CIT Group Inc, the small-business lender led by former Merrill Lynch Chief Executive Officer John Thain, said it lost $446.5 million in the first quarter after taking $620 million of charges for retiring high-cost debt.
Its shares fell more than 3 percent in morning trading.
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Pretax income excluding those charges was $214 million, up 21 percent from $178 million a year earlier. CIT, which entered and emerged from bankruptcy in late 2009, attributed the gain primarily to lower funding costs and higher gains on asset sales.
In a conference call with analysts, executives said gains from asset sales are likely to fall going forward as the company's inventory of unwanted loans decreases.
On a per-share basis, the New York-based lender, lost $2.22, matching the consensus mean estimate of analysts surveyed by Thomson Reuters I/B/E/S.
Thain, who has been CEO since February 2010, has been weaning CIT from reliance on high-cost debt. The company has eliminated or refinanced more than $22 billion of expensive debt since 2010 and last year created an online retail bank to gather inexpensive deposits. In the first quarter, CIT redeemed $6.5 billion of debt and, for the first time since emerging from bankruptcy, issued more than $1 billion of unsecured debt.
The New York-based lender also reported improvements in loan chargeoffs and nonperforming loans, but average earnings assets of $33 billion fell 2 percent during the quarter.
In another sign of improved credit quality, nonaccrual loans on which CIT does not expect timely payment fell to $482 million from $1.3 billion a year ago. However, the company set aside $43 million for potential future credit losses, more than double the $16 million provision it took in the fourth quarter of 2011.
Chief Financial Officer Scott Parker said on the call that the company was preparing for losses that naturally accompany growth expected in its commercial loan portfolio.
CIT, which lends to small and medium-sized businesses that do not qualify for traditional bank credit, recently revived moribund commercial real estate and construction equipment finance businesses.
The company continues to operate under an agreement subjecting it to close scrutiny from the Federal Reserve Bank of New York. The firm's bankruptcy led the U.S. government to lose a $2.3 billion bailout loan it had provided during the financial crisis.
CIT has "substantially satisfied" the conditions set by the regulator and is waiting for the Fed to verify its work, Thain said on the call. He declined to say when the regulator might respond or lift remaining restrictions.
CIT has indicated a desire to buy a small bank to raise cheap deposits to fund its loan and airplane and rail leasing operations when the regulatory agreement ends. The company, which also has not issued dividends or repurchased stock since entering the agreement, opened an online bank at the end of last year that now has deposits of more than $1.1 billion.
CIT's counterparty ratings were upgraded a notch during the first quarter by Moody's, Standard & Poor's and Dun & Bradstreet, but still remain at junk levels.
Thain received a $1.9 million cash bonus as part of his 2011 compensation to reflect in part progress in resolving the regulatory issues, the company's compensation committee said in an earlier filing with the Securities and Exchange Commission. Thain's compensation rose 23 percent to $8.2 million last year, when CIT's net income fell to $28 million from $526 million in 2010.
The company, which in recent years booked losses from accelerating bankruptcy-accounting charges, offered a mixed outlook for its credit and growth fundamentals. Fee revenue in the first quarter fell 46 percent from the fourth quarter of 2011 because of "very low" deliveries of airplanes and trains to leasing customers, Parker said, adding that the company may need to buy some more loan portfolios to achieve its fee goals.
Thain attributed the company's improved credit quality to much stronger underwriting standards than it had under his predecessor and to an improving economy. "Some of the very low levels of chargeoffs and nonaccruals is a function of where we are in the economic cycle," he said.
CIT's shares fell 3.4 percent to $37.86 in morning trading on the New York Stock Exchange. The stock had been up 12.4 percent this year through the close of trading on Monday, compared with an 8.7 percent gain for the S&P 500 index.