Updated from 10 a.m. EST

For investors looking for signs of an economic revival, the first-quarter profit report from

CIT Group

(CIT) - Get Report

, an important middle-market business lender, offers some somber news.

The New Jersey-based financial services reported net income of $127 million, or 60 cents a share, which fell 3 cents short of the Thomson First Call consensus estimate.

It's difficult to compare CIT's bottom-line performance to a year ago because the company was still part of

Tyco

(TYC)

TST Recommends

at the time, and its income statement included a $4.5 billion writedown in goodwill and other onetime charges.

But compared with the final quarter of 2002, CIT saw a significant slump in revenue, as its financing operations were squeezed by a combination of low interest rates and lackluster demand from businesses for new loans.

The firm's operating margin -- all revenue less interest costs and depreciation expenses -- came in at $446 million, a decline of 6.6% from the fourth quarter of last year.

And don't look for any quick improvement. In a conference call with analysts, Albert Gamper, CIT's president and chairman, said, "the economy still looks soft in our view."

The lone bright spot for CIT is that it managed to reduce operating expenses and the dollar value of the bad loans it charged off in the quarter. The finance firm wrote off $114.3 in bad loans and assets in the quarter, compared with $154.5 million in the fourth quarter.

The problems for CIT, however, are most apparent in it lending and commercial finance divisions. In the first quarter, CIT recorded $592.5 million in net finance income, down 6% from the most recent quarter. A slump in fees generated from commercial finance and structured finance work led to an 8.5% decline in "other revenues," which totaled $235.5 million in the quarter.

A big problem for CIT is that low interest rates are taking a bite out of its financing operation because they are narrowing the difference between the amount of interest CIT takes in from its customers and the firm's own borrowing costs. In the quarter, CIT's net finance margin -- a ratio that measures the interest squeeze -- came in at 3.63%, compared with 4.34% in the prior quarter.

"Leading indicators are improving and charge-offs are down substantially," said Gamper. "Asset growth was respectable for the quarter, however, we continue to experience margin decline, partially the result of our decision to maintain excess liquidity in this environment."

Shares of CIT have struggled since it was spun off by Tyco in an initial public offering last July. The stock continues to trade well below its IPO price of $23.

In Thursday midday trading, the stock was down 40 cents, or 2%, at $18.52.