Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CIT > SEC Filings for CIT > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for CIT GROUP INC

Form 10-Q for CIT GROUP INC


6-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

and

Item 3. Quantitative and Qualitative Disclosures about Market Risk


OVERVIEW

CIT Group Inc., together with its subsidiaries ("we", "our", "CIT" or the "Company") has provided financial solutions to its clients since its formation in 1908. We provide financing, leasing and advisory services principally to middle market companies in a wide variety of industries and offer vendor, equipment, commercial and structured financing products, as well as factoring and management advisory services. We have over $35 billion of financing and leasing assets at September 30, 2013. CIT became a bank holding company ("BHC") in December 2008 and a financial holding company in July 2013. CIT is regulated by the Board of Governors of the Federal Reserve System ("FRS") and the Federal Reserve Bank of New York ("FRBNY") under the U.S. Bank Holding Company Act of 1956. CIT Bank (the "Bank"), a wholly-owned subsidiary, is a state chartered bank located in Salt Lake City, Utah, that offers commercial financing and leasing products as well a suite of savings options.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk" contain financial terms that are relevant to our business. You can find a glossary of key terms used in Part I Item 1. Business Overview in our Form 10-K for the year ended December 31, 2012 (the "2012 Form 10-K").

Management uses certain non-GAAP financial measures in its analysis of the financial condition and results of operations of the Company. See "Non-GAAP Financial Measurements" for a reconciliation of these to comparable financial measures based on accounting principles generally accepted in the United States of America ("GAAP").

2013 PRIORITIES

During 2013, we have focused on growing earning assets, meeting our profitability target, expanding the Bank and returning capital to our shareholders. Enhancing internal control functions and our relationships with our regulators also remain an ongoing focus. The following highlights certain accomplishments towards these goals in 2013:

1. Prudently Grow Assets

We plan to grow earning assets, either organically and/or through acquisitions, by focusing on existing products and markets as well as newer initiatives, including real estate, equipment, and maritime finance.

Commercial financing and leasing assets grew 1% during the third quarter to $32.1 billion at September 30, 2013, reflecting $2.6 billion of new business volume that was mostly offset by collections and asset sales.

For the nine months ended September 30, 2013, commercial assets grew approximately 6%, reflecting origination volumes of $7.4 billion, supplemented by loan portfolio acquisitions in Corporate Finance and Vendor Finance in the first quarter. Newer initiatives, such as real estate, equipment finance and maritime finance, have each contributed to this growth.

2. Continue to Achieve Profit Target

We will focus on managing the business to improve profitability in order to maintain our target pre-tax return on average earning assets of between 2.0% and 2.5%.

Our third quarter pre-tax return on average earning assets ("AEA")(1) was 2.52%, at the upper end of the target range. Third quarter pre-tax income was $213.7 million and net income was $199.6 million.

NFR as a percentage of AEA ("net finance margin" or "NFM") was 4.22%, improved from the year-ago quarter. The weighted average coupon rate of outstanding deposits and long-term borrowings was 3.09% at September 30, 2013, down from the year-ago quarter. At September 30, 2013, deposits were 35% of total CIT funding, at the low end of our 35%-45% target range.

Operating expenses excluding restructuring charges(2) were 2.70% as a percentage of AEA, above the target range of 2.00%-2.50%. Our target for the quarterly run rate of operating expenses, excluding restructuring



(1) Average earning assets is a non-GAAP measure; see "Non-GAAP Financial Measurements" for a reconciliation of non-GAAP to GAAP financial information.

(2) Operating expenses excluding restructuring costs is a non-GAAP measure. See "Non-GAAP Financial Measurements" for reconciliation of non-GAAP to GAAP financial information.

Item 2. Management's Discussion and Analysis and Item 3. Quantitative and Qualitative Disclosures about Market Risk 37


Table of Contents

charges, is approximately $215 million in 2014. Operating efficiency improvements are being phased in over 2013 and the full benefits of these actions will likely be realized later in 2014. The complexities of exiting certain countries and platforms will result in an elevated level of restructuring, legal and other related costs for another few quarters.

We have lowered headcount by approximately 250 since a year ago to 3,380 at September 30, 2013, modified several benefit plans and consolidated some offices.

We are progressing on our subscale platform rationalization strategy and have concluded our review of the Vendor Europe business. In total we plan to exit over 20 countries across Europe, South America and Asia, although we continue to have a presence in these regions. As a result of these decisions, we have moved portfolios of financing and leasing assets to assets held for sale, including our small business lending portfolio in Corporate Finance.

3. Expand CIT Bank Assets and Funding

The Bank is funding virtually all of our U.S. lending and leasing volume, expanding online deposit product offerings and evaluating launching a limited branch network.

Total assets at the Bank increased to $14.7 billion at September 30, 2013, up $0.8 billion since June 30, 2013 and up $2.4 billion from December 31, 2012, reflecting growth in commercial financing and leasing assets. Funded new business volume totaled $1.7 billion for the quarter and $5.0 billion year-to-date, which represented nearly all U.S. new business volume for Corporate Finance, Transportation Finance and Vendor Finance. This volume was supplemented with a $720 million portfolio purchase in the first quarter.

Deposits grew by approximately $0.7 billion during the quarter and $2.2 billion year-to-date, consistent with asset growth and the overall liquidity position of the Bank.

4. Begin to Return Capital

On May 30, 2013, our Board of Directors approved the repurchase of up to $200 million of common stock through December 31, 2013.

During the third quarter, we repurchased over 800,000 shares for a total of $39 million, bringing total shares repurchased to 1.1 million, or $51 million.

In addition, on October 21, 2013, our Board of Directors declared a cash dividend in the amount of $0.10 per share on our outstanding common stock payable on November 29 to holders of record November 15.

THIRD QUARTER 2013 FINANCIAL OVERVIEW

Net income for the 2013 third quarter totaled $200 million, $0.99 per diluted share, compared to a net loss of $299 million for the year-ago quarter, or $(1.49) per diluted share, and net income of $184 million for the prior quarter, $0.91 per diluted share. Year-to-date, net income for 2013 totaled $546 million, $2.70 per diluted share, compared to a net loss of $799 million for the prior year, or $(3.98) per diluted share.

Pre-tax income totaled $214 million for the 2013 third quarter compared to a pre-tax loss of $(295) million for the year-ago quarter and pre-tax income of $216 million for the prior quarter. On an adjusted basis, pre-tax income excluding debt redemption charges(3) was up from $176 million in the year-ago quarter and down from $224 million in the prior quarter. Year-to-date, pre-tax income excluding debt redemption charges for 2013 totaled $637 million, compared to $670 million for 2012. The lower results excluding the debt redemption charges were primarily a result of lower gains on asset sales, which more than offset the decline in funding costs.

The following table presents pre-tax results adjusted for debt redemption charges, a non-GAAP measurement.


Impacts of FSA Accretion and Debt Refinancing Costs on Pre-tax Income (Loss)
(dollars in millions)
--------------------------------------------------------------------------------
                                                                       Quarters Ended
                                                      -------------------------------------------------         Nine Months Ended
                                                                                                                  September 30,
                                                       September 30,      June 30,       September 30,     ----------------------------
                                                           2013             2013             2012             2013            2012
                                                      ---------------    -----------    ---------------    -----------    -------------
Pre-tax income (loss)                                   $    213.7        $ 216.3         $   (294.5 )      $ 610.8        $  (706.6 )
Accelerated FSA net discount/(premium) on
debt extinguishments and repurchases                             -            8.1              453.9           25.9          1,315.7
Debt related - loss on debt extinguishments                      -              -               16.8              -             61.2
Total debt redemption charges                                    -            8.1              470.7           25.9          1,376.9
Pre-tax income - excluding debt redemption
charges                                                 $    213.7        $ 224.4         $    176.2        $ 636.7        $   670.3



(3) Pre-tax income excluding debt redemption charges is a non-GAAP measure. Debt redemption charges include accelerated fresh start accounting debt discount amortization and loss on debt extinguishments. See "Non-GAAP Financial Measurements" for components and for reconciliation of non-GAAP to GAAP financial information.

38 CIT GROUP INC


Table of Contents

Net finance revenue(4)("NFR") totaled $357 million for the 2013 third quarter, compared to $(129) million in the year-ago quarter and $381 million in the prior quarter. The improvement from last year reflected lower debt redemption charges and lower funding costs that resulted primarily from a higher proportion of deposit funding. The sequential decline reflected lower revenues due to the sale of higher yielding Vendor Finance assets, a decline in operating lease revenue, along with lower yield-related fees and net FSA accretion. Excluding debt redemption charges, NFR was up from $325 million in the year-ago quarter on higher assets and down from $389 million in the prior quarter. Year-to-date, excluding debt redemption charges, NFR was $1.1 billion, up from $927 million in the prior year as the benefit of lower funding costs offset lower FSA loan accretion. While other institutions may use net interest margin ("NIM") to measure earnings on interest bearing assets, defined as interest income less interest expense, we discuss NFR, which includes operating lease rental revenue and depreciation expense, due to the underlying assets significant impact on revenue and expense. While asset utilization remained strong, net operating lease revenue for the 2013 third quarter was down from the year-ago quarter and prior quarter. Year-to-date, net operating lease revenue for 2013 was slightly below last year.

AEA was $33.9 billion for the 2013 third quarter, up from $32.3 billion in the year-ago quarter, and $33.7 billion in the prior quarter. Average commercial earning assets totaled $30.4 billion in the current quarter, up from $27.9 billion for the year-ago quarter and $30.1 billion in the prior quarter. Year-to-date, AEA totaled $33.5 billion, up from $32.6 billion in 2012, reflecting growth in commercial loans and leases, partially offset by prior year sales of student loans.

NFM was 4.22%, improved from the year-ago quarter. Excluding debt redemption charges in the prior period, NFM improved from 4.02% in the year-ago quarter, primarily reflecting lower funding costs, and declined from 4.62% in the prior quarter. About half of the sequential decline was driven by the combination of lower interest recoveries, less benefit from suspended depreciation and lower FSA loan accretion. The remaining decline was primarily due to lower lease revenue, reflecting pressure on certain renewal lease rates in the commercial air portfolio, and the sale of Dell Europe assets, which had higher yields. The fourth quarter will include the full impact of that portfolio sale, as the remaining assets were sold at the start of the fourth quarter. Year-to-date, NFM was 4.50%, excluding debt redemption charges, up from 3.79% in 2012.

Provision for credit losses for the 2013 third quarter was $16 million, compared to an insignificant amount in the year-ago quarter, and $15 million in the prior quarter. Year-to-date, provision for credit losses for 2013 was $51 million, essentially flat with last year. The nine-month provision was essentially flat with the prior year despite higher net charge-offs in 2013. The current year charge-offs included amounts related to receivables transferred to assets held for sale, which had no net provision impact.

Other income for the 2013 third quarter of $105 million increased from $87 million in the year-ago quarter and $79 million in the prior quarter. The sequential increase is attributable to higher gains on asset sales and other revenue, including gains related to the sale of Vendor Finance and Transportation Finance assets in the current quarter, partially offset by impairments on loans and leases transferred to assets held for sale in conjunction with our international rationalization efforts. Year-to-date, other income was $254 million, down from $481 million in 2012, predominantly due to lower gains on asset sales, and to a lesser extent, lower recoveries on loans charged off pre-emergence and loans charged off prior to transfer to assets held for sale, and lower counterparty receivable accretion.

Operating expenses were $232 million compared to $235 million in the year-ago quarter and $230 million in the prior quarter. Excluding restructuring costs(5), operating expenses were $229 million, compared to $230 million in the year-ago quarter and $220 million in the prior quarter. The current period includes costs related to certain legal matters and our international rationalization efforts, while the prior quarter included a benefit in professional fees from a workout-related settlement. Headcount at September 30, 2013 was approximately 3,380, down from 3,630 a year ago and 3,420 at June 30, 2013. Year-to-date, operating expenses excluding restructuring charges of $18 million and $11 million, were $679 million for 2013 and $675 million for 2012.

Provision for income taxes in the third quarter of 2013 was $14 million, which primarily reflected the recognition of tax expense on international earnings and state tax expense in the U.S. The $4 million provision for taxes in the year-ago quarter reflected the change in geographic mix of earnings for that period. The $32 million provision in the prior quarter included over $20 million related to the establishment of valuation allowances on certain international deferred tax assets due to our international platform rationalizations. Year-to-date, provision for income taxes for 2013 was $61 million, down from $90 million last year.

Total assets at September 30, 2013 were $46.2 billion, up $1.6 billion from June 30, 2013 and $2.3 billion from December 31, 2012. Commercial financing and leasing assets ("Commercial FLA") increased to $32.1 billion, up $0.4 billion from June 30, 2013, and $1.9 billion from December 31, 2012, as new origination volume and portfolio purchases more than offset collections and sales. Consumer loans totaled $3.5 billion, down by approximately $70 million from June 20, 2013 and $240 million from December 31, 2012, reflecting the continued run off of student loans. Cash and investments totaled $8.5 billion, compared to $7.3 billion at June 30, 2013 and $7.9 billion at December 31, 2012.



(4) Net finance revenue and average earning assets are non-GAAP measures; see "Non-GAAP Financial Measurements" for a reconciliation of non-GAAP to GAAP financial information.

(5) Operating expenses excluding restructuring costs is a non-GAAP measure. See "Non-GAAP Financial Measurements" for reconciliation of non-GAAP to GAAP financial information.

Item 2. Management's Discussion and Analysis and Item 3. Quantitative and Qualitative Disclosures about Market Risk 39


Table of Contents

Credit metrics remained stable at cyclical lows, although, as in the prior quarter, charge-offs were elevated by amounts related to the transfer of loans to assets held for sale. Net charge-offs were $27 million (0.50% of average finance receivables), compared to $18 million (0.36%) in the year-ago quarter and $29 million (0.53%) in the prior quarter. Net charge-offs in the commercial segments were 0.59% of average finance receivables, compared to 0.44% in the year-ago quarter and 0.63% in the prior quarter. Recoveries of $9 million were lower than in recent quarters. Net charge-offs were negligible in Transportation Finance, and Trade Finance had net recoveries for the quarter and year-to-date. Charge-offs in Corporate Finance and Vendor Finance included $5 million and $7 million, respectively, related to transfers of loans to assets held for sale, while the prior quarter included $20 million of such charge-offs in Corporate Finance. Year-to-date, net charge-offs for 2013 were $66 million (0.40%) and $57 million (0.37%) last year. Non-accrual balances declined to $258 million (1.18% of finance receivables) at September 30, 2013 from $279 million (1.28%) at June 30, 2013 and $332 million (1.59%) at December 31, 2012.


NET FINANCE REVENUE

The following tables present management's view of consolidated NFR and NFM and
includes revenues from loans and leased equipment, net of interest expense and
depreciation, in dollars and as a percent of AEA.

--------------------------------------------------------------------------------
Net Finance Revenue(1) and Net Finance Margin (dollars in millions)
--------------------------------------------------------------------------------
                                                                            Quarters Ended
                                                         -----------------------------------------------------            Nine Months Ended
                                                                                                                            September 30,
                                                          September 30,        June 30,         September 30,     ----------------------------------
                                                              2013               2013               2012               2013               2012
                                                         ---------------    ---------------    ---------------    ---------------    ---------------
Interest income                                           $    337.4         $    351.6         $    375.5         $  1,044.8         $  1,212.1
Rental income on operating leases                              441.1              452.4              445.8            1,338.4            1,332.6
Finance revenue                                                778.5              804.0              821.3            2,383.2            2,544.7
Interest expense                                              (278.0 )           (281.4 )           (816.0 )           (851.3 )         (2,530.8 )
Depreciation on operating lease equipment                     (143.0 )           (141.3 )           (134.5 )           (427.6 )           (402.9 )
Net finance revenue                                       $    357.5         $    381.3         $   (129.2 )       $  1,104.3         $   (389.0 )
Average Earning Assets(1)(2) ("AEA")                      $ 33,904.8         $ 33,678.1         $ 32,264.0         $ 33,495.5         $ 32,592.0
As a % of AEA:
Interest income                                                 3.98 %             4.18 %             4.66 %             4.16 %             4.96 %
Rental income on operating leases                               5.20 %             5.37 %             5.53 %             5.33 %             5.45 %
Finance revenue                                                 9.18 %             9.55 %            10.19 %             9.49 %            10.41 %
Interest expense                                               (3.28 )%           (3.34 )%          (10.12 )%           (3.39 )%          (10.35 )%
Depreciation on operating lease equipment                      (1.68 )%           (1.68 )%           (1.67 )%           (1.70 )%           (1.65 )%
Net finance margin                                              4.22 %             4.53 %            (1.60 )%            4.40 %            (1.59 )%
Net Finance Margin by Segment:
Corporate Finance                                               2.90 %             3.25 %            (0.31 )%            3.20 %            (0.10 )%
Transportation Finance                                          5.05 %             5.26 %            (1.74 )%            5.07 %            (1.84 )%
Trade Finance                                                   2.93 %             2.83 %            (3.43 )%            2.81 %            (3.65 )%
Vendor Finance                                                  7.06 %             7.67 %             3.40 %             7.50 %             2.55 %
Commercial Segments                                             4.68 %             5.00 %            (0.46 )%            4.87 %            (0.62 )%
Consumer                                                        1.21 %             1.62 %             0.17 %             1.55 %             0.22 %

(1) NFR and AEA are non-GAAP measures; see reconciliation of non-GAAP to GAAP financial information.

(2) AEA are less than comparable balances displayed later in this document in 'Select Data' (Quarterly Average Balances) due to the exclusion of deposits with banks and other investments and the inclusion of credit balances of factoring clients.

NFR and NFM are key metrics used by management to measure the profitability of our lending and leasing assets. NFR includes interest and fee income on our loans and capital leases, rental income and depreciation from our operating lease equipment, interest and dividend income on cash and investments, as well as funding costs. Since our asset composition includes a high level of operating lease equipment (37% of AEA for the September 30, 2013 quarter), NFM is a more appropriate metric for CIT than net interest margin ("NIM") (a common metric used by other bank holding companies), as NIM does not fully reflect the earnings of our portfolio because it includes the impact of debt costs on all our assets but excludes the net revenue (rental income less depreciation) from operating leases.

NFR increased from the year-ago quarter largely due to the negative impact of accelerated debt FSA accretion in the year-ago quarter, reflecting repayments of high cost debt,

40 CIT GROUP INC


Table of Contents

and decreased from the prior quarter, as lower revenues and FSA accretion offset revenue earned on the higher level of assets. There was no accelerated FSA accretion on debt extinguishments this quarter, while the year-ago quarter included $454 million and the prior quarter had $8 million. Year-to-date, accelerated FSA accretion on debt extinguishments decreased NFR by $26 million in 2013 and $1.3 billion in 2012. The higher 2012 FSA interest expense accretion amounts reflect repayments of Series A and C Notes. The 2013 accelerated FSA discount related to the repayment of senior unsecured notes issued under CIT's InterNotes retail notes program. See "InterNotes" in Funding and Liquidity. See Fresh Start Accounting section for FSA accretion details and the first table in Results by Business Segment for accelerated debt FSA accretion impact on each segment.

As detailed in the following table, excluding debt redemption charges, adjusted NFR was up from the year-ago quarter primarily on lower funding costs. Adjusted NFR was down from the prior quarter as discussed below.


Adjusted NFR(1) ($) and NFM(1) (%) (dollars in millions)
                                                                                         Quarters Ended
                                                     --------------------------------------------------------------------------------------
                                                           September 30,                                              September 30,
                                                               2013                     June 30, 2013                      2012
                                                     -------------------------    -------------------------    ----------------------------
NFR / NFM                                             $ 357.5          4.22 %      $ 381.3          4.53 %      $ (129.2 )        (1.60 )%
Accelerated FSA net discount/(premium) on
debt extinguishments and repurchases                        -             -            8.1          0.09 %         453.9           5.62 %
Adjusted NFR / NFM                                    $ 357.5          4.22 %      $ 389.4          4.62 %      $  324.7           4.02 %




                                                                                       Nine Months Ended September 30,
                                                                         ------------------------------------------------------------
                                                                                    2013                            2012
                                                                         ---------------------------    -----------------------------
NFR / NFM                                                                 $ 1,104.3          4.40 %      $  (389.0 )        (1.59 )%
Accelerated FSA net discount/(premium) on
. . .
  Add CIT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CIT - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.