UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


Form 10-K


  [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

  [_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number: 001-31369

CIT Group Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)
   65-1051192
(IRS Employer
Identification No.)  
   
1211 Avenue of the Americas, New York, New York
(Address of principal executive offices)
  10036
(Zip Code)

Registrant’s telephone number including area code: (212) 536-1211


Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 Name of each exchange
on which registered

Preferred Stock, Series A par value $0.01 per share New York Stock Exchange
Common Stock, par value $0.01 per share New York Stock Exchange
5 7/8% Notes due October 15, 2008 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |X| No|_|.

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No|X|.         

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No|_|.

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.|_|

        The aggregate market value of voting common stock held by non-affiliates of the registrant, based on the New York Stock Exchange Composite Transaction closing price of Common Stock ($42.97 per share, 209,890,252 shares of common stock outstanding), which occurred on June 30, 2005, was $9,018,984,128. For purposes of this computation, all officers and directors of the registrant are deemed to be affiliates. Such determination shall not be deemed an admission that such officers and directors are, in fact, affiliates of the registrant. At February 15, 2006, 199,429,586 shares of CIT’s common stock, par value $0.01 per share, were outstanding.

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes|_| No |X|.

DOCUMENTS INCORPORATED BY REFERENCE

        List here under the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

        Portions of the registrant’s definitive proxy statement relating to the 2006 Annual Meeting of Stockholders are incorporated by reference into Part III hereof to the extent described herein.

See pages 103 to 105 for the exhibit index.




CONTENTS

Part One   

ITEM 1. Business
 
ITEM 1A. Risk Factors 10 
 
ITEM 1B. Unresolved Staff Comments 12 
 
ITEM 2. Properties 12 
 
ITEM 3. Legal Proceedings 12 
 
ITEM 4. Submission of Matters to a Vote of Security Holders 12 
 
Part Two

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities 13 
 
ITEM 6. Selected Financial Data 15 
 
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16 
 
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk 16 
 
ITEM 8. Financial Statements and Supplementary Data 51 
 
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 100 
 
ITEM 9A. Controls and Procedures 100 
 
ITEM 9B. Other Information 101 
 
Part Three

ITEM 10. Directors and Executive Officers of the Registrant 102 
 
ITEM 11. Executive Compensation 102 
 
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 102 
 
ITEM 13. Certain Relationships and Related Transactions 102 
 
ITEM 14. Principal Accountant Fees and Services 102 
 
Part Four

ITEM 15. Exhibits and Financial Statement Schedules 103 
 Signatures 106 
 Where You Can Find More Information 107 

 
  Table of Contents 1


Part One

ITEM 1. Business


OVERVIEW

BUSINESS DESCRIPTION

CIT Group Inc., a Delaware corporation (“we,” “CIT” or the “Company”), is a leading global commercial and consumer finance company with a focus on middle-market companies. Founded in 1908, we provide financing and leasing capital for consumers and companies in a wide variety of industries. We offer vendor, equipment and commercial finance products, factoring, home lending, small business lending, student lending, structured financing products, and commercial real estate financing, as well as mergers and acquisitions and management advisory services. We manage $62.9 billion in assets, including $7.3 billion in securitized assets. Our owned financing and leasing assets were $55.6 billion and common stockholders’ equity was $6.5 billion at December 31, 2005.

We have broad access to customers and markets through our diverse businesses. Each business has industry alignment and focuses on specific sectors, products, and markets, with portfolios diversified by client and geography. The majority of our businesses focus on commercial clients ranging from small to larger companies with particular emphasis on the middle-market. We serve a wide variety of industries, including manufacturing, transportation, retailing, wholesaling, construction, healthcare, communications and various service-related industries. We also provide financing to consumers in the home and student loan markets.

Our commercial products include direct loans and leases, operating leases, leveraged and single investor leases, secured revolving lines of credit and term loans, credit protection, accounts receivable collection, import and export financing, debtor-in-possession and turnaround financing, acquisition and expansion financing and U.S. government-backed small business loans. Consumer products are primarily first mortgage loans and government-backed student loans. Our commercial and consumer offerings include both fixed and floating-interest rate products.

We also offer a wide variety of services to our commercial and consumer clients, including capital markets structuring and syndication, finance-based insurance, and advisory services in asset finance, balance sheet restructuring, merger and acquisition and commercial real estate analysis.

We generate transactions through direct calling efforts with borrowers, lessees, equipment end-users, vendors, manufacturers and distributors, and through referral sources and other intermediaries. In addition, our business units work together both in referring transactions among units (i.e. cross-selling) and by combining various products and structures to meet our customers’ overall financing needs. We also buy and sell participations in and syndications of finance receivables and lines of credit. From time to time, in the normal course of business, we purchase finance receivables on a wholesale basis (commonly called bulk portfolio purchases).

We generate revenue by earning interest income on the loans we hold on our balance sheet, collecting rentals on the equipment we lease and generating fee and other income from our service-based operations. We also sell certain finance receivables and equipment to reduce our concentration risk, manage our balance sheet or improve profitability.

We fund our businesses in the capital markets. The primary funding sources are term debt (U.S., European, and other), commercial paper (U.S., Canada and Australia), and asset-backed securities (U.S. and Canada).

SEGMENT AND CONCENTRATION DATA

See the “Results by Business Segments” and “Concentrations” sections of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures about Market Risk, and Notes 5 and 20 of Item 8. Financial Statements and Supplementary Data, for additional information. See page 9 for a glossary of key terms used by management in our business.


Managed Assets by Segment
At December 31, 2005 (dollars in billions)




Managed Assets by Region
At December 31, 2005

 


 
2 CIT GROUP INC 2005  


BUSINESS SEGMENTS

CIT meets customers’ financing needs through six business segments organized into two groups.

Specialty Finance Group

We deliver significant value to vendor and consumer markets through our core strengths in relationship management, risk and behavior scoring capabilities, and global servicing reach.

 
Specialty Finance – Commercial

Vendor Finance
– Provides innovative financing and leasing solutions to manufacturers and distributors around the globe.

Small Business Lending – Provides small business financing alternatives to entrepreneurs in a wide array of industries under the U.S. government’s Small Business Administration program.


 
Specialty Finance – Consumer

Provides secured and government-guaranteed loans to consumers and small businesses through broker and intermediary relationships. Units include:
Home Lending
Student Loan Xpress
CIT Bank
 

Commercial Finance Group

We use our product acumen, industry expertise, structuring capabilities and rapid decision making to build enduring relationships by offering clients a full suite of products and services through business cycles.

 
Commercial Services

Provides factoring and other trade products to companies in the retail supply chain, primarily in the US, but with increasing international focus.

 
Corporate Finance

Provides lending, leasing and other banking services to middle-market companies with a focus on specific industries. Units include:

Business Capital
Energy & Infrastructure
Communications, Media and Entertainment
Healthcare
 

 
Capital Finance

Provides longer-term, large-ticket equipment leases and other secured financing to companies in transportation industries.

Aerospace    
Rail Resources
 

 
Equipment Finance

Provides secured financing and leasing products and services to manufacturers, dealers and end-users of small and mid-ticket industrial equipment in a broad range of industries. Units include:

Construction
Diversified Industries
 


 

  Item 1: Business 3


BUSINESS SEGMENTS


SPECIALTY FINANCE GROUP

Specialty Finance – Commercial

Our Specialty Finance – Commercial segment includes financing and leasing assets in our vendor programs, small business lending operation and the remaining assets of our liquidating portfolios (principally manufactured housing).

Through our global relationships with industry-leading equipment vendors, including manufacturers, dealers, and distributors, we deliver customized financing solutions to both commercial and consumer customers of our vendor partners in a wide array of programs. These alliances allow our vendor partners to focus on their core competencies, reduce capital needs, manage credit risk and drive incremental sales volume. As a part of these programs, we offer (1) credit financing to the commercial and consumer end users for the purchase or lease of products, and (2) enhanced sales tools, such as asset management services, efficient loan processing, and real-time credit adjudication.

Certain of these partnership programs provide integration with the vendor’s business planning process and product offering systems to improve execution and reduce cycle times. We have significant vendor programs in information technology, telecommunications equipment, and healthcare, and we serve many other industries through our global network.

Our vendor alliances feature traditional vendor finance programs, joint ventures, profit sharing, and other transaction structures with large, sales-oriented vendor partners. In the case of joint ventures, we and the vendor combine financing activities through a distinct legal entity that is jointly owned. Generally, we account for these arrangements on an equity basis, with profits and losses distributed according to the joint venture agreement, and we purchase qualified finance receivables originated by the joint venture. We also use “virtual joint ventures,” by which the assets are originated on our balance sheet, while profits and losses are shared with the vendor. These strategic alliances are a key source of business for us.

Vendor finance also includes a small and mid-ticket commercial business which focuses on leasing office products, computers, and other technology products primarily in the United States and Canada. We originate products through relationships with manufacturers, dealers, distributors, and other intermediaries as well as through direct calling.

Our small business lending unit is primarily focused on originating and servicing loans under the U.S. government’s Small Business Administration’s 7(a) loan program. Loans are granted to qualifying clients in the retail, wholesale, manufacturing, and service sectors. CIT is an SBA preferred lender and has been recognized as the nation’s #1 SBA Lender (based on volume) in each of the last six years.

Specialty Finance – Commercial also houses our Global Insurance Services unit, through which we offer insurance products to existing CIT clients. We offer various collateral protection and credit insurance products that are underwritten by third parties. Revenue from this operation is allocated to the unit with the underlying financing relationship.

Specialty Finance – Consumer

Specialty Finance – Consumer includes our home lending and student loan operations and CIT Bank, a Utah-based industrial bank with deposit-taking capabilities.

The home lending unit primarily originates, purchases and services loans secured by first or second liens on detached, single-family, residential properties. Products include both fixed and variable-rate, closed-end loans, and variable-rate lines of credit. Customers borrow to finance a home purchase, consolidate debts, refinance an existing mortgage, pay education expenses, or for other purposes.

Loans are originated through brokers and correspondents with a high proportion of home lending applications processed electronically over the Internet via BrokerEdgeSM , a proprietary system. Through experienced lending professionals and automation, we provide rapid turnaround time from application to loan funding, which is critical to broker relationships. We also buy/sell individual loans and portfolios of loans from/to banks, thrifts, and other originators of consumer loans to maximize the value of our origination network, to manage risk and to improve overall profitability.

Our centralized consumer asset service center services and collects substantially all of our consumer receivables, other than student loans, including loans retained in our portfolio and loans subsequently securitized or sold with servicing retained. We also service portfolios of loans owned by third parties for a fee on a “contract” basis. These third-party portfolios totaled $3.0 billion at December 31, 2005.

In 2005, we broadened our consumer product offerings with the acquisition of Education Lending Group. Our student lending unit, which markets under the name Student Loan Xpress, offers student loan products, services, and solutions to students, parents, schools, and alumni associations. Our business is focused on originating and purchasing government-guaranteed student loans made under the Federal Family Education Loan Program, known as FFELP, which includes consolidation loans, Stafford loans and Parent Loans for Undergraduate Students (PLUS). We also offer and purchase alternative supplemental loans that may be guaranteed by a third-party guarantor.

To date, the majority of the loans we have originated are consolidation loans. We generally hold these loans on our balance sheet. Currently, we sell most of Stafford and PLUS loans we originate in the secondary market. The majority of our outstanding student loans are currently serviced by third parties, but we are shifting servicing in-house to Student Loan Xpress.

CIT Bank, with assets of $368 million and deposits of $273 million, is located in Salt Lake City, Utah and provides a benefit to us in the form of favorable funding rates for various


 
4 CIT GROUP INC 2005  

consumer and small business financing programs in both the local and national marketplace. CIT Bank also originates certain loans generated by bank affiliation programs with manufacturers and distributors of consumer products. The Bank is chartered by the state of Utah as an industrial bank and is subject to regulation and examination by the Federal Deposit Insurance Corporation and the Utah Department of Financial Institutions.

COMMERCIAL FINANCE GROUP

Commercial Services

Our Commercial Services segment provides factoring, receivable and collection management products, and secured financing to companies in apparel, textile, furniture, home furnishings, and other industries.

We offer a full range of domestic and international customized credit protection, lending, and outsourcing services that include working capital and term loans, factoring, receivable management outsourcing, bulk purchases of accounts receivable, import and export financing, and letter of credit programs.

We provide financing to clients through the purchase of accounts receivable owed to clients by their customers, as well as by guaranteeing amounts due under letters of credit issued to the clients’ suppliers, which are collateralized by accounts receivable and other assets. The purchase of accounts receivable is traditionally known as “factoring” and results in the payment by the client of a factoring fee that is commensurate with the underlying degree of credit risk and recourse, and which is generally a percentage of the factored receivables or sales volume. When we “factor” (i.e., purchase) a customer invoice from a client, we record the customer receivable as an asset and also establish a liability for the funds due to the client (“credit balances of factoring clients”). We also may advance funds to our clients before collecting the receivables, typically in an amount up to 80% of eligible accounts receivable (as defined for that transaction), charging interest on advances (in addition to any factoring fees), and satisfying advances by the collection of receivables. We integrate our clients’ operating systems with ours to facilitate the factoring relationship.

Clients use our products and services for various purposes, including improving cash flow, mitigating or reducing credit risk, increasing sales, and improving management information. Further, with our TotalSourceSM product, our clients can out-source their bookkeeping, collection, and other receivable processing to us. These services are attractive to industries outside the traditional factoring markets. We generate business regionally from a variety of sources, including direct calling efforts and referrals from existing clients and other referral sources. We have centralized our accounts receivable, operations, and other administrative functions.

Corporate Finance

Our Corporate Finance segment provides secured financing, including term and revolving loans based on asset values, as well as cash flow and enterprise value, to a full range of borrowers from small to larger-sized companies, with emphasis on the middle market. We service clients in a broad array of industries with focused industry specialized groups serving communications, media and entertainment, energy and infrastructure, healthcare, commercial real estate and sponsor finance sectors in the U.S. and abroad.

We offer loan structures ranging from asset-based revolving and term loans secured by accounts receivable, inventories, and fixed assets to loans based on earnings performance and enterprise valuations to mid- and larger-sized companies. Our clients use these loans primarily for working capital, asset growth, acquisitions, debtor-in-possession financing, and debt restructurings. We sell and purchase participation interests in these loans to and from other lenders.

We meet our customer financing needs through our variable rate, senior revolving and term loan products. We primarily structure financings on a secured basis, although we will periodically extend loans based on the sustainability of a customer’s operating cash flow and ongoing enterprise valuations. We make revolving and term loans on a variable interest-rate basis based on published indices such as LIBOR or the prime rate of interest.

We also offer clients an array of financial and advisory services through an investment banking unit. The unit offers capital markets structuring and syndication capabilities as well as merger and acquisition, commercial real estate and balance sheet restructuring advisory services.

We originate business regionally through solicitation focused on various types of intermediaries and referrals. We maintain long-term relationships with selected banks, finance companies, and other lenders both to obtain and to diversify our funding sources.

Capital Finance

Our Capital Finance segment specializes in providing customized leasing and secured financing primarily to end-users of aircraft, locomotives, and railcars. Our services include operating leases, single investor leases, equity portions of leveraged leases, and sale and leaseback arrangements, as well as loans secured by equipment. Our typical customers are major and regional, domestic and international airlines, North American railroad companies, and middle-market to larger-sized companies. We generate new business through direct calling, supplemented with transactions introduced by intermediaries and other referrals.

We have provided financing to commercial airlines for over 30 years, and our commercial aerospace portfolio includes most of the leading U.S. and foreign commercial airlines. As of December 31, 2005, our commercial aerospace financing and leasing portfolio was $6.0 billion, consisting of 93 accounts and 215 aircraft with a weighted average age of approximately 6 years. We have developed strong relationships with most


 
  Item 1: Business 5

major airlines and major aircraft and aircraft engine manufacturers. These relationships provide us with access to technical information, which enhances our customer service and provides opportunities to finance new business. We have entered into purchase commitments with aircraft manufacturers for 66 aircraft to be delivered through 2013 at a current price of $3.3 billion. In 2005, we opened our international aerospace servicing center, located in Dublin, Ireland, following the American Jobs Creation Act of 2004, which provides favorable tax treatment for certain aircraft leasing operations conducted offshore. See “Concentrations” section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 16 – Commitments and Contingencies of Item 8. Financial Statements and Supplementary Date for further discussion of our aerospace portfolio.

We have been financing the rail industry for over 25 years. Our dedicated rail equipment group maintains relationships with several leading railcar manufacturers and calls directly on railroads and rail shippers in North America. Our rail portfolio, which totaled $3.5 billion at December 31, 2005, includes leases to all of the U.S. and Canadian Class I railroads (which are railroads with annual revenues of at least $250 million) and other non-rail companies, such as shippers and power and energy companies. The operating lease fleet primarily includes: covered hopper cars used to ship grain and agricultural products, plastic pellets and cement; gondola cars for coal, steel coil and mill service; open hopper cars for coal and aggregates; center beam flat cars for lumber; boxcars for paper and auto parts; and tank cars. Our railcar operating lease fleet is relatively young, with an average age of approximately 7 years and approximately 87% (based on net investment) built in 1996 or later. The rail owned and serviced fleet totals in excess of 80,000 railcars and over 500 locomotives.

Our Capital Finance segment has a global presence with operations in the United States, Canada, and Europe. We have extensive experience in managing equipment over its full life cycle, including purchasing new equipment, maintaining equipment, estimating residual values, and re-marketing by releasing or selling equipment. We manage the equipment, the residual value, and the risk of equipment remaining idle for extended periods of time, and, where appropriate, we locate alternative equipment users or purchasers.

Equipment Finance

Our Equipment Finance segment is a middle-market secured equipment lender with a strong market presence throughout North America. We provide customized financial solutions for our customers, which include manufacturers, dealers, distributors, intermediaries, and end-users of equipment. Our financing and leasing assets reflect a diverse mix of customers, industries, equipment types, and geographic areas.

Our primary products in Equipment Finance include loans, leases, wholesale and retail financing packages, operating leases, sale-leaseback arrangements, and revolving lines of credit. A core competency for us is assisting customers with the total life-cycle management of their capital assets including acquisition, maintenance, refinancing, and the eventual liquidation of their equipment. We originate our products through direct relationships with manufacturers, dealers, distributors and intermediaries, and through an extensive network of direct sales representatives and business partners located throughout the United States and Canada.

We build competitive advantage through an experienced staff that is both familiar with local market factors and knowledgeable about the industries they serve. We achieve operating efficiencies through our two servicing centers located in Tempe, Arizona and Burlington, Ontario. These offices centrally service and collect loans and leases originated throughout the United States and Canada.

Our Equipment Finance segment is organized in three primary operating units: Construction, Diversified Industries, and Canadian Operations. Our Construction unit has provided financing to the construction industry in the United States for over fifty years. Products include equipment loans and leases, collateral and cash flow loans, revolving lines of credit, and other products that are designed to meet the special requirements of contractors, distributors, and dealers. Our Diversified Industries unit offers a wide range of financial products and services to customers in specialized industries such as food and beverage, defense and security, mining and energy, and regulated industries. Our Canadian Operation has leadership positions in the construction, healthcare, printing, plastics, and machine tool industries.


 
6 CIT GROUP INC 2005  


2005 SEGMENT PERFORMANCE


Earnings and Return Summary (dollars in millions)
For the year ended December 31, 2005 Net
Income

   Return on Assets
   Return on
Equity

 
Specialty Finance – Commercial $ 326.6  2.96 % 25.0 %
Specialty Finance – Consumer 66.7  0.62 % 9.4 %

      
   Total Specialty Finance Group 393.3  1.81 % 19.1 %

      
Commercial Services 184.7  6.78 % 27.1 %
Corporate Finance 177.1  2.10 % 19.0 %
Capital Finance 129.9  1.33 % 9.9 %
Equipment Finance 98.2  1.82 % 12.3 %

      
   Total Commercial Finance Group 589.9  2.24 % 15.8 %

      
Corporate(46.8 )    

      
   Total $ 936.4  1.95 % 15.1 %

      


2006 SEGMENT REPORTING CHANGES

Effective January 1, 2006, we realigned select business operations to better serve our clients. Following is a summary of the changes from the reporting contained herein.

The Small Business Lending unit ($1.3 billion in owned assets at December 31, 2005) was transferred from Specialty Finance – Commercial to Specialty Finance – Consumer, reflecting commonalities with our home lending and student loan businesses.
Consistent with our strategic focus on industry alignment, the Equipment Finance segment has been consolidated into our Corporate Finance segment. This combination will allow us to provide clients in the construction and selected other industries access to the full complement of CIT’s products and services.
We have also made name changes to clarify the market focus of our segments.
(a)Specialty Finance – Commercial has been renamed Vendor Finance
(b) Specialty Finance – Consumer has been renamed Consumer / Small Business Lending
(c)Commercial Services has been renamed Trade Finance
(d) Capital Finance has been renamed Transportation Finance

The following charts depict our managed assets by segment on a historical and prospective basis.


 

  Item 1: Business 7


EMPLOYEES

CIT employed approximately 6,340 people at December 31, 2005, of which approximately 4,865 were employed in the United States and approximately 1,475 were outside the United States.


COMPETITION

Our markets are highly competitive, based on factors that vary depending upon product, customer, and geographic region. Our competitors include captive and independent finance companies, commercial banks and thrift institutions, industrial banks, leasing companies, insurance companies, hedge funds, manufacturers, and vendors. Many bank holding, leasing, finance, and insurance companies that compete with us have formed substantial financial services operations with global reach. On a local level, community banks and smaller independent finance and mortgage companies are competitive with substantial local market positions. Many of our competitors are large companies that have substantial capital, technological, and marketing resources. Some of these competitors are larger than we are and may have access to capital at a lower cost than we do. The markets for most of our products have a large number of competitors, although the number of competitors has fallen in recent years because of continued consolidation in the industry.

We compete primarily on the basis of financing terms, structure, client service, and price. From time to time, our competitors seek to compete aggressively on the basis of these factors and we may lose market share to the extent we are unwilling to match competitor pricing and terms in order to maintain interest margins or credit standards, or both.

Other primary competitive factors include industry experience, equipment knowledge, and relationships. In addition, demand for an industry’s services and products and industry regulations will affect demand for our products in some industries.


REGULATION

In some instances, our operations are subject to supervision and regulation by federal, state, and various foreign governmental authorities. Additionally, our operations may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions. This oversight may serve to:

regulate credit granting activities, including establishing licensing requirements, if any, in various jurisdictions,
establish maximum interest rates, finance charges and other charges,
regulate customers’ insurance coverages,
require disclosures to customers,
govern secured transactions,
set collection, foreclosure, repossession and claims handling procedures and other trade practices,
prohibit discrimination in the extension of credit and administration of loans, and
regulate the use and reporting of information related to a borrower’s credit experience and other data collection.

In addition, CIT Bank, a Utah industrial bank wholly owned by CIT, is subject to regulation and examination by the Federal Deposit Insurance Corporation and the Utah Department of Financial Institutions. CIT Small Business Lending Corporation, a Delaware corporation, is licensed by and subject to regulation and examination by the U.S. Small Business Administration. CIT Capital Securities L.L.C., a Delaware limited liability company, is a broker-dealer licensed by the National Association of Securities Dealers, and is subject to regulation by the NASD and the Securities and Exchange Commission. CIT Bank Limited, an English corporation, is licensed as a bank and subject to regulation and examination by the Financial Service Authority of the United Kingdom.

Our insurance operations are conducted through the Equipment Insurance Company, a Vermont corporation, and Highlands Insurance Company Limited, a Barbados company. Each company is licensed to enter into insurance contracts. They are regulated by the local regulators in Vermont and Barbados. In addition, we have various banking corporations in France, Italy, Belgium, Sweden, and the Netherlands and broker-dealer entities in Canada and the United Kingdom, each of which is subject to regulation and examination by banking regulators and securities regulators in their home country.


 
8 CIT GROUP INC 2005  


GLOSSARY OF TERMS

Average Earning Assets (AEA) is the average during the reporting period of finance receivables, operating lease equipment, financing and leasing assets held for sale, and some investments, less the credit balances of factoring clients. We use this average for certain key profitability ratios, including return on AEA and margins as a percentage of AEA.

Average Finance Receivables (AFR) is the average during the reporting period of finance receivables and includes loans and finance leases. It excludes operating lease equipment. We use this average to measure the rate of net charge-offs on an owned basis for the period.

Average Managed Assets (AMA) is the average earning assets plus the average of finance receivables previously securitized and still managed by us. We use this average to measure the rate of net charge-offs on a managed basis for the period, to monitor overall credit performance, and to monitor expense control.

Capital is the sum of common equity, preferred stock, and preferred capital securities.

Derivative Contract is a contract whose value is derived from a specified asset or an index, such as interest rates or foreign currency exchange rates. As the value of that asset or index changes, so does the value of the derivative contract. We use derivatives to reduce interest rate, foreign currency or credit risks. The derivative contracts we use include interest-rate swaps, cross-currency swaps, foreign exchange forward contracts, and credit default swaps.

Efficiency Ratio is the percentage of salaries and general operating expenses (including provision for restructuring) to operating margin, excluding the provision for credit losses. We use the efficiency ratio to measure the level of expenses in relation to revenue earned.

Finance Income includes both interest income on finance receivables and rental income on operating leases.

Financing and Leasing Assets include loans, capital and finance leases, leveraged leases, operating leases, assets held for sale, and other investments.

Lease – capital and finance is an agreement in which the party who owns the property (lessor) permits another party (lessee) to use the property with substantially all of the economic benefits and risks of ownership passed to the lessee.

Lease – leveraged is a lease in which a third party, a long-term creditor, provides non-recourse debt financing. We are party to these lease types as creditor or as lessor.

Lease – tax-optimized leveraged lease is a lease in which we are the lessor and a third-party creditor has a priority claim to the leased equipment. We have an increased risk of loss in the event of default in comparison to other leveraged leases, because they typically feature higher leverage to increase tax benefits.

Lease – operating is a lease in which we retain beneficial ownership of the asset, collect rental payments, recognize depreciation on the asset, and retain the risks of ownership, including obsolescence.

Managed Assets are comprised of finance receivables, operating lease equipment, finance receivables held for sale, some investments, and receivables securitized and still managed by us. The change in managed assets during a reporting period is one of our measurements of asset growth.

Net Revenue is the sum of net finance margin and other revenue.

Non-GAAP Financial Measures are balances, amounts or ratios that do not readily agree to balances disclosed in financial statements presented in accordance with accounting principles generally accepted in the U.S. We use non-GAAP measures to provide additional information and insight into how current operating results and financial position of the business compare to historical operating results and the financial position of the business and trends, after adjusting for certain nonrecurring, or unusual, transactions.

Non-performing Assets include loans placed on non-accrual status, due to doubt of collectibility of principal and interest, and repossessed assets.

Non-spread Revenue includes syndication fees, gains from dispositions of receivables and equipment, factoring commissions, loan servicing and other fees and is reported in Other Revenue.

Operating Margin is the total of net finance margin after provision for credit losses (risk adjusted margin) and other revenue.

Retained Interest is the portion of the interest in assets we retain when we sell assets in a securitization transaction.

Residual Values represent the estimated value of equipment at the end of the lease term. For operating leases, it is the value to which the asset is depreciated at the end of its useful economic life (i.e., “salvage” or “scrap value”).

Return on Equity or Tangible Equity is net income expressed as a percentage of average common equity or average common tangible equity. These are key measurements of profitability.

Risk Adjusted Margin is net finance margin after provision for credit losses.

Special Purpose Entity (SPE) is a distinct legal entity created for a specific purpose in order to isolate the risks and rewards of owning its assets and incurring its liabilities. We typically use SPEs in securitization transactions, joint venture relationships, and certain structured leasing transactions.

Tangible Metrics exclude goodwill, other intangible assets, and some comprehensive income items. We use tangible metrics in measuring capitalization and returns.

Yield-related Fees In addition to interest income, in certain transactions we collect yield-related fees in connection with our assumption of underwriting risk. We report yield-related fees, which include prepayment fees and certain origination fees and are recognized over the life of the lending transaction, in Finance Income.


 
  Item 1: Business 9


ITEM 1A. RISK FACTORS


You should carefully consider the following discussion of risks, and the other information provided in this Annual Report on Form 10-K. The risks described below are not the only ones facing us. Additional risks that are presently unknown to us or that we currently deem immaterial may also impact our business.

WE MAY BE ADVERSELY AFFECTED BY A GENERAL DETERIORATION IN ECONOMIC CONDITIONS.

A general recession or downturn in the economy could make it difficult for us to originate new business, given the resultant reduced demand for consumer or commercial credit. In addition, a downturn in certain industries may result in a reduced demand for the products we finance in that industry.

Credit quality may also be impacted during an economic slowdown or recession as borrowers may fail to meet their debt payment obligations. While we maintain a reserve for potential credit losses, this allowance could be insufficient depending upon the severity of the economic downturn. Adverse economic conditions may also result in declines in collateral values. As a result, higher credit and collateral related losses could impact our financial position or operating results.

OUR LIQUIDITY OR ABILITY TO RAISE CAPITAL MAY BE LIMITED.

We rely upon access to the capital markets to fund asset growth and to provide sources of liquidity. We actively manage and mitigate liquidity risk by: 1) maintaining diversified sources of funding; 2) maintaining committed alternate sources of funding; 3) maintaining a contingency funding plan to be implemented in the event of market disruption; and 4) issuing debt with maturity schedules designed to mitigate refinancing risk. Although we believe that we will maintain sufficient access to the capital markets, adverse changes in the economy, deterioration in our business performance or changes in our credit ratings could limit our access to these markets.

WE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT CHANGES IN INTEREST RATES.

Although we generally employ a matched funding approach to managing our interest rate risk, including matching the repricing characteristics of our assets with our liabilities, significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both our ability to originate new finance receivables and our ability to grow. Conversely, a decrease in interest rates could result in accelerated prepayments of owned and managed finance receivables.

WE MAY NOT BE ABLE TO REALIZE OUR ENTIRE INVESTMENT IN THE EQUIPMENT WE LEASE.

The realization of equipment values (residual values) at the end of the term of a lease is an important element in the leasing business. At the inception of each lease, we record a residual value for the leased equipment based on our estimate of the future value of the equipment at the expected disposition date. Residual values are determined by experienced internal equipment management specialists, as well as external consultants.

A decrease in the market value of leased equipment at a rate greater than the rate we projected, whether due to rapid technological or economic obsolescence, unusual wear and tear on, or use of, the equipment or other factors, would adversely affect the residual values of such equipment. Consequently, there can be no assurance that our estimated residual values for equipment will be realized.

The degree of residual realization risk varies by transaction type. Capital leases bear the least risk because contractual payments cover approximately 90% of the equipment’s cost at the inception of the lease. Operating leases have a higher degree of risk because a smaller percentage of the equipment’s value is covered by contractual cashflows at lease inception. We record periodic depreciation expense on operating lease equipment based upon estimates of the equipment’s useful life and the estimated future value of the equipment at the end of its useful life. Leveraged leases bear the highest level of risk as third parties have a priority claim on equipment cashflows.

OUR RESERVE FOR CREDIT LOSSES MAY PROVE INADEQUATE.

Our business depends on the creditworthiness of our customers. We believe that our credit risk management systems are adequate to limit our credit losses to a manageable level. We attempt to mitigate credit risks through the use of a corporate credit risk management group, formal credit management processes implemented by each business unit and automated credit scoring capabilities for small ticket business.

We maintain a consolidated reserve for credit losses on finance receivables that reflects management’s judgment of losses inherent in the portfolio. We periodically review our consolidated reserve for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and non-performing assets. We cannot be certain that our consolidated reserve for credit losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy or events adversely affecting specific customers, industries or markets. If the credit quality of our customer base materially decreases, or if our reserves for credit losses are not adequate, our business, financial condition and results of operations may suffer.


 
10 CIT GROUP INC 2005  

WE MAY BE ADVERSELY AFFECTED BY THE REGULATED ENVIRONMENT IN WHICH WE OPERATE.

Our domestic operations are subject, in certain instances, to supervision and regulation by state and federal authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties.

The financial services industry is heavily regulated in many jurisdictions outside the United States. As a result, growing our international operations may be challenged by the varying requirements of these jurisdictions. Given the evolving nature of regulations in many of these jurisdictions, it may be difficult for us to meet these requirements even after we establish operations and receive regulatory approvals. Our inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse effect on our operations in that market and on our reputation generally.

WE COMPETE WITH A VARIETY OF FINANCING SOURCES FOR OUR CUSTOMERS.

Our markets are highly competitive and are characterized by competitive factors that vary based upon product and geographic region. Our competitors are varied and include captive and independent finance companies, commercial banks and thrift institutions, industrial banks, community banks, leasing companies, insurance companies, mortgage companies, manufacturers and vendors.

Competition from both traditional competitors and new market entrants has intensified in recent years due to a strong economy, growing marketplace liquidity and increasing recognition of the attractiveness of the commercial finance markets. In addition, the rapid expansion of the securitization markets is dramatically reducing the difficulty in obtaining access to capital, which is the principal barrier to entry into these markets.

We compete primarily on the basis of pricing, terms and structure. To the extent that our competitors compete aggressively on any combination of those factors, we could lose market share. Should we match competitors’ terms, it is possible that we could experience some margin compression and/or increased losses.

OUR ACQUISITION OR DISPOSITION OF BUSINESSES OR ASSET PORTFOLIOS MAY ADVERSELY AFFECT OUR BUSINESS.

As part of our long-term business strategy, we may pursue acquisitions of other companies or asset portfolios as well as dispose of non-strategic businesses or asset portfolios. Future acquisitions may result in potentially dilutive issuances of equity securities and the incurrence of additional debt, which could have a material adverse effect on our business, financial condition and results of operations. Such acquisitions may involve numerous other risks, including: difficulties in integrating the operations, services, products and personnel of the acquired company; the diversion of management’s attention from other business concerns; entering markets in which we have little or no direct prior experience; and the potential loss of key employees of the acquired company. In addition, acquired businesses and asset portfolios may have credit-related risks arising from substantially different underwriting standards associated with those businesses or assets.

In the event of future dispositions of our businesses or asset portfolios, there can be no assurance that we will receive adequate consideration for those businesses or assets at the time of their disposition or will be able to adequately replace the volume associated with the businesses or asset portfolios that we dispose of with higher-yielding businesses or asset portfolios having acceptable risk characteristics. As a result, our future disposition of businesses or asset portfolios could have a material adverse effect on our business, financial condition and results of operations.

INVESTMENT IN AND REVENUES FROM OUR FOREIGN OPERATIONS ARE SUBJECT TO THE RISKS ASSOCIATED WITH TRANSACTIONS INVOLVING FOREIGN CURRENCIES.

While we do attempt to hedge our translation and transaction exposures, foreign currency exchange rate fluctuations can have a material adverse effect on the investment in international operations and the level of international revenues that we generate from international asset based financing and leasing. Reported results from our operations in foreign countries may fluctuate from period to period due to exchange rate movements in relation to the U.S. dollar, particularly exchange rate movements in the Canadian dollar, which is our largest non-U.S. exposure. In addition, an economic recession or downturn or increased competition in the international markets in which we operate could adversely affect us.

OUR BUSINESS INITIATIVES HAVE POTENTIAL EXECUTION RISK.

Our ability to improve our levels of asset and revenue generation depends on our initiatives to align our businesses around customers and industry sectors, and to expand our sales and marketing platforms. These initiatives involve asset transfers, changes in management accountabilities, as well as the streamlining and realignment of related infrastructure, including information technology and personnel. Our failure to implement these initiatives successfully, or the failure of such initiatives to result in increased asset and revenue levels, could adversely affect our financial position and results of operations.


 
  Item 1: Business 11



ITEM 1B. Unresolved Staff Comments

There are no unresolved SEC staff comments.



ITEM 2. Properties

CIT operates in the United States, Canada, Europe, Latin America, Australia and the Asia-Pacific region. CIT occupies approximately 2.2 million square feet of office space, substantially all of which is leased. Such office space is suitable and adequate for our needs and we utilize, or plan to utilize, substantially all of our leased office space.



ITEM 3. Legal Proceedings

NORVERGENCE RELATED LITIGATION

On September 9, 2004, Exquisite Caterers Inc., et al. v. Popular Leasing Inc., et al. (“Exquisite Caterers”), a putative national class action, was filed in the Superior Court of New Jersey against 13 financial institutions, including CIT, which had acquired equipment leases (“NorVergence Leases”) from NorVergence, Inc., a reseller of telecommunications and Internet services to businesses. The complaint alleged that NorVergence misrepresented the capabilities of, and overcharged for, the equipment leased to its customers and that the NorVergence Leases are unenforceable. Plaintiffs seek rescission, punitive damages, treble damages and attorneys’ fees. In addition, putative class action suits in Illinois and Texas, all based upon the same core allegations and seeking the same relief, were filed by NorVergence customers against CIT and other financial institutions. The Court in Exquisite Caterers certified a New Jersey-only class, and a motion for decertification is pending.

On July 14, 2004, the U.S. Bankruptcy Court ordered the liquidation of NorVergence under Chapter 7 of the Bankruptcy Code. Thereafter, the Attorneys General of several states commenced investigations of NorVergence and the financial institutions, including CIT, that purchased NorVergence Leases. CIT has entered into settlement agreements with the Attorneys General in each of these states, except for Texas. Under those settlements, lessees in those states have had an opportunity to resolve all claims by and against CIT by paying a percentage of the remaining balance on their leases. CIT has also produced documents for transactions related to NorVergence at the request of the Federal Trade Commission (“FTC”) and pursuant to a subpoena in a grand jury proceeding being conducted by the U.S. Attorney for the Southern District of New York in connection with an investigation of transactions related to NorVergence. CIT has entered into a settlement agreement with respect to the Exquisite Catering case and the Texas putative class action. Such settlement is subject to court approval and is not expected to have a material adverse financial effect on CIT.

OTHER LITIGATION

In addition, there are various proceedings that have been brought against CIT in the ordinary course of business. While the outcomes of the ordinary course legal proceedings, and the related activities, are not certain, based on present assessments, management does not believe that they will have a material adverse financial effect on CIT.



ITEM 4. Submission of Matters to a Vote of Security Holders

We did not submit any matters to a vote of security holders during the three months ended December 31, 2005.


 
12 CIT GROUP INC 2005  



Part Two

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities


Our common stock is listed on the New York Stock Exchange. The following table sets forth the high and low reported closing prices for CIT’s common stock for each of the quarterly periods in the two years ended December 31, 2005.

2005
2004
Common Stock Prices
HIGH
LOW
HIGH
LOW
First Quarter   $46.07   $37.40   $39.91   $35.83  
Second Quarter   $43.17   $35.45   $38.73   $33.28  
Third Quarter   $46.80   $42.60   $38.48   $34.53  
Fourth Quarter   $52.62   $43.62   $45.82   $36.51  
 

During the year ended December 31, 2005, we paid a dividend of $0.13 per common share for the first quarter and $0.16 for each of the following three quarters for a total of $0.61 per share. During the year ended December 31, 2004, for each of the four quarters, we paid a dividend of $0.13 per share for a total of $0.52 per share. On January 17, 2006, the Board of Directors approved a $0.04 per share increase to the quarterly dividend to $0.20 per share.

Our dividend practice is to pay a dividend while retaining a strong capital base. The declaration and payment of future dividends are subject to the discretion of our Board of Directors. Any determination as to the payment of dividends, including the level of dividends, will depend on, among other things, general economic and business conditions, our strategic and operational plans, our financial results and condition, contractual, legal and regulatory restrictions on the payment of dividends by us, and such other factors as the Board of Directors may consider to be relevant.

As of February 15, 2006, there were 96,761 beneficial owners of CIT common stock.

All equity compensation plans in effect during 2005 were approved by our shareholders, and are summarized in the following table.

NUMBER OF
SECURITIES
TO BE ISSUED
UPON EXERCISE
OF OUTSTANDING
OPTIONS(1)

WEIGHTED-AVERAGE
EXERCISE PRICE OF
OUTSTANDING
OPTIONS

NUMBER OF
SECURITIES
REMAINING
AVAILABLE FOR
FUTURE ISSUANCE
UNDER EQUITY
COMPENSATION
PLANS (EXCLUDING
SECURITIES
REFLECTED
IN COLUMN (A))

(A)(B) (C)
EQUITY COMPENSATION PLANS   
APPROVED BY SECURITY HOLDERS17,470,879  $37.80 5,191,152 
(1) Excludes 1,278,099 unvested restricted shares and 1,876,193 unvested performance shares outstanding under the Long-Term Equity Compensation Plan.

We had no equity compensation plans that were not approved by shareholders. For further information on our equity compensation plans, including the weighted average exercise price, see Item 8. Financial Statements and Supplementary Data, Note 15.


 
  Item 5: Market for Registrant’s Common Equity 13

The following table details the repurchase activity of CIT common stock during the quarter ended December 31, 2005.

TOTAL
NUMBER OF
SHARES
PURCHASED

AVERAGE
PRICE
PAID
PER SHARE

TOTAL NUMBER OF
SHARES PURCHASED
AS PART OF PUBLICLY
ANNOUNCED PLANS
OR PROGRAMS

MAXIMUM NUMBER
OF SHARES THAT MAY
YET BE PURCHASED
UNDER THE PLANS
OR PROGRAMS

BALANCE AT SEPTEMBER 30, 2005  12,015,244        2,425,997 
  
         
   OCTOBER 1 - 31, 2005  606,900 $44.83  606,900  1,819,097 
   NOVEMBER 1 - 30, 2005 533,900  $48.68  533,900  1,285,197 
   DECEMBER 1 - 31, 2005 274,700  $52.06  274,700  1,010,497 
   ACCELERATED
   STOCK BUYBACK
 844,669  $51.92  844,669 (1)     
  
         
   TOTAL PURCHASES   2,260,169         
  
         
REISSUANCES(2)  (1,070,056)         
  
         
BALANCE DECEMBER 31, 2005   13,205,357         
  
         
 
(1) On July 28, 2005, the Company paid $500 million and received an initial delivery of 8,232,655 shares. The Company received an additional 1,830,812 shares in August and a final delivery of 844,669 shares in December.
(2) Includes the issuance of common stock held in treasury upon exercise of stock options, payment of employee stock purchase plan obligations and the vesting of restricted stock.

On January 17, 2006, our Board of Directors approved a continuation of the common stock repurchase program to acquire up to an additional 5 million shares of our outstanding common stock in conjunction with employee equity compensation programs. These are in addition to the 1,010,497 shares remaining from the previous program that was approved on October 20, 2004. The program authorizes the company to purchase shares on the open market from time to time over a two-year period beginning January 18, 2006. The repurchased common stock is held as treasury shares and may be used for the issuance of shares under CIT’s employee stock plans. Acquisitions under the share repurchase program will be made from time to time at prevailing prices as permitted by applicable laws, and subject to market conditions and other factors. The program may be discontinued at any time and is not expected to have a significant impact on our capitalization.


 
14 CIT GROUP INC 2005  



ITEM 6.Selected Financial Data


The following tables set forth selected consolidated financial information regarding our results of operations and balance sheets. The data presented below should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures about Market Risk and Item 8. Financial Statements and Supplementary Data.

At or for the Years Ended December 31, At or for
the Three
Months Ended
December 31,
2002

At or for the
Year Ended
September 30,
2002

At or for
the Nine
Months Ended
September 30,
2001

(dollars in millions, except per share data) 2005
2004
2003
Results of Operations                          
Net finance margin   $    1,635.2   $    1,535.3   $    1,303.1   $       339.8   $     1,619.4   $    1,291.8  
Provision for credit losses   217.0   214.2   387.3   133.4   788.3   332.5  
Operating margin   2,555.6   2,208.2   1,775.1   463.5   1,763.4   1,531.9  
Salaries and general                  
   operating expenses   1,113.8   1,012.0   888.2   227.5   903.3   767.5  
Net income (loss)   936.4   753.6   566.9   141.3   (6,698.7 ) (2) 263.3  
Net income (loss) per                  
   share — diluted   4.44   3.50   2.66   0.67   (31.66 ) 1.24  
Dividends per share(1)   0.61   0.52   0.48   0.12     0.25  
Balance Sheet Data                  
Total finance receivables   $  44,294.5   $  35,048.2   $  31,300.2   $  27,621.3   $   28,459.0   $  31,879.4  
Reserve for credit losses   621.7   617.2   643.7   760.8   777.8   492.9  
Operating lease equipment, net   9,635.7   8,290.9   7,615.5   6,704.6   6,567.4   6,402.8  
Total assets   63,386.6   51,111.3   46,342.8   41,932.4   42,710.5   51,349.3  
Commercial paper   5,225.0   4,210.9   4,173.9   4,974.6   4,654.2   8,869.2  
Variable-rate senior notes   15,485.1   11,545.0   9,408.4   4,906.9   5,379.0   9,614.6  
Fixed-rate senior notes   22,853.6   21,715.1   19,830.8   19,681.8   18,385.4   17,113.9  
Non-recourse, secured
  borrowings — student lending
  4,048.8            
Total stockholders’ equity   6,962.7   6,055.1   5,394.2   4,870.7   4,757.8   5,947.6  
Selected Profitability Ratios                  
Net income (loss) as a
   percentage of AEA
  1.95 % 1.93 % 1.58 % 1.73 % (18.71 )% 0.87 %
Net income (loss) as a percentage
   of average tangible common
   stockholders’ equity
  17.6 % 14.5 % 11.8 % 12.5 % (160.0 )% 8.5 %
Net finance margin as a  
   percentage of AEA   3.40 3.94 3.64 4.22 4.57 4.29
Efficiency ratio   41.1 % 41.8 % 41.1 % 38.1 % 35.4 % 41.2 %
Salaries and general  
   operating expenses  
   as a percentage of AMA   2.05 % 2.13 % 1.94 % 2.05 % 1.91 % 2.02 %
Credit Quality                 

 60+ days contractual delinquency
   as a percentage of
  
finance receivables

  1.71 % 1.73 % 2.16 % 3.63 % 3.76 % 3.46 %
Non-accrual loans as a percentage                  
   of finance receivables   1.04 % 1.31 % 1.81 % 3.43 % 3.43 % 2.67 %
Net credit losses as a  
   percentage of AFR   0.60 % 0.91 % 1.77 % 2.32 % 1.67 % 1.20 %
Reserve for credit losses as a                  
   percentage of finance receivables   1.40 % 1.76 % 2.06 % 2.75 % 2.73 % 1.55 %
Other  
Total managed assets   $  62,866.4   $  53,470.6   $  49,735.6   $  46,357.1   $   47,622.3   $  50,877.1  
Tangible stockholders’ equity  
   to managed assets   9.8 % 10.7 % 10.4 % 10.4 % 9.9 % 8.6 %
Employees   6,340   5,860   5,800   5,835   5,850   6,785  
(1) Net income (loss) and dividend per share calculations for the periods preceding September 30, 2002 assume that common shares outstanding as a result of the July 2002 IPO (basic and diluted of 211.6 million and 211.7 million) were outstanding during such historical periods.
(2) Includes goodwill impairment charge of $6,511.7 million.

 
  Item 6: Selected Financial Data 15



Part Two

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  and
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk


INTRODUCTION

In the following discussion we use financial terms that are relevant to our business. You can find a glossary of other key terms used in our business in Part I Item 1. Business section.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure about Market Risk contains certain non-GAAP financial measures. See Non-GAAP Financial Measurements” for additional information. In the sections that follow, we analyze our results.


KEY PERFORMANCE METRICS AND MEASUREMENTS      

Profitability Our ability to generate income on investments to generate returns to our shareholders and build our capital base to support future growth. We measure our performance in this area with:         Net income per common share (EPS);
  Net income as a percentage of average tangible common equity (ROTE);
  Net income as a percentage of average common equity (ROE); and
  Net income as a percentage of average earning assets (ROA).

Asset Generation Our ability to originate new business and build our earning assets. We measure our performance in these areas with:         Origination volumes by channel;
  Customer retention;
  Sales force productivity; and
  Levels of financing and leasing assets, and managed assets (including securitized finance receivables that we continue to manage).

Revenue Generation Our ability to lend money at rates in excess of our cost of borrowing and to generate non-spread revenue. We measure our performance in this area with:          

Levels of net finance margin;

  Levels of non-spread and other revenue;
  Finance income as a percentage of AEA;
  Net finance margin as a percentage of AEA; and
  Operating lease margin as a percentage of average leased equipment (“AOL”).

Liquidity and Market Rate Risk Management Our liquidity risk management pertains to our ability to obtain funding at competitive rates, which depends on maintaining high quality assets, strong capital ratios, and high credit ratings. Market rate risk management pertains to our ability to manage our interest rate and currency rate risk, where our goal is to substantially insulate our interest margins and profits from movements in market interest rates and foreign currency exchange rates. We measure our liquidity and market rate risk management with:       Interest expense as a percentage of AEA;
  Net finance margin as a percentage of AEA; and
  Various interest sensitivity and liquidity measurements, which we discuss in “Risk Management”.


 
16 CIT GROUP INC 2005  


KEY PERFORMANCE METRICS AND MEASUREMENTS (continued)   

Equipment and Residual Risk Management Our ability to evaluate collateral risk in leasing and lending transactions and to remarket equipment at lease termination. We measure these activities with:     Gains and losses on equipment sales; and
  Equipment utilization and value of equipment off lease.

Credit Risk Management Our ability to evaluate the credit-worthiness of our customers, both during the credit granting process and after the advancement of funds, and to maintain high-quality assets while balancing income potential with adequate credit loss reserve levels. We assess our credit risk management with:           Net charge-offs as a percentage of average finance receivables;
  Delinquent assets as a percentage of finance receivables;
  Non-performing assets as a percentage of finance receivables;
  Reserve for credit losses as a percentage of finance receivables, of delinquent assets, and of non-performing assets; and
  Concentration risk by geographic region, industry and by customer.

Expense Management Our ability to maintain efficient operating platforms and infrastructure in order to run our business at competitive cost levels. We track our efficiency with:     Efficiency ratio, which is the ratio of operating expenses to net revenue; and
  Operating expenses as a percentage of average managed assets (“AMA”).

Capital Management Our ability to maintain a strong capital base. We measure our performance in this area with:       Tangible capital base;
  Tangible capital to managed assets ratio; and
  Tangible book value per common share.


 
  Item 7: Management’s Discussion and Analysis 17


PROFITABILITY AND KEY BUSINESS TRENDS


Income Metrics

Diluted earnings per share and net income growth approximated 25% in 2005 and 30% in 2004. The improved earnings reflect strong operating fundamentals, asset growth and improved capital discipline. 2005 EPS growth also benefitted from a reduction in share count resulting from capital initiatives.


Return Metrics

Return on assets and return on equity improved in both 2005 and 2004 reflecting improved earnings in all segments.

Average earning assets grew 23% and 9%, and ending managed assets grew 18% and 8% during 2005 and 2004. Our focus during both 2005 and 2004 was on prudent growth, as we continued to supplement organic growth with strategic acquisitions, offset by the liquidation of non-strategic portfolios.

Earnings for 2005 reflected strong non-spread revenue, the continuation of low charge-offs, and reduced tax expense, in part due to the offshore relocation of certain aircraft leasing operations. Net finance margin, while stable during 2005, declined from 2004 due to growth in the lower risk and lower margin – U.S. government guaranteed – student lending business, longer-term debt financing and competitive market pricing. We also made investments in sales and marketing initiatives in 2005, which increased operating expenses.

The earnings improvement in 2004 from 2003 was driven primarily by improved finance margin and a considerable reduction in charge-offs.

Other significant items in the 2005 and 2004 trends are discussed further in the segment results discussion that follows.


 
18 CIT GROUP INC 2005  


RESULTS BY BUSINESS SEGMENT


Results by Business Segment (dollars in millions)
For the years ended December 31,   2005
  2004
  2003(1)
 
Net Income (Loss)              
Specialty Finance – Commercial   $ 326.6   $ 268.3   $ 225.3  
Specialty Finance – Consumer   66.7   46.3   35.6  



   Total Specialty Finance Group   393.3   314.6   260.9  



Commercial Services   184.7   161.1   127.6  
Corporate Finance   177.1   148.6   147.7  
Capital Finance   129.9   87.0   42.3  
Equipment Finance   98.2   81.5   38.5  



   Total Commercial Finance   589.9   478.2   356.1  



Corporate and Other   (46.8 ) (39.2 ) (50.1 )



   Total   $ 936.4   $ 753.6   $ 566.9  





   Return on Assets  
  Return on Equity  
 
For the years ended December 31,   2005
  2004
  2003(1)
  2005
  2004
  2003(1)
 
Specialty Finance – Commercial   2.96 % 2.56 % 2.21 % 25.0 % 21.0 % 18.1 %
Specialty Finance – Consumer   0.62 % 1.20 % 1.73 % 9.4 % 14.9 % 21.5 %
   Total Specialty Finance   1.81 % 2.19 % 2.13 % 19.1 % 19.8 % 19.3 %
Commercial Services   6.78 % 6.05 % 5.43 % 27.1 % 25.7 % 23.1 %
Corporate Finance   2.10 % 2.25 % 2.32 % 19.0 % 22.2 % 22.9 %
Capital Finance   1.33 % 1.06 % 0.56 % 9.9 % 10.5 % 5.5 %
Equipment Finance   1.82 % 1.18 % 0.56 % 12.3 % 8.0 % 3.8 %
   Total Commercial Finance   2.24 % 1.96 % 1.53 % 15.8 % 15.4 % 12.0 %
   Total   1.95 % 1.93 % 1.58 % 15.1 % 13.2 % 10.9 %
(1) 2003 results reflect a uniform leverage ratio among the segments.

We measure segment performance using risk-adjusted capital, applying different leverage ratios to each business to allocate capital based on market criteria and inherent differences in risk levels. The capital allocations reflect the relative risk of individual asset classes within the segments and range from approximately 2% of managed assets for U.S. government guaranteed education loans to approximately 15% of managed assets for longer-term assets such as aerospace. The targeted risk-adjusted capital allocations by segment (as a percentage of average managed assets) are as follows: Specialty Finance – Commercial, 9%, Specialty Finance –Consumer, 5%, Commercial Services, Corporate Finance and Equipment Finance, 10% and Capital Finance, 14%. See Note 20– Business Segment Information of Item 8. Financial Statements and Supplementary Data for details on our 2005 realignment initiatives and measuring segment performance using risk-adjusted capital.


 
  Item 7: Management’s Discussion and Analysis 19

Results by segment were as follows:

2005 versus 2004

Specialty Finance – Commercial reflected improved profitability in the vendor programs and international operations as well as a $26.8 million after tax gain on the sale of the microticket leasing point of sale unit, offset by the loss ($11.9 million after tax) on the disposition of manufactured housing receivables.
Specialty Finance – Consumer results reflected higher earnings in the home lending unit as well as earnings from the student lending business acquired in the first quarter of 2005. Returns both as a percentage of average earning assets and equity declined from the prior year. The decline in return on average earning assets was due to the lower margins in the U.S. government guaranteed student lending business. The decline in return on average equity was due to the allocation of capital related to goodwill associated with the student lending acquisition.
Commercial Services earnings improvement was driven by higher interest margin. Factoring commissions were up 4% from the prior year as increased volume was mitigated by lower commission rates.
Corporate Finance earnings reflected strong results across virtually all industry groups and increased non-spread revenue, offset by increased operating expenses, as we continue to invest in sales initiatives.
Capital Finance net income includes a $52.8 million after-tax loss relating to the disposition of certain aircraft assets. This amount was offset by a significant reduction in tax expense ($34.6 million after tax) due to the transfer of certain aerospace leasing operations offshore and the resolution of a tax liability in our international operations. Excluding the aircraft disposition loss, pretax income was up modestly from 2004, reflecting improved rentals in both aerospace and rail.
Equipment Finance net income improvement was driven by lower charge-offs and a $14.4 million after-tax gain on the strategic sale of certain business aircraft.

2004 versus 2003

Specialty Finance – Commercial reflected improved profitability in the small and mid-ticket leasing business and the continuation of strong returns in the vendor programs, which were offset in part by the loss related to the accelerated liquidation via sale of the manufactured housing portfolio.
Specialty Finance – Consumer results reflected higher net income and the continuation of good returns in the home lending unit. Home lending profitability also reflected lower securitization gains in 2004.
Commercial Services earnings reflected continued high returns in our factoring operations as well as the benefit from acquisitions completed in the latter part of 2003.
Corporate Finance earnings were essentially flat with 2003.
Capital Finance returns rebounded from disappointing results in 2003, reflecting some improvement in aerospace rentals and continued strong rail rentals, as well as increased non-spread revenue.
Equipment Finance returns improved from the low 2003 level, reflecting sharply lower charge-offs and higher equipment gains. Profitability improvement was broad, across business lines in both the U.S. and Canada.

Corporate included after tax amounts as shown in the table below:


Corporate (dollars in millions)
For the years ended December 31,   2005
  2004
  2003
 
Unallocated expenses   $  (93.9 ) $(75.6)$(3.3 )
Real estate investment sale gain  69.7      
Mark-to-market on non-accounting hedge derivatives(1)  24.4      
Hurricane charges  (25.6 )    
Specific Argentine and telecommunication provisions     26.4    
Preferred stock dividends  (12.7 )    
Restructuring charges  (15.4 )    
Gain on debt redemption     25.5   30.8  
Venture capital operating income/(losses)(2)  6.7   (15.5 ) (77.6)



   Total   $  (46.8 ) $(39.2)$(50.1 )



(1) See description in Other Revenue.
(2) Venture capital operating losses include realized and unrealized gains and losses related to venture capital investments as well as interest costs and other operating expenses associated with these portfolios.

The increase in unallocated corporate operating expense in both years was due primarily to increased performance-based compensation, professional services, and other compliance-related costs as well as higher unallocated funding costs.


 
20 CIT GROUP INC 2005  


REVENUE


Revenue (dollars in millions)

The trend in our revenues (total net revenues) from 2003 to 2005 reflects both asset growth and a focus on non-spread revenue growth. Non-spread revenue accounted for 41% of net revenue in 2005, up from 37% in 2004 and 40% in 2003. Increasing non-spread revenue continues to be a strategic focus.


NET FINANCE MARGIN


Net Finance Margin (dollars in millions)

For the years ended December 31,   2005
  2004
  2003
 
Finance income – loans and capital leases   $    3,018.7   $    2,363.8   $    2,249.2  
Rental income on operating leases  1,496.5   1,397.0  1,460.1  
Interest expense   1,912.0   1,260.1   1,348.7  



   Net finance income  2,603.2   2,500.7  2,360.6  
Depreciation on operating lease equipment  968.0   965.4  1,057.5  



   Net finance margin   $    1,635.2   $    1,535.3   $    1,303.1  



Average Earnings Assets (“AEA”)   $  48,128.2   $  39,011.3   $  35,813.4  



As a % of AEA:  
Finance income – loans and capital leases  6.27 % 6.06 % 6.28 %
Rental income on operating leases  3.11 % 3.58 % 4.08 %
Interest expense  3.97 % 3.23 % 3.77 %



   Net finance income  5.41 % 6.41 % 6.59 %
Depreciation on operating lease equipment  2.01 % 2.47 % 2.95 %



   Net finance margin  3.40 % 3.94 % 3.64 %



As a % of AOL:       
Rental income on operating leases  17.03 % 17.86 % 20.16 %
Depreciation on operating lease equipment  11.02 % 12.34 % 14.60 %



   Net operating lease margin  6.01 % 5.52 % 5.56 %



Average Operating Lease Equipment (“AOL”)   $    8,788.5   $    7,821.2   $    7,241.1  




 
  Item 7: Management’s Discussion and Analysis 21

The amount of net finance income increased during 2005 and 2004, reflecting the higher asset levels. As a percentage of average earning assets, net finance income declined in both years due to: 1) the blending of the lower rate, U.S. government guaranteed student lending portfolio in 2005 (net finance income as a percentage of AEA excluding student lending was 5.84% in 2005); 2) pricing pressure, reflecting liquidity in many of our lending businesses; and 3) an increasingly more conservative liquidity profile during the periods, including higher cash balances, the continued maturity extension of the debt portfolio and other increased alternative liquidity facilities. Yield related fees also declined in 2005. Market interest rates increased in both 2005 and 2004. Though we continuously manage our interest rate sensitivity with essentially a matched asset/liability position, we do fund a modest amount of fixed-rate assets with variable rate debt. As a result, the rising market interest rate environment also put modest pressure on our margins.

In both 2005 and 2004, the proportion of longer-lived aerospace and rail assets in Capital Finance increased from the preceding year. These longer-lived assets have lower rental rates and lower annual depreciation rates as a percentage of the operating lease assets than small to mid-ticket leasing assets in Specialty Finance – Commercial and Equipment Finance. As a result operating lease rentals and depreciation expense declined as a percentage of operating lease assets during both years. The increase in net operating lease margin as a percentage of operating lease assets reflected strengthening rental rates in both aerospace and rail, including the impact of higher interest rates. See “Concentrations – Operating Leases” for additional information regarding our operating lease assets.


NET FINANCE MARGIN AFTER PROVISION FOR CREDIT LOSSES
(RISK ADJUSTED MARGIN)


Net Finance Margin after Provision for Credit Losses (Risk Adjusted Margin) (dollars in millions)

For the years ended December 31,   2005
  2004
  2003
 
Net finance margin   $    1,635.2   $    1,535.3   $    1,303.1  
Provision for credit losses  217.0   214.2  387.3  



Net finance margin after provision for         
  credit losses (risk adjusted margin)   $    1,418.2   $    1,321.1   $       915.8  



As a % of AEA:  
Net finance margin  3.40 % 3.94 % 3.64 %
Provision for credit losses  0.45 % 0.55 % 1.08 %



Net finance margin after provision for        
  credit losses (risk adjusted margin)  2.95 % 3.39 % 2.56 %



Average Earnings Asset (“AEA”)   $  48,128.2   $  39,011.3   $  35,813.4  



The growth in risk adjusted margin from 2003 to 2005 largely reflects the variances in net finance margin as discussed previously, as well as a benefit from lower charge-offs, which we discuss further in “Credit Metrics”.

During 2005, we recorded a $34.6 million provision for credit losses related to estimated hurricane losses, which is discussed further in “Reserve for Credit Losses”. Excluding this item, adjusted margin as a percentage of AEA was 3.02% for 2005. During 2004, we reduced previously established specific reserves by $43.3 million relating to telecommunications assets. Excluding this provision reduction, risk adjusted margin as a percentage of AEA was 3.28%.


 
22 CIT GROUP INC 2005  


OTHER REVENUE


Other Revenue (dollars in millions)

For the years ended December 31,   2005
  2004
  2003
 
Fees and other income   $      637.0   $     518.6   $     586.2  
Factoring commissions  235.7   227.0  189.8  
Gains on sales of leasing equipment  91.9   101.6  70.7  
Gains on securitizations  39.1   59.1   100.9 
Gain on real estate investment sale  115.0      
Charge related to aircraft accelerated liquidation  (86.6 )    
Gain on sale of micro-ticket leasing business unit  44.3      
Gain on strategic sale of business aircraft  22.0      
Gain on derivatives  43.1      
Charges related to sale of manufactured housing loans  (20.0 ) (15.7 )  
Net gain (loss) on venture capital investments  15.9   (3.5 ) (88.3 )



   Total other revenue   $   1,137.4   $     887.1   $     859.3  



Other revenue as a percentage of AEA  2.36 % 2.27 % 2.40 %



Other revenue as a percentage of net revenues  41.0 % 36.6 % 39.7 %



We continue to emphasize growth and diversification of other revenues to improve our overall profitability.

Fees and other income include securitization-related servicing fees and accretion, syndication fees, miscellaneous fees, and gains from asset sales. Securitization-related fees (net of impairment charges) were essentially flat in 2005 due to reduced impairment charges, following a decline in 2004, corresponding to a 14% decline in securitized assets. Our emphasis on funding home lending receivables on-balance sheet resulted in a reduction in securitization-related revenues and an increase in both interest margin and provision for credit losses in both years. Strong fees and other income in Capital Finance and Corporate Finance more than offset this factor. Gains on sales of receivables were up from 2005 due to sales of student lending receivables.

Higher factoring commissions reflect strong volumes, including incremental volume from acquisitions, though commission rates were down modestly from 2004. The increased commissions in 2004 reflected two large acquisitions completed during the latter part of 2003.

Gains on sales of equipment remained strong in 2005, but were down from 2004, largely in Capital Finance. The increase in 2004 resulted from firming of equipment prices and higher gains across virtually all leasing businesses, most notably in Equipment Finance and in the international unit of Specialty Finance-Commercial.

Securitization gains decreased in 2005 and 2004 from the preceding years, due to both a lower volume of receivables securitized and reduced gains on the amounts securitized. In 2005 and 2004, we funded home lending growth entirely on-balance sheet, versus $489 million of home lending assets that were securitized in 2003. The lower gains as a percentage of volume in both 2005 and 2004 were primarily due to a higher proportion of, and tighter spreads on, vendor receivables sold. Securitization gains were 2.8% of pretax income in 2005, down from 4.8% and 10.8% in the preceding two years.

The following items of note, the majority of which were the result of capital allocation activities, also impacted other revenue. Excluding these amounts and venture capital investment gains and losses, other revenue was 2.09%, 2.32% and 2.65% of AEA and 38.0%, 37.1% and 42.1% of net revenues for 2005, 2004 and 2003.

Gain on real estate investment resulted from the sale of an interest in Waterside Plaza, a residential complex in New York City.

Charge related to aircraft held for sale resulted from management’s strategic decision to actively market certain older, out of production commercial, regional and business aircraft in the third quarter of 2005 with a carrying value of approximately $190 million. As of December 31, 2005, approximately $15.0 million have been sold at amounts approximating the writtendown values. The remainder of the portfolio remains classified as assets held for sale.

Gain on sale of micro-ticket leasing business is the fourth quarter 2005 sale of the micro-ticket leasing point-of-sale unit in Specialty Finance –Commercial.

Gain on sale of business aircraft reflects the strategic sale of the majority of the Equipment Finance business aircraft portfolio (approximately $900 million). The remainder of this portfolio (approximately $600 million) was transferred to Capital Finance following the completion of the sale in the second half of 2005.

Gain on derivatives relates to the mark-to-market of certain compound cross-currency swaps that did not qualify for hedge accounting treatment. All of the swaps were either terminated or had matured as of December 31, 2005. See Item 9A. Controls and Prodecures for a discussion of internal controls relating to derivative hedge accounting.


 
  Item 7: Management’s Discussion and Analysis 23

Charges related to the sales of manufactured housing loans reflect the accelerated liquidation of approximately $125 million and $300 million in manufactured housing loans in 2005 and 2004. These assets were reclassified as held for sale on the financial statements and marked to estimated fair value, resulting in the above charges.


RESERVE FOR CREDIT LOSSES


Reserve for Credit Losses (dollars in millions)

For the years ended December 31,   2005
  2004
  2003
 
Balance beginning of period   $    617.2   $     643.7   $    760.8  



Provision for credit losses – finance  
   receivables (by segment)  
   Specialty Finance – Commercial   93.2   109.2   132.8  
   Specialty Finance – Consumer  34.6   32.7   26.5  
   Commercial Services   22.9   23.4   27.6  
   Corporate Finance  3.2  24.5   46.5  
   Capital Finance   4.6   7.3   12.3  
   Equipment Finance  21.1   53.2   125.7 
   Corporate and Other, including         
      specific reserving actions   37.4   (36.1 ) 15.9  



   Total provision for credit loss  217.0   214.2  387.3  
Reserves relating to         
   acquisitions, other movements   38.6   60.5   17.5  



   Additions to reserve for  
      credit losses, net  255.6   274.7  404.8  



Net credit losses – excluding         
   telecommunications and         
   Argentina:          
   Specialty Finance – Commercial  95.3   111.0  138.8  
   Specialty Finance – Consumer   53.2   41.0   27.2  
   Commercial Services  22.9   23.3   27.6  
   Corporate Finance   0.5   26.0   44.6  
   Capital Finance  53.6   6.6   10.0  
   Equipment Finance   25.6   53.2   125.7  



   Net credit losses – prior to  
      telecommunication/Argentine 
      chargeoffs  251.1   261.1  373.9  
   Telecommunications     40.1   47.0  
   Argentine       101.0 



   Total net credit losses  251.1   301.2  521.9  



Balance end of period   $    621.7   $     617.2   $    643.7  



Reserve for credit losses as a         
   percentage of finance       
   receivables   1.40 % 1.76 % 2.06 %
Reserve for credit losses as a  
   percentage of past due  
   (60 receivables days or more)  82.0 % 101.5 % 95.2 %
Reserve for credit losses as a         
   percentage of non-performing assets  119.3 % 114.4 % 95.2 %

 
24 CIT GROUP INC 2005  

The lower level of reserve for credit losses in the years presented above reflects the improvements in our credit metrics, specifically the decline in charge-offs over the same periods. This credit quality improvement, along with the addition of $5.1 billion of U.S. government guaranteed student lending receivables, drove the decline in the percentage of reserve to finance receivables over the periods shown. Corporate and Other includes specific amounts provided for estimated hurricane losses in 2005 and the reversal of previously established specific telecommunications reserves in 2004. See Credit Metrics for further discussion.

We determine the reserve for credit losses using three key components: (1) specific reserves for collateral and cash flow dependent loans that are impaired under SFAS 114, (2) reserves for estimated losses inherent in the portfolio based upon historical and projected credit risk, and (3) reserves for economic environment risk and other factors.

The reserve included specific reserves, excluding telecommunication accounts, relating to impaired loans of $61.7 million, $87.1 million and $66.4 million at December 31, 2005, 2004 and 2003. The 2005 balance includes amounts for a power generation facility subject to bankruptcy proceedings and Hurricanes Katrina and Rita, while the 2004 balance includes amounts related to U.S. commercial airline hub carriers. The portion of the reserve related to inherent estimated loss and estimation risk reflects our evaluation of trends in our key credit metrics, as well as our assessment of risk in specific industry sectors.

In managing the consolidated reserve for credit losses to provide for losses inherent in the portfolio, we estimate the ultimate outcome of collection efforts and realization of collateral values, among other things. Therefore, we may make additions or reductions to the consolidated reserve for credit losses depending on changes in economic conditions or credit metrics, including past due and non-performing accounts, or other events affecting specific obligors or industries. We continue to believe that the credit risk characteristics of the portfolio are well diversified by geography, industry, borrower, and collateral type. See “Concentrations” for more information.

During the third quarter of 2005, we established a $34.6 million reserve for credit losses related to Hurricanes Katrina and Rita. This amount reflects management’s best estimate of loss based on available, relevant information. Total business segment owned and securitized receivables in the three most impacted states (Louisiana, Alabama and Mississippi) were approximately $925 million and $200 million. Of these amounts, exposure to commercial and consumer customers located in the Federal Emergency Management Agency (“FEMA”) designated disaster areas and other areas that management determined were significantly impacted were approximately $600 million and $50 million respectively, including approximately $250 million in the FEMA designated disaster areas relating principally to equipment and vendor finance assets and home mortgages. For commercial loans, management performed a loan-by-loan assessment of estimated loss. For equipment and vendor assets and home mortgages in the FEMA designated disaster areas, management performed an analysis of exposure by zip code, including flood versus nonflood designated locations, supplemented with a range of corresponding estimated damage assessments. This estimate of loss involves considerable judgment and assumptions about uncertain matters, including the existence of insurance in force with respect to damages incurred, insurance claims and proceeds and the extent of property damage. Our current expectation is for related charge-offs to be realized in the latter part of 2006 and into 2007. Management will continue to assess the financial impact of the hurricanes as more information becomes available.

While the Hurricane reserves were provisioned through Corporate, a summary of the estimated incurred hurricane charges by segment is as follows:

(dollars in millions)   Reserve for
Credit Losses

 
Specialty Finance – Commercial   $      4.2  
Specialty Finance – Consumer  16.9  

   Total Specialty Finance Group   21.1  

Commercial Services  3.0  
Corporate Finance   6.5  
Equipment Finance  4.0  

Total Commercial Finance Group   13.5  

   Total   $    34.6  

Based on currently available information and our portfolio risk assessment, we believe that our total reserve for credit losses is adequate.


 
  Item 7: Management’s Discussion and Analysis 25


CREDIT METRICS

NET CHARGE-OFFS


Net Charge-offs (dollars in millions)

For the years ended December 31, 2005
2004
2003
Owned                    
Specialty Finance – Commercial   $  95.3  1.08 % $111.0  1.32 % $239.8  2.96 %
Specialty Finance – Consumer  53.2  0.52 %41.0  1.11 %27.2   1.53%

 
 
 
   Total Specialty Finance   148.5  0.78 % 152.0  1.26 % 267.0   2.71%

 
 
 
Commercial Services  22.9  0.34 %23.3  0.37 %27.6   0.54%
Corporate Finance  0.5  0.01 %66.1  1.00 %91.6  1.44 %
Capital Finance  53.6  2.34 %6.6  0.37 %10.0  0.53 %
Equipment Finance  25.6  0.51 %53.2  0.84 % 125.7   2.03%

 
 
 
   Total Commercial Finance   102.6  0.46 % 149.2  0.71 % 254.9   1.30%

 
 
 
   Total   $251.1  0.60% $301.2  0.91% $521.9  1.77%

 
 
 
              
Managed                
Specialty Finance – Commercial   $133.8  1.06 % $155.4  1.25 % $299.5  2.44 %
Specialty Finance – Consumer  80.8  0.72 %60.8  1.17 %40.6   1.02%

 
 
 
   Total Specialty Finance   214.6  0.90 % 216.2  1.22 % 340.1   2.09%

 
 
 
Commercial Services  22.9  0.34 %23.3  0.37 %27.6   0.54%
Corporate Finance  1.4  0.02 %66.1  1.00 %91.6  1.44 %
Capital Finance  53.6  2.34 %6.6  0.37 %10.0  0.53 %
Equipment Finance  42.1  0.56 %97.7  1.06 % 210.8   2.14%

 
 
 
   Total Commercial Finance   120.0  0.48 % 193.7  0.81 % 340.0   1.47%

 
 
 
   Total   $334.6  0.68% $409.9  0.99% $680.1  1.72%

 
 
 


Owned Charge-Offs (as a percentage of average finance receivables)


Managed Charge-Offs (as a percentage of average managed receivables)

The trends in the tables above are positive, as charge-offs on an owned and managed basis, both in amount and as a percentage of assets, declined in 2005 and 2004 across virtually every segment. Capital Finance was the only notable exception, as 2005 amounts included $48.5 million in airline receivable charge-offs on two bankrupt U.S. hub carriers. The improvement in charge-offs was largely in the owned portfolio, as the decline in securitized portfolio charge-offs during the two years was more modest, particularly as a percentage of securitized assets given our emphasis on balance sheet funding during 2005 and 2004. Total securitized portfolio charge-offs were 1.12%, 1.28% and 1.58% as a percentage of securitized assets in 2005, 2004 and 2003, reflecting the higher proportion of vendor assets sold (for which CIT has loss recourse) and improvement in the Equipment Finance portfolios. Consumer home lending securitization-related charge-offs increased approximately


 
26 CIT GROUP INC 2005  

$8 million or 139 basis points as a percentage of securitized assets from 2004, due to seasoning in these portfolios and the switch to on-balance sheet funding in this business.

Specialty Finance - Commercial charge-offs improved in 2005 due to improved credit in the vendor programs, the international unit and small business lending. Charge-offs in 2003 included a $101.0 million write-off of owned assets in Argentina, which reflected the substantial progress of collection and work out efforts in the Argentine portfolio. Excluding Argentina and liquidating portfolios, Specialty Finance - Commercial charge-offs were 1.56% as a percentage of average finance receivables for 2003.

Specialty Finance - Consumer charge-offs in 2005 were up in amount from the prior year, but were down as a percentage of average finance receivables, reflecting portfolio growth, improved credit performance and the addition of the student lending assets.

Corporate Finance trends between 2003 and 2005 were driven largely by charge-offs in the telecommunications portfolio that were taken against a specific reserve established in 2002. Approximately $40 million of these telecommunication charge-offs were taken in both 2003 and 2004, versus negligile amounts in 2005, as the current period benefited from recoveries in this portfolio.

Capital Finance 2005 charge-offs included the above-mentioned charge-offs on two bankrupt U.S. hub carriers.

Equipment Finance charge-off reductions in both 2005 and 2004 were across product lines in both the U.S. and Canada, reflecting improved underwriting standards, lower non-performing assets and strengthening collateral values.

PAST DUE LOANS AND NON-PERFORMING ASSETS

Like charge-off trends, the trend in our delinquency and non-performing metrics were favorable for the three-year period and ended 2005 at levels that are low in relation to our historical measures. Non-performing assets declined in both 2005 and 2004 from the preceding years, both in amount and as a percentage of assets, with broad-based improvement, particularly in the commercial businesses. Delinquencies increased in 2005, primarily due to the student lending acquisition, as delinquency in this business is high in relation to our other portfolios, yet is not indicative of ultimate loss due to the U.S. government guarantee. Excluding these assets, owned delinquency was $625.5 million (1.59%) at December 31, 2005.


Past Due Loans (60 days or more) (dollars in millions, % as a percentage of finance receivables)

As of December 31, 2005
2004
2003
Owned Past Due                    
Specialty Finance – Commercial  $296.8   3.49 % $283.3  3.22 % $   287.3  3.59 %
Specialty Finance – Consumer  318.2   2.35 % 116.4  2.27 % 88.7   3.33 %

 
 
 
   Total Specialty Finance  615.0   2.79 % 399.7  2.87 % 376.0   3.53 %

 
 
 
Commercial Services  39.3   0.59 % 88.0   1.42 % 35.5  0.56 %
Corporate Finance  43.4   0.46 % 43.3   0.65 % 109.5  1.73 %
Capital Finance   17.0  0.90 % 26.9   1.47 % 17.4  1.03 %
Equipment Finance  43.5   1.01 % 50.1   0.79 % 137.9  2.18 %

 
 
 
   Total Commercial Finance  143.2   0.64 % 208.3  0.99 % 300.3   1.45 %

 
 
 
   Total   $758.2  1.71 % $608.0   1.73 % $   676.3   2.16 %

 
 
 
              
Managed Past Due              
Specialty Finance – Commercial  $402.6   3.04 % $402.1  2.82 % $   418.4  3.19 %
Specialty Finance – Consumer  401.0   2.71 % 227.8  3.45 % 197.6   4.22 %

 
 
 
   Total Specialty Finance  803.6   2.87 % 629.9  3.02 % 616.0   3.46 %

 
 
 
Commercial Services  39.3   0.59 % 88.0   1.42 % 35.5  0.56 %
Corporate Finance  43.4   0.46 % 43.3   0.65 % 109.5  1.73 %
Capital Finance   17.0  0.83 % 26.9   1.47 % 17.4  1.03 %
Equipment Finance  62.1   0.90 % 90.3   0.96 % 243.6  2.49 %

 
 
 
   Total Commercial Finance  161.8   0.64 % 248.5  1.03 % 406.0   1.69 %

 
 
 
   Total   $965.4  1.81 % $878.4   1.95 % $1,022.0  2.44 %

 
 
 

 
  Item 7: Management’s Discussion and Analysis 27

Specialty Finance – Commercial delinquency increased in 2005, reflecting higher delinquency levels in the vendor finance and international portfolios.

Specialty Finance – Consumer delinquency increased in 2005, primarily due to the student lending acquisition. Excluding student lending receivables, delinquencies were $185.5 million (2.18%), versus $116.4 million (2.27%) last year-end, reflecting the home lending portfolio growth.

Commercial Services delinquency was down in 2005 due to the work-out of one significant account.

Corporate Finance, Capital Finance, and Equipment Finance delinquencies remained at the relatively low year-end 2004 levels.


Non-performing Assets (dollars in millions, % as a percentage of finance receivables)

As of December 31, 2005
2004
2003
Specialty Finance – Commercial  $155.2  1.83 %$165.9  1.88 %$179.7   2.25 %
Specialty Finance – Consumer  173.0   1.28 % 119.3  2.32 % 96.3   3.61 %

 
 
 
   Total Specialty Finance  328.2   1.49 % 285.2  2.05 % 276.0   2.59 %

 
 
 
Commercial Services  5.3  0.08 % 56.8   0.92 % 5.2  0.08 %
Corporate Finance  114.5   1.22 % 61.8   0.92 % 164.8  2.61 %
Capital Finance   22.3  1.18 % 4.6   0.25 % 12.2  0.73 %
Equipment Finance  50.9   1.18 % 131.2  2.06 % 218.3  3.46 %

 
 
 
   Total Commercial Finance  193.0   0.87 % 254.4  1.21 % 400.5   1.94 %

 
 
 
   Total   $521.2  1.18 % $539.6   1.54 % $676.5   2.16 %

 
 
 
Non-accrual loans  $460.7      $458.4      $566.5      
Repossessed assets  60.5      81.2      110.0      

 
 
 
Total non-performing assets  $521.2      $539.6      $676.5      

 
 
 

Non-performing assets decreased in both amount and percentage in 2005 and 2004. Improvements during 2005 in Commercial Services, Equipment Finance and the vendor finance business of Specialty Finance – Commercial were offset by increased non-accrual assets in Corporate Finance ($60 million lease on a power generation facility), Capital Finance (aerospace) and the home lending business of Specialty Finance – Consumer. The decline in percentage from 2004 also reflects the impact of acquired student lending receivables. The improvement in Corporate Finance during 2004 reflects the return to accrual status of a waste-to-energy project. Repossessed asset inventory declined reflecting lower inventory levels primarily in Equipment Finance.


SALARIES AND GENERAL OPERATING EXPENSES


Salaries and General Operating Expenses (dollars in millions)

For the years ended December 31,   2005
  2004
  2003
 
Salaries and employee benefits   $       695.8   $       612.2   $       529.6  
Other general operating expenses  418.0   399.9  358.6  



Salaries and general operating expenses   $    1,113.8   $    1,012.1   $       888.2  



Efficiency ratio(1)  41.1 % 41.8 % 41.1 %
Salaries and general operating expenses       
   (including the restructuring charge)         
   as a percentage of AMA  2.05 % 2.13 % 1.94 %
Average Managed Assets   $  55,553.7   $  47,519.3   $  45,809.3  



(1) Excluding various “non-recurring” gains and losses (including real estate investment gains, derivative mark to market adjustments, venture capital gains and losses and other items) in other revenue and the 2005 restructuring charge, the efficiency ratio was 42.2%, 41.5% and 39.5% for 2005, 2004 and 2003.

 
28 CIT GROUP INC 2005  

Salaries and general operating expenses in 2005 increased, largely due to incremental operating expenses associated with current year acquisitions (student lending in Specialty Finance – Consumer and healthcare in Corporate Finance), investments made in our sales and marketing functions and higher incentive-based compensation. The 2005 expense also includes $10.5 million in charges relating to the combination of an early termination of a portion of our New York City building lease and for a legal settlement.

The 2004 increase from 2003 was driven primarily by higher incentive-based compensation (including restricted stock awards), increased professional fees, including higher compliance-costs related to the Sarbanes-Oxley Act and increased benefit expenses.

The efficiency ratio, excluding non-recurring items, deteriorated for 2005 and 2004 as the rate of expense increase outpaced revenue growth in both years, particularly given our investment in sales and marketing initiatives. Both the Specialty Finance and Commercial Finance efficiency ratios deteriorated modestly from 2004. Personnel totaled 6,340 at December 31, 2005, versus 5,860 and 5,800 at the end of the prior two years.

Both the business unit and corporate management monitor expenses closely, and actual results are reviewed monthly in comparison to business plan and forecast. We have an approval and review procedure for major capital expenditures, such as computer equipment and software, including post-implementation evaluations.


INCOME TAXES


Provision for Income Taxes (dollars in millions)

For the Years ended December 31,   2005
  2004
  2003
 
Provision for income taxes   $  464.2   $  483.2   $  365.0  
Effective tax rate  32.8 % 39.0 % 39.0 %

The effective tax rate differs from the U.S. federal tax rate of 35% primarily due to state and local income taxes, the domestic and international geographic distribution of taxable income and corresponding foreign income taxes, as well as differences between book and tax treatment of certain items. The 2004 and 2003 effective tax rates exceed the U.S. federal rate primarily due to state and local income taxes.

The reduction in the 2005 effective tax rate reflects: (1) improved profitability in our international operations, resulting from better platform efficiency coupled with asset growth; (2) the relocation of certain aerospace assets to Ireland with offshore funding, as provisions of the American Jobs Creation Act of 2004 provide favorable tax treatment for certain aircraft leasing operations conducted offshore; (3) the release of a $17.0 million deferred tax liability associated with the Irish aerospace initiative; and (4) the release of a tax liability of $17.6 million relating to our international operations, as we finalized a tax filing position based on a favorable opinion received from the local tax authorities.

We have U.S. federal net operating losses (“NOL’s”) of approximately $850 million at December 31, 2005, which expire in various years beginning in 2011. In addition, we have various state NOL’s that will expire in various years beginning in 2006. Federal and state operating losses may be subject to annual use limitations under section 382 of the Internal Revenue Code of 1986, as amended, and other limitations under certain state laws. Management believes that CIT will have sufficient taxable income in future years and can avail itself of tax planning strategies in order to utilize these federal losses fully. Accordingly, we do not believe a valuation allowance is required with respect to these federal NOL’s. Based on management’s assessment as to realizability, the net deferred tax liability includes a valuation allowance of approximately $19.0 million and $7.4 million as of December 31, 2005 and December 31, 2004 relating to state NOL’s.

We have open tax years in the U.S., Canada and other jurisdictions that are currently under examination by the applicable taxing authorities, and certain tax years that may in the future be subject to examination. Management periodically evaluates the adequacy of our related tax reserves, taking into account our open tax return positions, tax assessments received, tax law changes and third-party indemnifications. We believe that our tax reserves are appropriate. The final determination of tax audits could affect our tax reserves.

See Item 9A. Controls and Procedures for a discussion of internal controls relating to income taxes.


 
  Item 7: Management’s Discussion and Analysis 29


FINANCING AND LEASING ASSETS


Financing and Leasing Assets by Segment (dollars in millions)

% change
As of December 31, 2005
2004
2003
05 vs 04
04 vs 03
Specialty Finance Group                      
  Specialty Finance – Commercial  
    Finance receivables   $  8,503.0   $  8,805.7   $  7,996.5   (3.4 )% 10.1 %
    Operating lease equipment, net  1,049.5   1,078.7  959.5   (2.7 )% 12.4 %
    Financing and leasing assets              
      held for sale   826.3   1,288.4   548.1   (35.9 )% 135.1%
 
 
 
       
      Owned assets  10,378.8   11,172.8  9,504.1   (7.1 )% 17.6 %
    Finance receivables securitized              
      and managed by CIT   3,921.6   4,165.5   4,557.9   (5.9 )% (8.6 )%
 
 
 
       
      Managed assets  14,300.4   15,338.3  14,062.0   (6.8 )% 9.1%
 
 
 
       
  Specialty Finance – Consumer                
    Finance receivables – home lending  8,199.7   4,896.8  2,513.1   67.5 % 94.9 %
    Finance receivables – student lending  5,051.0          
    Finance receivables – other  302.9   236.0  151.2   28.3 % 56.1 %
    Financing and leasing assets              
      held for sale   390.2   241.7   150.0   61.4 % 61.1%
 
 
 
       
      Owned assets  13,943.8   5,374.5  2,814.3   159.4 % 91.0 %
    Home lending finance receivables               
      securitized and managed by CIT   838.8   1,228.7   1,867.6   (31.7 )% (34.2 )%
 
 
 
       
      Managed assets  14,782.6   6,603.2  4,681.9   123.9 % 41.0 %
 
 
 
       
Commercial Finance Group               
  Commercial Services            
    Finance receivables   6,690.0   6,204.1   6,325.8   7.8 % (1.9 )%
 
 
 
       
  Corporate Finance  
    Finance receivables   9,348.3   6,702.8   6,314.1   39.5 % 6.2 %
    Operating lease equipment, net  73.3   35.1     108.8 %  
    Financing and leasing assets              
      held for sale  127.9          
 
 
 
       
      Owned assets  9,549.5   6,737.9  6,314.1   41.7 % 6.7%
    Finance receivables securitized          
      and managed by CIT 41.2         
 
 
 
       
      Managed assets  9,590.7   6,737.9  6,314.1   42.3 % 6.7%
 
 
 
       
  Capital Finance               
    Finance receivables  1,895.4   1,829.7  1,681.6   3.6 % 8.8 %
    Operating lease equipment, net   8,408.5   6,736.5   6,236.4   24.8 % 8.0 %
    Financing and leasing assets               
      held for sale  150.3           
 
 
 
       
      Owned assets   10,454.2   8,566.2   7,918.0   22.0 % 8.2%
 
 
 
       
  Equipment Finance  
    Finance receivables  4,304.2   6,373.1  6,317.9   (32.5 )% 0.9 %
    Operating lease equipment, net  104.4   440.6  419.6   (76.3 )% 5.0 %
    Financing and leasing assets              
      held for sale  125.6   110.7  220.2   13.5 % (49.7 )%
 
 
 
       
      Owned assets  4,534.2   6,924.4  6,957.7   (34.5 )% (0.5 )%
    Finance receivables securitized              
      and managed by CIT  2,484.1   2,915.5  3,226.2   (14.8 )% (9.6 )%
 
 
 
       
      Managed assets  7,018.3   9,839.9  10,183.9   (28.7 )% (3.4 )%
 
 
 
       
  Other – Equity Investments  30.2   181.0  249.9   (83.3 )% (27.6)%
 
 
 
       
Managed assets  $62,866.4   $53,470.6  $49,735.6   17.6 % 7.5 %
 
 
 
       

 
30 CIT GROUP INC 2005  


Total Managed Assets (dollars in billions)
As of December 31,

In 2005, we launched several initiatives to grow our business through expanding our sales force, broadening our market reach via industry vertical alignment, improving certain higher growth industries such as healthcare and student lending, and improving our syndication and capital markets capabilities. We continued to allocate capital to businesses with higher risk- adjusted returns by liquidating non-strategic portfolios. Aided by an improving economy, this approach to growth and risk management led to continued declines in delinquency, non-performing assets, and charge-off levels from 2004.

Record business volumes, reflecting the emphasis on sales initiatives and our more customer-centric perspective, drove financing and leasing asset growth for 2005. Leading the 2005 growth was Specialty Finance – Consumer, Home Lending and Student Loan Xpress. (See “Concentration” section for specific detail on these businesses). Home lending completed a second year of strong growth as we strategically supplement our originations with bulk purchases. At the outset of 2005, we announced our venture into the student lending business, which grew by about $1 billion during the year. Corporate Finance experienced significant growth, notably in Telecommunications & Media, Capital Markets and especially in Healthcare, through an acquisition and expansion beyond our traditional vendor financings. The Capital Finance aerospace portfolio continued to timely place all deliveries of new aircraft (see “Concentration” section for specific detail on this business). Strength in the rail industry, provided opportunities to grow our rail assets to $3.5 billion, an increase of $0.9 billion for the year. The decline in Specialty Finance – Commercial is due primarily to sales, including the sale of a micro-ticket leasing business as well as manufactured housing assets. Equipment Finance decreased due to asset sales, as well as portfolio transfers, for which prior period amounts have not been restated. During 2005, we sold $0.9 billion of the business aircraft portfolio, and transferred the remaining to Capital Finance (approximately $0.6 billion). (See “Disposition” section below for significant sale activity). The decline in receivables securitized reflects our funding home lending growth on-balance sheet and a lower level of commercial equipment securitizations.

BUSINESS VOLUMES


Total Business Volumes (dollars in millions)
For the years ended December 31,


Business Volumes (excluding factoring, dollars in millions)

For the years ended December 31,   2005
  2004
  2003
 
Specialty Finance – Commercial  $10,642.4   $  9,962.2   $  9,047.3  
Specialty Finance – Consumer  9,606,7   4,881.8  3,382.3  
Corporate Finance  5,166.5   2,796.5  2,656.9  
Capital Finance  2,264.1   1,333.7  1,321.5  
Equipment Finance  3,570.8   4,582.4  3,824.1  



  Total new business volume  $31,250.5   $23,556.6  $20,232.1  




 
  Item 7: Management’s Discussion and Analysis 31

We had record business volume in all but one of our segments in 2005. Specialty Finance – Consumer volumes doubled as the relatively low interest rate environment resulted in strong production from our home lending broker origination channel, while softness with respect to liquidity and pricing in the home lending securitization markets afforded us the opportunity to purchase newly originated portfolios in bulk from other home lending originators. Specialty Finance – Commercial continued to generate strong new business strong volumes as increased volumes during 2004 were followed by higher 2005 levels most notably in the vendor and international units. Capital Finance volumes increased over the two years on aircraft deliveries and rail growth. The decrease in Equipment Finance volumes reflects related business transfers.

ACQUISITIONS


Acquisition Summary (dollars in millions)

Asset Type
   Assets
  Closing
  Segment
Healthcare   $   500    3rd quarter 2005  Corporate Finance
Factoring  860   1st quarter 2005  Commercial Services
Student loans  4,300   1st quarter 2005  Specialty Finance – Consumer
Vendor finance  700   3rd quarter 2004  Specialty Finance – Commercial
Technology   520   2nd quarter 2004  Specialty Finance – Commercial

In January 2005, we announced our purchase of Education Lending Group, a student lending company, which provided CIT with a new product line with good growth opportunities, and we have grown this portfolio by about $1 billion during the year by expanding the business sales reach. The factoring acquisition was an add-on to our established businesses. We acquired a healthcare business to quickly grow this strategic product line, which offers high growth opportunities coupled with strong returns.

DISPOSITIONS


Disposition Summary (dollars in millions)

Asset Type
   Assets
  Closing
  Segment
Micro-ticket leasing  $300   4th quarter 2005  Specialty Finance – Commercial
Manufactured housing  400   1st/4th quarters 2005  Specialty Finance – Commercial
Business aircraft  920   2nd quarter 2005  Equipment Finance
Venture capital  150   1st /2nd quarters 2005  Corporate and Other
Non-strategic portfolios (including       
  recreational marine and vehicle,       
  franchise finance and owner-
  operator trucking)
  300   Various 2004  Specialty Finance – Commercial / Equipment Finance
Venture capital   70   2nd quarter 2004  Corporate and Other

Periodically during 2004 and 2005, we continued our disposition of assets that we determined did not meet our risk-adjusted return criteria or did not fit in with our strategic direction, including growth and scale characteristics. This guided the scale and liquidation initiatives above, thereby freeing up the corresponding capital for redeployment. We also targeted in the third quarter of 2005 approximately $200 million of Capital Finance commercial aircraft assets for sale and wrote them down to estimated fair value. We anticipate these assets will be sold in the first half of 2006.


 
32 CIT GROUP INC 2005  

CONCENTRATIONS

Ten Largest Accounts

Our ten largest financing and leasing asset accounts in the aggregate represented 4.5% of our total financing and leasing assets at December 31, 2005 (the largest account being less than 1.0%), 5.3% at December 31, 2004, and 5.7% at December 31, 2003. The decline is due to our consumer portfolio growth during the year.

OPERATING LEASES


Operating Leases (dollars in millions)

As of December 31,   2005
  2004
  2003
 
Capital Finance – Aerospace  $5,327.1   $4,461.0  $4,141.1  
Capital Finance – Rail and Other  3,081.4   2,275.5  2,095.3  
Specialty Finance – Commercial  1,049.5   1,078.7  959.5  
Corporate Finance  73.3   35.1    
Equipment Finance  104.4   440.6  419.6  
  
 
 
 
  Total  $9,635.7   $8,290.9  $7,615.5  



We strive to maximize the profitability of the lease equipment portfolio by balancing equipment utilization levels with market rental rates and lease terms.

The year over year increases in the Capital Finance aerospace portfolio reflect deliveries of new commercial aircraft. The increases in Capital Finance rail and other was due to strong rail volumes, including bulk portfolio purchases, and utilization, which allowed us to expand our owned railcar portfolio from approximately 55,000 at the end of 2003 to in excess of 80,000 at December 31, 2005.

The decline in Specialty Finance – Commercial operating lease portfolio reflects a general market trend toward financing equipment through finance leases and loans, rather than operating leases. The increase in 2004 was due to a technology financing business acquisition.

The decline in Equipment Finance operating leases is primarily due to the sale of the business aircraft portfolio.

LEVERAGED LEASES


Leveraged Lease Portfolio (dollars in millions)

As of December 31,   2005
  2004
  2003
 
Commercial aerospace – non-tax optimized   $   232.1   $   336.6   $   232.5  
Commercial aerospace – tax optimized  135.2   221.0  217.9  
Project finance  360.1   334.9  325.0  
Rail  260.8   233.9  225.4  
Other  32.5   115.4  122.1  



Total leveraged lease transactions  $1,020.7   $1,241.8  $1,122.9  



As a percentage of finance receivables  2.3%3.5%3.6%



The major components of net investments in leveraged leases include: 1) commercial aerospace transactions, including tax-optimized leveraged leases, which generally have increased risk of loss in default for lessors in relation to conventional lease structures due to additional leverage and the third-party lender priority recourse to the equipment in these transactions; 2) project finance transactions, primarily in the power and utility sectors; and 3) rail transactions. The decline in the aerospace balances during 2005 reflects the reclassification to operating leases of aircraft leased to airlines that filed for bankruptcy.


 
  Item 7: Management’s Discussion and Analysis 33

JOINT VENTURE RELATIONSHIPS

Our strategic relationships with industry-leading equipment vendors are a significant origination channel for our financing and leasing activities. These vendor alliances include traditional vendor finance programs, joint ventures and profit sharing structures. Our vendor programs with Dell, Snap-on and Avaya are among our largest alliances. We have multiple program agreements with Dell, the largest of which is Dell Financial Services (“DFS”), covering originations in the U.S. The agreements provide Dell with the option to purchase CIT’s 30% interest in DFS in February 2008 and extends CIT’s right to purchase a percentage of DFS finance receivables through January 2010. The joint venture agreement with Snap-on was recently extended until January 2009, pursuant to an automatic renewal provision in the agreement. The Avaya agreement, which relates to profit-sharing on a CIT direct origination program, extends through September 2006.

Our financing and leasing assets include amounts related to the Dell, Snap-on, and Avaya joint venture programs. These amounts include receivables originated directly by CIT as well as receivables purchased from joint venture entities.

Returns relating to the joint venture relationships (i.e., net income as a percentage of average managed assets) for 2005 were somewhat in excess of our consolidated returns. A significant reduction in origination volumes from any of these alliances could have a material impact on our asset and net income levels. For additional information regarding certain of our joint venture activities, see Note 19 – Certain Relationships and Related Transactions.


Joint Venture Relationships (dollars in millions)

As of December 31,   2005
  2004
  2003
 
Owned Financing and Leasing Assets         
Dell U.S.   $1,986.3  $1,980.7   $1,408.1 
Dell – International   1,528.3   1,408.7   1,170.1  
Snap-on  1,035.7   1,114.7  1,093.4  
Avaya Inc.   563.0   620.7   828.6  
Securitized Financing and Leasing Assets  
Dell U.S.   $2,526.1   $2,484.1   $2,471.6  
Dell – International  34.2   5.1   17.0  
Snap-on  55.4   64.8  68.2  
Avaya Inc.   460.5  599.6   781.0 

 
34 CIT GROUP INC 2005  

GEOGRAPHIC COMPOSITION


Geographic Concentrations by Obligor (dollars in millions)

As of December 31,   2005
  2004
  2003
 
State         
  California   9.8 % 10.3 % 10.2 %
  Texas   7.5 % 7.8 % 7.7 %
  New York   6.7 % 6.8 % 7.4 %
  All other states   54.9 % 52.8 % 54.0 %



Total U.S.   78.9 % 77.7 % 79.3 %



Country          
  Canada  6.1 % 5.5 % 5.1 %
  England  3.5 % 3.9 % 2.8 %
  Australia   1.1 % 1.3 % 1.3 %
  France  1.0 % 1.4 % 1.1 %
  China  1.0 % 1.2 % 0.9 %
  Germany  0.8 % 1.2 % 1.0 %
  Mexico  0.9 % 1.1 % 1.0 %
  All other countries  6.7%6.7%7.5%



Total Outside U.S.  21.1 % 22.3 % 20.7 %



The table summarizes significant state concentrations greater than 5.0% and foreign concentrations in excess of 1.0% of our owned financing and leasing portfolio assets. International assets increased in amount from 2004, but were lower as a percentage of owned financing and leasing portfolio assets due to the size of the U.S. student lending acquisition. For each period presented, our managed asset geographic composition did not differ significantly from our owned asset geographic composition.


 
  Item 7: Management’s Discussion and Analysis 35

INDUSTRY COMPOSITION

Our industry composition is detailed in Note 5 – Concentrations. We believe the following discussions, covering certain industries, are of interest to investors.

Aerospace


Aerospace (dollars in millions)

As of December 31,  2005
  2004
  2003
 
   Net
Investment

  Number
  Net
Investment

  Number
  Net
Investment

  Number
 
By Region:                                
  Europe     $2,348.4    75    $2,160.0    72    $1,991.0    65  
  North America    1,243.6    62    1,057.7   66    1,029.7    72  
  Asia Pacific    1,569.0    52    1,242.4    46   1,013.6     40  
  Latin America    533.7    20    611.3   25    612.7    28  
  Africa / Middle East    257.2    6    54.2    3   69.1    4  
   
  
  
  
  
  
 
    Total    $5,951.9    215    $5,125.6    212    $4,716.1    209  
   
  
  
  
  
  
 
By Manufacturer:  
  Boeing    $2,644.6    124    $2,558.8    133    $2,581.7    140  
  Airbus     3,269.0    84    2,536.9    70    2,114.6    57  
  Other    38.3    7    29.9    9    19.8    12  
   
  
  
  
  
  
 
    Total   $5,951.9   215     $5,125.6    212    $4,716.1    209 
   
  
  
  
  
  
 
By Body Type:(1)                        
  Narrow body    $4,331.0    165    $3,894.9    168   $3,415.7     159 
  Intermediate    1,347.2    27    842.7    18    877.0    18  
  Wide Body    235.4    16    358.1    17   403.6    20  
  Other    38.3    7    29.9    9    19.8    12  
   
  
  
  
  
  
 
    Total   $5,951.9   215     $5,125.6    212    $4,716.1    209 
   
  
  
  
  
  
 
By Product:                      
  Operating lease    $5,327.1    182    $4,324.6    167   $4,011.7     159 
  Leverage lease (other)(2)    232.1    10    336.6     12    232.5    12  
  Leverage lease  
    (tax optimized)(2)    135.2    7    221.0    9     217.9    9  
  Capital lease    67.7    3    137.4    6   135.6    7  
  Loan    189.8    13    106.0    18    118.4    22  
   
  
  
  
  
  
 
    Total   $5,951.9   215     $5,125.6    212    $4,716.1    209 
   
  
  
  
  
  
 
Other Data:  
Number of accounts    93          92        84      
Largest customer net investment    $   277.3         $   286.4         $   268.6      
Weighted average age of fleet                         
  (years) (3)    6         6        6      
Off-lease aircraft    10         2        5      
(1) Narrow body are single-aisle design and consist primarily of Boeing 737 and 757 series and Airbus A320 series aircraft. Intermediate body are smaller twin-aisle design and consist primarily of Boeing 767 series and Airbus A330 series aircraft. Wide body are large twin-aisle design and consist primarily of Boeing 747 and 777 series and McDonnell Douglas DC10 series aircraft.
(2) In general, the use of leverage increases the risk of a loss in the event of a default, with the greatest risk incurred in tax-optimization leveraged leases.
(3) Based on dollar value weighted assets.

 
36 CIT GROUP INC 2005  

Our commercial and regional aerospace portfolios are in the Capital Finance segment. The commercial aircraft all comply with Stage III noise regulations. The increase in the portfolio was due to new aircraft deliveries from both Airbus and Boeing.

Our top five commercial aerospace exposures totaled $1,073.5 million at December 31, 2005. All top five are to carriers outside of the U.S. The largest exposure to a U.S. carrier at December 31, 2005 was $156.6 million.

The regional aircraft portfolio at December 31, 2005 consisted of 104 planes and a net investment of $275.3 million. The carriers are primarily located in North America and Europe. Loans make up approximately 63% of the portfolio, operating leases account for about 32% of the portfolio, and the remainder are capital leases. At December 31, 2004 the portfolio consisted of 121 planes and a net investment of $302.6 million.

The following is a list of our exposure to aerospace carriers that have filed for bankruptcy protection and the current status of our aircraft at December 31, 2005:

UAL Corp. – United Airlines leases two CIT-owned narrow body aircraft (Boeing 757 aircraft) with a net investment of $44.3 million. We hold Senior A tranche Enhanced Equipment Trust Certificates (“EETCs”) issued by United Airlines, which are debt instruments collateralized by aircraft operated by the airline, with a fair value of $12.1 million. Further, we have an outstanding balance of $9.5 million (with a commitment of $31.2 million) relating to a debtor-in-possession facility in connection with United Airlines’ filing under Chapter 11. On February 1, 2006, UAL Corp formally exited bankruptcy following confirmation of the company’s Plan of Reorganization by the United States Bankruptcy Court.
Delta Air Lines – On September 14, 2005, Delta Air Lines announced that it had filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. During the fourth quarter of 2005, we charged off $13.2 million. Currently we have three loans totaling $33.9 million and one operating lease for $25.0 million secured by four Boeing aircraft. In addition, we have an outstanding balance of $10.0 million (with a commitment of $15.0 million) relating to a debtor-in-possession facility.
Northwest Airlines – On September 14, 2005, Northwest Airlines announced that it had filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. During the fourth quarter of 2005, we charged off $35.3 million. As of December 31, 2005, our Northwest Airlines exposures include $130.8 million in finance receivables on two Airbus aircraft and one operating lease for $10.0 million for a Boeing aircraft.

Our aerospace assets include both operating leases and capital leases. Management considers current lease rentals as well as relevant and available market information (including third-party sales for similar equipment, published appraisal data and other marketplace information) both in determining undiscounted future cash flows when testing for the existence of impairment and in determining estimated fair value in measuring impairment. We adjust the depreciation schedules of commercial aerospace equipment on operating leases or residual values underlying capital leases when projected fair value at the end of the lease term is less than the projected book value at the end of the lease term. We review aerospace assets for impairment annually, or more often should events or circumstances warrant. Aerospace equipment is defined as impaired when the expected undiscounted cash flow over its expected remaining life is less than its book value. We factor historical information, current economic trends and independent appraisal data into the assumptions and analyses we use when determining the expected undiscounted cash flow. Included among these assumptions are the following:

Lease terms
Remaining life of the asset
Lease rates
Remarketing prospects
Maintenance costs

Aerospace depreciation expense for the years ended December 31, 2005, 2004 and 2003 totaled $248.4 million, $215.8 million (including a $14.8 million impairment charge) and $165.4 million.

At December 31, 2005, 10 commercial aircraft were off-lease due to bankruptcy repossessions and late-year returns. Subsequent to year end, we signed one to a lease and have letters of intent for all the other aircraft. Generally, we write leases for terms between three and five years. Within the regional aircraft portfolio at December 31, 2005, there were 5 aircraft off-lease.

See Item 8. Financial Statements and Supplementary Data, Note 16 – Commitments and Contingencies for additional information regarding commitments to purchase additional aircraft and Note 5 – Concentrations for further discussion on geographic and industry concentrations.


 
  Item 7: Management’s Discussion and Analysis 37

Home Lending

Selected statistics for our managed home lending portfolio are as follows:

(dollars in millions)
As of or for the years ended
December 31,
  2005
  2004
 
Portfolio assets  $  8,335.7   $5,069.8 
Managed assets  $  9,174.5   $6,298.5 
Portfolio as a % of owned total assets  15%9%
Managed as a % of total managed assets  15%12%
% of first mortgages  92%92%
Average loan size   $  118.3   $  101.0  
Top state concentrations  California  California 
   Florida  Florida 
   Texas, Illinois  Texas, Ohio 
    New York   Pennsylvania 
Top state concentrations as a %  
  of managed portfolio  42%45%
Fixed-rate mortgage %  43%56%
Average loan-to-value  81%80%
Average FICO score  633  631  
Delinquencies (sixty days or more)  2.89 % 3.59 %
Net charge-offs  0.98 % 1.11 %

The Specialty Finance-consumer home lending business is largely originated through a broker network. As part of originating business through this core channel, we employ an active portfolio management approach, whereby we target desired portfolio mix / risk attributes in terms of product type, lien position, and geographic concentrations, among other factors, resulting in sales of a portion of our originations from time to time. We supplement business with opportunistic purchases in the secondary market when market conditions are favorable from a credit and price perspective.

Student Lending (Student Loan Xpress)

The Consumer Finance student lending portfolio, which is marketed as Student Loan Xpress, totaled $5.3 billion at December 31, 2005, representing 9.5% of owned and 8.4% of managed assets. Loan origination volumes were $2.4 billion for the period of CIT ownership (beginning in February 2005). Student Loan Xpress has arrangements with certain financial institutions to sell selected loans and works jointly with these financial institutions to promote these relationships.

Finance receivables by product type for our student lending portfolio are as follows:

(dollars in millions)   December 31,
2005
  March 31,
2005
 
 
 
 
Consolidation loans  $4,668.7   $3,996.9  
Other U.S. Government  
  guaranteed loans  568.7   424.6  
Private (nonguaranteed)     
  loans and other  30.4   13.4  
 
 
 
Total   $5,267.8  $4,434.9  
 
 
 

Delinquencies (sixty days or more) were $132.7 million, 2.52% of finance receivables at December 31, 2005 and $112.6 million, 2.60% at March 31, 2005.

Top 5 state concentrations (California, New York, Pennsylvania, Texas, and Ohio) represented an aggregate 37.5% of the portfolio.


 
38 CIT GROUP INC 2005  


RISK MANAGEMENT

Our business activities involve various elements of risk. We consider the principal types of risk to be credit risk (including credit, collateral and equipment risk) and market risk (including interest rate, foreign currency and liquidity risk). Managing risks is essential to conducting our businesses and to our profitability. Accordingly, our risk management systems and procedures are designed to identify and analyze key business risks, to set appropriate policies and limits, and to continually monitor these risks and limits by means of reliable administrative and information systems, along with other policies and programs. The position of Vice Chairman and Chief Lending Officer within the Office of the Chairman was established to oversee risk management across the businesses.

We review and monitor credit exposures, both owned and managed, on an ongoing basis to identify, as early as possible, customers that may be experiencing declining creditworthiness or financial difficulty, and periodically evaluate the performance of our finance receivables across the entire organization. We monitor concentrations by borrower, industry, geographic region and equipment type, and we set or modify exposure limits as conditions warrant, to minimize credit concentrations and the risk of substantial credit loss. We have maintained a standard practice of reviewing our aerospace portfolio regularly and, in accordance with SFAS No. 13 and SFAS No. 144, we test for asset impairment based upon projected cash flows and relevant market data with any impairment in value charged to earnings. Given the developments in the aerospace sector post 2001, performance, profitability and residual values relating to aerospace assets have been reviewed more frequently with the Executive Credit Committee. In conjunction with our capital allocation initiatives, we are in the process of enhancing our credit risk management practices, including portfolio modeling, probability of default analysis, further development of risk-based pricing tools, and reserve for credit loss analysis.

Our Asset Quality Review Committee is comprised of members of senior management, including the Vice Chairman and Chief Lending Officer, the Vice Chairman and Chief Financial Officer, the Chief Credit Officer, the Controller and the Director of Credit Audit. Periodically, this committee meets with senior executives of our business units and corporate credit risk management group to review portfolio performance, including the status of individual financing and leasing assets, owned and managed, to obligors with higher risk profiles. In addition, this committee periodically meets with the Chief Executive Officer of CIT to review overall credit risk, including geographic, industry and customer concentrations, and the reserve for credit losses.

CREDIT RISK MANAGEMENT

We have developed systems specifically designed to manage credit risk in each of our business segments. We evaluate financing and leasing assets for credit and collateral risk during the credit granting process and periodically after the advancement of funds. The Corporate Credit Risk Management group, which reports to the Vice Chairman and Chief Lending Officer, oversees and manages credit risk throughout CIT. This group includes senior credit executives in each of the business units. Our Executive Credit Committee includes the Chief Executive Officer, the Chief Lending Officer and members of the Corporate Credit Risk Management group. The committee approves transactions which are outside of established target market definitions and risk acceptance criteria, corporate exceptions as delineated within the individual business unit credit authority and transactions that exceed the strategic business units’ credit authority. The Corporate Credit Risk Management group also includes an independent credit audit function.

Each of our strategic business units has developed and implemented a formal credit management process in accordance with formal uniform guidelines established by the credit risk management group. These guidelines set forth risk acceptance criteria for:

acceptable maximum credit lines;
selected target markets and products;
creditworthiness of borrowers, including credit history, financial condition, adequacy of cash flow, financial performance and quality of management; and
the type and value of underlying collateral and guarantees (including recourse from dealers and manufacturers).

Compliance with established corporate policies and procedures, along with the credit management processes at each strategic business unit are reviewed by the credit audit group. The credit audit group examines adherence with established credit policies and procedures and tests for inappropriate credit practices, including whether potential problem accounts are being detected and reported on a timely basis.

In a limited number of instances, with the approval of Corporate Credit Risk Management, CIT has entered into credit default swaps. These derivative contracts are designed to economically hedge certain credit exposures to customers.

Commercial Credit Risk Management – The commercial credit management process (other than small ticket leasing transactions) begins with the initial evaluation of credit risk and underlying collateral at the time of origination and continues over the life of the finance receivable or operating lease, including collecting past due balances and liquidating underlying collateral.

Credit personnel review a potential borrower’s financial condition, results of operations, management, industry, customer base, operations, collateral and other data, such as third party credit reports, to thoroughly evaluate the customer’s borrowing and repayment ability. Borrowers are graded according to credit quality based upon our uniform credit grading system, which considers both the borrower’s financial condition and the underlying collateral. Credit facilities are subject to approval within our overall credit approval and underwriting guidelines and are issued commensurate with the credit evaluation performed on each borrower.


 
  Item 7: Management’s Discussion and Analysis 39

Consumer and Small Ticket Leasing/Lending – For consumer transactions and certain small-ticket leasing/lending transactions, we employ proprietary automated credit scoring models by loan type that include customer demographics and credit bureau characteristics. The profiles emphasize, among other things, occupancy status, length of residence, employment, debt to income ratio (ratio of total installment debt and housing expenses to gross monthly income), bank account references, credit bureau information, combined loan to value ratio, length of time in business, industry category and geographic location. The models are used to assess a potential borrower’s credit standing and repayment ability considering the value or adequacy of property offered as collateral. Our credit criteria include reliance on credit scores, including those based upon both our proprietary internal credit scoring model and external credit bureau scoring, combined with judgment. The credit scoring models are regularly reviewed for effectiveness utilizing statistical tools.

We regularly evaluate the consumer loan portfolio and the small ticket leasing portfolio using past due, vintage curve and other statistical tools to analyze trends and credit performance by loan type, including analysis of specific credit characteristics and other selected subsets of the portfolios. Adjustments to credit scorecards and lending programs are made when deemed appropriate. Individual underwriters are assigned credit authority based upon their experience, performance and understanding of the underwriting policies and procedures of our consumer and small-ticket leasing operations. A credit approval hierarchy also exists to ensure that an underwriter with the appropriate level of authority reviews all applications.

EQUIPMENT/RESIDUAL RISK MANAGEMENT

We have developed systems, processes and expertise to manage the equipment and residual risk in our commercial segments. Our process consists of the following: 1) setting residual value at transaction inception; 2) systematic residual reviews; and 3) monitoring of residual realizations. Reviews for impairment are performed at least annually. Residual realizations, by business unit and product, are reviewed as part of our ongoing financial and asset quality review, both within the business units and by senior management.

MARKET RISK MANAGEMENT

Market risk is the risk of loss arising from changes in values of financial instruments, and includes interest rate risk, foreign exchange risk, derivative counterparty credit risk and liquidity risk. We engage in transactions in the normal course of business that expose us to market risks. We conduct what we believe are appropriate management practices and maintain policies designed to effectively mitigate such risks. The objectives of our market risk management efforts are to preserve the economic and accounting returns of our assets by matching the repricing and maturity characteristics of our assets with that of our liabilities. Strategies for managing market risks associated with changes in interest rates and foreign exchange rates are an integral part of the process, because those strategies affect our future expected cash flows as well as our cost of capital.

Our Capital Committee sets policies, oversees and guides the interest rate and currency risk management process, including the establishment and monitoring of risk metrics, and ensures the implementation of those policies. Other risks monitored by the Capital Committee include derivative counterparty credit risk and liquidity risk. The Capital Committee meets periodically and includes the Chief Executive Officer, Vice Chairman and Chief Financial Officer, Vice Chairman and Chief Lending Officer, Vice Chairman – Specialty Finance, Vice Chairman – Commercial Finance, Treasurer, and Controller, with business unit executives serving on a rotating basis.

INTEREST RATE AND FOREIGN EXCHANGE RISK MANAGEMENT

Interest Rate Risk Management – We monitor our interest rate sensitivity on a regular basis by analyzing the impact of interest rate changes upon the financial performance of the business. We also consider factors such as the strength of the economy, customer prepayment behavior and re-pricing characteristics of our assets and liabilities.

We evaluate and monitor risk through two primary metrics:

Margin at Risk (MAR), which measures the impact of changing interest rates upon interest income over the subsequent twelve months.
Value at Risk (VAR), which measures the net economic value of assets by assessing the market value of assets, liabilities and derivatives.

We regularly monitor and simulate our degree of interest rate sensitivity by measuring the characteristics of interest-sensitive assets, liabilities, and derivatives. The Capital Committee reviews the results of this modeling periodically.

The first interest rate sensitivity modeling technique (MAR) that we employ includes the creation of prospective twelve-month baseline and rate shocked net interest income simulations. At the date that we model interest rate sensitivity, we derive the baseline net interest income considering the current level of interest-sensitive assets, the current level of interest-sensitive liabilities, and the current level of derivatives. Our baseline simulation assumes that, over the next successive twelve months, market interest rates (as of the date of our simulation) are held constant and that no new loans or leases are extended. Once we calculate the baseline net interest income, we instantaneously raise market interest rates, which we previously held constant, 100 basis points across the entire yield curve, and a rate shocked simulation is run in which all interest rate sensitive assets, liabilities and derivatives are immediately reset. We then measure interest rate sensitivity as the difference between the calculated baseline and the rate shocked net interest income.

An immediate hypothetical 100 basis point increase in the yield curve on January 1, 2006 would reduce our net income by an estimated $14 million after-tax over the next twelve months. A corresponding decrease in the yield curve would


 
40 CIT GROUP INC 2005  

cause an increase in our net income of a like amount. A 100 basis point increase in the yield curve on January 1, 2005 would have reduced our net income by an estimated $20 million after tax, while a corresponding decrease in the yield curve would have increased our net income by a like amount.

The second interest rate modeling technique (VAR) we employ is focused on the net economic value of the firm by modeling the current market value of assets, liabilities and derivatives, to determine our market value baseline. Once the baseline market value is calculated, we raise market interest rates 100 basis points across the entire yield curve, and new market values are estimated. By modeling the economic value of the portfolio we are able to understand how the economic value of the balance sheet would change under specific interest rate scenarios.

An immediate hypothetical 100 basis point increase in the yield curve on January 1, 2006 would increase our economic value by $51 million. A 100 basis point increase in the yield curve on January 1, 2005 would have increased our economic value by $37 million.

Although we believe that these measurements provide an estimate of our interest rate sensitivity, they do not account for potential changes in the credit quality, size, composition, and prepayment characteristics of our balance sheet, nor do they account for other business developments that could affect our net income or for management actions that could be taken. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, such simulations do not represent our current view of future market interest rate movements.

A comparative analysis of the weighted average principal outstanding and interest rates on our debt before and after the effect of interest rate swaps is shown on the following table.

(dollars in millions) Before Swaps After Swaps
 

For the year ended December 31, 2005                  
Commercial paper and variable-rate senior notes   $17,238.8  3.55 % $20,640.3  3.91 %
Fixed-rate senior subordinated notes   25,947.5   5.10 % 22,546.0   4.90 %
  
   
   
Composite   $43,186.3  4.48% $43,186.3  4.43%
  
   
   
For the year ended December 31, 2004         
Commercial paper and variable-rate senior notes   $15,138.8  1.88 % $18,337.9  2.59 %
Fixed-rate senior subordinated notes   19,755.6   5.64 % 16,556.5   5.08 %
  
   
   
Composite   $34,894.4  4.01% $34,894.4  3.77%
  
   
   
For the year ended December 31, 2003         
Commercial paper, variable-rate senior notes
   and bank credit facilities
  $12,352.1  1.83 % $15,942.0  2.63 %
Fixed-rate senior subordinated notes   20,002.0   6.06 % 16,412.1   5.82 %
  
   
   
Composite   $32,354.1  4.45% $32,354.1  4.25%
  
    
   

The weighted average interest rates before swaps do not necessarily reflect the interest expense that we would have incurred over the life of the borrowings had we managed the interest rate risk without the use of such swaps.

We offer a variety of financing products to our customers, including fixed and floating-rate loans of various maturities and currency denominations, and a variety of leases, including operating leases. Changes in market interest rates, relationships between short-term and long-term market interest rates, or relationships between different interest rate indices (i.e., basis risk) can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities, and can result in an increase in interest expense relative to finance income. We measure our asset/liability position in economic terms through duration measures and sensitivity analysis, and we measure the effect on earnings using maturity gap analysis. Our asset portfolio is generally comprised of loans and leases of short to intermediate term. As such, the duration of our asset portfolio is generally less than three years. We target to closely match the duration of our liability portfolio with that of our asset portfolio. As of December 31, 2005, our liability portfolio duration was slightly longer than our asset portfolio duration.

A matched asset/liability position is generally achieved through a combination of financial instruments, including commercial paper, medium-term notes, long-term debt, interest rate and currency swaps, foreign exchange contracts, and through securitization. We do not speculate on interest rates or foreign exchange rates, but rather seek to mitigate the possible impact of such rate fluctuations encountered in the normal course of business. This process is ongoing due to prepayments, refinancings and actual payments varying from contractual terms, as well as other portfolio dynamics.

We periodically enter into structured financings (involving the issuance of both debt and an interest rate swap with corresponding notional principal amount and maturity) to manage liquidity and reduce interest rate risk at a lower overall funding cost than could be achieved by solely issuing debt.

As part of managing exposure to interest rate, foreign currency, and, in limited instances, credit risk, CIT, as an end-user, enters into various derivative transactions, all of which are transacted in over-the-counter markets with other financial institutions acting as principal counterparties. Derivatives are utilized to eliminate or mitigate economic risk only, and our


 
  Item 7: Management’s Discussion and Analysis 41

policy prohibits entering into derivative financial instruments for trading or speculative purposes. To ensure both appropriate use as a hedge and to achieve hedge accounting treatment, whenever possible, substantially all derivatives entered into are designated according to a hedge objective against a specific or forecasted liability or, in limited instances, assets. The notional amounts, rates, indices, and maturities of our derivatives closely match the related terms of the underlying hedged items.

CIT utilizes interest rate swaps to exchange variable-rate interest underlying forecasted issuances of commercial paper, specific variable-rate debt instruments, and, in limited instances, variable-rate assets for fixed-rate amounts. These interest rate swaps are designated as cash flow hedges and changes in fair value of these swaps, to the extent they are effective as a hedge, are recorded in other comprehensive income. Ineffective amounts are recorded in interest expense. Interest rate swaps are also utilized to convert fixed-rate interest on specific debt instruments to variable-rate amounts. These interest rate swaps are designated as fair value hedges and changes in fair value of these swaps are effectively recorded as an adjustment to the carrying value of the hedged item, as the offsetting changes in fair value of the swaps and the hedged items are recorded in earnings.

The following table summarizes the composition of our interest rate sensitive assets and liabilities before and after swaps:

Before Swaps
After Swaps
Fixed
rate

Floating
rate

Fixed
rate

Floating
rate

December 31, 2005                
Assets  49 % 51 % 49 % 51 %
Liabilities  50 % 50 % 44 % 56 %
December 31, 2004  
Assets  55 % 45 % 55 % 45 %
Liabilities  60 % 40 % 46 % 54 %

Total interest sensitive assets were $51.9 billion and $41.7 billion at December 31, 2005 and 2004. Total interest sensitive liabilities were $45.6 billion and $35.9 billion at December 31, 2005 and 2004.

Foreign Exchange Risk Management – To the extent local foreign currency borrowings are not raised, CIT utilizes foreign currency exchange forward contracts to hedge or mitigate currency risk underlying foreign currency loans to subsidiaries and the net investments in foreign operations. These contracts are designated as foreign currency cash flow hedges or net investment hedges and changes in fair value of these contracts are recorded in other comprehensive income along with the translation gains and losses on the underlying hedged items. Translation gains and losses of the underlying foreign net investment, as well as offsetting derivative gains and losses on designated hedges, are reflected in other comprehensive income in the Consolidated Balance Sheet.

CIT also utilizes cross-currency swaps to hedge currency risk underlying foreign currency debt and selected foreign currency assets. The swaps that meet hedge accounting criteria are designated as foreign currency cash flow hedges or foreign currency fair value hedges and changes in fair value of these contracts are recorded in other comprehensive income (for cash flow hedges), or effectively as a basis adjustment (including the impact of the offsetting adjustment to the carrying value of the hedged item) to the hedged item (for fair value hedges) along with the transaction gains and losses on the underlying hedged items. CIT also has certain cross-currency swaps that economically hedge exposures, but do not qualify for hedge accounting treatment.

Other Market Risk Management – CIT has entered into credit default swaps to economically hedge certain CIT credit exposures. These swaps do not meet the requirements for hedge accounting treatment and therefore are recorded at fair value, with both realized and unrealized gains or losses recorded in other revenue in the consolidated statement of income. See Note 9 – Derivative Financial Instruments for further discussion, including notional principal balances of interest rate swaps, foreign currency exchange forward contracts, cross currency swaps, Treasury locks, and credit default swaps.

DERIVATIVE RISK MANAGEMENT

We enter into interest rate and currency swaps, foreign exchange forward contracts, and in limited instances, credit default swaps and commodity swaps as part of our overall risk management practices. We assess and manage the external and internal risks associated with these derivative instruments in accordance with the overall operating goals established by our Capital Committee. External risk is defined as those risks outside of our direct control, including counterparty credit risk, liquidity risk, systemic risk, legal risk and market risk. Internal risk relates to those operational risks within the management oversight structure and includes actions taken in contravention of CIT policy.

The primary external risk of derivative instruments is counterparty credit exposure, which is defined as the ability of a counterparty to perform its financial obligations under a derivative contract. We control the credit risk of our derivative agreements through counterparty credit approvals, pre-established exposure limits and monitoring procedures.

The Capital Committee, in conjunction with Corporate Risk Management, approves each counterparty and establishes exposure limits based on credit analysis and market value. All derivative agreements are entered into with major money center financial institutions rated investment grade by nationally recognized rating agencies, with the majority of our counter-


 
42 CIT GROUP INC 2005  

parties rated “AA” or better. Credit exposures are measured based on the current market value and potential future exposure of outstanding derivative instruments. Exposures are calculated for each derivative contract and are aggregated by counterparty to monitor credit exposure.

See Item 9A. Control and Procedures for discussion related to derivative and hedge accounting.

LIQUIDITY RISK MANAGEMENT

Liquidity risk refers to the risk of being unable to meet potential cash outflows promptly and cost-effectively. Factors that could cause such a risk to arise might be a disruption of a securities market or other source of funds. We actively manage and mitigate liquidity risk by maintaining diversified sources of funding and committed alternate sources of funding, and we maintain and periodically review a contingency funding plan to be implemented in the event of any form of market disruption. Additionally, we target our debt issuance strategy to achieve a maturity pattern designed to reduce refinancing risk. The primary funding sources are commercial paper (U.S., Canada and Australia), long-term debt (U.S. and International) and asset-backed securities (U.S. and Canada). Additional sources of liquidity are loan and lease payments from customers, whole-loan asset sales and loan syndications.

Outstanding commercial paper totaled $5.2 billion at December 31, 2005, compared with $4.2 billion at both December 31, 2004 and 2003. Our targeted U.S. program size remains at $5.0 billion with modest programs aggregating $500 million to be maintained in Canada and Australia. Our goal is to maintain committed bank lines in excess of aggregate outstanding commercial paper. We have aggregate bank facilities of $6.3 billion in multi-year facilities. We also maintain committed bank lines of credit to provide backstop support of commercial paper borrowings and local bank lines to support our international operations.

We maintain registration statements with the Securities and Exchange Commission (“SEC”) covering debt securities that we may sell in the future. At December 31, 2005, we had $0.8 billion of registered, but unissued, debt securities available under which we may issue debt securities and other capital market securities. Subsequent to year end, we filed a new shelf registration statement that became effective. Our Board of Directors has approved up to $18 billion of debt funding under the statement for 2006. Term-debt issued during 2005 totaled $13.3 billion: $7.1 billion in variable-rate medium-term notes and $6.2 billion in fixed-rate notes. Consistent with our strategy of managing debt refinancing risk, the weighted average maturity of term-debt issued in 2005 was approximately five years. Included with the fixed rate notes are issuances under a retail note program in which we offer fixed-rate senior, unsecured notes utilizing numerous broker-dealers for placement to retail accounts. During the year, we issued $0.4 billion under this program having maturities of between 2 and 10 years. As part of our strategy to further diversify our funding sources, $1.4 billion of foreign currency denominated debt was issued during 2005. We plan on continuing to utilize diversified sources of debt funding to meet our strategic global growth initiatives.

To further strengthen our funding capabilities, we maintain committed asset backed facilities and shelf registration statements, which cover a range of assets from equipment to consumer home lending receivables and trade accounts receivable. While these are predominately in the U.S., we also maintain facilities for Canadian domiciled assets. As of December 31, 2005, we had approximately $4.8 billion of availability in our committed asset-backed facilities and $5.0 billion of registered, but unissued, securities available under public shelf registration statements relating to our asset-backed securitization program.

We also target and monitor certain liquidity metrics to ensure both a balanced liability profile and adequate alternate liquidity availability as outlined in the following table:

Liquidity Measurement
  Current
Target

  December 31,
2005

December 31,
2004

December 31,
2003

Commercial paper to total debt   Maximum of 15%  11 %11 %13 %
Short-term debt to total debt   Maximum of 35%  29 %31 %36 %
Bank lines to commercial paper   Minimum of 100%  131 %150 %149 %
Aggregate alternative liquidity to short-term debt   Minimum of 100%  110 %108 %93 %

Our credit ratings are an important factor in meeting our earnings and margin targets as better ratings generally correlate to lower cost of funds (see Net Finance Margin, interest expense discussion). The following credit ratings have been in place since September 30, 2002:

Short-Term
Long-Term
Outlook
Moody’s   P-1  A2  Stable  
Standard & Poor’s  A-1  A   Stable  
Fitch  F1   A   Stable 
DBRS  R-1L   A   Stable 

The credit ratings stated above are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.


 
  Item 7: Management’s Discussion and Analysis 43

We have certain covenants contained in our legal documents that govern our funding structures. The most significant covenant in CIT’s indentures and credit agreements is a negative pledge provision, which limits granting or permitting liens on our assets, but provides for exceptions for certain ordinary course liens needed to operate our business. In addition, our credit agreements also contain a minimum net worth requirement of $4.0 billion.

The following tables summarize significant contractual obligations and projected cash receipts, and contractual commitments at December 31, 2005 :


Payments and Collections by Year (dollars in millions)(3)

  Total
2006
2007
2008
2009
2010+
 
Commercial paper $  5,225.0   $  5,225.0   $          –   $         –   $         –   $           –  
Variable-rate senior unsecured notes 15,485.1  6,154.7   5,318.6  2,053.7   751.1  1,207.0  
Fixed-rate senior unsecured notes 22,853.6   3,017.3   3,994.0   2,574.8   1,400.1   11,867.4  
Non-recourse, secured borrowings 4,048.8  504.3         3,544.5  
Preferred capital security 252.0           252.0  
Lease rental expense 340.3  48.5   43.7  37.3   22.3  188.5  
 
 
 
 
 
 
 
  Total contractual obligations 48,204.8   14,949.8   9,356.3   4,665.8   2,173.5   17,059.4  
 
 
 
 
 
 
 
Finance receivables(1) 44,294.5  12,438.0   4,482.0  3,872.0   2,556.2  20,946.3 
Operating lease rental income 4,074.8  1,164.0   1,017.6  713.5   482.3  697.4  
Finance receivables held for sale(2) 1,620.3  1,620.3          
Cash – current balance 3,658.6  3,658.6          
Retained interest in securitizations and other investments 1,152.7  603.2   254.4  129.5   52.2  113.4  
 
 
 
 
 
 
 
  Total projected cash receipts 54,800.9  19,484.1   5,754.0  4,715.0   3,090.7  21,757.1  
 
 
 
 
 
 
 
Net projected cash inflow (outflow) $  6,596.1   $  4,534.3  $(3,602.3 ) $   49.2  $   917.2   $  4,697.7  
 
 
 
 
 
 
 
(1)  Based upon contractual cash flows; amount could differ due to prepayments, extensions of credit, charge-offs and other factors.
(2)  Based upon management’s intent to sell rather than contractual maturities of underlying assets.
(3)  Projected proceeds from the sale of operating lease equipment, interest revenue from finance receivables, debt interest expense and other items are excluded. Obligations relating to postretirement programs are also excluded.


Commitment Expiration by Year (dollars in millions)

  Total
2006
2007
2008
2009
2010+
Credit extensions  $10,432.0   $1,907.8  $1,148.1   $1,187.0  $1,125.3   $5,063.8  
Aircraft purchases  3,316.5   923.8  1,001.6   830.6    560.5  
Letters of credit  1,047.6   927.7  26.3   39.1  24.7   29.8  
Sale-leaseback payments  590.7   41.2  41.2   41.2  41.2   425.9  
Manufacturer purchase commitments  696.2   668.1  28.1        
Guarantees  206.5   194.6    10.5  1.4    
Acceptances  20.1   20.1         
  
 
 
 
 
 
 
Total contractual commitments  $16,309.6   $4,683.3  $2,245.3   $2,108.4  $1,192.6   $6,080.0 
  
 
 
 
 
 
 

 
44 CIT GROUP INC 2005  

INTERNAL CONTROLS

The Internal Controls Committee is responsible for monitoring and improving internal controls and overseeing the internal controls attestation mandated by Section 404 of the Sarbanes-Oxley Act of 2002 (“SARBOX”). The committee, which is chaired by the Controller, includes the CFO, the Director of Internal Audit and other senior executives in finance, legal, risk management and information technology.

See Item 9A. Controls and Procedures for Management’s Report on Internal Control over Financial Reporting.

OFF-BALANCE SHEET ARRANGEMENTS

Securitization Program

We fund asset originations on our balance sheet by accessing various sectors of the capital markets, including the term debt and commercial paper markets. In an effort to broaden funding sources and provide an additional source of liquidity, we use an array of securitization programs, including both asset-backed commercial paper and term structures, to access both the public and private asset-backed securitization markets. Current products in these programs include receivables and leases secured by equipment as well as consumer loans secured by residential real estate. The following table summarizes data relating to our securitization programs.


Securitized Assets (dollars in millions)

At or for the Years Ended December 31, 2005 2004 2003
 


Securitized Assets:              
Specialty Finance – Commercial  $3,921.6   $4,165.5  $4,557.9  
Specialty Finance – Consumer (home lending)   838.8   1,228.7   1,867.6  
Equipment Finance  2,484.1   2,915.5  3,226.2  
Corporate Finance   41.2      
  
 
 
 
  Total securitized assets  $7,285.7   $8,309.7  $9,651.7  
  
 
 
 
Securitized assets as a % of managed assets   11.6 % 15.5 % 19.4 %
Volume Securitized:          
Specialty Finance – Commercial  $3,230.9   $3,153.8  $3,416.2  
Specialty Finance – Consumer (home lending)      489.2  
Equipment Finance  1,089.6   1,280.7  1,414.8  
  
 
 
 
  Total volume securitized  $4,320.5   $4,434.5  $5,320.2  
  
 
 
 

Under our typical asset-backed securitization, we sell a “pool” of secured loans or leases to a special-purpose entity (“SPE”), typically a trust. SPEs are used to achieve “true sale” requirements for these transactions in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” The special-purpose entity, in turn, issues certificates and/or notes that are collateralized by the pool and entitle the holders thereof to participate in certain pool cash flows.

Accordingly, CIT has no legal obligations to repay the securities in the event of a default by the SPE. CIT retains the servicing rights of the securitized contracts, for which we earn a servicing fee. We also participate in certain “residual” cash flows (cash flows after payment of principal and interest to certificate and/or note holders, servicing fees and other credit-related disbursements). At the date of securitization, we estimate the “residual” cash flows to be received over the life of the securitization, record the present value of these cash flows as a retained interest in the securitization (retained interests can include bonds issued by the special-purpose entity, cash reserve accounts on deposit in the special-purpose entity or interest only receivables) and typically recognize a gain. Assets securitized are shown in our managed assets and our capitalization ratios on a managed basis.

In estimating residual cash flows and the value of the retained interests, we make a variety of financial assumptions, including pool credit losses, prepayment speeds and discount rates. These assumptions are supported by both our historical experience and anticipated trends relative to the particular products securitized. Subsequent to recording the retained interests, we review them quarterly for impairment based on estimated fair value. These reviews are performed on a disaggregated basis. Fair values of retained interests are estimated utilizing current pool demographics, actual note/certificate outstandings, current and anticipated credit losses, prepayment speeds and discount rates.

Our retained interests had a carrying value at December 31, 2005 of $1,136.4 million. Retained interests are subject to credit and prepayment risk. As of December 31, 2005, approximately 50% of our outstanding securitization pool bal-
 

  Item 7: Management’s Discussion and Analysis 45

ances are in conduit structures. Securitized assets are subject to the same credit granting and monitoring processes which are described in the “Credit Risk Management” section. See Note 6 – Retained Interests in Securitizations and Other Balances for detail on balance and key assumptions.

Joint Venture Activities

We utilize joint ventures organized through distinct legal entities to conduct financing activities with certain strategic vendor partners. Receivables are originated by the joint venture and purchased by CIT. The vendor partner and CIT jointly own these distinct legal entities, and there is no third-party debt involved. These arrangements are accounted for using the equity method, with profits and losses distributed according to the joint venture agreement. See disclosure in Note 19 – Certain Relationships and Related Transactions.

CAPITALIZATION


Capital Structure (dollars in millions)

As of December 31, 2005 2004 2003
 


Commercial paper, term debt and secured borrowings  $47,612.5   $37,471.0  $33,413.1  
  
 
 
 
Total common stockholders’ equity(1)  6,418.1   6,073.7  5,427.8  
Preferred stock  500.0      
  
 
 
 
Total stockholders’ equity(1)  6,918.1   6,073.7  5,427.8  
Preferred capital securities  252.0   253.8  255.5  
  
 
 
 
  Total capital  7,170.1   6,327.5  5,683.3  
Goodwill and other intangible assets  (1,011.5 ) (596.5 ) (487.7 )
  
 
 
 
  Total tangible capital  6,158.6   5,731.0  5,195.6  
  
 
 
 
Total tangible capitalization  $53,771.1   $43,202.0  $38,608.7  
  
 
 
 
Tangible capital to managed assets  9.80 % 10.72 % 10.45 %
Tangible book value per common share(2)   $     27.15   $     26.03   $     23.32  

(1) Stockholders’ equity excludes the impact of the changes in fair values of derivatives qualifying as cash flow hedges and certain unrealized gains or losses on retained interests and investments, as these amounts are not necessarily indicative of amounts that will be realized. See “Non-GAAP Financial Measurements.”
(2) Tangible book value per common share outstanding is the sum of total common stockholders’ equity less goodwill and other intangible assets divided by outstanding common stock.

The student lending acquisition in Specialty Finance-Consumer, a factoring purchase in Commercial Services and a healthcare acquisition in Corporate Finance drove the increase in goodwill and acquired intangibles from December 2004, while a European vendor finance acquisition increased goodwill and acquired intangibles during 2004. See Note 22 – Goodwill and Other Intangible Assets.

During the September 2005 quarter, CIT issued $500 million aggregate amount of Series A and Series B preferred equity securities. Series A has a stated value of $350 million, comprised of 14 million shares of 6.35% non-cumulative fixed rate preferred stock, with a liquidation value of $25 per share. Series B has a stated value of $150 million, comprised of 1.5 million shares of 5.189% non-cumulative adjustable rate preferred stock, with a liquidation value of $100 per share. (See Note 10 – Stockholders’ Equity for further detail on preferred stock.)

The preferred capital securities are 7.70% Preferred Capital Securities issued in 1997 by CIT Capital Trust I, a wholly-owned subsidiary. CIT Capital Trust I invested the proceeds of that issue in Junior Subordinated Debentures of CIT having identical rates and payment dates. Consistent with rating agency measurements, preferred capital securities are included in tangible equity in our leverage ratios. See “Non-GAAP Financial Measurements” for additional information.

See “Liquidity Risk Management” for discussion of risks impacting our liquidity and capitalization.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect reported amounts of assets and liabilities, the reported amounts of income and expense during the reporting period and the disclosure of contingent assets and liabilities at the date of the financial statements. The following accounting estimates, which are based on relevant


 
46 CIT GROUP INC 2005  

information available at the end of each period, include inherent risks and uncertainties related to judgments and assumptions made by management. We consider the following accounting estimates to be critical in applying our accounting policies due to the existence of uncertainty at the time the estimate is made, the likelihood of changes in estimates from period to period and the potential impact that these estimates can have on the financial statements.

Charge-off of Finance Receivables – Finance receivables are reviewed periodically to determine the probability of loss. Charge-offs are taken after substantial collection efforts are conducted, considering such factors as the borrower’s financial condition and the value of underlying collateral and guarantees (including recourse to dealers and manufacturers). Net charge-offs for the year ended December 31, 2005 were $251.1 million.

Impaired Loans – Loan impairment is measured as any shortfall between the estimated value and the recorded investment for those loans defined as impaired loans in the application of SFAS 114. The estimated value is determined using the fair value of the collateral or other cash flows, if the loan is collateral dependent, or the present value of expected future cash flows discounted at the loan’s effective interest rate. The determination of impairment involves management’s judgment and the use of market and third party estimates regarding collateral values. Valuations in the level of impaired loans and corresponding impairment as defined under SFAS 114 affect the level of the reserve for credit losses. At December 31, 2005, the reserve for credit losses includes a $76.5 million impairment valuation component. A 10% fluctuation in this valuation equates to $0.02 in diluted earnings per share.

Reserve for Credit Losses – The reserve for credit losses is intended to provide for losses inherent in the portfolio, which requires the application of estimates and significant judgment as to the ultimate outcome of collection efforts and realization of collateral values, among other things. Therefore, changes in economic conditions or credit metrics, including past due and non-performing accounts, or other events affecting specific obligors or industries may necessitate additions or reductions to the reserve for credit losses.

The reserve for credit losses is reviewed for adequacy based on portfolio collateral values and credit quality indicators, including charge-off experience, levels of past due loans and non-performing assets, evaluation of portfolio diversification and concentration as well as economic conditions. We review finance receivables periodically to determine the probability of loss, and record charge-offs after considering such factors as delinquencies, the financial condition of obligors, the value of underlying collateral, as well as third party credit enhancements such as guarantees and recourse from manufacturers. This information is reviewed formally on a quarterly basis with senior management, including the CEO, CFO, Chief Lending Officer and Controller, among others, in conjunction with setting the reserve for credit losses.

The reserve for credit losses is determined based on three key components: (1) specific reserves for collateral dependent loans which are impaired, based upon the value of underlying collateral or projected cash flows (2) reserves for estimated losses inherent in the portfolio based upon historical and projected credit trends and (3) reserves for economic environment and other factors. Historical loss rates are based on one to three-year averages, which are consistent with our portfolio life and provides what we believe to be appropriate weighting to current loss rates. The process involves the use of estimates and a high degree of management judgment. As of December 31, 2005, the reserve for credit losses was $621.7 million or 1.40% of finance receivables. A hypothetical 5% change to the historic loss rates utilized in our reserve determination at December 31, 2005 equates to the variance of $22.3 million, or 5 basis points (0.05%) in the percentage of reserves to finance receivables, and $0.07 in diluted earnings per share.

Retained Interests in Securitizations – Significant financial assumptions, including loan pool credit losses, prepayment speeds and discount rates, are utilized to determine the fair values of retained interests, both at the date of the securitization and in the subsequent quarterly valuations of retained interests. These assumptions reflect both the historical experience and anticipated trends relative to the products securitized. Any resulting losses, representing the excess of carrying value over estimated fair value, are recorded in current earnings. However, unrealized gains are reflected in stockholders’ equity as part of other comprehensive income. See Note 6 –Retained Interests in Securitizations and Other Investments for additional information regarding securitization retained interests and related sensitivity analysis.

Lease Residual Values – Operating lease equipment is carried at cost less accumulated depreciation and is depreciated to estimated residual value using the straight-line method over the lease term or projected economic life of the asset. Direct financing leases are recorded at the aggregated future minimum lease payments plus estimated residual values less unearned finance income. We generally bear greater risk in operating lease transactions (versus finance lease transactions) as the duration of an operating lease is shorter relative to the equipment useful life than a finance lease. Management performs periodic reviews of the estimated residual values, with non-temporary impairment recognized in the current period as an increase to depreciation expense for operating lease residual impairment, or as an adjustment to yield for residual value adjustments on finance leases. Data regarding equipment values, including appraisals, and our historical residual realization experience are among the factors considered in evaluating estimated residual values. As of December 31, 2005, our direct financing lease residual balance was $2.1 billion and our operating lease equipment balance was $9.6 billion. A hypothetical


 
  Item 7: Management’s Discussion and Analysis 47

10 basis points (0.1%) fluctuation in the total of these amounts equates to $0.03 in diluted earnings per share.

Goodwill and Intangible Assets – CIT adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective October 1, 2001. The Company determined at October 1, 2001 that there was no impact of adopting this new standard under the transition provisions of SFAS No. 142. Since adoption, goodwill is no longer amortized, but instead is assessed for impairment at least annually. During this assessment, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows, and market place data. See “Note 22 – Goodwill and Intangible Assets” for additional information.

Intangible assets consist primarily of customer relationships acquired with acquisitions, with amortization lives up to 20 years, and computer software and related transaction processes, which are being amortized over a 5-year life. An evaluation of the remaining useful lives and the amortization methodology of the intangible assets is performed periodically to determine if any change is warranted. Goodwill and Intangibles Assets was $1,011.5 million at December 31, 2005. A hypothetical 5% fluctuation in the value equates to $0.24 in diluted earnings per share.

Income Tax Reserves and Deferred Income Taxes – We have open tax years in the U.S. and Canada and other jurisdictions that are currently under examination by the applicable taxing authorities, and certain later tax years that may in the future be subject to examination. We periodically evaluate the adequacy of our related tax reserves, taking into account our open tax return positions, tax assessments received, tax law changes and third party indemnifications. The process of evaluating tax reserves involves the use of estimates and a high degree of management judgment. The final determination of tax audits could affect our tax reserves.

Deferred tax assets and liabilities are recognized for the future tax consequences of transactions that have been reflected in the Consolidated Financial Statements. Our ability to realize deferred tax assets is dependent on prospectively generating taxable income by corresponding tax jurisdiction, and in some cases on the timing and amount of specific types of future transactions. Management’s judgment, regarding uncertainties and the use of estimates and projections, is required in assessing our ability to realize net operating loss (“NOL’s”) and other tax benefit carry-forwards, as these assets expire at various dates beginning in 2006, and they may be subject to annual use limitations under the Internal Revenue Code and other limitations under certain state laws. Management utilizes historical and projected data, budgets and business plans in making these estimates and assessments. Deferred tax assets relating to NOL’s were $428 million at December 31, 2005. A hypothetical 1% fluctuation in the value of deferred tax assets relating to NOL’s equates to $0.02 in diluted earnings per share.

See Item 9A. Controls and Procedures for discussion regarding internal controls related to income tax accounting and reporting.

NON-GAAP FINANCIAL MEASUREMENTS

The SEC adopted regulations that apply to any public disclosure or release of material information that includes a non-GAAP financial measure. The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure about Market Risk contain certain non-GAAP financial measures. The SEC defines a non-GAAP financial measure as a numerical measure of a company’s historical or future financial performance, financial position, or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the financial statements or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

Non-GAAP financial measures disclosed in this report are meant to provide additional information and insight regarding the historical operating results and financial position of the business and in certain cases to provide financial information that is presented to rating agencies and other users of financial information. These measures are not in accordance with, or a substitute for, GAAP and may be different from or inconsistent with non-GAAP financial measures used by other companies.


 
48 CIT GROUP INC 2005  


Non-GAAP Reconciliations (dollars in millions)

As of December 31, 2005 2004 2003
 


Managed assets(1):              
Finance receivables  $ 44,294.5   $ 35,048.2  $ 31,300.2  
Operating lease equipment, net   9,635.7   8,290.9   7,615.5  
Financing and leasing assets held for sale  1,620.3   1,640.8  918.3  
Equity and venture capital investments (included in other assets)   30.2   181.0   249.9  
  
 
 
 
Total financing and leasing portfolio assets  55,580.7   45,160.9  40,083.9  
  Securitized assets   7,285.7   8,309.7   9,651.7  
  
 
 
 
  Managed assets  $ 62,866.4   $ 53,470.6  $ 49,735.6  
  
 
 
 
Earning assets(2):         
Total financing and leasing portfolio assets  $ 55,580.7   $ 45,160.9  $ 40,083.9  
  Credit balances of factoring clients   (4,187.8 ) (3,847.3 ) (3,894.6 )
  
 
 
 
Earning assets  $ 51,392.9   $ 41,313.6  $ 36,189.3  
  
 
 
 
Total tangible capital(3):         
Total common stockholders’ equity   $   6,462.7   $   6,055.1   $   5,394.2  
  Other comprehensive (income) loss relating to derivative
     financial instruments
  (27.6 ) 27.1   41.3  
  Unrealized gain on securitization investments  (17.0 ) (8.5 ) (7.7 )
  Goodwill and intangible assets   (1,011.5 ) (596.5 ) (487.7 )
  
 
 
 
Tangible common stockholders’ equity  5,406.6   5,477.2  4,940.1  
  Preferred stock   500.0      
  Preferred capital securities  252.0   253.8  255.5  
  
 
 
 
Total tangible capital   $   6,158.6   $   5,731.0   $   5,195.6  
  
 
 
 
Debt, net of overnight deposits(4):       
Total debt   $ 47,864.5   $ 37,724.8   $ 33,668.6  
  Overnight deposits  (2,703.1 ) (1,507.3 ) (1,529.4 )
  Preferred capital securities   (252.0 ) (253.8 ) (255.5 )
  
 
 
 
Debt, net of overnight deposits  $ 44,909.4   $ 35,963.7  $ 31,883.7  
  
 
 
 
(1) Managed assets are utilized in certain credit and expense ratios. Securitized assets are included in managed assets because CIT retains certain credit risk and the servicing related to assets that are funded through securitizations.
(2) Earning assets are utilized in certain revenue and earnings ratios. Earning assets are net of credit balances of factoring clients. This net amount, which corresponds to amounts funded, is a basis for revenues earned.
(3) Total tangible stockholders’ equity is utilized in leverage ratios, and is consistent with certain rating agency measurements. Other comprehensive income/losses and unrealized gains on securitization investments (both included in the separate component of equity) are excluded from the calculation, as these amounts are not necessarily indicative of amounts which will be realized.
(4) Debt, net of overnight deposits is utilized in certain leverage ratios. Overnight deposits are excluded from these calculations, as these amounts are retained by the Company to repay debt. Overnight deposits are reflected in both debt and cash and cash equivalents.

 
  Item 7: Management’s Discussion and Analysis 49

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document are “forward-looking statements”within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature are forward-looking and the words “anticipate,” “believe,” “expect,” “estimate,”“target” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statements contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to known and unknown risks, uncertainties and contingencies. Forward-looking statements are included, for example, in the discussions about:

our liquidity risk management,
our credit risk management,
our asset/liability risk management,
our funding, borrowing costs and net finance margin,
our capital, leverage and credit ratings,
our operational and legal risks,
our growth rates,
our commitments to extend credit or purchase equipment, and
how we may be affected by legal proceedings.

All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences include, but are not limited to:

risks of economic slowdown, downturn or recession,
industry cycles and trends,
demographic trends,
risks inherent in changes in market interest rates and quality spreads,
funding opportunities and borrowing costs,
changes in funding markets, including commercial paper, term debt and the asset-backed securitization markets,
uncertainties associated with risk management, including credit, prepayment, asset/liability, interest rate and currency risks,
adequacy of reserves for credit losses, including amounts related to hurricane losses,
risks associated with the value and recoverability of leased equipment and lease residual values,
changes in laws or regulations governing our business and operations,
changes in competitive factors, and
future acquisitions and dispositions of businesses or asset portfolios.

 
50 CIT GROUP INC 2005  



ITEM 8. Financial Statements and Supplementary Data


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
CIT Group Inc.:

We have completed integrated audits of CIT Group Inc.'s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of CIT Group Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that CIT Group Inc. maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of

 

  ITEM 8: Financial Statements and Supplementary Data 51

records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
New York, New York
March 2, 2006


 
52 CIT GROUP INC 2005  


CIT GROUP INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS – Assets (dollars in millions – except share data)

December 31, 2005 2004
 

Financing and leasing assets:          
   Finance receivables  $ 39,243.5   $ 35,048.2 
   Student lending receivables pledged   5,051.0    
   Reserve for credit losses  (621.7 ) (617.2 )
  
 
 
   Net finance receivables   43,672.8   34,431.0  
   Operating lease equipment, net  9,635.7   8,290.9  
   Financing and leasing assets held for sale   1,620.3   1,640.8  
Cash and cash equivalents, including $311.1 and $0.0 restricted  3,658.6   2,210.2 
Retained interest in securitizations and other investments   1,152.7   1,228.2  
Goodwill and intangible assets, net  1,011.5   596.5  
Other assets  2,635.0   2,713.7  
  
 
 
Total Assets   $ 63,386.6   $ 51,111.3  
  
 
 


CONSOLIDATED BALANCE SHEETS – Liabilities and Stockholders’ Equity

Debt:          
   Commercial paper   $   5,225.0   $   4,210.9  
   Variable-rate senior unsecured notes   15,485.1   11,545.0  
   Fixed-rate senior unsecured notes   22,853.6   21,715.1  
   Non-recourse, secured borrowings – student lending   4,048.8    
   Preferred capital securities   252.0   253.8  
  
 
 
Total debt   47,864.5   37,724.8  
Credit balances of factoring clients   4,187.8   3,847.3  
Accrued liabilities and payables   4,321.8   3,443.7  
  
 
 
   Total Liabilities   56,374.1 45,015.8 
Commitments and Contingencies (Note 16)     
Minority interest  49.8  40.4  
Stockholders’ Equity:     
   Preferred stock: $0.01 par value, 100,000,000 authorized, Issued and outstanding:      
     Series A 14,000,000 with a liquidation preference of $25 per share   350.0    
     Series B 1,500,000 with a liquidation preference of $100 per share   150.0    
   Common stock: $0.01 par value, 600,000,000 authorized,     
     Issued: 212,315,498 and 212,112,203  2.1  2.1  
     Outstanding: 199,110,141 and 210,440,170     
   Paid-in capital, net of deferred compensation of $49.5 and $39.3   10,632.9   10,674.3  
   Accumulated deficit   (3,691.4 ) (4,499.1 )
   Accumulated other comprehensive income/(loss)   115.2   (58.4 )
   Less: treasury stock, 13,205,357 and 1,672,033 shares, at cost   (596.1 ) (63.8 )
  
 
 
Total Common Stockholders’ Equity   6,462.7   6,055.1  
  
 
 
   Total Stockholders’ Equity   6,962.7   6,055.1  
  
 
 
Total Liabilities and Stockholders’ Equity   $ 63,386.6   $ 51,111.3  
  
 
 

 
  ITEM 8 – Financial Statements and Supplementary Data 53


CIT GROUP INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME (dollars in millions – except per share data)

Years Ended December 31,  2005  2004  2003 
  
 
 
 
Finance income   $ 4,515.2   $ 3,760.8   $ 3,709.3  
Interest expense  1,912.0   1,260.1  1,348.7  
  
 
 
 
Net finance income   2,603.2   2,500.7   2,360.6  
Depreciation on operating lease equipment  968.0   965.4  1,057.5  
  
 
 
 
Net finance margin   1,635.2   1,535.3   1,303.1  
Provision for credit losses  217.0   214.2  387.3  
  
 
 
 
Net finance margin after provision for credit losses   1,418.2   1,321.1   915.8  
Other revenue  1,137.4   887.1  859.3  
  
 
 
 
Operating margin   2,555.6   2,208.2   1,775.1  
Salaries and general operating expenses  1,113.8   1,012.1  888.2  
Provision for restructuring   25.2      
Gain on redemption of debt     41.8   50.4  
  
 
 
 
Income before provision for income taxes   1,416.6   1,237.9   937.3  
Provision for income taxes  (464.2 ) (483.2 ) (365.0 )
Minority interest, after tax   (3.3 ) (1.1 )  
Dividends on preferred capital securities, after tax      (5.4 )
  
 
 
 
Net income before preferred stock dividends  949.1   753.6  566.9  
Preferred stock dividends  (12.7 )    
  
 
 
 
Net income available to common stockholders   $    936.4   $    753.6   $    566.9  
  
 
 
 
Per common share data         
Basic earnings per share   $      4.54   $      3.57   $      2.68  
Diluted earnings per share   $      4.44   $      3.50   $      2.66  
Weighted average number of shares – basic (thousands)  206,059   211,017  211,681  
Weighted average number of shares – diluted (thousands)  210,734   215,054  213,143  
Dividends per share   $      0.61   $      0.52   $      0.48  

 
54 CIT GROUP INC 2005  


CIT GROUP INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (dollars in millions)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Other

 

 

 

Total

 

 

Preferred

 

Common

 

Paid-in

 

Earnings/

 

Comprehensive

 

Treasury

 

Stockholders’

 

 

Stock

 

Stock

 

Capital

 

(Deficit)

 

(Loss) / Income

 

Stock

 

Equity

 

 
 
 
 
 
 
 
 

December 31, 2002

$    –

 

$ 2.1

 

$10,676.2

 

$(5,606.9

$(200.7

$    –

 

$4,870.7

 

Net income

 

 

 

 

 

 

566.9

 

 

 

 

 

566.9

 

Foreign currency
   translation adjustments

 

 

 

 

 

 

 

 

(30.2

 

 

(30.2

Change in fair values of
   derivatives qualifying
   as cash flow hedges

 

 

 

 

 

 

 

 

77.0

 

 

 

77.0

 

Unrealized loss on equity
   and securitization
   investments

 

 

 

 

 

 

 

 

(7.4

 

 

(7.4

Minimum pension liability
   adjustment

 

 

 

 

 

 

 

 

19.7

 

 

 

19.7

 

                   
 

Total comprehensive
   income

 

 

 

 

 

 

 

 

 

 

 

 

626.0

 

                   
 

Cash dividends

 

 

 

 

 

(101.8

 

 

 

 

(101.8

Restricted common
   stock grants

 

 

 

 

8.8

 

 

 

 

 

 

 

8.8

 

Treasury stock
   purchased, at cost

 

 

 

 

 

 

 

 

 

 

(28.9

(28.9

Exercise of stock option
   awards

 

 

 

 

(7.3

)

 

 

 

 

27.4

 

20.1

 

Employee stock
   purchase plan
   participation

 

 

 

 

(0.7

 

 

 

 

 

 

(0.7

 
 
 
 
 
 
 
 

December 31, 2003

 

2.1

 

10,677.0

 

(5,141.8

(141.6

(1.5

5,394.2

 

Net income

 

 

 

 

 

 

753.6

 

 

 

 

 

753.6

 

Foreign currency
   translation adjustments

 

 

 

 

 

 

 

 

68.6

 

 

 

68.6

 

Change in fair values of
   derivatives qualifying
   as cash flow hedges

 

 

 

 

 

 

 

 

14.2

 

 

 

14.2

 

Unrealized gain on equity
   and securitization
   investments

 

 

 

 

 

 

 

 

2.3

 

 

 

2.3

 

Minimum pension liability
   adjustment

 

 

 

 

 

 

 

 

(1.9

 

 

(1.9

                   
 

Total comprehensive
   income

 

 

 

 

 

 

 

 

 

 

 

 

836.8

 

                   
 

Cash dividends

 

 

 

 

 

 

(110.9

 

 

 

 

(110.9

Restricted common
   stock grants

 

 

 

 

23.5

 

 

 

 

 

 

 

23.5

 

Treasury stock
   purchased, at cost

 

 

 

 

 

 

 

 

 

 

(174.8

(174.8

Exercise of stock option
   awards

 

 

 

 

(25.6

 

 

 

 

111.6

 

86.0

 

Employee stock
   purchase plan participation

 

 

 

 

(0.6

 

 

 

 

0.9

 

0.3

 

 
 
 
 
 
 
 
 

December 31, 2004

 

2.1

 

10,674.3

 

(4,499.1

(58.4

(63.8

6,055.1

 

Net income

 

 

 

 

 

 

936.4

 

 

 

 

 

936.4

 

Foreign currency
   translation adjustments

 

 

 

 

 

 

 

 

110.7

 

 

 

110.7

 

Change in fair values of
   derivatives qualifying as
   cash flow hedges

 

 

 

 

 

 

 

 

54.7

 

 

 

54.7

 

Unrealized gain on equity and
   securitization investments

 

 

 

 

 

 

 

 

8.7

 

 

 

8.7

 

Minimum pension liability
   adjustment

 

 

 

 

 

 

 

 

(0.5

 

 

(0.5

                   
 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

1,110.0

 

                   
 

Issuance of Series A and B
   preferred stock

500.0

 

 

 

(10.1

 

 

 

 

 

 

489.9

 

Stock repurchase agreement

 

 

 

 

(8.5

 

 

 

 

(491.5

(500.0

Cash dividends

 

 

 

 

 

 

(128.7

 

 

 

 

(128.7

Restricted common stock
   grants amortization

 

 

 

 

43.3

 

 

 

 

 

 

 

43.3

 

Treasury stock purchased, at
   cost

 

 

 

 

 

 

 

 

 

 

(276.3

(276.3

Exercise of stock option
   awards

 

 

 

 

(65.5

 

 

 

 

231.1

 

165.6

 

Employee stock purchase
   plan participation

 

 

 

 

(0.6

 

 

 

 

4.4

 

3.8

 

 
 
 
 
 
 
 
 

December 31, 2005

$ 500.0

 

$ 2.1

 

$10,632.9

 

$(3,691.4

$ 115.2

 

$(596.1

$6,962.7

 

 
 
 
 
 
 
 
 


  ITEM 8: Financial Statements and Supplementary Data 55


CIT GROUP INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in millions)

Years Ended December 31,  2005  2004  2003 
  
 
 
 
Cash Flows From Operations              
Net income   $      936.4   $      753.6   $      566.9  
Adjustments to reconcile net income to net cash flows from    operations:          
   Depreciation and amortization  1,001.2   998.8  1,086.6  
   Provision for deferred federal income taxes   295.7   321.0   265.1  
   Provision for credit losses  217.0   214.2  387.3  
   Gains on equipment, receivable and investment sales   (242.4 ) (208.8 ) (164.7 )
   Gain on debt redemption     (41.8 ) (50.4)
   Decrease/(increase) in other assets   339.0   (282.2 ) (174.2 )
   Decrease/(increase) in finance receivables held for sale  199.3   (394.5 ) 295.1 
   Increase in accrued liabilities and payables   294.3   328.9   279.2  
   Other   (127.2 ) (71.5)(8.7 )
  
 
 
 
Net cash flows provided by operations   2,913.3   1,617.7   2,482.2  
  
 
 
 
Cash Flows From Investing Activities       
Loans extended   (57,596.2 ) (57,062.0 ) (53,157.8 )
Collections on loans  53,986.5   48,944.1  45,123.9  
Proceeds from asset and receivable sales   6,351.9   8,491.4   7,419.0  
Purchase of finance receivable portfolios  (4,633.1 ) (3,180.0 ) (1,097.5 )
Purchases of assets to be leased   (2,359.1 ) (1,489.2 ) (2,096.3 )
Acquisitions, net of cash acquired  (548.9 ) (726.8 )  
Goodwill and intangibles assets acquired   (436.5 ) (122.1 ) (92.6 )
Net decrease (increase) in short-term factoring receivables  96.5   48.3  (396.1 )
Other   154.0   41.6   14.8  
  
 
 
 
Net cash flows (used for) investing activities  (4,984.9 ) (5,054.7 ) (4,282.6 )
  
 
 
 
Cash Flows From Financing Activities         
Proceeds from the issuance of variable and fixed-rate notes  13,869.3   13,005.6  13,034.6  
Repayments of variable and fixed-rate notes   (9,133.8 ) (8,824.1 ) (10,265.6 )
Net loans extended – pledged in conjunction with secured    borrowings  (1,708.1 )    
Net increase (decrease) in commercial paper   1,014.1   37.0   (800.7 )
Treasury stock repurchases  (584.7 )    
Proceeds from issuance of preferred stock   489.9      
Net repayments of non-recourse leveraged lease debt  (630.0 ) (367.2 ) (125.4 )
Cash dividends paid   (128.7 ) (110.9 ) (101.8 )
Other  20.9   (66.9)(3.6 )
  
 
 
 
Net cash flows provided by financing activities  3,208.9   3,673.5  1,737.5  
  
 
 
 
Net increase (decrease) in cash and cash equivalents  1,137.3   236.5  (62.9 )
Unrestricted cash and cash equivalents, beginning of period  2,210.2   1,973.7  2,036.6  
  
 
 
 
Unrestricted cash and cash equivalents, end of period   $   3,347.5   $   2,210.2   $   1,973.7  
  
 
 
 
Supplementary Cash Flow Disclosure         
Interest paid      $   1,651.5   $  1,241.5   $  1,517.6  
Federal, foreign, state and local income taxes paid, net  $      115.6  $     115.0  $       80.6 

 
56 CIT GROUP INC 2005  


CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CIT Group Inc., a Delaware corporation (“we,” “CIT” or the “Company”), is a global commercial and consumer finance company that was founded in 1908. CIT provides financing and leasing capital for consumers and companies in a wide variety of industries, offering vendor, equipment, commercial, factoring, home lending, student lending and structured financing products as well as offering management advisory services. CIT operates primarily in North America, with locations in Europe, Latin America, Australia and the Asia-Pacific region.

Basis of Presentation

The Consolidated Financial Statements include the results of CIT and its subsidiaries and have been prepared in U.S. dollars in accordance with accounting principles generally accepted in the United States. Inter-company transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current presentation, including certain rail and aerospace maintenance costs related to equipment under operating leases that were previously included in salaries and general operating expenses and reclassified to net finance margin.

In accordance with the provisions of FASB Interpretation No. 46R (“FIN 46”), “Consolidation of Variable Interest Entities,” CIT consolidates variable interest entities for which management has concluded that CIT is the primary beneficiary. Entities that do not meet the definition of a variable interest entity are subject to the provisions of Accounting Research Bulletin No. 51 (“ARB 51”), “Consolidated Financial Statements” and are consolidated when management has determined that it has the controlling financial interest. Entities which do not meet the consolidation criteria in either FIN 46 or ARB 51 but which are significantly influenced by the Company, generally those entities that are twenty to fifty percent owned by CIT, are included in other assets at cost for securities not readily marketable and presented at the corresponding share of equity plus loans and advances. Investments in entities which management does not have significant influence over are included in other assets at cost, less declines in value that are other than temporary. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, qualifying special purpose entities utilized in securitizations are not consolidated.

Financing and Leasing Assets

CIT provides funding through a variety of financing arrangements, including term loans, lease financing and operating leases. The amounts outstanding on loans and direct financing leases are referred to as finance receivables and, when combined with finance receivables held for sale, net book value of operating lease equipment, and certain investments, represent financing and leasing assets.

At the time of designation for sale, securitization or syndication by management, assets are classified as finance receivables held for sale. These assets are carried at lower of cost or fair value.

Income Recognition

Finance income includes interest on loans, the accretion of income on direct financing leases, and rents on operating leases. Related origination and other nonrefundable fees and direct origination costs are deferred and amortized as an adjustment of finance income over the contractual life of the transactions. Income on finance receivables other than leveraged leases is recognized on an accrual basis commencing in the month of origination. Leveraged lease income is recognized on a basis calculated to achieve a constant after-tax rate of return for periods in which CIT has a positive investment in the transaction, net of related deferred tax liabilities. Rental income on operating leases is recognized on an accrual basis.

The accrual of finance income on commercial finance receivables is generally suspended and an account is placed on non-accrual status when payment of principal or interest is contractually delinquent for 90 days or more, or earlier when, in the opinion of management, full collection of all principal and interest due is doubtful. To the extent the estimated fair value of collateral does not satisfy both the principal and accrued interest outstanding, accrued but uncollected interest at the date an account is placed on non-accrual status is reversed and charged against income. Subsequent interest received is applied to the outstanding principal balance until such time as the account is collected, charged-off or returned to accrual status. The accrual of finance income on consumer loans is suspended, and all previously accrued but uncollected income is reversed, when payment of principal and/or interest is contractually delinquent for 90 days or more.

Other revenue includes the following: (1) factoring commissions, (2) commitment, facility, letters of credit, advisory and syndication fees, (3) servicing fees, including servicing of securitized loans, (4) gains and losses from sales of leasing equipment and sales of finance receivables, (5) gains from and fees related to securitizations including accretion related to retained interests (net of impairment), (6) equity in earnings of joint ventures and unconsolidated subsidiaries and (7) gains and losses related to certain derivative transactions.

Lease Financing

Direct financing leases are recorded at the aggregate future minimum lease payments plus estimated residual values less unearned finance income. Operating lease equipment is carried at cost less accumulated depreciation and is depreciated to estimated residual value using the straight-line method over the lease term or projected economic life of the asset. Equipment acquired in satisfaction of loans is recorded at the lower of carrying value or estimated fair value when acquired. Lease receivables include leveraged leases, for which a major portion of the funding is provided by third party lenders on a nonrecourse basis, with CIT providing the balance and acquiring title to the property. Leveraged leases are recorded at the aggregate value of future minimum lease payments plus estimated residual value, less non-recourse third party debt and unearned finance income. Management performs periodic reviews of estimated residual values with other than temporary impairment recognized in current period earnings.


 
  ITEM 8: Financial Statements and Supplementary Data 57


CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reserve for Credit Losses on Finance Receivables

The reserve for credit losses is intended to provide for losses inherent in the portfolio and is periodically reviewed for adequacy considering economic conditions, collateral values and credit quality indicators, including historical and expected charge-off experience and levels of and trends in past due loans, non-performing assets and impaired loans. Changes in economic conditions or other events affecting specific obligors or industries may necessitate additions or deductions to the reserve for credit losses.

The reserve for credit losses is determined based on three key components: (1) specific reserves for loans that are impaired under SFAS 114, based upon the value of underlying collateral or projected cash flows, (2) reserves for estimated losses inherent in the portfolio based upon historical and projected credit risk and (3) reserves for economic environment risk and other factors. In management’s judgment, the reserve for credit losses is adequate to provide for credit losses inherent in the portfolio.

Charge-off of Finance Receivables

Finance receivables are reviewed periodically to determine the probability of loss. Charge-offs are taken after considering such factors as the borrower’s financial condition and the value of underlying collateral and guarantees (including recourse to dealers and manufacturers). Such charge-offs are deducted from the carrying value of the related finance receivables. To the extent that an unrecovered balance remains due, a final charge-off is taken at the time collection efforts are deemed no longer useful. Charge-offs are recorded on consumer and certain small ticket commercial finance receivables beginning at 180 days of contractual delinquency based upon historical loss severity. Collections on accounts previously charged off are recorded as recoveries.

Impaired Finance Receivables

Impaired finance receivables include any loans or capital leases of $500 thousand or greater that are placed on non-accrual status and are subject to periodic individual review by CIT’s Asset Quality Review Committee (“AQR”). The AQR, which is comprised of members of senior management, reviews overall portfolio performance, as well as individual accounts meeting certain credit risk grading parameters. Excluded from impaired finance receivables are: 1) certain individual commercial non-accrual finance receivables for which the collateral value supports the outstanding balance and the continuation of earning status, 2) home lending and other homogeneous pools of loans, which are subject to automatic charge-off procedures, and 3) short-term factoring customer finance receivables, generally having terms of no more than 30 days. Impairment occurs when, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to the contractual terms of the financing agreement. Impairment is measured as any shortfall between the estimated value and the recorded investment in the finance receivable, with the estimated value determined using the fair value of the collateral and other cash flows if the finance receivable is collateralized, or the present value of expected future cash flows discounted at the contract’s effective interest rate.

Long-Lived Assets

A review for impairment of long-lived assets, such as certain operating lease equipment, is performed at least annually and whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Impairment of assets is determined by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment is the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is based upon discounted cash flow analysis and available market data. Current lease rentals, as well as relevant and available market information (including third party sales for similar equipment, published appraisal data and other marketplace information), is considered, both in determining undiscounted future cash flows when testing for the existence of impairment and in determining estimated fair value in measuring impairment. Depreciation expense is adjusted when projected fair value at the end of the lease term is below the projected book value at the end of the lease term. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to dispose.

Goodwill and Other Identified Intangibles

SFAS No. 141 “Business Combinations” requires that business combinations be accounted for using the purchase method. The purchase method of accounting requires that the cost of an acquired entity be allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The difference between the fair values and the purchase price is recorded to goodwill. Also under SFAS 141, identified intangible assets acquired in a business combination must be separately valued and recognized on the balance sheet if they meet certain requirements.

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired, less the fair value of liabilities assumed from business combinations. CIT adopted SFAS No. 142, “Goodwill and Other Intangible Assets” effective October 1, 2001. Since adoption, goodwill is no longer amortized, but instead is assessed for impairment at least annually. During this assessment, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows and market place data.

Intangible assets consist primarily of customer relationships acquired, which have amortizable lives up to 20 years, and computer software and related transactions processes, which are being amortized over a 5-year life. An evaluation of the remaining useful lives and the amortization methodology of the intangible assets is performed periodically to determine if any change is warranted.


 
58 CIT GROUP INC 2005  


CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Student Lending Acquisition

In February 2005, CIT acquired Education Lending Group, Inc. (“EDLG”), a specialty finance company principally engaged in providing education loans (primarily U.S. government guaranteed), products and services to students, parents, schools and alumni associations. The acquisition was accounted for under the purchase method, with the acquired assets and liabilities recorded at their estimated fair values as of the February 17, 2005 acquisition date. The assets acquired included approximately $4.4 billion of finance receivables and $300 million of goodwill and intangible assets. This business is largely funded with “Education Loan Backed Notes,” which are accounted for under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The assets related to these borrowings are owned by a special purpose entity that is consolidated in the CIT financial statements, and the creditors of that special purpose entity have received ownership and / or security interests in the assets. As EDLG retains certain call features with respect to these borrowings, the transactions do not meet the SFAS 140 requirements for sales treatment and are therefore recorded as secured borrowings and are reflected in the Consolidated Balance Sheet as “student lending receivables pledged” and “non-recourse, secured borrowings - student lending.” Certain cash balances, included in cash and cash equivalents, are restricted in conjunction with these borrowings.

Other Assets

Assets received in satisfaction of loans are carried at the lower of carrying value or estimated fair value less selling costs, with write-downs generally reflected in provision for credit losses.

Realized and unrealized gains (losses) on marketable equity securities included in CIT’s venture capital portfolios are recognized currently in operations. Unrealized gains and losses, representing the difference between carrying value and estimated current fair market value, for other debt and equity securities are recorded in other accumulated comprehensive income, a separate component of equity.

Investments in joint ventures are accounted for using the equity method, whereby the investment balance is carried at cost and adjusted for the proportionate share of undistributed earnings or losses. Unrealized intercompany profits and losses are eliminated until realized, as if the joint venture were consolidated.

Investments in debt and equity securities of non-public companies are carried at fair value. Gains and losses are recognized upon sale or write-down of these investments as a component of operating margin.

Securitization Sales

Pools of assets are originated and sold to special purpose entities which, in turn, issue debt securities backed by the asset pools or sell individual interests in the assets to investors. CIT retains the servicing rights and participates in certain cash flows from the pools. For transactions meeting accounting