CIT Group Earnings Call Insights: Economic vs. Core Margins and FSA Accretion
CIT Group Inc (NYSE:CIT) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Economic vs. Core Margins
Brad Ball – Evercore: Scott, could you reconcile for us the difference the economic margin of 3.63% points and what you are calling the core margin of 3.10%. What are the moving parts in there and can you give us a sense as to what those moving parts look like in the next few quarters?
Scott T. Parker – CFO: Brad, as you know, about 30 basis points is from the suspended depreciation and that’s been pretty consistent and the delta is a combination of both interest recoveries and other yield related fees. So those have been – as we have upfront committed fees, if the loan pays off, those fees are accelerated when that loan is refinanced or paid off and so those, as we’ve talked about have been declining and due to the high refinancing in the fourth quarter, they’ve kind of spiked back up again. So, I would expect the depreciation to kind of stay stable until the second half of the year, around that 30 basis points and then the interest recoveries and yield related fees are going to be really dependent on activity in the marketplace. So, we kind of thought those would be kind of getting down below 10 basis points, but they’ve kind of spiked up in the fourth quarter, but those are the kind of the two variables that are outside of the core margins.
Brad Ball – Evercore: And given the increase in deposits and lower cost funding and the mix on the asset side, your expectation is that the core NIM stays in your target range which is 3% to 4%?
Scott T. Parker – CFO: Yes, I think, we’ll see as we continue to move – make that transition that will continue to improve our cost of funds and then on the yield side, if we can kind of keep the yields in the range we are that would be a good thing. So as long as the market pressures, we can manage those we should see some improvement on the margin, but not at the pace that it was in the past that we mentioned before.
Brad Ball – Evercore: Then a follow-up for John. John, could you give us any update on the status of the written agreement if there is any update there. Whether or not you view the written agreement as impairing your ability to either take acquisitions – portfolio acquisitions or capital actions as per your capital plan submitted earlier this month.
John A. Thain – Chairman and CEO: So we have no update on the written agreement. The written agreement does not in any way prevent us from making portfolio acquisitions and we demonstrated that by the portfolio we bought at the end of the year. It is also really separate from the capital plan so we did submit, as both of us said, a capital plan and that capital plan includes a return – a modest return of capital. So await response on that.
Brad Ball – Evercore: So you think that that could improve the return of capital even with the written agreement in place?
John A. Thain – Chairman and CEO: they absolutely could.
Moshe Orenbuch – Credit Suisse: I noticed that the kind of the ‘normal FSA accretion’ over the last four quarter was kind of bounced around kind of between, let’s say $60 million and $120 million, you talk a little bit Scott maybe about what that normal amount is, I think that’s included right in the core net interest margin, right?
Scott T. Parker – CFO: No it’s not in the core. That’s kind of the difference between economic margin strips out the FSA. So as we kind of reported, you have the gap reported and then we strip that out. So the FSA, that’s remaining right now, I mean look into chance to get in the tables but we’re down to roughly about $2.6 billion on the operating lease portfolio and if you add up the remaining loan accretion and FSA on the secured debt after we did the restructuring of the student loans, they are about equal. So I’d say that those two aren’t going to – mostly aren’t going to directly offset, dollar for dollar every quarter but they will be pretty close and then will just be the amortization of the operating lease into depreciation. That’s been running somewhere around $45 million to $50 million a quarter. So I think that – from that point of view, I think going into 2013, John and I would probably not be talking too much about the FSA benefit. We’ll kind of focus on the reported results, but you’ll have the details in the back of the press release on what the net accretion was in the quarter.
John A. Thain – Chairman and CEO: As we go into 2013, we really will focus on GAAP financials.
Moshe Orenbuch – Credit Suisse: Just kind of as a follow-up on a slightly different topic. The portfolio that you bid on and kind of the other ones, presuming there are other things that you are in discussions. Can you talk a little bit about the level of competition for those and against whom you are generally competing? How is that process been going?
Scott T. Parker – CFO: I think competition is very strong. So as you know most institutions are looking for assets. So we’ve looked at a lot as we said in the past and we’ve been very disciplined. This one kind of met our return hurdles and we were also able to close quickly, which we thought was a big competitive advantage relative to our peer group.