CIT Reports Lower Q1 Earnings
CIT Group reported Q1/14 net income of $109 million compared to net income of $163 million for Q1/13. CIT said first quarter results were primarily impacted by lower levels of interest income, higher maintenance and other operating lease expenses and an increase in the provision for credit losses.
John Thain, chairman and chief executive officer, said, “We made progress this quarter in growing commercial assets, restructuring the organization and returning capital to shareholders. However, our financial results were negatively impacted by lower finance margin and fee income. In the year ahead, we will continue to focus on building long-term shareholder value by expanding our businesses, managing expenses and growing CIT Bank.”
Effective January 1, 2014, CIT realigned its organizational structure into three operating segments, Transportation & International Finance, North American Commercial Finance and Non-Strategic Portfolios.
Transportation & International Finance
Pre-tax earnings for the quarter were $118 million, down from $139 million in the year-ago quarter primarily due to higher credit costs and operating expenses, partially offset by higher net finance revenue. Pre-tax earnings were essentially flat sequentially. Financing and leasing assets grew to $17.6 billion at March 31, 2014, up sequentially from $16.4 billion and from $15.2 billion a year ago. The sequential increase included $0.8 billion of growth in Rail, due in large part to the European rail acquisition that added $0.65 billion in operating lease equipment (~9,500 railcars), $0.2 billion in Aerospace and $0.1 billion in Maritime. New business volume was just over $1.0 billion, which consisted of the delivery of nine aircraft and approximately 1,400 railcars and funding of $0.4 billion of finance receivables.
Net finance revenue was $202 million, up from the year-ago quarter, as the impact from asset growth offset margin compression, and up sequentially. Net finance margin was 4.73% compared to 4.76% in the year ago quarter and 4.83% in the prior quarter. The margin decline reflects higher operating lease and maintenance expense which was partially offset by an increase in the loan portfolio yield due to a prepayment in the current quarter. Other income of $7 million was down from the year ago quarter, which had higher gains on sales of operating lease equipment, and flat sequentially.
Provision for credit losses was $12 million, up from the year-ago quarter, which benefited from a reserve release in Aerospace, and down slightly sequentially. Charge-offs were concentrated in the International portfolio.
Operating expenses were $80 million, up from a year ago and sequentially and reflect the European rail acquisition and our continued investment in the Maritime platform.
Utilization remained strong with 99% of commercial aircraft and 98% of rail equipment on lease or under a commitment at quarter-end. All aircraft scheduled for delivery in the next 12 months, and approximately 84% of all railcars on order, have lease commitments. Gross yields in Aerospace improved to 12.6%, reflecting a prepayment in the loan portfolio, while gross rental yields in Rail declined slightly to 14.6% due in part to the addition of the European rail portfolio.
North American Commercial Finance
Pre-tax earnings for the quarter were $43 million, down from $59 million in the year-ago quarter and from $135 million in the prior quarter. The decline from the year-ago quarter was largely attributable to a decline in finance revenue in Corporate Finance and Equipment Finance, while the sequential quarter decline reflected higher credit costs and fewer gains related to asset sales and workouts.
Financing and leasing assets grew to $15.2 billion, up from $15.0 billion at December 31, 2013 and from $14.3 billion at March 31, 2013, reflecting solid new business volumes. Funded loan and lease volume totaled $1.4 billion, up from $1.3 billion in the year-ago quarter, and down from $1.8 billion in the prior quarter, in line with typical seasonal trends. The increase in volume from the year-ago quarter primarily reflected an increase in middle market corporate lending.
Net finance revenue of $125 million declined from both the year-ago and prior quarters. Net finance margin was 3.64% compared to 4.82% in the year-ago quarter and 4.14% in the prior quarter. The decline in net finance margin from prior periods reflects the reduction of benefits from interest recoveries, lower portfolio yields in Corporate Finance and Equipment Finance, as well as lower benefits from net FSA accretion. Other income of $62 million declined slightly from $64 million in the year-ago quarter and from $107 million in the prior quarter. The prior quarter included $36 million in benefits from a workout related claim and a gain on the sale of a leverage lease. Operating expenses were $122 million, improved from $128 million in the year-ago quarter largely due to lower headcount.
Operating expenses increased from the prior quarter, which included benefits from the recovery of legal expenses.
Credit metrics remained at or near cycle lows. Non-accrual loans declined to $131 million (0.88% of finance receivables) from $147 million (1.00%) at December 31, 2013 and $197 million (1.39%) a year ago. The provision for credit losses was $23 million, modestly lower than in the year-ago quarter, but up from the prior quarter, in which there were net recoveries. Net charge-offs were $16 million (0.43% of average finance receivables), compared to $6 million (0.17%) in the year-ago quarter and a net recovery of $2 million last quarter. The current period had a lower level of recoveries, and a higher level of charged-off accounts that had specific reserves in Corporate Finance.
Pre-tax losses for the quarter were $6 million, compared to pre-tax losses of $5 million in the year-ago quarter and $9 million in the prior quarter. The changes from both the year-ago quarter and the sequential quarter reflect lower operating expenses offset by reduced net finance revenue from the continued decline in asset levels.
Financing and leasing assets at March 31, 2014 totaled $4.4 billion, which included approximately $3.3 billion of student loans, $0.4 billion of small business lending loans and $0.7 billion of international assets. Financing and leasing assets were down from $4.6 billion at December 31, 2013 and from $5.6 billion at March 31, 2013, primarily due to loan sales and portfolio runoff.
As of April 25, 2014, we completed the sale of the student loan portfolio along with certain secured debt and servicing rights. A portion of the cash proceeds was used to repay $0.8 billion of debt secured by student loans. As a result, in the second quarter the student loan business will be reported as discontinued operations in which we expect to recognize a net gain of over $50 million.
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