CIT Group Inc. reported net income of $247 million for the second quarter of 2014, compared to net income of $184 million for the year-ago quarter. During the quarter, the company completed the sale of the $3.3 billion Student Loan portfolio along with certain secured debt and servicing rights, generating income of $52 million net of taxes. As a result of the sale, the financial results of the Student Lending business are reported as a discontinued operation for all periods presented. Income from continuing operations for the second quarter was $195 million compared to $176 million for the year-ago quarter.
Net Income for the six month period ended June 30, 2014 was $364 million compared to $346 million for the period ended June 30, 2013. Income from continuing operations for the six month period ended June 30, 2014 was $310 million compared to $329 million for the period ended June 30, 2013.
“We had a solid second quarter and made good progress strengthening our franchise,” said John Thain, Chairman and Chief Executive Officer. “We grew our commercial assets by 3%, repurchased 9.4 million common shares and announced the acquisition of Direct Capital Corporation while completing the sale of certain non-strategic portfolios. We continue to focus on building long-term value by growing our earning assets, expanding CIT Bank, achieving our profitability targets and returning capital to our shareholders.”
Summary of Second Quarter Financial Results from Continuing Operations
All references in this section relate to continuing operations and therefore do not include any of the assets or results of operations of the discontinued operation.
Second quarter results reflect growth in earning assets and a further shift to deposit funding. Additionally, net income reflected benefits from loan prepayments, lower credit costs as well as the restructuring of two aircraft securitizations in our TRS facility that positively impacted interest expense and other income.
Total assets from continuing operations at June 30, 2014 were $44.2 billion, down from $44.9 billion at March 31, 2014, reflecting the use of cash to repay the $1.3 billion debt maturity on April 1, 2014, and up from $40.7 billion at June 30, 2013.
Financing and leasing assets in North American Commercial Finance and Transportation & International Finance increased to $34.1 billion, an increase of $1.3 billion (4%) from March 31, 2014 and $4.3 billion (15%) from a year ago. The sequential quarter increase was driven by solid origination volumes while the increase from the year-ago quarter also included the acquisition of Nacco in the first quarter of 2014, which added approximately $0.65 billion of financing and leasing assets. The Non-Strategic Portfolios declined by approximately $0.5 billion from March 31, 2014, and by $1.3 billion from a year ago, to $0.7 billion, reflecting portfolio run off and asset sales including the completion of the sale of the Small Business Lending portfolio in June 2014.
Total loans of $18.6 billion increased slightly from March 31, 2014 and by $0.4 billion from a year ago, reflecting new loan originations partially offset by asset sales. Operating lease equipment increased $0.6 billion from March 31, 2014 and $2.5 billion from a year ago to $14.8 billion, reflecting the Nacco acquisition and other equipment purchases. Cash and investments of $7.3 billion were down $1.7 billion from March 31, 2014 and were relatively flat from June 30, 2013.
Selected Segment Highlights:
Transportation & International Finance
Pre-tax earnings for the quarter were $148 million, down from $158 million in the year-ago quarter and up from $118 million sequentially. Pre-tax earnings this quarter included $7 million net benefit in interest expense due to the refinancing of secured debt within the TRS, while the year-ago quarter included $5 million of debt redemption charges. Excluding these items, pre-tax earnings declined $21 million from the prior year primarily due to lower gains on sale and increased $23 million sequentially reflecting increased net finance revenue, decreased credit costs and lower operating expenses.
Financing and leasing assets grew to $18.4 billion at June 30, 2014, up sequentially from $17.6 billion and from $15.4 billion a year ago. The sequential increase reflected growth in all divisions except International Finance with Aerospace accounting for approximately 80% of the growth. The $3.0 billion, or 19%, increase from June 2013 included $1.4 billion of growth in Rail, including the European rail acquisition in the 2014 first quarter, $1.2 billion in Aerospace, and $0.3 billion in Maritime. Assets Held for Sale increased to $0.7 billion largely due to the addition of $0.5 billion of loans from our International Finance division. New business volume was $1.4 billion and consisted of $0.9 billion of lease equipment, including the delivery of 13 aircraft and approximately 2,500 railcars, and the funding of $0.5 billion of finance receivables.
Net finance revenue was $222 million, up from the year-ago quarter and sequentially, due primarily to asset growth. Net finance margin was 4.91% compared to 5.12% in the year-ago quarter and 4.73% in the prior quarter. Excluding the impact from debt redemptions, margin was 4.75%, down from the year-ago quarter reflecting lower net rental yields in air and flat sequentially as lower maintenance and operating lease expense offset reduced loan prepayment benefits. Other income was $10 million, down from the year-ago quarter and up sequentially largely reflecting changes in gains on asset sales.
Provision for credit losses was $8 million, up from the year-ago quarter and down sequentially reflecting fluctuations in the international portfolio. Credit metrics in the current quarter includes $9 million of reserves charged-off against the International Finance assets transferred to Assets Held for Sale.
Operating expenses were $76 million, up from a year ago reflecting the European rail acquisition and our continued investment in growth initiatives. Operating expenses were down sequentially reflecting lower legal and employee costs.
Utilization remained strong with all but one commercial aircraft and over 98% of rail equipment on lease or under a commitment at quarter-end. All but one aircraft scheduled for delivery in the next 12 months, and approximately 87% of all railcars on order, have lease commitments. Gross yields in Aerospace were 12.2%, down sequentially reflecting reduced prepayment benefits in the loan portfolio and lease re-pricings, while gross yields in Rail declined slightly to 14.4% due in part to holding the European rail portfolio for the full quarter.
North American Commercial Finance
Pre-tax earnings for the quarter were $93 million, improved from $87 million in the year-ago quarter and from $43 million in the prior quarter. The improvement from the year-ago quarter was largely attributable to lower credit costs and higher non-spread revenue, while the sequential quarter increase also reflected a prepayment benefit.
Financing and leasing assets grew to $15.7 billion, up from $15.2 billion at March 31, 2014 and from $14.3 billion at June 30, 2013, reflecting solid new business volumes. Funded loan and lease volume totaled $1.6 billion, down from $1.7 billion in the year-ago quarter, and up from $1.4 billion in the prior quarter, in line with typical seasonal trends. The decrease in volume from the year-ago quarter reflected modest declines in Corporate Finance and Real Estate Finance partially offset by an increase in Equipment Finance. The sequential improvement in volume was across all divisions.
Net finance revenue of $146 million was essentially unchanged from the year-ago quarter and improved from the prior quarter. Net finance margin was 4.13% compared to 4.53% in the year-ago quarter and 3.64% in the prior quarter. The decline in net finance margin from the year-ago quarter primarily reflects lower portfolio yields in Corporate Finance and Equipment Finance and lower benefits from net FSA accretion. The sequential quarter improvement is largely due to the benefits of a prepayment in the current quarter. Other income was $70 million, compared to $65 million in the year-ago quarter and $62 million in the prior quarter, and included benefits from both investment gains and counterparty receivable accretion. Operating expenses were $120 million, up from $118 million in the year-ago quarter, which benefited from a litigation settlement, and improved slightly from $122 million in the prior quarter.
Credit metrics remained at or near cycle lows. Non-accrual loans of $132 million (0.86% of finance receivables) were essentially unchanged from March 31, 2014, and improved from $178 million (1.27%) a year ago. The current quarter provision for credit losses reflects primarily lower charge-offs, largely in Corporate Finance, and lower reserve build due to portfolio composition. Net charge-offs were $9 million (0.23% of average finance receivables), compared to $4 million (0.12%) in the year-ago quarter and $16 million (0.43%) in the prior quarter, and include a lower level of recoveries than in the comparable periods.
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