--CIT redeemed $4.1 billion of 7% Series C notes in second
quarter
--Company had improvements in lending profitability
--Company received orders for 3,000 tank cars
(Updates with details about railcar orders in paragraph 31.)
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
57 cents a share, according to Thomson Reuters.
CIT's shares were up 4.8% to $36.47 Monday afternoon on the
better-than-expected results.
"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, 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.
The company may make acquisitions, including of brick-and-mortar
branches, in the future to boost its deposits, Thain said.
"We would continue and do continue to look at opportunities to
buy deposits," Thain said during a conference call with analysts,
noting there haven't been many opportunities to do so thus far.
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. (C), wrote in a research note last week.
About $4 billion of the company's 7% debt remains, and
executives said Monday that CIT will look for opportunities to
continue paying that down. Redeeming that amount would result in
$450 million of costs tied to fresh start accounting, Scott Parker,
chief financial officer of CIT, said.
"We have a strong desire to remove it as fast as possible,"
Parker said on the call.
As its financial condition improves, CIT hopes to boost its debt
ratings with the credit-ratings agencies. Earlier this year
Standard & Poor's and Moody's Investors Service each raised
CIT's ratings by a notch, though the company remains in junk
territory.
The company is also waiting for a response from the Federal
Reserve Bank of New York, which has a written agreement with CIT
preventing it from paying dividends and buying back shares.
"We continue to wait for a response from the Fed," Thain said.
"I certainly expect to get one before the end of the year, and
hopefully much sooner than that."
CIT isn't subject to the Federal Reserve's so-called annual
stress tests, which measure the potential performance of the
largest bank-holding companies under challenging economic
scenarios, but it is still required to file a capital plan with the
Fed, Thain said.
"We anticipate including some form of capital return" in the
company's 2013 capital plan, Thain said.
Total interest income fell 32% to $409.3 million, while total
non-interest 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 in new loan volume during 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.
Thain said the economic environment is "OK" but "not great."
"We see slow growth in the U.S. consistent with the most recent
GDP number," Thain said, adding the company has seen a slowdown in
Brazil, though business in China continues to grow.
Separately on Monday, CIT said it placed orders for an
additional 3,000 tank cars, bolstering its railcar leasing
business, among the largest in the industry. The company has placed
orders for $1.8 billion of new railcars since last year.
-Victoria Stilwell contributed to this story.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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