CIT Group Inc. : CIT Reports Fourth Quarter 2013 Net Income of $130 Million ($0.65 Per Diluted Share); Includes Previously Announced $45 Million Tax Agreement Settlement Charge

CIT Group Inc. (NYSE:CIT), a leading provider of financing and advisory services to small businesses and middle market companies, today reported net income of $130 million, $0.65 per diluted share, for the fourth quarter of 2013, compared to net income of $207 million, $1.03 per diluted share, for the fourth quarter of 2012. Net income for the year ended December 31, 2013 was $676 million, $3.35 per diluted share, compared to a net loss of $592 million, $2.95 per diluted share, which included $1.5 billion of debt redemption charges¹ , for the year ended December 31, 2012.

"In 2013, we returned CIT to profitability, grew CIT Bank and our commercial assets, while rationalizing our global platforms and returning capital to shareholders," said John Thain, Chairman and Chief Executive Officer. "We remain focused on enhancing the value of our franchise as we put our knowledge to work to meet the lending, leasing and advisory needs of our small business, middle market and transportation clients."

Summary of Fourth Quarter Financial Results

Fourth quarter results reflect growth in earning assets, aided by higher levels of new business activity, and continued strong credit metrics. There were also a number of items that in aggregate reduced net income, the largest of which was the Tyco Tax Agreement settlement for which we recorded a $45 million charge in the quarter. In addition, the decline in net income from the year-ago quarter largely reflected lower interest income and net FSA accretion, which were partially offset by lower debt redemption charges.

Total assets at December 31, 2013 were $47.1 billion, up $0.9 billion from September 30, 2013, and $3.1 billion from December 31, 2012. Commercial financing and leasing assets increased to $32.7 billion, up $0.6 billion from September 30, 2013 and $2.5 billion from December 31, 2012. Total loans of $18.6 billion decreased $3.2 billion sequentially and $2.2 billion from a year ago, reflecting the transfer of the $3.4 billion student loan portfolio into assets held for sale during the current quarter. Operating lease equipment increased $0.5 billion from September 30, 2013 and $0.6 billion from a year ago to $13.0 billion, reflecting the addition of aircraft and railcars. Cash and investment securities increased to $8.8 billion from $8.5 billion at September 30, 2013 and $7.9 billion at December 31, 2012.

Net finance revenue² was $337 million compared to $312 million in the year-ago quarter, which included approximately $83 million of debt redemption costs, and $357 million in the prior quarter. Average earning assets were $34.2 billion in the fourth quarter, up from $32.3 billion in the year-ago quarter and $33.9 billion in the prior quarter. Net finance revenue as a percentage of average earning assets ("net finance margin") was 3.95% in the fourth quarter, improved from 3.86% in the year-ago quarter and down from 4.22% in the prior quarter. Excluding the impact of debt redemptions³, net finance margin was 4.00% in the current quarter, down from 4.88% in the year-ago quarter and 4.22% in the prior quarter, primarily reflecting the sale of higher-yielding Vendor Finance assets and a decline in operating lease margin and net FSA accretion.

Other income of $128 million declined from $172 million in the year-ago quarter, primarily due to lower counterparty receivable accretion, and increased $23 million sequentially. Other income benefited from several items, including a $29 million gain on the sale of the remaining Dell Europe portfolio, a $19 million gain on a workout-related claim, a $17 million gain on the sale of a leveraged lease (on which there was also a $13 million expense in the tax provision), which were partially offset by $22 million of impairment charges on assets held for sale related to our international platform rationalization efforts.

Operating expenses were $288 million, up from $232 million in both the year-ago and prior quarters. Excluding restructuring charges⁴, operating expenses were $269 million in the current period, up $49 million from the year-ago quarter and $40 million from the prior quarter. The current period includes a $45 million charge related to the Tyco Tax Agreement settlement and a benefit from the recovery of legal expenses. Headcount at December 31, 2013 was approximately 3,240 down from 3,560 a year ago and 3,380 at September 30, 2013.

The provision for income taxes in the fourth quarter was $31 million, down from $44 million in the year-ago quarter and up from $14 million in the prior quarter. The current quarter includes a $13 million expense related to the sale of a leveraged lease. In addition to the impact of discrete items, which increased the provision by $12 million in the year-ago quarter and decreased it by $4 million in the prior quarter, the tax provision reflects the recognition of tax expense on international earnings and state tax expense in the U.S.

Credit and Allowance for Loan Losses

Credit metrics remained at cyclical lows. Net charge-offs were $15 million, or 0.27% of average finance receivables, versus $17 million (0.34%) in the year-ago quarter and $27 million (0.50%) in the prior quarter. Net charge-offs in the commercial segments were 0.32% of average finance receivables, improved from 0.41% in the year-ago quarter and 0.59% in the prior quarter. Charge-offs this quarter included $5 million related to transfers of loans to assets held for sale, while the prior quarter included $12 million of such charge-offs.

Net charge-offs do not reflect recoveries of loans charged off pre-emergence and loans charged off prior to transfer to held for sale. Recoveries on these loans are recorded in other income and totaled $5 million, $17 million and $6 million for the current quarter, the year-ago quarter and the prior quarter, respectively.

Non-accrual loans declined to $241 million, or 1.29% of finance receivables, at December 31, 2013 from $332 million (1.59%) at December 31, 2012 and $258 million (1.18%) at September 30, 2013. Finance receivables in the current quarter include only the commercial segments whereas finance receivables in the year-ago quarter and prior quarter include the student loan portfolio that was moved to assets held for sale at the end of 2013. Non-accrual loans as a percentage of finance receivables in the commercial segments improved from 1.93% at December 31, 2012 and 1.41% at September 30, 2013, primarily driven by Corporate Finance.

The provision for credit losses was $14 million in the current quarter, up from $0.1 million in the year-ago quarter and down from $16 million in the prior quarter. The allowance for loan losses at December 31, 2013 was $356 million, or 1.91% of total finance receivables, compared to $379 million (1.82%) at December 31, 2012 and $356 million (1.63%) at September 30, 2013 (both comparable periods include U.S. government guaranteed student loans that had no related reserves). As a percentage of the commercial portfolio, the allowance for loan losses was 2.21% at December 31, 2012 and 1.94% at September 30, 2013. The trends in the allowance for loan losses are consistent with the reduction in non-accrual loans, offset by growth in the portfolio, the net effect of which was minimal in the current quarter. Specific reserves were $30 million at December 31, 2013, compared to $45 million at December 31, 2012 and $34 million at September 30, 2013.

Capital and Funding

Preliminary Tier 1 and Total Capital ratios at December 31, 2013 were 16.7% and 17.4%, respectively, unchanged from September 30, 2013 and up from 16.2% and 17.0% at December 31, 2012. Preliminary risk-weighted assets totaled $50.6 billion at December 31, 2013, up slightly from September 30, 2013 and up from $48.6 billion at December 31, 2012, primarily reflecting growth in financing and leasing assets. Book value per share grew to $44.78 at December 31, 2013 from $44.16 at September 30, 2013 and $41.49 at December 31, 2012. Tangible book value per share⁵ at December 31, 2013 was $42.98, improved from $42.36 at September 30, 2013 and $39.61 at December 31, 2012.

Cash and short-term investment securities totaled $7.6 billion at December 31, 2013, and was comprised of $6.1 billion of cash and $1.5 billion of short-term investments, compared to $7.4 billion at September 30, 2013 and $7.6 billion at December 31, 2012. Cash and short-term investment securities at December 31, 2013 consisted of $3.4 billion related to the bank holding company and $2.5 billion at CIT Bank, with the remainder comprised of cash at operating subsidiaries and restricted balances. We had approximately $1.9 billion of unused and committed liquidity under our $2 billion Revolving Credit Facility at December 31, 2013.

Deposits grew approximately $0.7 billion during the quarter to $12.5 billion, consistent with asset growth and the overall liquidity position of CIT Bank. At December 31, 2013, deposits represented approximately 36% of our funding, with secured and unsecured borrowings comprising 27% and 37% of the funding mix, respectively. The weighted average coupon rate on outstanding deposits and long-term borrowings was 3.07% at December 31, 2013, improved from 3.09% at September 30, 2013 and 3.18% at December 31, 2012.

During the quarter, CIT Bank closed a $750 million securitization that had a weighted average coupon of 1.02% and is secured by a pool of U.S. Vendor Finance equipment receivables. In January 2014, CIT renewed its Revolving Credit Facility, reducing the commitment to $1.5 billion and extending the maturity from August 2015 to January 2017.

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 fourth quarter we repurchased over 2.9 million shares at an average price of $48.60, bringing the total shares repurchased under the 2013 authorization to slightly over 4 million shares, or approximately $193 million. On January 21, 2014, the Board of Directors declared a quarterly cash dividend of $0.10 per share payable on February 28, 2014, and authorized the repurchase of up to $307 million of common stock through December 31, 2014, which includes the amount remaining from the 2013 authorization.

Segment Highlights

Certain comparisons in the segment discussions below are impacted by accelerated FSA net discount/(premium) on debt extinguishments, original issue discount accretion and loss on debt extinguishments. See details on the table on page 16.

Corporate Finance

Pre-tax earnings for the quarter were $81 million, down from $105 million in the year-ago quarter. While both quarters benefited from a number of items, the decrease from the year-ago quarter primarily reflects lower net FSA accretion. Pre-tax earnings for the quarter improved from $37 million in the prior quarter, primarily as a result of a gain on sale of a leveraged lease and a benefit from a workout-related claim.

Financing and leasing assets grew to nearly $10 billion, up $0.2 billion from September 30, 2013, with solid new business volumes being partially offset by prepayment activity, and up $1.7 billion from December 31, 2012, which also reflected a portfolio purchased during the first quarter of 2013. Funded loan volume, which included a balanced mix of asset-secured and cash flow loans, totaled $1.3 billion, down from $1.5 billion in the year-ago quarter, and up from $1.1 billion in the prior quarter.

Credit metrics remained at cyclical lows. Non-accrual loans declined to $127 million (1.34% of finance receivables) from $212 million (2.59%) a year ago and $155 million (1.68%) at September 30, 2013. There were net recoveries of $5 million (0.23% of average finance receivables), compared to net charge-offs of $14 million (0.72%) in the year-ago quarter and $9 million (0.39%) in the prior quarter.

Transportation Finance

Pre-tax earnings for the quarter were $133 million, down from $169 million in the year-ago quarter reflecting higher interest and depreciation expense, and from $161 million in the prior quarter as our portfolio management activities in commercial air resulted in lower non-spread revenue. Utilization remained strong with all but one commercial aircraft and over 98% of rail equipment on lease or under a commitment to lease at period-end.

Financing and leasing assets totaled $15.1 billion at December 31, 2013, up $0.8 billion sequentially reflecting growth in all business units and $0.9 billion from a year ago. During the quarter we took delivery of 11 new aircraft and approximately 1,800 railcars and funded over $0.4 billion of loans. At the end of December 2013 we signed an agreement to purchase a European railcar leasing company with approximately 9,500 railcars that is expected to close during the first quarter of 2014.

All aircraft and railcars scheduled for delivery in the next twelve months have lease commitments. A higher than usual number of aircraft will be subject to lease renewals in 2014, which could put pressure on the operating lease margin.

Trade Finance

Pre-tax earnings for the quarter were $16 million, compared to $21 million in the year-ago quarter, and $17 million in the prior quarter. Factoring volume was $6.8 billion, down slightly from the year-ago quarter, and up 3% sequentially, reflecting seasonality. Factoring commissions of $31 million were down modestly from the year-ago period and from the prior quarter.

Credit metrics remained favorable. Non-accrual balances of $4 million declined from $6 million a year ago and from $7 million at September 30, 2013. There was a modest net recovery in the current quarter and in each of the year-ago and prior quarters.

Vendor Finance

Pre-tax earnings for the quarter were $5 million and continued to be impacted by our international platform rationalization efforts, compared to $47 million in the year-ago period and $8 million in the prior quarter. The decline from the year-ago quarter reflects lower net finance income, higher credit costs and lower net FSA accretion, which more than offset lower operating expenses in the current quarter. The decline from the prior quarter reflects lower net rental income due to the sale of the Dell Europe portfolio and higher credit costs, partially offset by higher other income and lower expenses. Pre-tax income for the quarter included a $29 million gain on the sale of the remaining Dell Europe portfolio, that was partially offset by $22 million in impairments on assets held for sale related to our international platform rationalization efforts. The year-ago and sequential quarter comparisons also reflected the impact of the Dell Europe sales on net finance revenue, as those assets had high yields. In aggregate, results continue to be negatively impacted by our International platforms while the U.S. business continues to be profitable and grow.

Financing and leasing assets declined modestly from September 30, 2013 to $5.3 billion and were down 2% from a year ago, reflecting nearly $400 million of assets sold this quarter, primarily related to the Dell Europe portfolio and, to a lesser extent, continued progress on our international platform rationalizations. Assets held for sale decreased to $438 million as reductions from portfolio sales were partially offset by the addition of other international assets. We funded $711 million of new business volume in the quarter, a decrease of 18% from the year-ago quarter and down 7% from the prior quarter reflecting the wind down of certain international platforms.

Credit metrics were also impacted by the platform rationalization efforts. Net charge-offs were $21 million and included $4 million of charge-offs related to loans transferred to assets held for sale, and lower recoveries, while net charge-offs of $19 million in the prior quarter included $7 million of charge-offs related to loans transferred to assets held for sale. Non-accrual loans were $96 million (2.02% of finance receivables) at quarter-end, compared to $96 million (1.98%) at September 30, 2013 and up from $72 million (1.49%) a year ago.

Consumer

Pre-tax income for the quarter was $8 million, improved from a pre-tax loss of $51 million in the year-ago quarter, which included debt redemption charges partially offset by gains on loan sales, and pre-tax earnings of $5 million in the prior quarter. At December 31, 2013, the student loan portfolio totaled approximately $3.4 billion, all of which was transferred to assets held for sale in the quarter.

Corporate and Other

Corporate and Other includes certain items that are not allocated to the operating segments, such as unallocated interest expense primarily related to corporate liquidity costs, restructuring charges, and the Tyco Tax Agreement settlement charge, which was $45 million this quarter. Operating expenses included restructuring charges of $18 million in the current quarter, compared to $12 million in the year-ago quarter and $3 million in the prior quarter.

CIT Bank

Total assets were $16.1 billion at December 31, 2013, up $1.5 billion from September 30, 2013 and up $3.9 billion from a year ago. CIT Bank funded $2.1 billion of new business volume, which represented essentially all of the U.S. volume for Corporate Finance, Transportation Finance and Vendor Finance. Funded volumes were up 6% from the year-ago quarter and up 30% sequentially. Commercial loans totaled $12.0 billion, up from $10.9 billion at September 30, 2013 and $8.0 billion at December 31, 2012. Operating lease equipment of $1.3 billion, primarily railcars, increased from $1.1 billion at September 30, 2013 and $0.7 billion at December 31, 2012. Cash totaled $2.5 billion at December 31, 2013, unchanged from September 30, 2013, and down from $3.4 billion at December 31, 2012. Preliminary Total Capital and Tier 1 Leverage ratios were 18.1% and 17.0%, respectively, at December 31, 2013.

Total deposits at quarter-end were $12.5 billion, up from $11.8 billion at September 30, 2013 and $9.6 billion at December 31, 2012. The weighted average rate on outstanding deposits was 1.55% at December 31, 2013.

Full Year 2013 Results

CIT's 2013 results reflect progress on our strategic priorities, which included prudently growing our commercial businesses, continuing to achieve our profitability targets, expanding the role of CIT Bank both in asset origination and funding capabilities and beginning to return capital to shareholders.

Net income for the year was $676 million, $3.35 per diluted share, compared to a net loss of $592 million, $2.95 per share in 2012. Pre-tax income for the year was $774 million, compared to a pre-tax loss of $455 million in 2012. The net loss in 2012 included $1.5 billion of debt redemption charges whereas the current year included $31 million.

Net charge-offs of $81 million increased modestly from $74 million in 2012, and included approximately $40 million of charge-offs related to the transfer of loans into held for sale. Net charge-offs in the commercial segments were 0.44%, down slightly from 0.46% in 2012. The provision for credit losses was $65 million, up from $52 million in 2012.

Conference Call and Webcast

Chairman and Chief Executive Officer John A. Thain and Chief Financial Officer Scott T. Parker will discuss these results on a conference call and audio webcast today, January 28, 2014, at 8:00 a.m. (EST). Interested parties may access the conference call live by dialing 888-317-6003 for U.S., 866-284-3684 for Canadian callers or 412-317-6061 for international callers and reference access code "4812258" or access the audio webcast at cit.com/investor. An audio replay of the call will be available until 11:59 p.m. (EST) on February 11, 2014, by dialing 877-344-7529 for U.S. callers, 855-669-9658 for Canadian callers or 412-317-0088 for international callers with the access code "10038501", or at cit.com/investor.

About CIT

Founded in 1908, CIT (NYSE:CIT) is a financial holding company with more than $35 billion in financing and leasing assets. It provides financing, leasing and advisory services to its clients and their customers across more than 30 industries. CIT maintains leadership positions in middle market lending, factoring, retail and equipment finance, as well as aerospace, equipment and rail leasing. CIT operates CIT Bank (Member FDIC), its primary bank subsidiary, which, through its Internet bank BankOnCIT.com, offers a suite of savings options designed to help customers achieve a range of financial goals. cit.com

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of applicable federal securities laws that are based upon our current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. The words "expect," "anticipate," "estimate," "forecast," "initiative," "objective," "plan," "goal," "project," "outlook," "priorities," "target," "intend," "evaluate," "pursue," "commence," "seek," "may," "would," "could," "should," "believe," "potential," "continue," or the negative of any of those words or similar expressions is intended to identify forward-looking statements. All statements contained in this press release, other than statements of historical fact, including without limitation, statements about our plans, strategies, prospects and expectations regarding future events and our financial performance, are forward-looking statements that involve certain risks and uncertainties. While these statements represent our current judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results, and our actual results may differ materially. Important factors that could cause our actual results to be materially different from our expectations include, among others, the risk that CIT is unsuccessful in implementing its strategy and business plan, the risk that CIT is unable to react to and address key business and regulatory issues, the risk that CIT is unable to achieve the projected revenue growth from its new business initiatives or the projected expense reductions from efficiency improvements, the risk that CIT is delayed in implementing its branch strategy, and the risk that CIT becomes subject to liquidity constraints and higher funding costs. Further, there is a risk that the valuations resulting from our fresh start accounting analysis, which are inherently uncertain, will differ significantly from the actual values realized, due to the complexity of the valuation process, the degree of judgment required, and changes in market conditions and economic environment. We describe these and other risks that could affect our results in Item 1A, "Risk Factors," of our latest Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission. Accordingly, you should not place undue reliance on the forward-looking statements contained in this press release. These forward-looking statements speak only as of the date on which the statements were made. CIT undertakes no obligation to update publicly or otherwise revise any forward-looking statements, except where expressly required by law.

Non-GAAP Measurements

Net finance revenue, net operating lease revenue, and adjusted net finance revenue are non-GAAP measurements used by management to gauge portfolio performance. Operating expenses excluding restructuring costs is a non-GAAP measurement used by management to compare period over period expenses. Pre-tax income excluding debt redemption charges is a non-GAAP measurement used by management to compare period over period operating results. Tangible book value and tangible book value per share are non-GAAP metrics used to analyze banks.