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CIT Announces Second Quarter 2018 Results

NEW YORK, July 24, 2018 /PRNewswire/ --

CIT logo

Highlights:

  • Second quarter net income available to common shareholders of $117 million or $0.94 per diluted common share; income from continuing operations available to common shareholders of $138 million or $1.11 per diluted common share

  • Excluding noteworthy items, second quarter income from continuing operations available to common shareholders1 of $125 million or $1.00 per diluted common share

  • Average loans and leases were essentially unchanged compared to the prior quarter. Average loans and leases in core portfolios2 grew 1%
  • Completed repurchase of $680 million in common equity in 2Q18, consisting of approximately 12.5 million shares at a weighted average price per share of $54.43
  • Announced an additional common equity capital return of up to $750 million

  • Increased quarterly per share common stock dividend by 56% to $0.25

  • Closed on the sale of Financial Freedom, including our reverse mortgage portfolio

CIT Group Inc. (CIT) today reported second quarter net income available to common shareholders of $117 million or $0.94 per diluted common share, compared to net income available to common shareholders of $157 million or $0.85 per diluted common share for the year-ago quarter.  Income from continuing operations available to common shareholders for the second quarter was $138 million or $1.11 per diluted common share, compared to income available to common shareholders of $41 million or $0.22 per diluted common share in the year-ago quarter.

Income from continuing operations available to common shareholders excluding noteworthy items for the second quarter was $125 million or $1.00 per diluted common share, compared to $126 million or $0.68 per diluted common share in the year-ago quarter, as lower operating expenses, higher other non-interest income and the benefit of a lower effective tax rate were offset by a decline in net finance revenue, an increase in the provision for credit losses and the preferred stock dividend. The increase in income from continuing operations excluding noteworthy items per diluted common share reflects the decline in the average number of diluted common shares outstanding due to significant share repurchases over the past four quarters.

"Our second quarter results reflect strong originations, lower operating expenses and continued capital optimization as we make steady progress on our strategic plan," said CIT Chairwoman and Chief Executive Officer Ellen R. Alemany. "The direct bank delivered steady performance as we continued to build that franchise, adding $1.5 billion of average deposits and about 20,000 new customers.  In addition, the Business Capital division posted another quarter of solid growth, which was fueled by the investments we have made in technology and talent in our equipment financing operation."

Alemany continued, "Capital return remains a key component for us to achieve our ROTCE targets, and we are pleased with our progress in the second quarter. Going forward, we have increased our quarterly dividend by 56 percent per share and plan to return an additional $750 million of capital."

Return on Tangible Common Equity (ROTCE)3 for continuing operations was 9.4%. ROTCE for continuing operations excluding noteworthy items3 was 8.6%. Tangible book value per common share at June 30, 2018 was $49.41. The preliminary Common Equity Tier 1 Capital ratio decreased from the prior quarter and remained strong at 13.2%, and the preliminary Total Capital ratio decreased to 16.0%, at June 30, 2018.

Financial results for the second quarter in both continuing and discontinued operations included noteworthy items related to our strategic initiatives.

Noteworthy items (after-tax) in the second quarter in continuing operations included:

  • $22 million ($0.17 per diluted common share) in other non-interest income related to the Financial Freedom transaction, primarily a gain on the sale of our reverse mortgage portfolio.
  • $14 million ($0.11 per diluted common share) in debt extinguishment costs related to the redemption of $883 million in unsecured senior debt.
  • $6 million ($0.05 per diluted common share) benefit in net finance revenue from the suspension of the depreciation of assets related to NACCO that are in assets held for sale.

Noteworthy items (after tax) in the second quarter in discontinued operations included:

  • $14 million ($0.11 per diluted common share) net loss related to the Financial Freedom servicing business, primarily from reserves and transaction costs.

Selected Financial Highlights

Select Financial Highlights













2Q18 change* from



($ in millions)

2Q18



1Q18



2Q17



1Q18




2Q17































Net finance revenue(1)

$

389



$

391



$

390



$

(1)



0

%



$

(0)



0

%


Non-interest income


135




105




85




31



29

%




51



60

%


Total net revenue


524




495




474




29



6

%




50



11

%


Non-interest expenses


287




281




460




5



2

%




(174)



-38

%


Income from continuing operations before credit provision


238




214




14




24



11

%




224


NM



Provision for credit losses


33




69




4




(36)



-52

%




29


NM



Income from continuing operations before benefit (provision) for income
taxes


205




145




9




60



41

%




195


NM



Provision (benefit) for income taxes


57




41




(32)




16



39

%




89


NM



Income from continuing operations


147




104




41




44



42

%




106


NM



(Loss) income from discontinued operations, net of taxes


(21)




(7)




116




(14)


NM





(136)


NM



Net income


127




97




157




30



31

%




(30)



-19

%


Preferred stock dividends


9




-




-




9


NM





9


NM



Net income available to common shareholders

$

117



$

97



$

157



$

20



21

%



$

(39)



-25

%


Income from continuing operations available to common shareholders

$

138



$

104



$

41



$

34



33

%



$

97


NM































Per common share




























Earnings per diluted common share

$

0.94



$

0.74



$

0.85



$

0.20







$

0.09






Tangible book value per common share (TBVPS)(1)

$

49.41



$

49.25



$

46.34



$

0.16







$

3.07






Average diluted common shares outstanding (in thousands)


124,686




131,588




183,796




(6,902)








(59,110)


































Capital adequacy




























CET1 Ratio(3)


13.2

%



14.1

%



14.4

%


-90bps







NM






Total Capital Ratio(3)


16.0

%



16.8

%



16.2

%


-80bps







-20bps


































Asset quality




























Net charge-offs as a % of average loans


0.21

%



0.68

%



0.38

%


-47bps







-17bps






Allowance for loan losses as a % of loans


1.59

%



1.52

%



1.47

%


7bps







12bps


































Key performance metrics




























Net finance margin(1)


3.37

%



3.45

%



3.07

%


-8bps







30bps






Loans and leases to deposit ratio


121

%



126

%



120

%


NM







74bps






CIT Bank Loans and leases to deposit ratio


96

%



98

%



96

%


NM







10bps






Return on average common equity (available to common shareholders,
continuing operations)


8.48

%



6.09

%



2.30

%


NM







NM






Return on tangible common equity (available to common shareholders,
continuing operations)


9.44

%



6.83

%



2.84

%


NM







NM






Return on tangible common equity (available to common shareholders,
continuing operations), excluding noteworthy items(2)


8.56

%



6.40

%



8.14

%


NM







42bps






Return on AEA, applicable to common shareholders(1)


1.02

%



0.86

%



1.24

%


16bps







-22bps






Return on AEA, excluding noteworthy items(1)(2)


1.02

%



0.80

%



1.10

%


22bps







-8bps






Net efficiency ratio(1)


49.9

%



55.6

%



60.3

%


NM







NM






Headcount


3,843




3,898




3,994




(55)








(151)






























































* Certain balances may not sum due to rounding.

(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 25 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.

(2)Excludes noteworthy items and pro forma for capital reduction associated with Commercial Air sale that occurred in 2Q17.  See "Non-GAAP Measurements" at the end of this press release and beginning on page 25 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.

(3)Ratios on fully phased-in basis.

Unless otherwise indicated, all references below relate to continuing operations. Discontinued operations in the second quarter consisted of a partial period of operations for Financial Freedom, our reverse mortgage servicing business, and our Business Air portfolio. In the year-ago quarter, discontinued operations included a full period of operations for Financial Freedom.

Income Statement Highlights:
Income from continuing operations available to common shareholders excluding noteworthy items was $125 million compared to $97 million in the prior quarter, primarily reflecting a decline in operating expenses and credit costs.

Net Finance Revenue

Net Finance Revenue*




2Q18 change from



($ in millions)

2Q18



1Q18



2Q17



1Q18




2Q17































Interest income

$

474



$

451



$

478



$

22



5

%



$

(5)



-1

%


Rental income on operating leases


261




254




251




8



3

%




10



4

%


Depreciation on operating lease equipment


77




76




77




1



1

%




(0)



0

%


Maintenance and other operating lease expenses


64




57




53




6



11

%




10



19

%


Net rental income on operating leases


121




120




121




1



1

%




0



0

%


Interest expense


205




181




209




25



14

%




(4)



-2

%


Net finance revenue

$

389



$

391



$

390



$

(1)



0

%



$

(0)



0

%


Average earning assets(1)

$

46,230



$

45,265



$

50,676



$

965



2

%



$

(4,446)



-9

%


Net finance margin


3.37

%



3.45

%



3.07

%


-8bps







30bps






Excluding Noteworthy Items(1)




























Net finance revenue

$

380



$

381



$

404



$

(1)



0

%



$

(23)



-6

%


Average earning assets

$

46,230



$

45,265



$

46,990



$

965



2

%



$

(760)



-2

%


Net finance margin


3.29

%



3.37

%



3.44

%


-8bps







-15bps


































(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 25 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.



* Certain balances may not sum due to rounding.



Net finance revenue4 was $389 million compared to $391 million in the prior quarter. Net finance revenue in the current and prior quarter included a $9 million benefit from the suspension of depreciation expense related to NACCO because its assets are included in assets held for sale. Excluding noteworthy items, net finance revenue4 was $380 million, compared to $381 million in the prior quarter, as higher interest income on loans and investments was offset by higher deposit and borrowing costs. Higher funding costs in the current quarter primarily reflect higher deposit costs, higher borrowing costs on floating rate debt and a full quarter of interest expense related to our Tier 2 qualifying subordinated debt that was issued in March.

Net finance revenue as a percentage of average earning assets ("net finance margin4") excluding noteworthy items was 3.29%, an 8 bps decrease from 3.37% in the prior quarter. The decrease in net finance margin reflects the aforementioned drivers of net finance revenue, which was essentially flat compared to the prior quarter, and the change in asset mix, which included a significant increase in average interest-bearing deposits.

Net finance revenue in the year-ago quarter included $23 million in interest expense on approximately $5.8 billion of unsecured senior debt that previously was allocated to discontinued operations but was recorded in continuing operations following the Commercial Air sale on April 4, 2017, until the redemption of that debt later in the quarter. Partially offsetting this cost was $9 million in interest income related to the elevated cash balances for the period between the closing of the Commercial Air sale and the related liability management and capital actions. Excluding the aforementioned noteworthy items, net finance revenue decreased $23 million or 6% compared to the year-ago quarter. The decrease in net finance revenue primarily reflected lower purchase accounting accretion, lower gross yields in Rail and higher funding costs, partially offset by higher earnings on investment securities and loans in the Commercial Banking segment.

Net finance margin in the year-ago quarter was also impacted by average earnings assets that reflected elevated cash balances in continuing operations for the period between the closing of the Commercial Air sale and the related liability management and capital actions. Excluding noteworthy items in net finance revenue and in average earning assets, net finance margin decreased 15 bps compared to the year-ago quarter, reflecting the aforementioned drivers of the decrease in net finance revenue, partially offset by a shift in asset mix from interest-bearing deposits to investment securities and loans and leases in the Commercial Banking segment.

Other Non-interest Income

Other Non-Interest Income*




2Q18 change from



($ in millions)

2Q18



1Q18



2Q17



1Q18




2Q17































Fee revenues

$

27



$

27



$

28



$

(1)



-3

%



$

(2)



-6

%


Factoring commissions


24




26




23




(2)



-8

%




0



2

%


Gains on leasing equipment, net of impairments


14




14




13




1



7

%




1



11

%


Gains on investment securities, net of impairments


4




3




5




0



12

%




(1)



-18

%


BOLI income


7




7




0




0



2

%




7


NM



Other revenues


61




29




16




32


NM





45


NM



Total other non-interest income

$

135



$

105



$

85



$

31



29

%



$

51



60

%






























Total other non-interest income, excluding noteworthy items(1)

$

106



$

105



$

85



$

1



1

%



$

22



25

%






























(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 25 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.



* Certain balances may not sum due to rounding.



Other non-interest income was $135 million compared to $105 million in the prior quarter. Other non-interest income in the current quarter included $29 million in other revenues related to the Financial Freedom transaction, primarily a gain on the sale of the reverse mortgage portfolio. Excluding noteworthy items, other non-interest income[5] was $106 million, compared to $105 million in the prior quarter. Factoring commissions declined by $2 million from seasonally lower volumes. Fee income was unchanged. Other revenues in the current quarter included a $6 million benefit from a release of reserves related to the OneWest acquisition.

Other revenues in the current quarter included income of $5 million related to the reverse mortgage portfolio, which was sold during the quarter as part of the Financial Freedom transaction.

Other non-interest income excluding noteworthy items increased by $22 million from the year-ago quarter, primarily driven by higher gains on derivatives, income from bank-owned life insurance (BOLI), higher income from the reverse mortgage portfolio and a benefit from a release of reserves related to the OneWest acquisition.

Operating Expenses

Operating Expenses*




2Q18 change from



($ in millions)

2Q18



1Q18



2Q17



1Q18




2Q17































Compensation and benefits

$

143



$

148



$

145



$

(5)



-3

%



$

(2)



-2

%


Technology


33




32




34




0



1

%




(1)



-4

%


Professional fees


21




26




32




(5)



-20

%




(11)



-34

%


Insurance


19




20




25




(1)



-7

%




(6)



-26

%


Net occupancy expense


16




16




15




(0)



-1

%




1



6

%


Advertising and marketing


13




13




10




0



3

%




3



29

%


Other expenses


17




20




25




(3)



-16

%




(8)



-31

%


Operating expenses, excluding restructuring costs and
intangible asset amortization


262




275




286




(14)



-5

%




(25)



-9

%


Intangible asset amortization


6




6




6




0



0

%




(0)



-3

%


Restructuring costs


0




0




3




0


NM





(3)



-100

%


Total operating expenses

$

268



$

281



$

296



$

(14)



-5

%



$

(28)



-10

%


Net efficiency ratio(1)


49.9

%



55.6

%



60.3

%


NM







NM


































Total operating expenses, excluding noteworthy items and
intangible asset amortization(1)

$

262



$

275



$

286



$

(14)



-5

%



$

(25)



-9

%


Net efficiency ratio, excluding noteworthy items and
intangible asset amortization(1)


53.8

%



56.7

%



58.6

%


NM







NM


































(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 25 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.



* Certain balances may not sum due to rounding.



Operating expenses in the current and prior quarter included $6 million in intangible asset amortization. Operating expenses excluding noteworthy items and intangible asset amortization[6] in the current quarter was $262 million, a decrease from $275 million in the prior quarter, driven primarily by decreases in professional fees and compensation and benefits as well as a $5 million reversal of a non-income tax-related reserve. The decline in professional fees was partially due to a legal accrual in the prior quarter related to Rail.

Operating expenses in the year-ago quarter included $3 million in restructuring charges and $6 million in intangible asset amortization. Compared to the year-ago quarter, operating expenses excluding noteworthy items and intangible asset amortization decreased $25 million or 9%, primarily reflecting lower professional fees, lower FDIC insurance costs and a $5 million non-income tax-related charge in the year-ago quarter for which we recognized a reserve reversal in the current quarter, partially offset by higher advertising and marketing costs, primarily in the Consumer Banking segment.

The net efficiency ratio6 improved to 50% compared to 56% in in the prior quarter. The net efficiency ratio excluding noteworthy items6 was 54% compared to 57% in the prior quarter, driven by the decrease in operating expenses. Compared to the year-ago quarter, the net efficiency ratio excluding noteworthy items improved from 59%, primarily due to the decrease in operating expenses.

Debt Extinguishment Costs
We recognized $19 million in debt extinguishment costs associated with the redemption of $883 million of unsecured senior debt from the proceeds of the issuance of $1 billion in unsecured senior debt in the prior quarter. In the year-ago quarter, we recognized $165 million in debt extinguishment costs associated with the reduction of $5.8 billion of unsecured senior debt from the proceeds of the Commercial Air sale.

Income Taxes
The provision for income taxes in the current and prior quarter of $57 million and $41 million, respectively, both included an aggregate of $2 million in discrete tax expense. The benefit for income taxes in the year-ago quarter of $32 million included a $13 million net current tax benefit recognized for the resolution of an uncertain tax position, a $7 million net current tax benefit related to certain refunds expected and a $7 million deferred tax benefit related to the recognition of a deferred tax asset related to the company's investment in NACCO.

The effective tax rate in the current quarter was 28%. Excluding discrete tax items and noteworthy items, the effective tax rate was 27% in the current and prior quarter and 36% in the year-ago quarter. The decline in the effective tax rate compared to the year-ago quarter was primarily driven by lower statutory income tax rates from U.S. tax reform, partially offset by disallowance of FDIC insurance premiums, a change in accounting policy for low income housing tax credit (LIHTC) investments from the equity method of accounting to the proportional amortization method and state income taxes.

Balance Sheet Highlights:
Earning Assets

Earning Assets*




2Q18 change from



($ in millions)

2Q18



1Q18



2Q17



1Q18




2Q17































Loans (including assets held for sale)

$

29,517



$

30,540



$

29,405



$

(1,022)



-3

%



$

113



0

%


Operating lease equipment, net (including assets held for
sale)


8,001




7,988




7,688




13



0

%




313



4

%


Loans and leases


37,518




38,527




37,093




(1,009)



-3

%




426



1

%


Interest-bearing cash


3,267




3,895




4,739




(628)



-16

%




(1,472)



-31

%


Investment securities and securities purchased under
agreement to resell


6,107




6,161




5,530




(53)



-1

%




577



10

%


Indemnification asset


71




121




209




(50)



-41

%




(138)



-66

%


Credit balances of factoring clients


(1,431)




(1,549)




(1,405)




118



8

%




(26)



-2

%


Total earning assets(1)

$

45,533



$

47,155



$

46,165



$

(1,622)



-3

%



$

(632)



-1

%


Average earning assets(1)

$

46,230



$

45,265



$

50,676



$

965



2

%



$

(4,446)



-9

%






























(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 25 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.



* Certain balances may not sum due to rounding.



Total earning assets decreased 3% compared to the prior quarter, primarily reflecting a decrease in consumer loans, driven by the sale of the reverse mortgage portfolio, and a decrease in interest-bearing cash, primarily related to the redemption of $883 million in unsecured senior debt and the repurchase of $680 million of common stock. Total earning assets decreased 1% compared to the year-ago quarter, primarily reflecting a decrease in interest-bearing cash, partially offset by growth in loans and leases and the investment portfolio. Total loans and leases decreased 3% from the prior quarter, primarily reflecting the decrease in consumer loans, and increased 1% from the year-ago quarter, primarily from growth in commercial loans.

Average earning assets increased 2% from the prior quarter, primarily reflecting the timing of the sale of the reverse mortgage portfolio and certain liability management and capital actions. Average earning assets in the year-ago quarter included elevated cash balances for the period between the closing of the Commercial Air sale and related liability management and capital actions. Excluding this impact, average earning assets declined 2%, reflecting a decline in interest-bearing cash and run-off of legacy portfolios, partially offset by growth in the core portfolios and the investment portfolio. Growth in average loans and leases in the core portfolio was 1% compared to the prior quarter, driven by growth in the Other Consumer Banking division of Consumer Banking and in the Business Capital division of Commercial Banking. Strong growth in funded volume across core divisions in both Commercial Banking and Consumer Banking was largely offset by higher prepayments in the Commercial Finance and Real Estate Finance divisions of Commercial Banking. Growth in average loans and leases in the core portfolio was 5% compared to the year-ago quarter, driven by growth in the Other Consumer Banking division of Consumer Banking and the Business Capital and Commercial Finance divisions of Commercial Banking.

Cash and Investment Securities
Interest-bearing cash and investment securities (including securities purchased under agreements to resell) were $9.4 billion at June 30, 2018, and consisted of $3.3 billion of interest-bearing cash and $6.1 billion of investment securities. In addition, there was approximately $0.2 billion of non-interest-bearing cash.

Of the interest-bearing cash and investment securities, $8.1 billion was at CIT Bank and $1.0 billion was at the financial holding company, while the remaining $0.3 billion consisted of amounts held at the operating subsidiaries and restricted balances.

Deposits and Borrowings

Deposits and Borrowings*




2Q18 change from



($ in millions)

2Q18



1Q18



2Q17



1Q18




2Q17































Noninterest-bearing checking

$

1,290



$

1,227



$

1,274



$

63



5

%



$

16



1

%


Interest-bearing checking


2,078




2,618




2,744




(541)



-21

%




(666)



-24

%


Other money market/Sweeps


4,976




4,838




6,113




138



3

%




(1,137)



-19

%


Savings and Online money market accounts


9,125




7,657




5,273




1,468



19

%




3,853



73

%


Time deposits


13,537




14,089




15,357




(553)



-4

%




(1,820)



-12

%


Other


175




165




165




11



7

%




11



6

%


Total deposits

$

31,181



$

30,594



$

30,925



$

587



2

%



$

256



1

%


Unsecured borrowings

$

4,238



$

5,127



$

4,545



$

(888)



-17

%



$

(307)



-7

%


Secured borrowings


4,621




5,311




4,076




(689)



-13

%




545



13

%


Total borrowings

$

8,860



$

10,437



$

8,621



$

(1,578)



-15

%



$

238



3

%






























* Certain balances may not sum due to rounding.



Unsecured borrowings comprised 11% of the funding mix at June 30, 2018, a decrease from 13% at Mar. 31, 2018. The decrease was primarily driven by the aforementioned redemption of $883 million in unsecured senior debt with the proceeds of the unsecured senior debt issuances in the prior quarter, which extended the maturity profile of our total unsecured senior debt obligations. Unsecured borrowings included $400 million in subordinated debt at the financial holding company.

The weighted average coupon on our unsecured senior and subordinated debt was 4.95% at June 30, 2018, with a weighted average maturity of approximately 4.5 years, compared to 4.89% at Mar. 31, 2018, with a weighted average maturity of approximately 4.1 years.

Deposits at June 30, 2018 represented approximately 78% of CIT's funding compared to 74% at Mar. 31, 2018. Deposit growth in the online channel more than offset declines in the brokered and commercial channels. The loans and leases-to-deposits ratio at CIT Bank was 96% at June 30, 2018, compared to 98% at Mar. 31, 2018. For CIT Group, the loans and leases-to-deposits ratio was 121% at June 30, 2018, compared to 126% at Mar. 31, 2018.

The weighted average rate on average outstanding deposits in the current quarter increased 14 bps to 1.43% from 1.29% in the prior quarter. Compared to the year-ago quarter, the weighted average rate on average outstanding deposits increased 23 bps from 1.20%. The increases from the prior and year-ago quarter both primarily reflect increases in average money market account balances and the retail time deposit rate, partially offset by a reduction in higher-cost brokered deposits.

Secured borrowings decreased primarily due to a decrease in FHLB borrowings and comprised 11% of the funding mix at June 30, 2018, compared to 13% at Mar. 31, 2018.

Capital

Capital*




2Q18 change from



($ in millions, except per share data)

2Q18



1Q18



2Q17



1Q18




2Q17































Common stockholders' equity

$

6,201



$

6,802



$

7,026



$

(601)



-9

%



$

(826)



-12

%


Tangible common equity

$

5,730



$

6,325



$

6,275



$

(595)



-9

%



$

(546)



-9

%


Total risk-based capital(1)

$

6,980



$

7,528



$

7,070



$

(549)



-7

%



$

(90)



-1

%


Risk-weighted assets(1)

$

43,528



$

44,778



$

43,718



$

(1,250)



-3

%



$

(190)



0

%






























Book value per common share (BVPS)

$

53.47



$

52.97



$

51.88



$

0.50



1

%



$

1.59



3

%


Tangible book value per common share (TBVPS)

$

49.41



$

49.25



$

46.34



$

0.16



0

%



$

3.07



7

%


CET1 ratio(1)


13.2

%



14.1

%



14.4

%


-90bps







NM






Total capital ratio(1)


16.0

%



16.8

%



16.2

%


-80bps







-20bps






Tier 1 leverage ratio(1)


12.1

%



13.5

%



12.1

%


NM







0bps


































* Certain balances may not sum due to rounding.



(1)Balances and ratios on fully phased-in basis.



Capital actions during the quarter included the repurchase of approximately 12.5 million common shares at an average share price of $54.43 and a quarterly cash dividend of $0.16 per common share. Common stockholders' equity decreased from the prior quarter, primarily driven by the capital returns, partially offset by net income in the current quarter. Tangible book value per common share increased in the quarter to $49.41, as retained earnings and the reduced share count were partially offset by share repurchases and unrealized losses on investments in other comprehensive income.

Total common shares outstanding was 116.0 million at June 30, 2018, down from 128.4 million at Mar. 31, 2018 and 135.4 million at June 30, 2017.

The preliminary Common Equity Tier 1 Capital ratio decreased from the prior quarter and remained strong at 13.2%. Common Equity Tier 1 Capital decreased primarily from capital returns in the quarter, partially offset by earnings. Risk-weighted assets (RWA) decreased primarily reflecting the sale of the reverse mortgage portfolio and the sale of certain investments that carried higher risk weightings. The preliminary Total Capital ratio also decreased from the prior quarter to 16.0%.

On July 17, 2018, the Board of Directors declared a quarterly cash dividend of $0.25 per common share on outstanding common stock, a nine cent per share increase from the prior quarter. The dividend is payable on Aug. 24, 2018 to common shareholders of record as of Aug. 10, 2018.

Asset Quality

Asset Quality*




2Q18 change from



($ in millions)

2Q18



1Q18



2Q17



1Q18




2Q17































Net charge-offs (NCOs)

$

15



$

50



$

28



$

(35)



-69

%



$

(12)



-45

%


NCOs as a % of average loans


0.21

%



0.68

%



0.38

%


-47bps







-17bps






Non-accrual loans

$

292



$

237



$

257



$

55



23

%



$

35



14

%


OREO

$

35



$

46



$

78



$

(11)



-24

%



$

(43)



-56

%


Provision for credit losses

$

33



$

69



$

4



$

(36)



-52

%



$

29


NM



Total portfolio allowance as a % of loans


1.59

%



1.52

%



1.47

%


7bps







12bps


































* Certain balances may not sum due to rounding.



Provision
The provision for credit losses of $33 million decreased from $69 million in the prior quarter. The provision in the prior quarter included a $22 million charge-off of a single commercial exposure and a higher level of reserves primarily within the Commercial Finance division of Commercial Banking. The provision for credit losses in the current quarter and all but $2 million of the provision for credit losses in the prior quarter related to the Commercial Banking segment.

Compared to the year-ago quarter, the provision for credit losses increased $29 million to $33 million from an atypically low provision of $4 million.

Net Charge-offs
Net charge-offs were $15 million (0.21% of average loans), compared to $50 million (0.68% of average loans) in the prior quarter and $28 million (0.38% of average loans) in the year-ago quarter. The decrease in net charge-offs primarily reflects the aforementioned $22 million charge-off in the prior quarter in the Commercial Banking segment.

Because certain Legacy Consumer Mortgages (LCM) loans are subject to loss sharing agreements with the FDIC, under which CIT may be reimbursed for a portion of future losses, nearly all net charge-offs are in the Commercial Banking segment. In the Commercial Banking segment, net charge-offs were $15 million (0.25% of average loans), down from $50 million (0.86% of average loans) in the prior quarter and $27 million (0.48% of average loans) in the year-ago quarter.

Loan Loss Allowance
The allowance for loan losses was $467 million (1.59% of loans, 1.77% excluding loans subject to loss sharing agreements with the FDIC) at June 30, 2018, compared to $448 million (1.52% of loans, 1.70% excluding loans subject to loss sharing agreements with the FDIC) at Mar. 31, 2018 and $426 million (1.47% of loans, 1.70% excluding loans subject to loss sharing agreements with the FDIC) at June 30, 2017.

In the Commercial Banking segment, the allowance for loan losses was $438 million (1.90% of loans) at June 30, 2018, compared to $417 million (1.79% of loans) at Mar. 31, 2018 and $398 million (1.78% of loans) at June 30, 2017.

Purchase credit impaired (PCI) loans acquired as part of the OneWest acquisition are carried at a significant discount to the unpaid principal balance. At June 30, 2018, PCI loans with an aggregate unpaid principal balance of $2.7 billion were carried at $1.8 billion, representing a 32% discount. The vast majority of the discount is related to our LCM portfolio in Consumer Banking.

Non-accrual Loans
Non-accrual loans were $292 million (0.99% of loans) compared to $237 million (0.80% of loans) in the prior quarter and $257 million (0.88% of loans) in the year-ago quarter.

In Commercial Banking, non-accrual loans were $252 million (1.10% of loans), compared to $199 million (0.85% of loans) at Mar. 31, 2018 and $229 million (1.03% of loans) at June 30, 2017. The increase from the prior quarter primarily was driven by an increase in the Commercial Finance division. The increase from the year-ago quarter primarily reflected increases in the Commercial Finance and Business Capital divisions.

In Consumer Banking, non-accrual loans were $29 million (0.46% of loans) at June 30, 2018, compared to $26 million (0.42% of loans) at Mar. 31, 2018, and $20 million (0.29% of loans) at June 30, 2017, essentially all of which are in the LCM portfolio.

Commercial Banking

...

Earnings Summary*




2Q18 change from



($ in millions)

2Q18



1Q18



2Q17



1Q18




2Q17































Interest income

$

330



$

315



$

317



$

16



5

%



$

14



4

%


Rental income on operating leases


261




254




251




8



3

%




10



4

%


Interest expense


177




156




128




21



13

%




49



38

%


Depreciation on operating lease equipment


77




76




77




1



1

%




(0)



0

%


Maintenance and other operating lease expenses


64




57




53




6



11

%




10



19

%


Net finance revenue


274




278




309




(4)



-2

%




(35)



-11

%


Other non-interest income


73




78




75




(5)



-6

%




(2)



-2

%


Provision for credit losses


33




67




(0)




(34)



-51

%




33


NM



Operating expenses


171




183




177




(12)



-6

%




(5)



-3