CIT Q1 Earnings Disappoint on Higher Tax Rate Provision
CIT Group reported Q1/15 net income of $104 million was down 12% from net income of $117 million for Q1/14. Earnings per diluted share of $0.59 were off from the $0.73 EPS expected by analysts polled by Thomson Reuters.
CIT said first quarter results were impacted by a higher tax provision resulting from the recognition of federal income tax expense due to the prior year partial reversal of the valuation allowance against our net deferred tax asset.
“Our results reflected lower profitability in our North American Commercial Finance business as well as lower utilization rates in our transportation business,” said John Thain, chairman and chief executive officer. “Looking ahead, we will continue to execute on our 2015 priorities while positioning CIT for the long-term. We remain focused on expanding our commercial banking and deposit franchises through the acquisition of OneWest Bank, returning excess capital to our shareholders through our additional $200 million share repurchase, and meeting the financing needs of our small business, middle market and transportation customers.”
Net income from continuing operations of $104 million includes a $44 million tax provision. Net income also reflects the absence of interest recoveries and lower utilization rates. In addition, net income includes $6 million of charges related to portfolios that we are exiting.
Total assets from continuing operations1 at March 31, 2015 were $46.4 billion, compared to $47.9 billion at December 31, 2014, and $44.9 billion at March 31, 2014. Financing and leasing assets in North American Commercial Finance (NACF) and Transportation & International Finance (TIF) were $35.0 billion, down slightly from December 31, 2014 reflecting asset sales and up $2.3 billion (7%) from a year ago reflecting strong origination volumes in 2014 and the acquisition of Direct Capital.
Transportation & International Finance
Pre-tax earnings for the quarter were $157 million, up from $118 million in the year-ago quarter and down from $185 million in the prior quarter. The increase from the year-ago quarter primarily reflected higher gains on asset sales and asset growth, while the decrease from the prior quarter largely reflected lower finance revenue due to asset sales and lower equipment utilization.
Financing and leasing assets at March 31, 2015 were $18.8 billion compared to $19.0 billion at year-end and $17.6 billion at March 31, 2014. The increase from the prior year reflected growth in all transportation divisions including $0.9 billion in Aerospace, $0.5 billion in Rail, and $0.6 billion in Maritime, partially offset by a reduction in International Finance, largely reflecting the sale of our UK corporate lending portfolio in the fourth quarter of 2014. The sequential decline was driven by $0.4 billion of asset sales, including approximately $0.2 billion of aircraft to TC-CIT Aviation, our recently formed joint venture with Century Tokyo Leasing. Assets Held for Sale totaled $0.6 billion and largely consists of the U.K. equipment finance portfolio and commercial aircraft. New business volume for the quarter was $0.5 billion and consisted of $0.3 billion of operating lease equipment, including the delivery of 3 new aircraft and approximately 800 new railcars, and the funding of $0.2 billion of finance receivables. Additionally, our European rail business acquired a portfolio of nearly 1,000 railcars in the first quarter.
Net finance revenue was $215 million, up from $202 million from the year-ago quarter, primarily due to growth in earning assets, and down from $233 million in the prior quarter due to asset sales and lower equipment utilization. Net finance margin was 4.57% compared to 4.73% in the year-ago quarter and 4.88% in the prior quarter. The decreases from prior periods were driven primarily by lower net rental yields in Aerospace. Gross yields in Aerospace decreased from 11.5% in the prior period to 11.4%, reflecting lower equipment utilization, while gross yields in Rail remain strong but declined from an elevated level in the prior quarter of 15.3% to 14.8%.
Other income was $34 million, up from $7 million in the year-ago quarter largely reflecting higher gains on asset sales and flat sequentially.
Non-accrual loans of $39 million (1.10% of finance receivables) increased slightly from $37 million (1.05%) at December 31, 2014, and from $36 million (1.01%) a year ago. Provision for credit losses was $11 million, compared to $12 million in the year-ago quarter and $9 million sequentially, with the current quarter provision largely reflecting reserve build in Business Air and China as charge-offs were minimal. Net charge-offs were $2 million (0.17% of average finance receivables), compared to $13 million (1.47%) in the year-ago quarter and $8 million (0.84%) in the prior quarter. Net charge-offs include $3 million in the year ago quarter and $6 million in the prior quarter due to assets moved to held for sale.
Operating expenses were $82 million, up from $80 million a year ago and $73 million sequentially reflecting seasonally higher employee expenses.
Utilization declined from peak levels with 98% of rail equipment and 97% of aircraft leased or under a commitment at quarter-end. During the quarter we ordered five new aircraft delivering in 2016 and 2,200 rail cars delivering in 2016 and 2017. All but 1 new aircraft scheduled for delivery in the next 12 months and approximately 65% of total railcars on order, have lease commitments.
North American Commercial Finance
Pre-tax earnings were $36 million, down from $43 million in the year-ago quarter and from $122 million in the prior quarter. The decrease from the year-ago quarter reflects portfolio repricing across businesses partially offset by the addition of Direct Capital, while the decrease from the prior quarter reflects lower gains on asset sales of approximately $40 million as well as a reduced level of interest recoveries. The prior quarter also benefited from a reversal in specific reserves of which $12 million related to a resolution of a problem loan.
Financing and leasing assets were $16.2 billion, essentially unchanged from December 31, 2014, and up 7% from $15.2 billion at March 31, 2014. The increase from the year-ago quarter reflected solid new business volumes in 2014 and the acquisition of Direct Capital in the third quarter of 2014. New lending and leasing volume was $1.4 billion, in line with the year-ago quarter and down from $1.6 billion in the prior quarter, and factored volume rose 4% from year-ago levels. Strong volume in Equipment Finance was offset by lower originations in Corporate Finance, in line with trends in middle-market lending.
Net finance revenue of $128 million increased from $125 million in the year-ago quarter reflecting higher average earning assets, and decreased from $145 million in the prior quarter due to a lower levels of interest recoveries in Corporate Finance. Net finance margin was 3.52% compared to 3.64% in the year-ago quarter and 3.94% in the prior quarter. The reduction from the prior periods reflects lower levels of interest recoveries while the decrease from a year ago also reflects portfolio repricing. Other income of $66 million was up from $62 million in the year-ago quarter, reflecting higher capital markets fees, and down from $115 million in the prior quarter which included several gains on asset sales. Operating expenses were $135 million, up from $122 million in the year-ago quarter, largely due to the acquisition of Direct Capital in the third quarter, and up $3 million from the prior quarter.
The $24 million provision for credit losses is up from $23 million in the year-ago period and $6 million in the prior quarter. The increase from the prior quarter is due mainly to the reversal in specific reserves of which $12 million related to a resolution of a problem loan in the prior quarter. Credit metrics remained at or near cycle lows. Non-accrual loans of $116 million (0.73% of finance receivables) rose from $101 million (0.63%) at December 31, 2014, but were improved from $131 million (0.88%) a year ago. The sequential quarter increase was primarily attributable to one energy related account. Net charge-offs were $19 million (0.49% of average finance receivables), compared to $16 million (0.43%) in the year-ago quarter and $15 million (0.38%) in the prior quarter. Net charge-offs include $11 million from assets moved to held for sale in the current quarter compared to $4 million in the year ago quarter and $1 million in the prior quarter.
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