Good morning, and welcome to CIT's Fourth Quarter 2018 Earnings Conference Call. My name is Keith, 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 Barbara Callahan, Head of Investor Relations. Please proceed, ma'am.

Thank you, Keith. Good morning, and welcome to CIT's Fourth Quarter 2018 Earnings Conference Call. Our call today will be hosted by Ellen Alemany, Chairwoman and CEO; and John Fawcett, our CFO. After Ellen and John's prepared remarks, we will have a question-and-answer session. [Operator Instructions]. Elements of this call are forward-looking in nature and may involve risks, uncertainties and contingencies that may cause actual results to differ materially from those anticipated. Any forward-looking statements relate only to the time and date of this call. We disclaim any duty to update these statements based on new information, future events or otherwise. For information about risk factors relating to the business, please refer to our 2017 Form 10-K. Any references to non-GAAP financial measures are meant to provide meaningful insights and are reconciled with GAAP in our press release. Also, as part of the call this morning, we will be referencing a presentation that is available in the Investor Relations section of our website at cit.com. I'll now turn the call over to Ellen Alemany.

Thank you, Barbara. Good morning, everyone, and thank you for joining the call. 2018 was a milestone year for CIT. Through steady execution of a multiyear transformation plan, we successfully delivered on our financial targets and created long-term value for shareholders. On Slide 2, you can see the highlights. We grew average core loans and leases by about 6%. We hit our operating expense target and took out more than 12% of expenses over the last three years. We made substantial progress in rightsizing our regulatory capital, reducing our Tier 1 common equity ratio to 12%, down from more than 14% a year ago. And we met our return on tangible common equity goal, excluding noteworthy items, ending the quarter at 10.1%. These actions and more allowed us to increase our tangible book value per share by 3% and grow earnings per share from continuing operations by more than 30%, excluding noteworthy items. Our road map has been our five point strategic plan, which is summarized on Slide 3. In addition to the points I mentioned, we also delivered on several other fundamental initiatives that advanced our plan. For example, we largely completed our simplification efforts following the closing of the NACCO and reverse mortgage deals. Exiting non-core operations enabled us to focus more deliberately on growing our core business and, as a result, we increased funded volume 28% year-over-year. We optimized funding by terminating costly legacy vehicles, and our next unsecured debt maturity is not until 2021. We reduced higher-cost brokered and commercial deposits and grew consumer deposits. We repurchased $1.6 billion of stock and increased our common dividend per share by 56%, and we prudently managed risk. As a result of the divestitures, our operating risk decreased. And as we made the strategic shifts in our Commercial Finance…

Thank you, Ellen, and good morning, everyone. Net income for the fourth quarter on a GAAP basis was $82 million or $0.78 per common share and $428 million or $3.61 per common share for the full year. Excluding noteworthy items, which related to our strategic initiatives, income from continuing operations was $127 million or $1.21 per common share this quarter, compared to $131 million or $1.15 per common share last quarter and $130 million or $0.99 per common share in the year-ago quarter. On a full year basis, earnings from continuing operations, excluding noteworthy items, decreased. However, earnings per share increased by more than 30%. The reduction in earnings reflected nonstrategic asset dispositions over the past two years, growth in our core businesses and a lower effective tax rate, while the earnings per share improvement reflect the reduction in share count as we continued to return capital to shareholders. Funded origination volume in the fourth quarter of $3.6 billion was particularly strong in our Commercial Banking segment. However, higher prepayments, especially in Commercial Finance and Real Estate Finance, tempered growth in average loans and leases in our core portfolio, which grew 2% compared to the third quarter. Total average loans and leases decreased, resulting from the strategic sale of our European Rail business, NACCO, in early October, which represented $1.2 billion of assets as well as the continued runoff of the LCM portfolio. As shown on Slide 7 of the presentation and as I previewed last quarter, we have three noteworthy items, all in continuing operations, that aggregated to a net after-tax charge of $45 million. All three items were related to the sale of NACCO and the related liability management actions. These included the gain on the sale of the NACCO business, a charge related to the termination of…

Thanks, John. In closing, I want to reiterate that it's been a strong year. We did what we said we would do, and we know there's still more to accomplish. CIT has a deep heritage, about 110 years of working with customers to navigate their goals. We're proud of the contributions we've made so far, motivated by our momentum, and committed to deliver for our customers and shareholders. With that, we're happy to take your questions.

[Operator Instructions]. And the first question comes from Ken Zerbe with Morgan Stanley.

I just want to start off, actually, it's back on Slide 15 where you showed your deposit growth by channel. And, I guess, what caught my eye was the reduction in the online deposit balances. I know you guys are still served at the higher end or at least certainly very competitive with other online savings accounts. Can you explain a little bit more why the online deposits fell this quarter?

Yes. So, Ken, just with respect of history, recall that, last year, we went out with an offer rate of about 1.85 in February. And notwithstanding the fact that we saw Fed hikes in March, June and September, we actually held on for that 1.85 offer rate through to the beginning of October. When we got into October, we started to see a lot more competition coming to the space. And I think, as most online banks are doing, we experimented a little bit with rates. And so we've tried to move from 1.85 to 2.15, quickly moved on to 2.25 where we met with competition from about eight other online banks, and so there was a fair bit of competition in the space. That said, I think we started to get a little bit of our mojo back. And then in - very early in the first quarter of this year, post the December rate hike, moved our online offer rate from 2.25 to 2.45. And we've seen good pickup in terms of online acquisition of accounts.

Ken, this is Ellen. We're also trying to balance our deposit needs with the funding - the other side of the balance sheet, the funding needs as well, keeping that balanced.

All right, makes sense. And then, I guess, just coming back to the stock repurchase, I think I heard, Ellen, you mentioned $450 million of buyback, was that - that was just for this like upcoming year, 2019? Is there any chance - and I want to make sure I'm right about that, but is there any chance you could front-end load that? Or is that also subject, presumably, to loan growth that you may or may not do the full amount if loan growth is better or worse than expected?

Yes. So the $450 million is a commitment through the nine months of - the first nine months of the year. And so we've just recently received the authorization of the non-objection from the Fed. It's not necessarily tethered to any limits or restrictions in terms of what we do. Obviously, we prefer to be buyers below tangible book value, as I think we have been. And we've been very judicious in terms of the pacing of returns. So we'll see the $450 million covers us for nine months, and I think we'll be as opportunistic as we can to maximize shareholder value.

Okay. Perfect. And then just one last question. Just in terms of the operating expenses, I understand the guidance were down 3%. I think you'd mentioned $50 million reduction over the next two years. It looks like a big chunk of that comes in the first one year. Can you just give a little more detail? I mean, you guys have been so good about actually cutting expenses on an absolute basis, like where are you seeing more of these cuts coming from? Like what are the underlying, I'd say, businesses or expenses that you are reducing?

Sure. So, Ken, one is just want to make sure that we're balancing this with investment in the business and then the lease accounting changes that John mentioned. But we really - this is a story of continuous improvement. We probably still have a little of stranded costs from some of the businesses that we divested that we still want to get out. Most of these expenses are coming through the functions, not from the core businesses themselves. And we're using technology and digitization to provide for some of this efficiency. So, for example, some of the projects around data. There's many parts of the company that provide the same data to different people for different reports. By centralizing data, you'll have one source for all of that. We've launched a major credit reengineering project in the company. We were working on records management, vendor contract negotiation. We're trying to migrate more jobs to lower-cost locations. We think there's still some more opportunity to expand some layers in real estate. So this is a story of continuous improvement. We're building it in the DNA and the culture of the company, and we're working all of these items.

Yes. And I think Ellen said it exactly right. I mean, this is all about continuous improvement. And this is a company, I think under Ellen's leadership over the last three years, we've proven we can take $150 million out. And so if you just take $50 million a year, this new run rate gets us down to about $25 million or $30 million a year. And again, focus on the fact that we said at least $50 million. And so we're going to continue to look for more opportunities. But this becomes a little bit of diminishing returns. As you go through these programs and you've taken out $50 million a year over three years, I think, on the face of it, 3% of $1 billion doesn't sound that impressive. But the reality is, is that when you think about what it costs to keep the lights on in the bank, the 3% is actually multiples, given what your fixed cost base is in actually running the bank. And so this is going to be another daunting challenge, but I think we've made good progress in terms of identifying the pockets that we have to go at. And we're just not going to relent. It's just going to be continuous improvement, as Ellen said.

And the next question comes from Moshe Orenbuch with Crédit Suisse.

Great. Kind of two little ones and then a follow-up kind of from a big picture. I guess, John, can you just clarify some of the steps you said about the railcar? You said that it was pretty stable this quarter, but it's going to be down - still down 15% to 20% in 2019, maybe just explain why that is. And also, you mentioned the loss sharing arrangement ends. So what happens after that from a net interest income perspective? And then I've got a follow-up.

Yes. So on the rails, Moshe, so what's happening is, is that this is the pig in the pipeline, and so it's principally around tank cars. And so, as an example, about 1/3 of what we priced in 2018 were tank cars. And so we're still going to have another 25% of tank cars repriced in 2019 and then that diminishes further into '20. But it becomes a smaller and smaller number and it becomes less and less relevant in terms of the impact because what you're seeing is the top rate is coming off as the floor rate is starting to move up and so there's been a convergence in pricing. The other thing is that in 2018, we've seen some pretty substantial prepaid benefits to the pass-through of the Rail business, which if they come, that's great, but they're not built into the forecast, and so that's the big part of what's going on in the rail program. That said, the other thing I would mention is, is that while last year we guided down 20% to 30%, we actually wound up kind of around 20% or maybe a little bit under that on a full year basis. So I think we approached this fairly conservatively. Again, as I've said in the past, the offset to tanks is the freight or infrastructure cars. And if the economy continues to chug along and rail loadings continue to increase, we think that there's potentially more opportunity there, but we haven't necessarily built it in. And then the second question around the indemnification. So when the indemnification goes away, essentially, we have a modest allowance against these. These are well-marked positions. What essentially will happen is the risk weighting of these will change, which would increase risk-weighted assets by about $1 billion. But at the same time, we expect that there's a benefit that will come the other way from applying new-age CRE standards. And so, net-net, from a risk-weighted asset perspective, it just becomes a big push. Does that help?

I guess it did. The kind of big picture question I was thinking about is you've obviously done all the things that you set out to do, but in the idea that you want to become more bank-like and the comments about being incrementally harder to kind of just to chop away expenses, are there any other big-picture restructuring thoughts that you have in terms of the process of becoming more bank-like? I mean, any ways to either accelerate the transition of the railcar business either away or into the bank or other things that could make the company more bank-like?

Yes. Look, there's no silver bullet. This is going to be a grind. I mean, so the guidance was 9.5% to 10% this year, 11% in the fourth quarter next year, 12% in 2020. I think we all, internally, think that these things are scores. Yes, on the rails, we look at this all the time with the cessation of the total return swap. We moved $350 million of rail cars from the bank holding company into the bank. And so we're always looking for opportunities to do that within the regulatory framework, which is - limits us [indiscernible] perspective, on the one hand, but also from a residual asset perspective on the other hand. I think, as we sit right now, probably about 60% of the railcars are in the bank, and we're always looking for more opportunities to kind of move those in. But other than that, I mean, this is just going to be a grind, and we're looking at every lever all the time. Right now, the big levers are grow the business, and I think we've proven that we can do that, and adjust the mix to higher yields, small, middle market businesses. At the same time, we continue to optimize expenses and return capital to shareholders in the most thoughtful way possible.

And the next question comes from Eric Wasserstrom with UBS.

I just wanted to follow up on some of the components of the net interest margin guidance. I think you were very clear on the first quarter effects. But just more broadly, to end up at the lower end of the guidance, would that be because of a change in the broader environment? Or would that be a function of something more specific to your mix in terms of assets or funding structure?

Look, I think the two big wildcards are really going to be around deposits and where we go on rail lease renewal rates. I mean, right now, all the visibility on rail lease renewals is we think we have a pretty good view on where things are going and feel pretty good about that. I think what remains to be seen is what happens with the deposit cost, what the - even with no Fed hikes, you would expect that elements of the existing book of business would continue to migrate to the higher offer rate, and so that becomes a challenge. And I think it also depends on where are the banks wind up going, what competition does vis-à-vis deposit costs. So those are the big things. And to the extent that rates do remain somewhat flat, the larger benefit of rate increase is going to be on pricing power, which we've started to push a little bit in Business Capital, and we should get a little bit of modest lift of the carryover of the December increase into the first quarter. But beyond that, I think things are going to be pretty flattish if the budget plays out, which contemplates no rate increases at this point.

Great. And just a related question, just in terms of the core asset growth. Can you just help us maybe get a little bit of a more granular understanding of specifically which asset classes you think will be growing and which may remain perhaps at the softer end?

Sure. I mean, as we've said before, right now, we've got tremendous momentum in Business Capital. All of our leasing, we have differentiated technology there. Our Commercial Services and Business Capital businesses have reported record volumes this year. We've really tempered the growth on the real estate side of the business. We're being very, very careful there, and it's really almost flattish. And then in Commercial Finance, again, we're really staying very, very disciplined on the credit side. And we don't expect a tremendous growth in that segment of the marketplace. And then I would say normal outlook for Rail, that was talked about already.

And the next question comes from Kwun Lau with Oppenheimer & Co.

I have a question about capital ratio guidance and buyback. So how flexible is your 11% CET1 ratio guidance in 2019? Your median guidance is 10% to 11%. If the stock continues to trade at the current valuation, which is below tangible book value, so what does it take for CIT to accelerate the rundown further in '19, say, to the middle of the range and enhance more buyback after third quarter '19 and be more opportunistic to the discount we are seeing?

Yes, there's a bit of an oxymoron there in terms of being opportunistic in the context of a partnership with the Fed. I think we've been actually quite judicious in terms of the way we've described capital and the way we're returning capital. Our guidance last year was to get to 11.5% to 12%. This year, we got to 12%. Our guidance next year is to get to 11%, and we're not moving off that. I mean, we continue to enjoy a good working relationship, I think, with the Fed. It's a very balanced, thoughtful relationship. There is a regulatory framework that we are hard with these guys. And so in terms of opportunity, we've been very clear with the market, we've been very clear with the Fed in terms of what we're going to do, and that's what we're going to do. So I would say there is not a lot of opportunity to go below 11% before the end of '19. And after that, we'll take a look, and we will look at our capital planning process and we'll have conversations with our regulators in terms of other possibilities.

Okay, that's helpful. Just one follow-up on the railcar leasing side. I know it's still very early, but could you please give us a color on how the PSR implementation might affect your fleet? Do you find it more difficult to remarket box car? And also, how do you manage your risk from future PSR implementation? But again, I know it's very early, but any color would be very helpful.

Yes, it really is very early. And just for the uninitiated, this is around precision scheduling railroading, it's an approach with railroad operations have on improving operating ratios through greater car utilization and establishing a train schedule of departures and a plan for each shipment within that train schedule. I really do think it's just too early in the process to comment on. I think, like a lot of implementations, even within Rail or apart from Rail, the devil is in the details. Typically, as these things go, there's some bumps in the road, which actually reduces velocity and maybe creates some near-term opportunity in terms of car utilization. But over time, you would expect that to the extent that the railroads become more efficient, there would be less need for cars. But the timing and the types of cars are going to be impacted or not impacted is very hard to say. That said, we are aware of it, we are working through it. And as it becomes a more, I guess, notable event on the horizon, I think we'll come back to you with better guidance.

[Operator Instructions]. All right. And the next question comes from Arren Cyganovich with Citi.

It seemed like your loan volumes were pretty strong. I think you said something like investment in five years, but actual growth was a little [indiscernible]. Was there large amount of pay-downs or what was the PE movement there?

Sure, Arren. We had a large amount of prepayments in the Commercial Finance and the Real Estate divisions, which has been typical. It's the same pace that we've been operating on. But pipelines are very strong. I do want to say, though, that customer sentiment is getting - is more cautious. Customers are really being careful with capital spending, given trade wars, the equity market performance, a perceived economic slowdown and some of the geopolitical issues that are going on. But as I mentioned before, the strongest volumes we have right now are in the Business Capital division and our commercial factoring. And most of the growth is coming from our technology-based businesses and most of the growth is in asset-based lending.

Okay. And I think you mentioned that the pricing in this quarter in certain areas and pockets were - was a bit better. Are you seeing any benefit from credit spread widening we had back in the fourth quarter? And is that impacting at all the pricing dynamic that you're seeing on new commercial loans?

Yes. Most of the pricing benefit that we're seeing is actually coming through Business Capital. And I think we've had our toe in the water in terms of pushing price probably since the third quarter, pushed a little bit more in the fourth quarter and having seen a trade down in volumes. But, I mean, that's the yin and the yang of this, which is how much price can you push without compromising volume. And so far, so good. So we'll continue to push where we can.

Thank you. And as there are no more questions at the present time, I would like to return the floor to management for any closing comments.

Great. Thank you. And thank you, everyone, for joining our call this morning. If you have any follow-up questions, please feel free to contact me or any member of the Investor Relations team. You can find our contact information, along with the other information on CIT in the Investor Relations section of our website at cit.com. Thank you again for your time this morning, and have a great day.

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