CIT Group Inc. a leading provider of financing to small businesses and middle market companies, today reported a net loss for the quarter ended September 30, 2011 of $16 million, down from net income of $116 million, in 2010, on reduced fresh start accounting (“FSA”) benefits and higher costs associated with the prepayments of first and second lien debt. Net income for the nine months ended September 30, 2011 was $1 million, down from $442 million for 2010.
“Our franchises remain strong and continue to provide much needed financing to the small business and middle market sectors despite the continued uncertainties around the U.S. and global economies,” said John A. Thain, Chairman and Chief Executive Officer. “We advanced our 2011 priorities by growing business volumes, accessing diverse funding markets, and further reducing high cost debt. In October, we successfully launched CIT Bank online and eliminated most of the restrictive covenants in our Series A Second Lien Notes. We will continue to capitalize on market opportunities and make progress on our strategic objectives.”
Third quarter operating results reflect increases in new business volume, continued asset sales and lower funding, credit and operating costs. Third quarter pre-tax income was $14 million, improved from a pre-tax loss of $22 million in the prior quarter. Both periods include significant costs associated with debt redemptions ($169 million in the current quarter and $163 million in the second quarter), as well as sizable benefits from net FSA accretion ($95 million in the current quarter and $124 million in the second quarter). The third quarter net loss of $16 million resulted from a $31 million provision for income taxes, an increase of $4 million from the second quarter. Pre-tax results for the quarter ended September 30, 2010 totaled $236 million, which included $262 million of net FSA accretion benefit and $10 million of debt redemption costs.
Total assets at September 30, 2011 were $44.5 billion, down $3.5 billion from June 30, 2011 and down $9.0 billion from a year ago. Cash and short-term investments declined $2.7 billion sequentially to $7.3 billion reflecting actions taken on several liability management initiatives, including the previously mentioned debt repayments. Total loans decreased $0.5 billion during the quarter to $21.8 billion primarily due to asset sales and run-off of the consumer portfolio as funded new business volume exceeded portfolio collections in the commercial segments. Operating lease equipment increased slightly to $11.2 billion, reflecting purchases of aircraft and railcars.
Funded new business volume of $1.9 billion increased 8% sequentially and 75% from the prior- year quarter while committed new business volume of $2.3 billion increased 12% sequentially and more than doubled from a year ago. Corporate Finance, Transportation Finance and Vendor Finance each reported increases in committed volume when compared to both the prior quarter and prior-year quarter. Factoring volume of $6.8 billion was up 10% sequentially, reflecting seasonality, but was down modestly from the prior-year period as growth in CIT’s U.S. factoring volume was offset by lower volume from our European operation that is in wind-down.
Net finance revenue improved sequentially due to lower accelerated debt discount amortization and improved funding costs, but declined from a year ago reflecting a lower level of earning assets and less FSA accretion. Average earning assets of $33.7 billion decreased $0.8 billion sequentially and $5.9 billion from a year ago largely due to asset sales. Net finance revenue as a percentage of average earning assets (“finance margin”) was 2.30%, compared to 0.80% last quarter and 3.44% the prior-year quarter. Excluding FSA and debt prepayment penalties, finance margin was 1.60%, up from 1.45% in the prior quarter and 0.95% a year ago. Compared to the second quarter, the third quarter finance margin reflected stable asset yields and a reduction in debt costs, partially offset by reduced benefits on a secured borrowing facility (the Total Return Swap). The improvement from the prior year quarter was primarily driven by lower funding costs. Net operating lease revenue2 improved from the prior quarter reflecting lower depreciation expense due to lease equipment moved to held for sale.
Provision for credit losses was $48 million, down 44% sequentially and 71% from the prior year reflecting declines in net charge-offs and improved credit metrics.
Vendor Finance
Vendor Finance pre-tax earnings were $77 million, improved from $22 million in the prior quarter but down from $89 million in the prior-year quarter. The sequential quarter improvement included lower credit costs which reflected higher recoveries, increased gain on asset sales, and lower operating expenses due to non-recurring items in the prior quarter. The decline from the prior-year quarter reflected reduced FSA accretion and lower asset levels partially offset by higher gain on asset sales and reduced credit costs.
Total financing and leasing assets decreased to $4.5 billion from $4.7 billion at June 30, 2011, due primarily to the sale of approximately $125 million in assets in Europe and foreign exchange translations, and declined $1.2 billion from September 30, 2010 as asset sales and net portfolio collections outpaced new business volume. Funded new business volume was $607 million, a sequential increase of approximately 2%; excluding the Dell Canada platform, which was sold last quarter, funded volume rose approximately 10%. Funded volume increased approximately 12% from the prior-year quarter, or 25% excluding the impact of Dell Canada. Approximately 75% of U.S. funded new business volume was originated in CIT Bank.
Portfolio credit quality improved across all metrics. Credit losses decreased from the prior quarter due to both lower gross charge-offs and higher recoveries. Non-accrual loans were down 36% from June 30, 2011, due to the sale of the European assets and overall improvement in portfolio quality. The level of delinquent loans also declined.
Credit and Allowance for Loan Losses
Credit metrics continued to improve as net charge-offs, non-accrual loans and inflows to non-accruals were down from the prior quarter and the prior-year quarter.
Net charge-offs were $47 million, down from $56 million last quarter and $101 million in the third quarter of 2010. The favorable comparisons were driven primarily by Vendor Finance, which had strong recoveries in the current quarter. Also, in prior periods, Vendor Finance reported higher charge-offs relating to liquidating portfolios and the acceleration of delinquency-based charge-offs that occurred in the second half of last year. Net charge-offs and the provision for credit losses do not reflect recoveries of charge-offs on pre-emergence loans and loans classified as held for sale. Recoveries on these loans are recorded in other income and were $36 million, $25 million and $52 million for the current quarter, the prior quarter and the third quarter of 2010, respectively.
The provision for credit losses was $48 million, down from $85 million last quarter and $165 million in the prior year quarter. The trend in provisions reflects a continued reduction in specific reserves, and improved portfolio credit quality.
Non-accrual loans were $914 million at September 30, 2011, down 14% and 55% from the prior quarter and the prior-year quarter, respectively. All segments reported declines from the prior periods, both in amount and as a percentage of receivables, with the exception of Trade Finance, which reported a sequential quarter increase.
The allowance for loan losses declined to $414 million from $424 million at June 30, 2011 and $416 million at December 31, 2010. As a percentage of finance receivables, the allowance was 1.9%, unchanged from June 30, 2011 and up from 1.7% at December 31, 2010.