--CIT redeemed $4.1 billion of 7% Series C notes in second
quarter
--Company saw improvements in lending profitability
--Loan activity in its bank unit increased
(Updated with new details throughout.)
By Andrew R. Johnson
CIT Group Inc. (CIT), the business lender led by Wall Street
veteran John Thain, reported a wider loss in the second quarter as
expenses tied to debt refinancing continued to weigh on results and
interest income declined.
The company's loss of $70.7 million, or 35 cents a share, beat
the estimates of analysts, who were expecting on average a loss of
41 cents a share on a fully-reported basis, according to Thomson
Reuters.
"Our results this quarter, while impacted by the repayment of
high cost debt, reflect our efforts to grow our businesses as we
meet the financing needs of our small business and middle-market
clients," Thain, chairman and chief executive officer, said in a
statement.
The second-quarter loss compared with a year-earlier loss of
$49.7 million, or 25 cents a share. The latest period included $286
million in debt-refinancing charges, compared with $163 million a
year earlier.
CIT, which emerged from bankruptcy in late 2009, has been
working to get on a more stable footing by paying off debt and
raising deposits, a lower-cost source of funding for its business
loans.
The company traditionally relied on issuing debt to fund its
loans, which are used by mostly small and midsized businesses for
acquisitions, office-equipment purchases, transportation and other
activities.
Since then, Thain, the former Merrill Lynch chairman, and his
management team have moved several of its lending platforms from
its holding company to its bank subsidiary, allowing it to tap
deposits as a funding source. Last year it launched an online
consumer bank that offers certificates of deposit and savings
accounts, taking on other speciality lenders that have embarked on
similar strategies, including American Express Co. (AXP) and
Discover Financial Services (DFS).
The bank, which may also add checking accounts and business
accounts, has raised more than $2 billion in online-consumer
deposits since its launch last year, CIT said Monday.
Over time, the company's goal is to rely on deposits for 35% to
45% of its funding, unsecured debt for 25% to 35% of its funding
and secured funding for 25% to 35%. At the end of the second
quarter, deposits comprised 23% of its funding, the company
said.
CIT has been working to pay down its debt to improve its lending
profitability. It redeemed about $4.1 billion of its 7% Series C
notes in the quarter, and recently announced plans to redeem
another $600 million of those notes in the coming months. Including
the latest announcement, CIT will have paid down more than $26.5
billion of its debt since exiting bankruptcy.
"While work still remains...we see more investors starting to
take notice of CIT as the turnaround takes shape and we get better
visibility on normalized earnings," Don Fandetti, an analyst with
Citigroup Inc., wrote in a research note last week.
Total interest income fell 32% to $409.3 million, while total
noninterest income fell 9.8% from the previous year to $589.5
million.
But the company had improvement in its credit quality during the
quarter.
Net charge-offs were $17 million, down from $55 million the year
before and $22 million in the first quarter. Credit-loss provisions
totaled $8.9 million, down from $84.1 million a year before and
$42.6 million in the first quarter.
Its net financing margin, a measure of lending profitability,
was 3.02% in the quarter when excluding the effects of fresh start
accounting, a measure it adopted upon exiting bankruptcy, and
debt-repayment costs. That compares with 1.4% a year earlier and
1.97% in the previous quarter. The company attributed the
improvement to lower funding costs, among other things.
CIT's goal over time has been to get this number in the 3% to 4%
range, a level it enjoyed before its bankruptcy.
It funded $2.4 billion of new loan volume in the quarter, up 38%
from a year earlier. It ended the quarter with $2.7 billion in loan
commitments, up 31% from a year earlier.
Within CIT Bank, committed loan volume increased 63% to $1.8
billion from a year earlier.
Total assets as of June 30 were $42.8 billion, down $1.4 billion
from the first quarter and $5.4 billion from the year earlier,
reflecting fewer consumer assets as the company sold $1.1 billion
in student loans from its legacy portfolio.
Shares closed Friday at $34.79 and were inactive in premarket
trade. The stock is off 12% in the last 12 months.
-Victoria Stilwell contributed to this story.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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