Good morning and welcome to CIT’s Second Quarter 2020 Earnings Conference Call. My name is Rocco and I will be your operator today. At this time, all participants are in a listen-only mode. There will be a question-and-answer session later in the call. [Operator Instructions] As a reminder, this conference 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, Rocco. Good morning and welcome to CIT’s second quarter 2020 earnings conference call. Our call today will be hosted by Ellen Alemany, Chairwoman and CEO; and John Fawcett, our CFO. Also joining us for the Q&A discussion is our Chief Credit Officer, Marisa Harney. During this call, we’ll be referencing a presentation that is available on the Investor Relations section of our website at cit.com. Our forward-looking statements disclosure and non-GAAP reconciliations are included in today’s earnings materials and within our SEC filings. These cover our presentation materials, prepared comments and the questions-and-answers segment of today’s call. With that, I’ll now turn it over to Ellen Alemany.

Thanks, Barbara. Good morning, everyone, and thanks for joining the call. The COVID-19 pandemic has continued to affect the broader economy. And that has carried over to our financial results in the second quarter, although to a lesser degree than we experienced in the first quarter. As a result, we posted a net loss this period of $98 million or $0.99 per diluted common share. CIT began this year in position of strength with the multi-year strategic transformation reinforcing our foundation and the completion of the recent acquisition adding to our franchise capability. That strength along with the agility of our team will help us to continue to navigate through this unprecedented time. John will go into a detailed account of the drivers in the quarter, but some key factors in the performance were lower net finance revenue, primarily due to lower interest rates and holding elevated levels of liquidity during this turbulent period; lower factoring commissions due to retail store closures; and the $73 million net charge-off related to a single factoring bankruptcy exposure. We also continued to build our allowance for credit losses, but with the substantial reserve bills in the first quarter, the impact on our provision was much slower. Despite these factors, there were also pockets of strength in the quarter. Our average deposit costs declined by 27 basis points. And we were able to use some excess liquidity to repurchase 235 million of unsecured bank notes at a discount. Our average loans and leases were up 2% from last quarter, which included defensive draws on results in March, as well as new originations in stronger segments of the commercial market. Our capital and liquidity positions remained strong. Our integration plan from the recent acquisition is on track and we are unlocking greater operating efficiencies than…

Thank you, Ellen, and good morning, everyone. As mentioned, we reported a GAAP net loss of $98 million or $0.99 cents per diluted common share, and a loss of $61 million or $0.62 per share, excluding noteworthy items. Our results this quarter continued to reflect the ongoing global pandemic and low interest rates as we manage through the current environment. Overall business activity slowed in the earlier part of the quarter, but in June, we began to see activity pickup in many sectors where we have strong capabilities. Assuming there is no significant change in the current or forecasted macro environment or any expected credit performance of our portfolio, we expect to return to profitability and generate modest positive earnings in both the third and fourth quarters of 2020. Last quarter, we were proactive in our implementation of CECL and appropriately added substantial reserves, reflecting the COVID-19 environment. While this quarters credit provision was considerably lower than in the prior quarter, it remained elevated as we continued to bolster reserves and incurred a $73 million charge related to the bankruptcy of a single factoring customer in the retail industry. The factoring loss was a result of unique circumstances directly related to the precipitous economic shutdown and store closures. While we have reserved for additional charges in the retail industry, we do not anticipate another single customer loss of that magnitude in our factoring business. Overall, based on our forecasted view of the macro environment, we expect the provision to continue to moderate next quarter, obviously subject to conditions which remain fluid. Our net finance revenue and margin were significantly impacted this quarter by lower market rates, primarily LIBOR, which reduced our floating rate loan yields. In addition, we have higher levels of excess cash, primarily due to strong deposit growth,…

Thanks, John. As I've mentioned before, the work we have done to transform CIT over the last few years has strengthened us, tested us and best positioned us to navigate this period. The business is diverse and adaptable. The company is as strong as it's ever been and our deposit costs are declining. The management team is seasoned, agile and resilient. We established a considerable appropriate reserve in the first path to increase our allowance for credit losses and actively manage risks. And we are heading into the second half cautiously optimistic, but also mindful that this is a rapidly changing environment. With that, we're happy to take your questions.

Thank you. [Operator Instructions] Today's first question comes from Moshe Orenbuch with Credit Suisse. Please go ahead.

Great. Thanks. John, you had talked about the 10 to 20 basis points recovery in the margin. I guess, given the cuts you made in deposit costs, I'm surprised that it isn't bigger. Could you just talk a little bit about what we might see in Q3 in terms of trends in the margin and in net interest income in dollars or net finance revenue in dollars? Thanks.

Yes. So, Moshe, it's important to -- I think have a perspective on when the cutting began. And so I think very early in the second quarter, we put our toe in the water a little bit, and we had some very minor cuts across April because we were concerned about would be significant amount of attrition. As we've gone further and further, we've realized that, a lot of the strategies that we built out in the non maturity portfolio in the online bank is actually taking a whole. And across 13 weeks in the quarter, we actually reduced rates 80 basis points across 10 cuts and actually had consistent growth across all 13 weeks, which is kind of interesting. So to answer your question, we expect that a lot of the benefits that we'll go through that we -- in terms of the cuts that we did in second quarter, we'll continue to play through, into the third quarter and beyond. Separately, what I would say is, is that we think that there is continued opportunity to kind of drag pricing down even further, especially in the non-maturity deposit space. But I think across the board, we've done actually a pretty good job in terms of all of the deposit channels. In terms of the broader question around net interest income, the second quarter was pretty challenging. I think it was, clearly the bottom for us. And just in terms of business volumes I think in my script, we talked about business capital kind of coming back online. We're starting to see some shoots -- green shoots come out of the factoring business through the first, I want to say, 17 days of July, factoring volumes were at 97% of what they were last year. Business capital, which was…

So maybe if I could just take this from a slightly different angle. You had PPNR, that was about $200 million in the fourth quarter down to $180 million in the first quarter, maybe $110 million or so this quarter, that would benefit from some of the things you talked about on the fee income side and expenses. I mean, I guess, are you confident that number will be higher in the third quarter?

Yes, I am confident. I mean, based on what we're seeing now, look, these are very fluid times. And so at this nanosecond, I feel pretty confident that the third quarter is going to be better. As you start to look at non-interest income, as I said, we're seeing factoring volumes kind of ramp back up. Rail sales in the second quarter were slightly diminished and a little bit off of what our forecast was of '20. We expect we'll be on '20 as some of the dislocation in that market normalizes. We completely suspended legacy consumer mortgage portfolio sales in the second quarter. The pricing had just completely collapsed and we're not distressed sellers. And so we just took a pause. We'd expect that the activity that we didn't see in the second quarter, will transition into the third quarter, and we will probably see a double sized sale. What comes with that is not only the gain on the disposition of the LCM portfolio, but also provision and release related to the gross to purchase account accretion. Securities gains should hold in, and capital markets fees, I think will continue to kind of trend as the market starts to advance. And then I think on expenses, we're all over expenses. Reducing our footprint by 30% and taking out another body of heads we're very focused. And so we are …

And we accelerated another $25 million in expenses this year from Mutual of Omaha Bank that’s supposed to come out next year. I would say business overall is significantly up in June. I would say in commercial, April and May were very slow, but we really started to see increased activity in June in certain industry verticals. And in business capital, we had the same volumes in June as we had June of last year. And it's technology related, mostly it's lender finance and business capital. So we think we're really well positioned in some of these industry niches right now. And as John mentioned, in rail, we think we've seen the trial in rail. Basically with the U.S.-China Phase 1 trade agreement, we're seeing renewed activity in rail. We had really large order. We've seen the largest corn order from rail -- from China recently. And we also think that the trade one agreement is going to impact other markets like crude oil, refined products. And housing activity bounce is driving some demand for lumber products. So we're seeing some activity there.

Great. Thanks very much.

And our next question today comes from Arren Cyganovich with Citi. Please go ahead.

Thanks. The net finance margin, I think you mentioned was depressed from excess cash, I think you said around 30 basis points. How much of that will -- is incorporated in the improvement of 10 to 20 basis points? And, I guess, how do you expect to deploy that cash over the coming quarters?

Well, hopefully, Arren, these two things that are the principle dynamics, one is that as we continue to reduce pricing on the deposit product you would expect to see some deposits attrite. And I think that's okay. I think the other thing is, is that we've got some fairly high deposit cliffs that are actually coming in terms of CDs across the third quarter. And so some of that will attrite. What would be best is if we could actually put the deposits to work in growth that we're seeing on the balance sheet as we kind of re re-inflate. I think the interesting thing about the whole deposit phenomenon is the last time this happened, it happened during the financial crisis of '08, '09 and '10. And if you looked at search deposits, which is, I guess, what they call it now the hoarding of cash, like the quality, exit of equities and money market funds, delayed investments, all that kind of activity that actually ran its course over four or five years. And so, hypothetically, this could be something that we're living with for a long time, not just us, but all banks as cash continues to be trapped on the balance sheet. I think what's different about this financial crisis is this one's bacterial. The last one was a real financial crisis. And so as vaccines and we start to live with this, maybe it will be a little bit different. But right now we're sitting with $2 billion to $3 billion of excess liquidity and cash on the balance sheet. And the expectation is it will start to moderate, but it's anyone's guess as to how long it will take. We will be aggressive in terms of lowering our rates, and I think that will take care of some of the problem. But it might be a multi-quarter issue for sure.

Okay. And then in the -- on the payment deferral side, frankly, I'm a little bit surprised that some of the deferral numbers are low, just, I guess, for example, real estate finance, I think there's only 5% of the total compared to some of the other statistics I've seen from other banks. And then, I guess, in concurrent with that as the NPA is rising, what are the situations where you have stuff that is moving to NPA versus getting a deferral? And what are those situations where it just is so dire that you can't seem to be able to even come up with a plan from a deferral strategy?

Marisa, you want to comment on that?

Yes. I think there were three questions in there. Let me see if I can get them. The low level of deferral, I would say we took an early approach to and I don't know how different we are from others. I've had some anecdotal feedback, but we were pretty cautious with granting deferrals. For example, you can have a deferral for up to 180 days. We chose to do a 90-day deferral with a subsequent 90 days upon further information. We also have a commercial book that has a lot of private equity structures in it. And in many cases, although the operation of a company might be stressed due to the pandemic. The sponsor continues to have liquidity to support -- and this is particularly true in real estate finance to support those borrowers. And so we chose not to automatically grant the deferral or to push a deferral in those situations, but rather to press investors to try to solve that with some liquidity. And that in particular is true in real estate finance, which tends to be a more institutional book and therefore has more well-healed sponsorship behind it. With respect to NPAs, we took the approach that if a business, an operation was in -- it was shut down or had significant disruption due to the pandemic. However, we felt that the recovery period where -- whenever and wherever that might be was going to be particularly extended and would result in that particular business not being restored to its - for lack of a better term, normal, whatever that is, say that we would handle that as you would normally handle a credit that was distressed. So, for example, if a hospitality property is closed, we feel that the hospitality industry has a long recovery ahead of it. That's also true for passenger airlines, for example. And in those cases and those -- those are two areas that drove our NPAs this quarter, the increase in NPAs.

Okay. Thank you.

Sure.

[Operator Instructions] Today's next question comes from Vincent Caintic with Stephens. Please go ahead.

Hey, thanks. Good morning. Two questions. First one, a quick one on just how you're thinking about the dividend. So your capital levels have remained strong, but I'm wondering if there are any changes to your thinking about the dividend level, just given that EPS coverage has been low with the past two quarters.

I think it's a quarter-to-quarter exercise. I think it's obviously a conversation we have at our Board. I think it's obviously a conversation that we have with our regulatory partners. My view is that we're in a good place. I think we've been very good stewards of capital. When you think about the Mutual of Omaha Bank transaction, well ahead of that transaction we suspended share repurchases. We've always maintained a fairly modest dividend payout ratio. To the extent that we believe that we're returning to modest level of profitability, it feels like the horses are out of the barn. We've kind of done this significant amount of reserving in the first quarter and took for our lumps in the first quarter and augmented that in the second quarter. The impact on common equity Tier 1 ratio is about 7 basis points. We have ample liquidity at the holding company, ample liquidity at the bank. And the principal driver of the first half financial performance has been provisioning, which essentially is a transfer of loss absorbency from capital to ACL. And if you actually want to get wonky about '09, '04, which is actually governs our ability to pay dividends and the conversation we talk to the Fed about, it was written in 2009 when GAAP relied on incurred losses and less on the notion of the crystal ball embedded in CECL. So there's a kind of very fundamental misalignment between supervision and regulation guidance established in 2009 GAAP, which accelerated loss recognition in an almost spontaneous way. And so that's a challenge. And I guess the last couple of points and you said it is, our capital ratios are strong and above capital conservation buffers and we've maintained a very robust capital planning process. So notwithstanding the fact that we're not a CCAR bank, we're no longer SIFI. I'm not sure why we ever were. But we've maintained all of those protocols. And I think our regulators understand that and appreciate the fact that we've been throughout the babies in the bathwater. We’ve continued to operate with very heightened standards around capital and capital planning. It's a long winded way of saying I'm pretty relaxed with it.

Okay, great. It's very helpful. Second question. So you had commentary -- your commentary on June is very positive and your baseline assumptions for V-shaped recovery. Just wondering if you've had maybe any updates from July so far, if there's been any letup just from what we're kind of seeing in the news about maybe a second wave or some state shutting down? Just any updates from what you're seeing here? Thank you.

Yes. The business volume we do monthly reviews with the businesses and most of that activity was June reported activity and it's very, very current. And Marissa, can you just comment on the credit side, if you’ve seen anything in terms of pockets?

Yes. No. I mean, obviously, we’re watching the situation very closely. Clearly at the end of March, the economy was shocked by a complete shutdown. In my opinion, I don't think we're going to see a wholesale nationwide shutdown. Again, I just don’t think it's politically expedient. However, local markets are clearly experiencing a variety of different stresses. Probably, the single on the pulse of that is in our factoring business where clients who are typically wholesalers or manufacturers, are seeing orders pick up as retailing has opened. And we’re still seeing factoring volume pretty strong in the month -- at the beginning in month of July. But it's obviously kind of too soon to tell whether we’re going to see significant shutdowns ordered or involuntary, meaning people just don’t show up in some of the bigger markets. No, I don’t see anything particular that’s changed in credit between June and July.

Okay. Thank you very much.

And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to the management team for any final …

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

Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.