A rise in operating lease revenues drove CIT Group Inc.'s (CIT) third-quarter 2014 adjusted earnings from continuing operations of 89 cents per share, which beat the Zacks Consensus Estimate by a penny. However, this was below 96 cents earned in the year-ago quarter.
Results benefited from an increase in rental income on operating lease and almost stable operating expenses, which were, however, partially offset by lower net interest income and other revenues. Notably, credit quality depicted a mixed bag, while liquidity position remained impressive.
After considering certain non-recurring items, net income came in at $515 million or $2.76 per share. This was up from $200 million or 99 cents per share earned in the prior-year quarter.
Performance in Detail
On a non-GAAP basis, total net revenue was $389.4 million, down 13.8% from the prior-year quarter. The fall was largely due to lower other income, partially offset by a rise in net finance revenue. Further, the figure lagged the Zacks Consensus Estimate of $435.0 million.
Net interest revenue was $33.1 million, down 33.4% from the year-ago quarter, mainly due to higher interest expenses.
Total non-interest income was $559.2 million, down 3.2% year over year. The decline was owing to a substantial fall in other income, partially offset by an increase in rental income on operating leases.
Net finance margin (excluding the impact of debt prepayment) decreased 30 basis points (bps) to 4.26%. The decline was primarily due to sale of higher-yielding Dell Europe assets and portfolio re-pricing, which were partially offset by lower funding costs.
Operating expenses (excluding restructuring costs) were $225.3 million, marginally down from $225.6 million in the prior-year quarter.
Credit Quality
CIT Group's credit quality was a mixed bag during the reported quarter. Non-accrual loans fell 16.5% year over year to $201.1 million.
Also, net charge-offs were $19.2 million, down 29.2% from the prior-year quarter. However, provision for credit losses was $38.2 million, up significantly from $16.4 million in the year-ago quarter.
Balance Sheet and Capital Ratios
As of Sep 30, 2014, cash and short-term investment securities amounted to $7.2 billion, comprising $6.2 billion of cash, $0.7 billion of reverse repo securities and $0.3 billion of short-term investments. Also, CIT Group had approximately $1.4 billion of unused and committed liquidity under a $1.5 billion revolving credit facility, as of the same date.
Capital ratios were strong as of Sep 30, 2014, with Tier 1 capital ratio of 14.3% and total capital ratio of 15.0%, both of which declined from the prior-quarter level. Book value per share was $49.10 as of Sep 30, 2014, up from $44.16 as of Sep 30, 2013.
Share Repurchase
During the quarter, CIT Group bought back 2.2 million shares for $106 million. As of Sep 30, 2014, nearly $450 million of authorized repurchase capacity was left.
Our Viewpoint
We expect CIT Group’s liability-restructuring initiatives and access to low-cost debts to aid its growth going forward. Also, the company’s enhanced capital deployment activities will boost shareholders’ value. However, sluggish development in the industries where CIT Group provides finance, stringent regulations and a weak economic recovery could dent the company’s growth prospects.
Among other miscellaneous services companies, FleetCor Technologies, Inc. (FLT) is expected to announce results on Oct 30, while Global Cash Access Holdings, Inc. (GCA) and Ladder Capital Corp (LADR) are slated to report results on Nov 4.
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