of 1.5 years is that we'll selectively -- based on kind of the right pricing, selectively sell assets to provide liquidity to fund that growth. So over time, as we grow the commercial assets, we'll continue to run it down as well as selectively sell assets.

Your next question today comes from the line of David Hochstim with Buckingham Research. David S. Hochstim: I wonder if you could give us a little more color on sort of pricing in Corporate Finance and in Transportation Finance over the last year. I mean, could you give us, directionally, how much lease rates and loan rates have changed? Scott T. Parker: Well, I think on the Corporate Finance side, if you look at cash flow given some of the dislocation just as we've experienced in the capital markets, pricing has kind of gone up, I think, relatively for comparable risks and it's allowed us the opportunity to kind of move up a little bit in some of the credit quality because the pricing there is attractive given what's going on. On the ABL, it's kind of been -- it peaked kind of post 2009, but I think it's been playing and hovering in the same spot of -- in the 250, 300 range depending on kind of the nature of the assets being secured by the facility. So shorter duration, heavy turnover type retail clients probably in the lower than some of the other asset classes out there. On the Transportation side, we've seen the kind of rebound in the Rail. That's kind of been quarter-over-quarter as utilization and demand has picked up. And on the aircraft leasing, it's really kind of aircraft-type specific but in general, we've continued to have our fleet fully leased or almost fully leased over the last period of time and pricing really is a derivative of both the aircraft type. So in general, we've maintained good lease pricing in the aircraft side. David S. Hochstim: So planes that are being released from 5 years ago, are lease rates higher or lower? Scott T. Parker: Well, I mean, lease rates are a function of kind of the cost of the equipment. So because the assets -- one of the tough parts is a 5-year asset is depreciated down and so the rate is based on that. So as kind of a factor, it would probably go down as the equipment gets older. But the kind of lease percent, because the asset is lower, kind of tends to go -- kind of stays in the realm as a percent basis relative to lease factor and the actual dollars of rent that we collect. So dollars would go down, but the percentage would stay fairly stable. David S. Hochstim: Okay. And then can you talk a little bit about some of the initiatives to restart some old lines of business? You talked about that in the past, but how is that going, new kinds of financing? John A. Thain: Yes. So we did a couple of things. One is we hired a very experienced team of commercial real estate experts, who actually just started a couple of weeks ago. And we are reentering the commercial real estate lending area, although we will do that on a very conservative basis, making first-lien loans with relatively low loan to value and in a way that we think plays to our strength, which is primarily lending against assets. And then the other place, which we're restarting is the equipment finance area where we had a core expertise where we continue to have a good knowledge base. And again, it plays to our expertise of lending against assets. David S. Hochstim: And how much could those contribute to loans over the next year? I mean, can we start to see commercial loan assets growing in the first to second quarter or? John A. Thain: Well, obviously, the goal is to have them grow. So we do want them to grow. We want them to pay for themselves. But we're not going to predict kind of at what rate, and you'll kind of see as the quarters progress.

Okay. And just to clarify, did you -- you said that even when the written agreement is lifted, you don't expect to be able to buy back stock, return capital in 2012? John A. Thain: That is what I said.

Your next question comes from the line of Chris Brendler with Stifel, Nicolaus.

Just a quick follow-up on the fee income line, the line in your other income that's feed on the revenue used to be somewhat disappointing. I just didn't know if you -- I know you made, I guess, some general comments about your ability to get fee income. Anything else you could say about the prospects for a rebound in that line and what is driving some of the weakness there? John A. Thain: Yes, I think a lot of that is, as I've mentioned, that's really where the markdown on the operating leases that we have and held for sale goes through that line item. And so that's probably the main driver. Other than that, it's kind of -- it stayed. It has been fairly consistent over the last couple of quarters. Scott T. Parker: And I don't think there's any real weakness in -- from a business point of view. John A. Thain: No.

Okay. And then the second question would be just in terms of the business, in the past, you've given some rough metrics on what kind of spreads you're generating on new business, particularly as it relates to the bank. And I just wanted to know, some of the changes in the marketplace if you've seen -- it sounds like from a macro perspective, things seem to be pretty much stable, maybe a little bit of increasing competition, but your funding costs are obviously lower as you now originate much more of your fraction of the bank. Just give us an idea where the spreads are. And then if we do double-dip, what do you think the outlook would be for asset growth? I get this question a lot that -- do you think -- like I think that, on one hand, you're, obviously, macro sensitive and loan demand would fall. But on the other hand, you've made such progress on the bank side that you may be able to, I think, still continue to fund good lending opportunities given how much your cost of funding has dropped on a marginal basis. Can you just comment on how you think about asset growth going forward under sort of the current macro scenario of slow growth and one of a double-dip? Scott T. Parker: Yes, Chris, I'll answer the first question and John will answer the second part of that. So on the first part, we haven't seen any change, so that's why I didn't repeat it this quarter. But the corporate Finance loans and the vendor assets going into the bank are kind of maintaining -- the yields are not declining. So the yields are still kind of in the range that I've put out there before and given the cost of funds, both those businesses are kind of getting to the finance margins we would expect in the long-term targets that we've laid out. So it's just a matter, as we've mentioned before, it's just a matter of kind of the transition and it's still ramping up. So it's still on a proportion of the assets we have between the parent company and the bank. We'll continue to show and talk about that in future quarters. But I'll turn it over to John for that question on assets. John A. Thain: Yes. So in terms of the economy, as I said, we don't see a double dip, and we just see slow growth in the U.S. and we demonstrated, and I think can continue to demonstrate that we can grow assets in an attractive way in a slow-growth environment. If there was a double dip in the U.S., it would negatively impact loan demand. And so I think it would slow down our ability to generate new assets and it would also, I think, likely increase or at least it would slow down the improvement we're seeing in the credit portfolio of our existing book. So if we got into a double dip, I would expect both slower asset growth and some credit deterioration in the existing book. I think there's no way around the fact that we are sensitive to economic activity.

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

I guess in terms of -- and you talked a bit about the -- after you meet the terms of the written agreement, you might not be able to return capital. And then you specifically, I think, said that way you could look at some of your businesses and try to lower costs and increase operational flexibility, perhaps tied to that. Can you explain exactly what you mean by that? And what kinds of steps could you specifically envision being able to take after having met the terms of the written agreement that you can't take right now? Scott T. Parker: I think I will kind of -- there's 2 comingled pieces I think, Sameer. So one was the -- what I mentioned was around the debt covenants. So as we paid off the 2014's and had the consent of exchange offer, now we're -- the only remaining covenant that's -- is kind of the cash sweep. So with that, it's allowed us to kind of look at our subsidiaries and kind of work on the capitalization of each one of those, which will help us with respect to both lowering costs in certain areas, improving our tax efficiency, as well as some of the flexibility around where we can fund assets in different parts of the world. The second piece on the written agreement, I'll let John comment on what he said. John A. Thain: Well, I think part of the answer is we don't know for sure what form of memorandum of understanding would be written. Typically there are -- typically, they would require permission to buy back stock or pay dividend. And So I would expect that would be the case. I think the place where we would hope to get more flexibility is just in our overall business mix and being able to diversify out our business in attractive ways.

Okay. That's helpful. The other question I had is in terms of your asset sales, I think you said little over $700 million. How many of those -- or what mix of those that $700 million consisted of loans on nonaccrual because there's a decline in loans on nonaccrual. Just want to get a sense for the contribution from asset sales. Scott T. Parker: I'd say roughly probably 50% of those.

Okay. And then in your Trade Finance business, I think it looked like there was kind of an increase in loans on nonaccrual there. Is that any sort of indicator of the pressure that retailers are facing or I mean, can you just give us a little bit more color on that? Is it volume related? John A. Thain: No, it's actually, it's just one account. And so it does -- it's not indicative of anything.

Okay. That's helpful. And then just the last question. The transfer of the Trade Finance business, I thought you might have said that you expected to get approval to transfer that into the bank by the end of this year, is that still your expectation? John A. Thain: No, and I don't think we said that. So that's...

Maybe I was confusing that with the Vendor Finance, which you've already done. But do you have a sense of the Trade Finance and when you expect that to be going to the bank? John A. Thain: That's a 2012 project.

Okay. And you're continuing to make progress there. Are there any early indications that, that is going to be very likely because you were very confident about the Vendor Finance. Just want to get sense for where we stand on the Trade Finance? Scott T. Parker: I think I would just stay with what I said, which is that's a 2012 project.

Your next question comes from the line of Don Fandetti with Citigroup.

John, I was wondering if you could talk a little bit about how discussions have gone with the rating agencies and if, given your plans to pay down debt, if investment grade rating is even on the radar screen for '12 or is that more of a '13, '14 type target? John A. Thain: Well, first of all, I would never attempt to predict when the rating agencies will do things. I would say that I think it is likely we will trade at investment grade spreads before we get investment grade ratings. I think that we are rated or not rated where we should be if you look at our capital ratios, if you look at our earnings power, if you look at the fact that we've repaid or refinanced $15 billion worth of debt. I think we're rated too low as it is. But I'm not going to predict when they will actually give us investment grade ratings and I think that we will get to a primarily uncollateralized borrowing structure and will trade at investment grade spreads before we get investment grade ratings.

Your next question comes from the line of John Stilmar with SunTrust.

Scott, I wanted to touch briefly on a comment you just made with regards to international business, in which where to fund assets in the world, I think was the comment. I'm wondering if that also ties into my other question, which is on the Vendor business, it seems -- can you talk a little bit more about the types of loans that you're making in the international vendor business and is that really the same assets that tied back to your comment of where in the world to fund assets given that seems to be the platform for a lot of international growth or am I missing something? Scott T. Parker: No, I think the platforms internationally we have for vendor are in the same kind of industries that is the U.S. business. So it's mainly on the office product technology and telecom equipment. So it's just we're following, in some cases, some of our vendor partners as well as doing kind of local organic programs with relationships we have in each one of those regions. And as we've said, especially in Brazil and China, we have funding from our Brazilian bank as well as other sources there and we put in place a conduit with some of the large banks in China to fund our business in China. So I think that we feel good about that, and we also have a sizable kind of European platform that we're continuing to -- we have funding in place for most of that business also. So it's the same type of equipment that we have -- mainly the same kind of equipment we have that we do here in the U.S.

So is it a vendor business where it doesn't -- I guess what part of the business "where in the world" the assets can be financed? It seems like to me that the vendor business, internationally is relatively small today. You have gotten liquidity and funding in place. So the marginal benefit from international financing advancement would come from where? John A. Thain: I guess I don't totally understand the question. We are growing those assets outside the U.S. We're funding them to the extent we can locally. And I think that's just a source of growth for us. You look at where the GDP in the world is growing faster. It's in places like Brazil, places like China, and that drives faster asset growth on our site.

Perfect. So it's the portfolio mix. And then with regards to -- can you characterize cash flow and ABL type investments and compare and contrast the types of partners or people that are in the same kinds of facilities, or maybe a better way of asking the question is what your competition is? Is it different for the different types of asset classes? And if so, could you kind of characterize what those are? Scott T. Parker: Specifically in the Corporate Finance side?

Yes, for their cash flow versus ABL. Is it banks in the ABL type stuff that you're either partnering with or competing against? Or -- And then is it insurance companies, BDCs, other types of vehicles in the cash flow, is that really what the competition is today and is that reflective of some of the comments you had with regards to pricing and trend? Scott T. Parker: Yes, I would say there's definitely more competition in the ABL because you have both kind of regional banks, as well as the national kind of banks that are playing in there plus GE Capital and others that play in that arena. So on the cash flow, it tends to be a smaller group of competitors. So it's a -- and that one I think the competition and the number of players in there is much less, and the expertise and underwriting capabilities for cash flow are something that really has built on both the customer relationship but also structuring capability. And so I would say that's kind of one of the reasons for the pricing kind of dynamics around there.

Your next question is a follow-up from the line of Mike Turner with Compass Point.

You've really touched on this earlier, but what was kind of the average gross origination yield if you look across the $1.9 billion in funded originations in the quarter? Scott T. Parker: It's kind of hard to answer that in the sense of the difference business lines we have. Right? So I mean trade is really not kind of -- well, trade wouldn't be in the growth, but you've got transportation assets, which is really kind of a lease rate and railcar versus Corporate Finance and Vendor. So the blended number I think -- and maybe we can circle back with Ken and the IR team. I don't have the specific number off, but it's north of 6% in average.

Okay. That's helpful. And then also you've kind of mentioned in the past about looking at potential portfolio purchases now that you've got the Internet deposit strategy rolled out. Could you talk about that environment? I mean assuming spreads have widened, I would assume pricing might be more attractive. I don't know what the environment is like, and if there's as many willing sellers out there. John A. Thain: The answer is there are quite a number of portfolios for sale, and we believe that there will be pretty interesting and attractive opportunities for us to purchase portfolios.

Okay. Would you consider other lines that you're not in or really kind of just add on to existing businesses. John A. Thain: No, I think it's much more likely we would stick to the businesses that we know. I don't think we would buy a portfolio in a business that we didn't have an expertise in.

Okay. And then the last, the increase in the comp expense in the quarter, was that -- I know you said you added a new CRE team, I mean, is that kind of a onetime or is that a trend maybe that might develop? John A. Thain: I don't think it's related to the kind of the one team that we brought on. So... Scott T. Parker: We wish it was. John A. Thain: Exactly. So I think again looking at the trend was a little bit higher based on a couple of items in regards to kind of the mix of some of the people we did bring on. Our headcount was flat, but there are differences in the compensation of some of the folks we brought in, in the quarter. Also some is varied based kind of on volume being up on the sell side. You'd have a little bit compensation increase there. So I wouldn't say 135 is a trend nor is 120, but as we've talked about we're kind of looking and focusing on total expenses.

Your final question today comes from the line of Mike Taiano with Sandler O'Neill. Michael P. Taiano: Just a follow-up on the acquisition question. Given the fact that you're probably not likely to return capital to shareholders in 2012, does that just make you more inclined to look at acquisitions to better utilize the excess capital, does that factor in to the decision? And then also given that you still have that 7% debt out there, does that weigh pretty heavily and how you kind of view acquisitions as well? John A. Thain: Well, I think that the debt and portfolio acquisitions are really two different things. We absolutely want to retire the $6.5 billion of Series A debt kind of as quickly as we can. That will be determined more by cash flow generation, as well as our ability to access the capital markets. But the goal is to pay that $6.5 billion back as quickly as we can so we can become unsecured. That's really a separate issue from portfolio acquisitions because we do have substantial excess capital. We would only buy things that offered us attractive returns and attractive returns to our shareholders and was attractive vis-à-vis our own origination capability. So there's no particular pressure to push to buy portfolios. But I actually think in this environment, there are quite a number of motivated sellers and so I think we may have some pretty attractive opportunity to buy things.

Ladies and gentlemen, that does conclude today's Q&A portion. I would now like to turn the call back over to management for any closing remarks. Kenneth A. Brause: Well, we thank you all for joining us this morning and for all your questions. And if you have anything we didn't answer, please feel free to contact me or any member of the Investor Relations team. Thanks, and we'll talk to you again next quarter.

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