CIT Group (CIT) Stock Up on Q3 Earnings Beat, Merger Deal

CIT Group Inc.’s CIT third-quarter 2020 adjusted earnings per share of 84 cents hugely surpassed the Zacks Consensus Estimate of 14 cents. The reported figure excludes noteworthy items such as merger and integration-related costs in connection with the acquisition of Mutual of Omaha Bank, and performance stock unit expense reversal. In the prior-year quarter, the company recorded adjusted earnings of $1.29 per share.

Results benefited from an improvement in revenues, partly offset by higher expenses. Moreover, the balance sheet position remained strong in the quarter. However, an increase in provisions was a headwind.

Notably, following the release of the quarterly results as well as the announcement of the “merger of equals” deal with First Citizens BancShares, shares of CIT Group gained 26.7%. The deal is anticipated to create the 19th largest bank in the United States based on assets.

Net income available to common shareholders (GAAP basis) was $82.9 million in the third quarter compared with $142.8 million recorded in the year-ago quarter.

Revenues Improve, Expenses Rise

Quarterly total net revenues (non-GAAP) were $474 million, up 4.3% year over year. Moreover, the top line surpassed the Zacks Consensus Estimate of $425 million.

Net interest revenues were $257.8 million, down marginally year over year.

Total non-interest income was $347.3 million, up 11.1% from the year-ago quarter. The rise was due to an improvement in other non-interest income.

Net finance margin contracted 79 basis points year over year to 2.27%.

Operating expenses (excluding noteworthy items and intangible asset amortization) were $287 million, up 10% from the prior-year quarter.

Credit Quality Deteriorates

Provision for credit losses increased significantly year over year from $26.6 million to $63.3 million.

Non-accrual loans increased significantly year over year to $647 million. Net charge-offs were $66 million, up significantly from $26 million recorded in the prior-year quarter.

Balance Sheet Strong, Capital Ratios Worsen

As of Sep 30, 2020, average interest bearing cash and investment securities amounted to $13.6 billion, comprising $7.6 billion in interest bearing cash, and $6 billion in investment securities and securities purchased under the agreement to resell.

As of Sep 30, 2020, Common Equity Tier 1 and Total Capital ratios (as calculated under the fully phased-in Regulatory Capital Rules) were 9.9% and 13.1%, respectively, compared with 11.6% and 14.3% at the end of the prior-year quarter.

Guidance

The company expects accelerated net cost savings related to the Mutual of Omaha Bank deal of $25 million in 2020 (previously anticipated to be realized in 2021).

CIT Group & First Citizens to Merge

Concurrent with the earnings release, CIT Group announced that it entered an all-stock merger deal with First Citizens BancShares, Inc. The “merger of equals” is expected to close in the first half of 2021, subject to the satisfaction of customary closing conditions.

The merger, which compiles First Citizens’ low-cost retail deposit franchise and suite of banking products with CIT Group’s national commercial lending expertise and strong market positions, will create the 19th largest bank in the United States based on assets.

Terms & Financial Details

Per the agreement, shareholders of CIT Group will get 0.0620 shares of First Citizens’ class A common stock for each of their own shares held. First Citizens’ shareholders will own 61% of the combined firm and the remaining 39% will be owned by CIT Group’s stockholders.

Pro forma, the deal is expected to result in combined non-interest expense savings of 10%.

The transaction is anticipated to result in earnings per share accretion of more than 50%, once the cost savings are fully phased in.

Upon closing of the deal, tangible book value per share accretion is expected to be more than 30%.

On a pro forma basis, the combined firm expects to deliver top-tier operating performance, with a return on tangible common equity (ROTCE) of 13%.

Moreover, at closing, the combined company is expected to have Tier I common equity ratio in excess of 9.4%.

Frank Holding, Jr., chairman and CEO of First Citizens, stated, “This is a transformational partnership for First Citizens and CIT designed to create long-term value for all of our constituents including our stockholders, our customers, our associates and our communities. We have long admired CIT's market-leading commercial business, including their strong market position across multiple asset classes. Together, First Citizens and CIT will be able to leverage both companies' unique attributes to create the 19th largest bank in the country, well-positioned to compete across the United States.”

Ellen R. Alemany, CIT Group’s chairwoman and CEO, said, “Frank and I have long respected each other's companies and believe this transaction will accelerate our strategic goals by bringing together the expertise of both banks to create scale, strength and value. This transaction will build on those efforts and more fully unlock the potential in our core franchises.”  

Notably, the combined firm, which will be headquartered in Raleigh, NC, will operate under the First Citizens name. Frank Holding, Jr. will retain the same role at the combined company, whereas Ellen will assume the role of vice chairwoman and play a key role in the merger integration.

Our Viewpoint

CIT Group has been restructuring its business with a goal to simplify operations and become a regional commercial banking institution. Its business-streamlining initiatives are expected to keep supporting profitability. Moreover, the company remains well-positioned for organic growth, supported by a rise in demand for finance across various industries. However, continuously increasing expenses (as witnessed in the third quarter as well) will likely hurt bottom-line growth in the near term.

CIT Group Inc. Price, Consensus and EPS Surprise

CIT Group Inc. price-consensus-eps-surprise-chart | CIT Group Inc. Quote

Currently, CIT Group carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Companies

Aided by robust mortgage banking revenues, Wells Fargo WFC reported third-quarter 2020 adjusted earnings of 56 cents per share, beating the Zacks Consensus Estimate of 47 cents. Results, however, compared unfavorably with the prior-year quarter figure of 92 cents.

Citigroup C delivered an earnings surprise of 38.6% in third-quarter 2020 on robust market revenues. Earnings per share of $1.40 for the quarter handily outpaced the Zacks Consensus Estimate of $1.01. Results were, however, down significantly from the prior-year quarter.

Unexpected lower provisions along with improvement in trading and mortgage banking businesses drove JPMorgan’s JPM third-quarter 2020 earnings of $2.92 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.35.

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