CIT Posts $1.62 Billion 2Q Loss; Credit Provisions Surge

The results strike a blow to the very core of the company's small business lending operations, heightening concerns around its ability to survive. The commercial lender, hurt by the liquidity crisis as its customers drew down credit lines in fear that they might disappear, has been working in recent weeks to avoid bankruptcy.

The net loss of $4.30 a share for the quarter ended June 30 compares with red ink of $7.88 a share a year earlier, when the company reported a $8 charge per share from discontinued operations.

For the second quarter, the company not only suffered because it lent at rates that were lower than its cost of funds, but also from poor quality of its loans. CIT's net interest revenue - or the difference between what it earned from the loans it extended and borrowing costs - totaled a negative $19.1 million, compared with a positive $169.8 million a year earlier. In addition, the company put aside $588.5 million to reserve for credit losses, a nearly four-fold increase from $152.2 million a year ago. CIT wrote off 2.81% of loans, up from 2.41% in the prior quarter.

"There is substantial doubt about [CIT's] ability to continue as a going concern," the company said in a regulatory filing Monday evening.

In addition, CIT, which became a bank-holding company in late 2008, has also indicated in filings that its earlier plan to raise more funds via the bank it owns in Utah may no longer be feasible in the near term.

Banking regulators, including the Federal Deposit Insurance Corp., last month issued a "cease and desist" order at CIT's Utah bank, limiting the bank's ability to pay dividends and capping the amount of "brokered deposits" it accepts. CIT Bank had been using such deposits, which are similar to certificates of deposit and sold by brokers, to raise more funds, and the holding company had hoped to transfer more of its assets to the bank, but regulators were concerned about the risk involved. Before the credit crisis began in 2007, CIT got most of its funding from the credit markets by issuing bonds and commercial paper.

Earlier Monday, CIT, which is in the midst of a debt restructuring, said its tender offer for $1 billion in floating-rate notes due Monday was successful, though the 59.8% of notes that were tendered was below the level the company announced recently. link....