CIT Reports Third Quarter 2012 Net Loss of $305 Million ($1.52 Per Diluted Share); Pre-Tax Income of $170 Million Excluding $471 Million Debt Redemption Charges1
Third Quarter Financial Highlights
• Asset Growth – Fourth consecutive quarter of growth in commercial financing and leasing assets, which are up 10% from a year ago
• Completed Redemption of Restructuring-related Debt - Redeemed or refinanced $31 billion of high cost debt since 2010 including the remaining $4.6 billion in the third quarter
• Solid New Business Volume – Fourth consecutive quarter of funded volume of over $2 billion; up 16% from the year-ago quarter
• CIT Bank Growth – Online deposits surpassed $3.5 billion as assets exceed $11 billion; originated over 96% of U.S. funded loan and lease volume
• Credit Metrics Remain Strong - Non-Accrual balances further declined and net charge-offs remained at low levels
Tuesday, October 23, 2012 6:30 am EDT
"We achieved several strategic milestones this quarter that will lower our funding costs and better position CIT for future profitability,"
NEW YORK--(BUSINESS WIRE)--CIT Group Inc. (NYSE: CIT), a leading provider of financing to small businesses and middle market companies, today reported a net loss for the quarter ended September 30, 2012 of $305 million, $1.52 per diluted share, compared to a net loss of $32.8 million, $0.16 per diluted share, for the third quarter of 2011. The current period includes charges of $471 million related to the redemption of $4.6 billion of high cost debt, while the year-ago period included charges of $169 million related to the redemption of the $3 billion first lien term loan and approximately $1.5 billion of high cost debt. Pre-tax income excluding debt redemption charges was $170 million, down modestly from $176 million in the year-ago quarter. The net loss for the nine months ended September 30, 2012 was $822 million, $4.09 per diluted share, including debt redemption charges of $1.4 billion, compared to a net loss of $17 million, $0.08 per diluted share, including debt redemption charges of $0.4 billion, in the comparable 2011 period.
“We achieved several strategic milestones this quarter that will lower our funding costs and better position CIT for future profitability,” said John Thain, Chairman and Chief Executive Officer. “We eliminated the last of our $31 billion of restructuring-related debt, grew commercial assets for the fourth consecutive quarter, and exceeded $3.5 billion in Internet deposits at CIT Bank. We will continue to focus on achieving our financial targets as we meet the needs of our small business and middle market clients.”
Summary of Third Quarter Financial Results
Third quarter operating results reflect continued solid business activity and execution of our liability management strategy. While we reported a $301 million pre-tax loss for the quarter, pre-tax income excluding debt redemption charges was $170 million, compared to $176 million in the year-ago quarter and $245 million in the second quarter. Pre-tax income excluding debt redemption charges and net FSA accretion/amortization2 was $103 million, up from $91 million in the year-ago period but down sequentially primarily due to lower gains on loan sales. See the Non-GAAP disclosure table on page 16 for additional information.
Total assets at September 30, 2012 was $43.6 billion, up $0.8 billion from June 30, 2012, but down from $44.6 billion at September 30, 2011 as growth in the commercial portfolio was offset by sales and runoff of over $3 billion of government-guaranteed student loans over the past four quarters. Commercial financing and leasing assets increased to $29.6 billion, up $0.6 billion from June 30, 2012 and $2.6 billion from a year-ago. Total loans rose approximately $300 million during the quarter to $20.4 billion but declined $1.4 billion from a year ago due to the decline in consumer assets. Operating lease equipment increased to $12.1 billion, up approximately $0.2 billion since June 30, 2012 and nearly $1 billion from September 30, 2011, reflecting aircraft and railcar deliveries. Cash and short-term investments increased $0.2 billion from June 30, 2012 to $7.2 billion, largely due to higher cash balances at CIT Bank reflecting the success of raising deposits.
Funded new business volume of $2.2 billion increased 16% from the prior-year quarter, while committed new business volume of $2.5 billion increased 7% reflecting strong increases in Corporate Finance and Vendor Finance. Compared to the second quarter, volume decreased in Corporate Finance and Vendor Finance, as well as in Transportation Finance, which had fewer scheduled deliveries. Trade Finance factoring volume of $6.4 billion increased 8% sequentially, reflecting seasonal trends, but declined by approximately 6% from the year-ago quarter.
Reported net finance revenue3 continues to be impacted by accelerated interest expense related to the redemption of high cost debt. Average earning assets were $32.3 billion in the third quarter, down $1.4 billion from the year-ago quarter and essentially unchanged from the prior quarter. Average commercial earning assets were $27.9 billion and rose from both comparative periods. Reported net finance revenue as a percentage of average earning assets (“finance margin”) was negative in the third quarter, compared to 2.19% in the prior-year quarter and 1.05% in the second quarter of 2012 reflecting higher debt redemption costs. Excluding net FSA accretion and debt prepayment costs, finance margin was 2.97%, improved from 1.58% in the year-ago quarter and essentially unchanged from the second quarter. The increase from the year-ago quarter was driven primarily by lower funding costs and the reduction of low-yielding assets. When compared to the prior quarter, the benefits of reduced funding costs were essentially offset by lower interest recoveries and other yield-related fees. Operating lease rental income was similarly unchanged from the second quarter, and improved from the year-ago quarter in line with the growth in the lease portfolio.
Other income (excluding operating lease rentals) of $81 million decreased from prior periods largely due to lower counterparty receivable accretion, reduced gains on assets sold, and fewer recoveries of loans charged off pre-emergence. Factoring commissions were $33 million, improved from the second quarter but lower than the year-ago quarter, consistent with trends in factoring volume.
Operating expenses were $238 million and included $5 million of restructuring-related costs. Operating expenses declined from the prior quarter but were up modestly from the year-ago quarter as a decline in professional fees was offset by increases in costs related to raising deposits and technology costs. Headcount at September 30, 2012 was 3,630 compared to 3,480 a year ago and 3,570 at June 30, 2012.
The $17 million loss on debt extinguishments in the current quarter represents the accelerated recognition of fees related to liability management actions taken during the quarter, which are discussed below in Capital and Funding.
The provision for income taxes in the third quarter was $3 million, significantly lower than recent quarters. The decline from prior periods is the result of a greater proportion of earnings in countries with lower tax rates.
Credit and Allowance for Loan Losses
Our favorable portfolio credit quality trends continued in the third quarter, as non-accrual loans declined both sequentially and from the prior-year quarter, while net charge-offs remained at low levels.
Net charge-offs were $18 million, or 0.36% as a percentage of average finance receivables, versus $46 million (0.83%) in the year-ago quarter and $17 million (0.33%) in the prior quarter. Net charge-offs in our commercial segments were 0.44% of average finance receivables, compared to 1.21% in the year-ago quarter and 0.42% in the prior quarter. These continued favorable levels were driven largely by Corporate Finance, as net charge-offs in this segment were below both comparison periods. The modest sequential increase in Vendor Finance charge-offs was related to the international portfolio, while the increase in Transportation Finance was from a loan secured by aviation equipment. Net charge-offs do not reflect recoveries of loans charged off pre-emergence and loans charged off prior to transfer to held for sale. Recoveries on these loans are recorded in other income and totaled $9 million, $36 million and $19 million for the current quarter, the year-ago quarter, and the prior quarter, respectively.
There was no provision for credit losses in the current quarter; provision expense was $47 million in the year-ago quarter and $9 million in the prior quarter. This favorable trend reflects the overall improvement in credit metrics, notably the decline in net charge-offs.
Non-accrual loans further improved to $412 million, or 2.02% of finance receivables at September 30, 2012, compared to $914 million (4.19%) at September 30, 2011 and $455 million (2.26%) at June 30, 2012. Non-accrual loans as a percentage of finance receivables in the commercial segments were 2.48% at September 30, 2012, significantly improved from 6.11% at September 30, 2011 and 2.80% at June 30, 2012. While there were sequential declines in both the Corporate Finance and Trade Finance segments, there was an increase in Transportation Finance due to the addition of one loan secured by commercial aircraft.
The allowance for loan losses, which relates entirely to the commercial portfolio, was $398 million at September 30, 2012, or 1.95% of total finance receivables, compared to $415 million (1.90%) at September 30, 2011 and $414 million (2.06%) at June 30, 2012. As a percentage of the commercial portfolio, the allowance for loan losses was 2.39% at September 30, 2012, compared to 2.78% at September 30, 2011 and 2.56% at June 30, 2012. This decline reflects improved portfolio credit quality, including the continued replacement of lower credit quality legacy assets with new origination volume. Specific reserves were $55 million at September 30, 2012, essentially unchanged from $58 million a year ago and $54 million last quarter.
Capital and Funding
Preliminary Tier 1 and Total Capital ratios at September 30, 2012 were 16.7% and 17.5%, respectively, down from 18.0% and 18.9%, respectively, at June 30, 2012. Preliminary risk-weighted assets totaled $45.9 billion at September 30, 2012, compared to $44.3 billion at June 30, 2012. Book value per share at September 30, 2012 was $40.26, compared to $41.73 at June 30, 2012 and $44.32 at September 30, 2011. Tangible book value per share at September 30, 2012 was $38.43, compared to $39.87 at June 30, 2012 and $42.31 at September 30, 2011.
Cash and short-term investment securities totaled $7.2 billion at September 30, 2012, up from the prior-quarter and down slightly from September 30, 2011, and was comprised of $6.5 billion of cash and $0.7 billion of short-term investments. Cash and short-term investment securities at September 30, 2012 consisted of $1.9 billion related to the bank holding company, $3.6 billion at CIT Bank, $0.6 billion at operating subsidiaries and $1.1 billion in restricted balances. We had approximately $1.4 billion of unused and committed liquidity under a $2 billion revolving credit facility at September 30, 2012.
During the third quarter, we completed several transactions to lower our cost of capital and improve future profitability, while also diversifying our sources of funding. New financings included:
• The issuance of $3 billion of senior unsecured debt, which consisted of $1.75 billion of 4.25% notes that mature in 2017 and $1.25 billion of 5.00% notes that mature in 2022.
• A C$515 million ($511 million based on the exchange rate at the time of the transaction) securitization secured by a pool of Canadian equipment receivables from Vendor Finance that had a weighted average fixed coupon of 2.285%.
• The issuance of $1.9 billion of deposits, of which approximately 80% were originated through internet channels. (Discussed further in CIT Bank below.)
• A new RMB2.2 billion (approximately $345 million based on the exchange rate at the time of the transaction) committed facility, which is in addition to an existing RMB facility established in 2011, that will allow Vendor Finance to fund new originations in China. The committed availability period expires in September 2014 with a three year final maturity for each drawdown under the facility.
• The renewal of a $500 million committed facility secured by receivables at a lower cost and with a final maturity in November 2014.
• The funding of six Boeing aircraft under a secured facility guaranteed by the Export-Import Bank of the United States for total proceeds of approximately $200 million.
In addition, we redeemed at par all of the remaining 7% Series C notes aggregating approximately $4.6 billion. The acceleration of FSA discount accretion related to these redemptions increased third quarter 2012 interest expense by approximately $454 million.
As a result of these actions, we made further progress towards our long term targeted funding mix. At September 30, 2012, deposits represented 28% of our funding, with secured and unsecured borrowings comprising 33% and 39% of the funding mix, respectively. The weighted average coupon rate on outstanding deposits and long-term borrowings was 3.28% at September 30, 2012, improved from 3.83% at June 30, 2012 and 4.84% at September 30, 2011.
Segment Highlights
The following table details the impact of FSA accretion associated with accelerated debt repayment for each segment. The segment commentary that follows is focused on segment results excluding this impact.
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