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

FORM 10-Q

|X| Quarterly Report Pursuant to Section 13 or 15(d) or |_| Transition Report Pursuant to Section 13 or 15(d)
  of the Securities Exchange Act of 1934     of the Securities Exchange Act of 1934
  For the quarterly period ended March 31, 2008      

Commission File Number: 001-31369

CIT GROUP INC.
(Exact name of Registrant as specified in its charter)

Delaware 65-1051192
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
   
505 Fifth Avenue, New York, New York 10017
(Address of Registrant’s principal executive offices) (Zip Code)
   
(212) 771-0505  
(Registrant’s telephone number)  

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 |_| Smaller reporting company |_|.

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Yes | | No |X|

As of May 2, 2008, there were 282,617,637 shares of the registrant’s common stock outstanding.



CONTENTS

 

Part One—Financial Information:
ITEM 1. Consolidated Financial Statements 2
 
  Consolidated Balance Sheets (Unaudited) 2
 
  Consolidated Statements of Income (Unaudited) 3
 
  Consolidated Statement of Stockholders’ Equity (Unaudited) 4
   
  Consolidated Statements of Cash Flows (Unaudited) 5
     
  Notes to Consolidated Financial Statements 6-26
   
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  
     
  and  
   
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 27-59
 
ITEM 4. Controls and Procedures 59

Part Two—Other Information:
ITEM 1. Legal Proceedings 60
 
ITEM 1A Risk Factors 60-65
   
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 65
 
ITEM 3. Defaults Upon Senior Securities 66
 
ITEM 4. Submission of Matters to a Vote of Security Holders 66
 
ITEM 5. Other Information 66
 
ITEM 6. Exhibits 66-69
 
Signatures 70

  Table of Contents 1

Part One—Financial Information

ITEM 1. Consolidated Financial Statements


CIT GROUP INC. AND SUBSIDIARIES


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

  March 31,
2008

December 31,
2007

Financing and leasing assets held for investment:        
   Finance receivables, including receivables pledged of $25,014.1 and $24,174.6 $63,538.9   $62,536.5  
   Reserve for credit losses (1,121.9 ) (831.5 )
 
 
 
   Net finance receivables 62,417.0   61,705.0  
   Operating lease equipment, net 12,203.7   12,610.5  
Financing and leasing assets held for sale 2,615.7   1,606.0  
Cash and cash equivalents, including $1,293.7 and $479.2 restricted 10,340.3   6,792.3  
Retained interests in securitizations 1,153.1   1,208.0  
Goodwill and intangible assets, net 1,159.5   1,152.5  
Other assets 5,834.4   5,539.1  
 
 
 
Total Assets $95,723.7   $90,613.4  
 
 
 


CONSOLIDATED BALANCE SHEETS – Liabilities and Stockholders’ Equity

Debt:        
   Commercial paper $1,338.4   $2,822.3  
   Variable-rate bank credit facilities 7,300.0    
   Variable-rate non-recourse, secured borrowings 19,090.3   17,430.3  
   Variable-rate senior unsecured notes 18,584.5   19,888.2  
   Fixed-rate senior unsecured notes 30,668.5   29,477.6  
   Junior subordinated notes 1,440.0   1,440.0  
 
 
 
Total debt 78,421.7   71,058.4  
   Deposits 2,406.5   2,745.8  
Credit balances of factoring clients 3,572.9   4,542.2  
Accrued liabilities and payables 4,624.7   5,248.9  
 
 
 
Total Liabilities 89,025.8   83,595.3  
Commitments and Contingencies (Note 11)        
Minority interest 54.3   57.5  
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   350.0  
             Series B 1,500,000 with a liquidation preference of $100 per share 150.0   150.0  
   Common stock: $0.01 par value, 600,000,000 authorized        
       Issued: 215,044,322 and 214,390,177 2.1   2.1  
       Outstanding: 191,600,618 and 189,925,903        
   Paid-in capital, net of deferred compensation of $16.7 and $34.4 10,367.3   10,453.9  
   Accumulated deficit (3,207.0 ) (2,949.8 )
   Accumulated other comprehensive income 152.8   194.8  
   Less: treasury stock, 23,443,704 and 24,464,574 shares, at cost (1,171.6 ) (1,240.4 )
 
 
 
Total Common Stockholders’ Equity 6,143.6   6,460.6  
 
 
 
Total Stockholders’ Equity 6,643.6   6,960.6  
 
 
 
Total Liabilities and Stockholders’ Equity $95,723.7   $90,613.4  
 
 
 

See Notes to Consolidated Financial Statements.

 

2 CIT GROUP INC


CIT GROUP INC. AND SUBSIDIARIES


Consolidated Statements of Income (Unaudited) (dollars in millions - except per share data)

  Quarters Ended March 31,
  2008
2007
Finance revenue $1,682.0   $1,617.1  
Interest expense 954.1   873.6  
Depreciation on operating lease equipment 294.6   263.6  
 
 
 
Net finance revenue 433.3   479.9  
Provision for credit losses 464.5   71.1  
 
 
 
Net finance revenue, after credit provision (31.2 ) 408.8  
Valuation allowance for receivables held for sale 140.5    
 
 
 
Net finance revenue, after credit provision and valuation allowance (171.7 ) 408.8  
Other income 174.0   328.6  
 
 
 
Total net revenue, after valuation allowance 2.3   737.4  
Salaries and general operating expenses 318.0   355.8  
Provision for severance and real estate exiting activities 69.1    
Loss on debt and debt-related derivative extinguishments 148.1   139.3  
 
 
 
(Loss) income before (benefit) provision for income taxes (532.9 ) 242.3  
Benefit (provision) for income taxes 294.2   (34.1 )
Minority interest, after tax (11.0 ) (0.1 )
 
 
 
Net (loss) income before preferred stock dividends (249.7 ) 208.1  
Preferred stock dividends (7.5 ) (7.5 )
 
 
 
Net (loss) income (attributable) available to common stockholders $  (257.2 ) $   200.6  


Per common share data        
Basic (loss) earnings per share $    (1.35 ) $     1.03  
Diluted (loss) earnings per share $    (1.35 ) $     1.01  
Number of shares - basic (thousands) 191,091   194,099  
Number of shares - diluted (thousands) 191,091   197,922  
Dividends per common share $     0.25   $     0.25  

See Notes to Consolidated Financial Statements.

 

  Item 1: Consolidated Financial Statements 3


CIT GROUP INC. AND SUBSIDIARIES


Consolidated Statement of Stockholders’ Equity (Unaudited) (dollars in millions)

Preferred
Stock

Common
Stock

Paid-in
Capital

Accumulated
(Deficit) /

Earnings

Accumulated
Other
Comprehensive
Income / (Loss)

Treasury
Stock

Total
Stockholders’
Equity

December 31, 2007 $500.0    $2.1    $10,453.9   $(2,949.8 ) $194.8   $(1,240.4 ) $6,960.6  
                         
 
Net loss before preferred stock dividends             (249.7 )         (249.7 )
Foreign currency translation adjustments                 (7.3 )     (7.3 )
Change in fair values of derivatives                            
   qualifying as cash flow hedges                 (25.3 )     (25.3 )
Unrealized loss on available for                            
   sale equity and securitization                            
   investments, net                 (4.0 )     (4.0 )
Minimum pension liability adjustment                 (5.4 )     (5.4 )
                         
 
Total comprehensive (loss)                         (291.7 )
                         
 
Cash dividends – common         (48.2 )             (48.2 )
Cash dividends – preferred             (7.5 )         (7.5 )
Restricted stock expense         (6.8 )             (6.8 )
Stock option expense         5.3               5.3  
Issuance of stock         (33.8 )         65.0   31.2  
Employee stock purchase plan participation         (3.1 )         3.8   0.7  







March 31, 2008 $500.0   $2.1   $10,367.3   $(3,207.0 ) $152.8   $(1,171.6 ) $6,643.6  







See Notes to Consolidated Financial Statements.

 

4 CIT GROUP INC


CIT GROUP INC. AND SUBSIDIARIES


Consolidated Statements of Cash Flows (Unaudited)
Quarters Ended March 31, (dollars in millions)


  2008
2007
Cash Flows From Operations        
Net (loss) income before preferred stock dividends $    (249.7 ) $    208.1  
Adjustments to reconcile net (loss) income to net cash flows from operations:        
   Depreciation, amortization and accretion 334.8   292.2  
   Gains on equipment, receivable and investment sales (56.9 ) (72.9 )
   Valuation allowance for receivables held for sale 140.5    
   Loss on debt and debt-related derivative extinguishments 148.1   139.3  
   Provision for credit losses 464.5   71.1  
   (Benefit) provision for deferred federal income taxes (351.8 ) 44.1  
   Share-based compensation amortization   17.5  
   Decrease (increase) in finance receivables held for sale 40.6   (211.9 )
   Decrease in other assets 79.6   52.3  
   (Decrease) in accrued liabilities and payables (322.9 ) (84.3 )


Net cash flows provided by operations 226.8   455.5  


Cash Flows From Investing Activities        
Finance receivables extended and purchased (17,002.0 ) (17,979.5 )
Principal collections of finance receivables and investments 13,972.9   13,613.7  
Proceeds from asset and receivable sales 627.9   1,038.3  
Purchases of assets to be leased and other equipment (660.4 ) (696.2 )
Acquisitions, net of cash acquired   (1,835.6 )
Net (increase) in short-term factoring receivables (634.6 ) (200.2 )


Net cash flows (used for) investing activities (3,696.2 ) (6,059.5 )


Cash Flows From Financing Activities        
Net decrease in commercial paper (1,483.9 ) (103.6 )
Proceeds from the issuance of term debt and bank credit facilities 10,539.5   6,971.5  
Repayments of term debt (2,540.2 ) (2,291.9 )
Net (decrease) increase in deposits (339.3 ) 569.7  
Net repayments of non-recourse leveraged lease debt (4.3 ) (22.4 )
Collection of security deposits and maintenance funds 754.4   326.9  
Repayment of security deposits and maintenance funds (677.7 ) (282.4 )
Cash dividends paid (55.7 ) (58.9 )
Treasury stock issuances 31.2   79.3  
Treasury stock repurchases   (498.4 )
Excess tax benefit related to share-based compensation   17.6  
Other (21.1 ) (62.6 )


Net cash flows provided by financing activities 6,202.9   4,644.8  


Net increase (decrease) in cash and cash equivalents 2,733.5   (959.2 )
Unrestricted cash and cash equivalents, beginning of period 6,313.1   4,279.4  


Unrestricted cash and cash equivalents, end of period $  9,046.6   $ 3,320.2  


Supplementary Cash Flow Disclosure        
Interest paid $     805.2   $    656.4  
Federal, foreign, state and local income taxes paid, net $         1.0   $      84.2  

See Notes to Consolidated Financial Statements.

  Item 1: Consolidated Financial Statements 5


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

NOTE 1 – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of CIT Group Inc. and its majority owned subsidiaries (“CIT” or the “Company”), and those variable interest entities (VIEs) where the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. Results of operations of companies purchased are included from the dates of acquisition and for VIEs, from the dates that the Company became the primary beneficiary. Assets held in an agency or fiduciary capacity are not included in the consolidated financial statements. The Company accounts for investments in companies for which it owns a voting interest of 20 percent to 50 percent and for which it has the ability to exercise significant influence over operations and financial decisions using the equity method of accounting. These investments are included in other assets and the Company’s proportionate share of net income or loss is included in other income.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates and assumptions. These financial statements have been prepared in accordance with the instructions to Form 10-Q, do not include all of the information and note disclosures required by accounting principles generally accepted in the United States (“GAAP”) and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The financial statements in this Form 10-Q have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of CIT’s financial position, results of operations and cash flows. Certain prior period amounts have been conformed to the current year presentation including cash flow balances and the balance sheet presentation of derivative counterparty receivables and payables detailed in the following sections.

Commencing with the presentation of the Consolidated Statements of Cash Flows for the nine months ended September 30, 2007, the Company revised the classification of cash flow changes in security deposits and aerospace equipment maintenance funds and included these amounts as separate line items within “Cash Flows from Financing Activities”. Previously, these changes had been included in the line item Increase (decrease) in accrued liabilities and payables in “Cash Flows from Operations”. The effect of this revision to the previously issued 2007 cash flow statement is a reduction of $44.5 million and corresponding increase in cash flows from financing activities.

Liquidity and Capital

The success and profitability of the Company’s business depends upon access to the debt capital markets to provide liquidity and efficient funding for profitable asset growth. These markets have exhibited heightened volatility and dramatically reduced liquidity. Liquidity in the debt capital markets has become significantly more constrained and interest rates available to the Company have increased significantly relative to benchmark rates, such as U.S. treasury securities and LIBOR. Recent downgrades in the Company’s short and long-term credit ratings had the practical effect of leaving the Company without current access to the “A1/P1” prime commercial paper market, a historical source of liquidity, and necessitated the Company’s recent action to fully draw down its $7.3 billion of bank credit facilities. As a result of these developments, the Company is not currently accessing the commercial paper and unsecured term debt markets and has shifted funding sources over the past year primarily to asset-backed securities and other secured credit facilities, including both on-balance sheet and off-balance sheet securitizations. While secured financing may provide funding at an acceptable cost in the current market for many of the Company’s businesses, for some businesses, secured funding is significantly less efficient and more costly than unsecured debt facilities have been historically.

In April and May 2008, the Company issued common and preferred stock for proceeds totaling approximately $1.535 billion (prior to expenses) (see Note 19) and announced a 60% reduction in the quarterly common stock dividend. Additional measures approved by the Company’s Board of Directors and designed to enhance the Company’s capital and liquidity position, include the following:

•  second quarter 2008 sale of $1.4 billion of asset-backed loans and $3.2 billion of related commitments;
   
sale of $770 million of commercial aircraft, of which $300 million closed in the first quarter of 2008;
   
identification of an additional $2 billion in assets to be financed or sold; and
   
evaluation of strategic alternatives for the Company’s $4 billion rail leasing business.

The liquidity and capital enhancement measures described above are designed to restore, over time, the Company’s access to competitively-priced unsecured term debt markets and the commercial paper market and, in turn, to restore the Company to profitability. These initiatives are subject to a number of uncertainties, and there can be no assurance that any or all of them will be undertaken and if undertaken, successfully completed. Further, if any or all of these measures are undertaken, they may not achieve their anticipated benefits. Management’s failure to successfully implement its liquidity and capital enhancement measures could have a material adverse effect on the Company’s financial position, results of operations and cashflows.

6 CIT GROUP INC


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

Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between two market participants on the measurement date. The impact of adopting SFAS No. 157 on accumulated deficit at January 1, 2008 was not material. Subsequent changes in the fair value of financial assets and liabilities are recognized in earnings as they occur.

The Company determines the fair value of its assets and liabilities based on the fair value hierarchy established in SFAS 157, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain other securities that are highly liquid and are actively traded in over-the-counter markets;
   
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes derivative contracts and certain loans held-for-sale;
   
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using valuation models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes retained residual interests in securitizations, highly structured or long-term derivative contracts and collateralized loan obligations (CLO) where independent pricing information is not able to be obtained for a significant portion of the underlying assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest ranking of any input that is significant to the fair value measurement.

The Company did not elect to measure any financial instruments at fair value under SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”

Effective January 1, 2008, the Company adopted FASB Staff Position FIN 39-1 (FSP FIN 39-1), an amendment to FASB Interpretation No. 39, which allows for the accounting policy election to offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. In conjunction with this adoption, the Company has elected to present assets and liabilities on a gross-by-counterparty basis. Assets and liabilities, as previously reported at December 31, 2007, were reflected on a net-by-counterparty basis for transactions settled in the same currency. Accordingly, other assets and accrued liabilities and payables as of December 31, 2007 were each increased by $365.4 million from amounts previously reported in order to conform to the current presentation.

New Accounting Pronouncements

On March 19, 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment to FASB No. 133” (SFAS 161). SFAS 161 requires expanded qualitative, quantitative and credit-risk disclosures about derivatives and hedging activities and their effects on the Company’s financial position, financial performance and cashflows. SFAS 161 also clarifies that derivatives are subject to credit risk disclosures as required by SFAS 107, “Disclosures about Fair Value of Financial Instruments.” SFAS 161 is effective for the year beginning January 1, 2009. The adoption of SFAS 161 will not impact the Company’s financial condition and results of operations.

On December 4, 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R). SFAS 141R modifies the accounting for business combinations and requires, with limited exceptions, the acquiring entity in a business combination to recognize 100 percent of the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date fair value. In addition, SFAS 141R limits the recognition of acquisition-related restructuring liabilities, requires the expensing of acquisition-related and restructuring costs and the acquirer to record contingent consideration measured at the acquisition date fair value. SFAS 141R is effective for new acquisitions consummated on or after January 1, 2009. Early adoption of SFAS 141R is not permitted. The Company is currently evaluating the effect of this standard.

  Item 1: Consolidated Financial Statements 7


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

On December 4, 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 requires all entities to report noncontrolling (i.e. minority) interests in subsidiaries as equity in the Consolidated Financial Statements and to account for transactions between an entity and noncontrolling owners as equity transactions if the parent retains its controlling financial interest in the subsidiary. SFAS 160 also requires expanded disclosure that distinguishes between the interests of a parent’s owners and the interests of noncontrolling owners of a subsidiary. SFAS 160 is effective for the Company’s financial statements for the year beginning on January 1, 2009 and early adoption is not permitted. The adoption of SFAS 160 is not expected to have a material impact on the Company’s financial condition and results of operations.

NOTE 2 – FINANCING AND LEASING ASSETS

The following table summarizes the assets pledged/encumbered. With the exception of the rail assets, pledged assets are classified as finance receivables. These amounts do not include non-recourse borrowings related to leveraged lease transactions. Unencumbered financing and leasing assets totaled $52,081.2 million and $52,578.5 million at March 31, 2008 and December 31, 2007.


Pledged or Encumbered Financing and Leasing Assets (dollars in millions)

  March 31,
2008

December 31,
2007

     
Consumer (student lending) $  9,732.3 $  9,079.4
Home Lending 6,614.0 7,074.3
Trade Finance (factoring)(1) 5,975.3 5,897.5
Vendor Finance (acquisition financing) 1,354.0 1,491.3
Corporate Finance(2) 1,076.4 370.0
Corporate Finance    
   (energy project finance) 262.1 262.1


Subtotal – Finance Receivables 25,014.1 24,174.6
Transportation Finance – Rail(3) 1,263.0


Total Financing and Leasing Assets $26,277.1 $24,174.6



(1) Excludes credit balances of factoring clients.
 
(2) Includes financing executed via total return swaps (whereby CIT receives periodic payments based on the performance of the underlying loans and makes periodic payments based on interest indices), under which CIT retains control of and the full risk related to, these loans.
   
(3) Equipment under operating lease

On June 30, 2007 the Company determined that its home lending receivables portfolio no longer qualified as assets held for investment. Subsequently, management determined an orderly run-off of a substantial portion of the Company’s home lending receivables portfolio, rather than a sale was preferable and $9.7 billion in then remaining unpaid principal balance (UPB) was transferred at the lower of cost or market from assets held for sale to assets held for investment. Consistent with management’s determination to hold certain assets for the foreseeable future, the Company segregated $7.2 billion UPB of the $9.7 billion portfolio in a bankruptcy-remote vehicle and issued $5.2 billion of securities as on-balance sheet, non-recourse secured financings. These financing transactions encumber the assets for their remaining lives, as the terms of the securitizations do not permit the Company to withdraw assets from the securitization vehicles or to substitute comparable assets. The securities in these on-balance sheet financing (securitization) transactions were structured into separate credit tranches and rated AAA through BBB-. The $5.2 billion private placement of securities sold to investors was comprised entirely of the AAA components of the structure. The $6.6 billion of home lending loans at March 31, 2008 in the preceding table remains encumbered by these transactions.

At September 30, 2007, the Company transferred assets from held for sale (HFS) to held for investment (HFI) at the lower of cost or market at the time of transfer. The portion of the accumulated valuation allowance related to loans transferred from HFS to HFI at September 30 is accounted for as accretable discount for periods after September 30, 2007. In the first quarter of 2008, the Company transferred approximately $482 million (contractual unpaid principal balance) of remaining manufactured housing loans from HFS to HFI. The cumulative unaccreted discount included in the carrying value of loans held for investment was $409 million and $453 million at March 31, 2008 and December 31, 2007.

In the quarter ended March 31, 2008, the Company identified $1.4 billion of Corporate Finance funded asset-based loan commitments for sale in the second quarter, and $500 million of commercial aerospace assets for sale in 2008 in conjunction with management’s plan to sell additional aircraft. Accordingly, such assets are included in financing and leasing assets held for sale.

See Note 6 Debt for variable-rate non-recourse secured borrowing balances.

NOTE 3 – RESERVE FOR CREDIT LOSSES

The following table presents changes in the reserve for credit losses.


At or for the Quarters Ended March 31, (dollars in millions)

  2008
2007
Balance, beginning of period $831.5   $659.3  


Provision for credit losses –        
   commercial segments (1) 97.1   27.9  
Provision for credit losses –        
   consumer segments 367.4   43.2  
Reserve changes relating to        
   foreign currency translation,        
   acquisitions, other (8.2 ) 30.8  


   Net additions to the        
      reserve for credit losses 456.3   101.9  


Charged-off - finance receivables (180.8 ) (103.3 )
Recoveries on finance receivables        
   previously charged-off 14.9   46.1  


   Net credit losses (165.9 ) (57.2 )


Balance, end of period $1,121.9   $704.0  



(1) Including Corporate and Other

8 CIT GROUP INC



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

NOTE 4 – CONCENTRATIONS

The following table summarizes the geographic and industry compositions (by obligor) of owned financing and leasing assets and other equity investments.


Concentrations (dollars in millions)

  March 31, 2008
December 31, 2007
Geographic Amount
Percent
Amount
Percent
Northeast $14,418.2    18.3 % $14,530.2    18.9 %
West 12,704.9 16.2 % 12,893.0 16.7 %
Midwest 13,051.3 16.6 % 12,769.5 16.6 %
Southeast 10,716.8 13.6 % 10,209.1 13.3 %
Southwest 7,015.0 8.9 % 6,659.0 8.7 %
 
 
 
 
 
    Total U.S. 57,906.2 73.6 % 57,060.8 74.2 %
Canada 4,762.2 6.1 % 4,841.1 6.3 %
Other international 15,923.5 20.3 % 15,016.9 19.5 %
 
 
 
 
 
    Total $78,591.9 100.0 % $76,918.8 100.0 %
 
 
 
 
 
Industry            
Student lending(1) $12,561.9 16.0 % $11,584.9 15.1 %
Manufacturing(2) 10,031.2 12.8 % 9,923.5 12.9 %
Commercial airlines (including regional airlines) 8,824.9 11.2 % 8,625.8 11.2 %
Home mortgage(3)(6) 8,642.4 11.0 % 9,010.4 11.7 %
Retail(4) 6,897.7 8.8 % 7,225.6 9.4 %
Service industries 4,932.1 6.3 % 5,282.7 6.9 %
Healthcare 4,199.5 5.3 % 4,223.1 5.5 %
Transportation(5) 3,192.0 4.1 % 3,138.8 4.1 %
Wholesaling 2,076.4 2.6 % 1,889.9 2.5 %
Communications 1,757.3 2.2 % 1,625.3 2.1 %
Other (no industry greater than 2.0%) 15,476.5 19.7 % 14,388.8 18.6 %
 
 
 
 
 
    Total $78,591.9 100.0 % $76,918.8 100.0 %
 
 
 
 
 

(1) Includes Private (non-government guaranteed) loans of $734.4 million and $599.3 million at March 31, 2008 and December 31, 2007. Loans to students at the top 5 institutions, based on outstanding exposure, represent approximately 50% of the private loan portfolio on a UPB basis.
(2) Includes manufacturers of apparel (1.8%), followed by food and kindred products, steel and metal products, transportation equipment, industrial machinery and equipment, electronic equipment, textiles, printing and other industries.
(3) Includes receivables from customers for products in manufactured housing.
(4) Includes retailers of apparel (3.3%) and general merchandise (3.3%).
(5) Includes rail, bus, over-the-road trucking industries and business aircraft.
(6) Geographic concentrations by region for home lending include $1.9 billion northeast, $1.5 billion midwest, $2.6 billion west, $1.9 billion southeast and $0.7 billion southwest. The top 5 states include California ($1.6 billion), Florida ($0.8 billion), New York ($0.6 billion), Illinois ($0.5 billion), and Texas ($0.5 billion).

  Item 1: Consolidated Financial Statements 9



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

NOTE 5 – RETAINED INTERESTS IN SECURITIZATIONS

The following table details the components of retained interests in securitizations.


Retained Interests in Securitizations (dollars in millions)

  March 31,
2008

December 31,
2007

Retained interests in loans other than home lending:    
   Retained subordinated securities(1) $  556.4 $  500.5
   Interest-only strips 332.3 426.0
   Cash reserve accounts 241.2 251.0
 
 
 
   Sub-total 1,129.9 1,177.5
 
 
 
Retained interests in home lending loans:    
   Retained subordinated securities 21.9 26.4
   Interest-only strips 1.3 4.1
 
 
 
   Sub-total 23.2 30.5
 
 
 
Total retained interests in securitizations $1,153.1 $1,208.0
 
 
 

(1) Includes $6.8 million in a collateralized loan obligation for both periods.

Retained subordinated securities, which create “over-collateralization” for more senior securities, represent the discounted cash flows expected to be realized by CIT from the principal balance of the finance receivables in the trusts/conduits in excess of the principal balance of the debt issued by such trusts/conduits, after taking into account expected losses.

Interest-only strips represent the discounted cash flows expected to be realized by CIT from the interest on the finance receivables in the trusts/conduits in excess of the interest expense on the debt issued by such trusts/conduits, to the extent the excess spread is not utilized to cover expected losses in the portfolios and servicing fees and expenses.

Cash reserve accounts represent the discounted cash flows expected to be realized by CIT from cash reserves placed with the trusts/conduits by CIT to the extent the reserves are not utilized to cover expected losses in the portfolios.

During the quarter the Company recorded a pretax $40 million impairment charge, largely reflecting the repricing of debt underlying a securitization conduit vehicle in the Vendor Finance segment that was triggered by the sale of CIT’s joint venture equity interest of which $33 million should have been recorded concurrently with the 2007 fourth quarter sale of its Dell Financial Services joint venture equity interest.

NOTE 6 – DEBT

Commercial paper declined to $1.3 billion at March 31, 2008 from $2.8 billion at December 31, 2007. Recent downgrades in the Company’s short and long-term credit ratings had the practical effect of leaving the Company without current access to the “A1/P1” rated commercial paper market, a historical source of liquidity, and necessitated the Company’s recent action to fully draw down its bank credit facilities. Given the draw on the bank lines and the credit ratings downgrades, the Company is no longer accessing the prime (A-1/P-1 rated) commercial paper markets and expects to repay, prior to December 31, 2008, all outstanding commercial paper.

The following table includes information relating to these bank line facilities.


Bank Lines Drawn (dollars in millions)

Maturity Date Original
Term

# of
Banks

Total
Facility
Amount

October 10, 2008 5 Year 27 $2,100
April 14, 2009 5 Year 33    2,100
April 13, 2010 5 Year 30    2,100
December 6, 2011 5 Year 37    1,000
     
 
      $7,300
     
 

Interest on each of these facilities is based on a credit ratings grid, with the interest rate measured as a spread in basis points over LIBOR, increasing if the Company’s credit ratings decrease. At the Company’s current ratings, the total weighted average interest rate approximates LIBOR plus 50 basis points. At the lowest credit rating, the weighted average rate would not exceed LIBOR plus 100 bps. The individual low and high rates, depending on the Company’s credit ratings, are LIBOR plus 29 bps and LIBOR plus 120 bps. The maturities of these facilities reflect the date upon which the Company must repay the outstanding balance, with no option to extend the term for repayment.

10 CIT GROUP INC



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

Variable-rate non-recourse secured borrowings increased to $19.1 billion at March 31, 2008 from $17.4 billion at December 31, 2007. See Note 2 Financing and Leasing Assets for encumbered financing and leasing asset balances. The new borrowings of $2.7 billion have a weighted average cost of approximately LIBOR plus 100 to 125 basis points. Secured financing maturities of $1.0 billion were repaid during the quarter. The following table summarizes the secured borrowings by type of collateral.


Variable-rate Non-recourse Secured Borrowings Summary (dollars in millions)

  March 31,
2008

December 31,
2007

Consumer (student lending) $  9,812.9 $  9,437.5
Home Lending 4,652.7 4,785.9
Trade Finance (factoring receivable)(1) 1,294.0 1,262.5
Vendor Finance (acquisition financing) 1,246.8 1,312.3
Transportation Finance–Rail 850.0
Corporate Finance(2) 971.8 370.0
Corporate Finance (energy project finance) 262.1 262.1


Total $19,090.3 $17,430.3



(1) Excludes credit balances of factoring clients.
   
(2) Includes financing executed via total return swaps, under which CIT retains control of, and the full risk related to, these loans.

During the quarter ended March 31, 2008, the Company issued approximately $600 million in unsecured retail notes with a weighted average term of 3 years at a weighted average coupon of 6.75% and repaid maturing unsecured term debt of $1.6 billion.

NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company executes derivative transactions to hedge economic exposures. The majority of these transactions qualify for hedge accounting.

The fair value of the Company’s derivative contracts is reflected net of cash paid or received pursuant to credit support agreements and is reported on a gross-by-counterparty basis in the Company’s consolidated statements of financial condition at March 31, 2008. The amounts as of December 31, 2007 have been conformed to the current presentation. The fair value of derivative financial instruments is set forth below:


Fair Value of Derivative Financial Instruments (dollars in millions)

  March 31, 2008
December 31, 2007
  Assets
Liabilities
Assets
Liabilities
Cross currency swaps $1,244.3 $      (0.8 ) $   856.0 $      (0.5 )
Interest rate swaps 308.5 (349.0 ) 312.4 (407.9 )
Foreign currency forward exchange contracts 182.1 (437.9 ) 194.9 (493.0 )
 
 
 
 
 
Derivatives qualifying as SFAS 133 hedges 1,734.9 (787.7 ) 1,363.3 (901.4 )
Non-qualifying derivatives 259.9 (308.1 ) 99.1 (129.8 )
 
 
 
 
 
Total $1,994.8 $(1,095.8 ) $1,462.4 $(1,031.2 )
 
 
 
 
 

  Item 1: Consolidated Financial Statements 11



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

The following table presents additional information regarding qualifying SFAS 133 hedges, specifically the notional principal value of interest rate swaps by class and the corresponding hedged positions.


Interest Rate Swaps (dollars in millions)

March 31,
2008

December 31,
2007

Hedged Item
Classification
Variable rate to fixed rate swaps(1)    
$ 8,252.3 $ 9,744.8 Cash flow variability associated with specific  
    variable-rate debt    Cash flow
1,796.9 Cash flow variability related to forecasted  
    commercial paper issuances    Cash flow


$ 8,252.3 $11,541.7    


Fixed rate to variable rate swaps(2)    
$11,625.1 $12,920.9 Specific fixed rate debt    Fair value



(1) CIT pays a fixed rate of interest and receives a variable rate of interest. These swaps hedge the cash flow variability associated with forecasted commercial paper and specific variable rate debt.
(2) CIT pays a variable rate of interest and receives a fixed rate of interest. These swaps hedge specific fixed rate debt instruments.

During the quarter ended March 31, 2008, hedge accounting was discontinued with respect to the commercial paper program and the related variable to fixed rate swaps. In addition, to maintain the Company’s overall interest sensitivity position, hedge accounting was also discontinued on a similar notional amount of fixed rate to variable rate swaps, with essentially offsetting economics, which previously hedged specific fixed rate debt. All of these swaps were terminated in the second quarter of 2008.

The following table presents the notional principal amounts of cross-currency swaps by class and the corresponding hedged positions.


Cross-currency Swaps (notional dollars in millions)

March 31,
2008

  December 31,
2007

  Hedged Item
  Hedge
Classification

  Description
$4,026.5 $4,026.5 Foreign denominated debt Foreign currency fair value CIT pays a U.S. variable rate of interest and receives a variable foreign rate of interest. These swaps hedge the fair value changes in foreign currency associated with specific foreign denominated debt and are designated as foreign currency fair value hedges.
249.5 249.5 Foreign denominated fixed-rate debt Foreign currency cash flow CIT pays a U.S. fixed rate of interest and receives a fixed foreign rate of interest. These swaps hedge the currency and interest rate cash flow variability associated with payments on specific foreign denominated fixed rate debt and are designated as foreign currency cash flow hedges.
4.3 27.6 Foreign currency loans to subsidiaries Foreign currency cash flow CIT receives a U.S. fixed rate of interest and pays a fixed foreign rate of interest. These swaps hedge the currency cash flow variability associated with payments on specific fixed-rate foreign denominated inter-company receivables and are designated as foreign currency cash flow hedges.

 
$4,280.3 $4,303.6      

 
           

12 CIT GROUP INC



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

CIT sells various foreign currencies forward. These contracts are designated as either cash flow hedges of specific foreign denominated inter-company receivables or as net investment hedges of foreign denominated investments in subsidiaries. The following table presents the notional principal amounts of foreign currency forward exchange contracts and the corresponding hedged positions.


Foreign Currency Forward Exchange Contracts (notional dollars in millions)

March 31,
2008

December 31,
2007

 Hedged Item
Hedge
Classification

$3,897.1 $3,853.8 Foreign currency equity investments in subsidiaries Foreign currency net investment
1,537.2 1,394.4 Foreign currency loans to subsidiaries Foreign currency cash flow


   
$5,434.3 $5,248.2    


The table that follows summarizes the nature and notional amount of economic hedges that do not qualify for hedge accounting under SFAS 133.


Non-hedge Accounting Derivatives (notional dollars in millions)

March 31,
2008

December 31,
2007

Type of Swaps/ Caps
$19,459.8 $17,564.1 US dollar interest rate swaps
4,102.0 3,184.1 Interest rate caps
401.3 349.6 Cross-currency swaps
350.1 254.4 Foreign currency interest rate swaps
148.0 168.0 Credit default swaps

 
   
$24,461.2 $21,520.2  

 
   

The U.S. dollar interest rate swaps included in the table above relates to the following: (1) $9.4 billion at March 31, 2008 and $10.7 billion at December 31, 2007 in notional amount of interest rate swaps executed in conjunction with the 2007 third quarter on balance sheet securitization of home lending receivables, whereby CIT entered into offsetting swap transactions with the bankruptcy remote securitization trust formed for the transaction and with a third party commercial bank, each totaling approximately $4.7 billion and $5.3 billion in notional amount at March 31, 2008 and December 31, 2007 (2) $2.9 billion at March 31, 2008 and $2.5 billion at December 31, 2007 in notional amount of interest rate swaps related to customer derivative programs and (3) $3.0 billion of U.S. dollar interest rate swaps hedging the commercial paper program and certain fixed rate debt, for which hedge accounting was discontinued in the first quarter of 2008. CIT has also extended $4.0 billion at March 31, 2008 and $3.2 billion at December 31, 2007 in interest rate caps in connection with its customer derivative program. The notional amounts of derivatives related to the customer program include both derivative transactions with CIT customers, as well as offsetting transactions with third parties with like notional amounts and terms.

CIT also has certain cross-currency swaps, certain U.S. and Canadian dollar interest rate swaps, and interest rate caps that are economic hedges of certain interest rate and foreign currency exposures.

CIT has entered into credit default swaps, with original terms of 5 years, to economically hedge certain CIT credit exposures.

In addition to the amount in the preceding table, CIT had $2.1 billion and $2.0 in notional amount of interest rate swaps outstanding with securitization trusts at March 31, 2008 and December 31, 2007 to insulate the trusts against interest rate risk. CIT entered into offsetting swap transactions with third parties totaling $2.1 billion and $2.0 billion in notional amount at March 31, 2008 and December 31, 2007 to insulate the Company from the related interest rate risk.

Hedge ineffectiveness occurs in certain cash flow hedges, and was recorded as either an increase or decrease to interest expense as presented in the following table. Ineffectiveness for the quarter ended March 31, 2007 related to interest rate swaps hedging the commercial paper program. Hedge accounting for this program was discontinued in the first quarter of 2008.


Hedge Ineffectiveness (dollars in millions)

  Ineffectiveness
Increase/
Decrease

to Interest

Expense

Quarter ended March 31, 2008 $   –   N/A  
Quarter ended March 31, 2007 $0.1   Decrease  

  Item 1: Consolidated Financial Statements 13



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

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table details the components of accumulated other comprehensive income, net of tax.


Accumulated Other Comprehensive Income (dollars in millions)

  March 31,
2008

December 31,
2007

Foreign currency translation adjustments $311.8   $319.1  
Changes in fair values of derivatives qualifying as cash flow hedges (121.9 ) (96.6 )
Benefit plan net (loss) and prior service (cost), net of tax (41.0 ) (35.6 )
Unrealized gain on available for sale equity and securitization investments 3.9   7.9  


Total accumulated other comprehensive income $152.8   $194.8  


The change in fair values of derivatives qualifying as cash flow hedges related to variations in market interest rates, as these derivatives hedge the interest rate variability associated with an equivalent amount of variable-rate debt. See Note 6 for additional information. The foreign currency translation adjustment, at both March 31, 2008 and December 31, 2007, reflects the weakening of the U.S. dollar in relation to various foreign currencies, partially offset by corresponding hedging activity, on an after tax basis.

The total comprehensive loss before preferred dividends for the quarter ended March 31, 2008 was $291.7 million, versus total comprehensive income of $200.0 million for the prior year quarter. See Consolidated Statement of Stockholders’ Equity.

The components of the adjustment to Accumulated Other Comprehensive Loss for derivatives qualifying as hedges of future cash flows are presented in the following table.


Accumulated Other Comprehensive Loss Derivatives (dollars in millions)

  Fair Value
Adjustments

of Derivatives

Income
Tax
Effects

Total
Unrealized Loss

Balance at December 31, 2007 — unrealized loss $(170.8 ) $ 74.2   $  (96.6 )
Discontinuation – hedge accounting related to commercial
   paper program
148.1   (58.6 ) 89.5  
Changes in values of derivatives qualifying as cash flow hedges (190.9 ) 76.1   (114.8 )
 
 
 
 
Balance at March 31, 2008 — unrealized loss $(213.6 ) $ 91.7   $(121.9 )
 
 
 
 

The unrealized loss as of March 31, 2008 reflects lower market interest rates since the inception of the hedges. The Accumulated Other Comprehensive Loss (along with the corresponding swap asset or liability) will be adjusted as market interest rates change over the remaining lives of the swaps. Assuming no change in interest rates, approximately $93.8 million, net of tax, of the Accumulated Other Comprehensive Loss relating to derivatives qualifying as cash flow hedges as of March 31, 2008 is expected to be reclassified to earnings over the next twelve months as contractual cash payments are made.

The discontinuation of hedge accounting for interest rate swaps hedging the Company’s commercial paper program resulted in a $148.1 million earnings charge, which was previously reflected in other comprehensive loss. The swaps converted commercial paper, essentially a floating rate liability, to fixed rate for the funding of fixed rate assets with terms similar to the swaps. The loss resulted from declines in market interest rates since inception of the swaps.

14 CIT GROUP INC



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

NOTE 9 – EARNINGS (LOSS) PER COMMON SHARE

Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. For the 2007 quarter where net income was positive, diluted EPS includes the potential impact of dilutive securities, including stock options and restricted stock grants. The dilutive effect of stock options is computed using the treasury stock method, which assumes the repurchase of common shares by CIT at the average market price for the period. Options and restricted shares that do not have a dilutive effect are not included in the denominator and averaged approximately 12.3 million shares for the quarter ended March 31, 2007.

For 2008, the net loss had the effect of making all dilutive securities, which totaled approximately 13.6 million shares, anti-dilutive for the EPS calculation.

The reconciliation of the numerator and denominator of basic EPS with that of diluted EPS is presented below:


Earnings (Loss) Per Share (dollars in millions, except per share amount; shares in thousands)

  2008
2007
  Net
(Loss)

Common
Shares

Per
Share

Amount

Net
Income

Common
Shares

Per
Share
Amount

Quarters Ended March 31,                
Basic EPS $(257.2 ) $191,091 $(1.35 ) $200.6 194,099 $1.03
Effect of dilutive securities:                
   Restricted shares           1,594  
   Stock options           2,229  
 
 
   
 
   
Diluted EPS $(257.2 ) $191,091 $(1.35 ) $200.6 197,922 $1.01
 
 
   
 
   

NOTE 10 – RETIREMENT AND POSTRETIREMENT BENEFIT PLANS

The following table discloses various components of pension and postretirement expense.


Retirement and Postretirement Benefit Plans (dollars in millions)

  Quarters Ended
March 31,

  2008
2007
Retirement Plans        
Service cost $5.9   $6.2  
Interest cost 6.1   5.4  
Expected return on plan assets (5.3 ) (5.6 )
Amortization of net loss 0.2   0.3  
Amortization of prior service cost 0.6   0.7  
Loss due to settlements & curtailments 4.4      
Termination benefits 0.7    


Net periodic benefit cost $12.6   $7.0  


Postretirement Plans        
Service cost $0.3   $0.5  
Interest cost 0.7   0.8  
Amortization of net loss   0.2  
Loss due to settlements & curtailments 0.5    


Net periodic benefit cost $1.5   $1.5  


For the first quarter 2008, CIT contributed $2.6 million to the retirement plans, and currently expects to contribute an additional $8.4 million in 2008, for a total of $11.0 million. CIT contributed $0.3 million to postretirement plans, and currently expects to contribute an additional $3.1 million in 2008, for a total of $3.4 million.

  Item 1: Consolidated Financial Statements 15



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

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Financing and leasing asset commitments, referred to as loan commitments or lines of credit, are agreements to lend to customers subject to the customers’ compliance with contractual obligations. The accompanying table summarizes these and other credit-related commitments, as well as purchase and funding commitments.


Commitments (dollars in millions)

  March 31, 2008
December 31,
2007

  Due to Expire
Total
Outstanding

Total
Outstanding

  Within
One Year

After
One Year

Financing Commitments        
   Financing and leasing assets (1) $3,427.0 $7,452.0 $10,879.0 $13,062.6
Letters of Credit, Acceptances and Guarantees        
   Standby letters of credit 556.3 160.1 716.4 743.6
   Other letters of credit 337.9 337.9 365.9
   Guarantees, acceptances and other recourse obligations 112.3 7.9 120.2 232.3
Purchase and Funding Commitments        
   Aerospace purchase commitments 1,389.0 6,665.0 8,054.0 7,222.0
   Other manufacturer purchase commitments 584.5 55.8 640.3 735.5
   Sale-leaseback payments 142.8 1,681.8 1,824.6 1,925.9
Other      
   Liabilities for unrecognized tax benefits 30.0 190.9 220.9 223.1

(1) Includes $3.2 billion of undrawn asset-based loan commitments outstanding at March 31 that the Company has agreed to sell.

Commitments to extend credit declined to $10.9 billion at March 31, 2008 from $13.1 billion at December 31, 2007, as $2.2 billion was either utilized or expired during the first quarter.

In addition to the amounts shown in the table above, the Company has extended unused, cancelable lines of credit to customers in connection with third-party vendor programs, which may be used solely to finance additional product purchases. These uncommitted lines of credit can be reduced or canceled by CIT at any time without notice. Management’s experience indicates that customers typically will not seek to exercise their entire available line of credit at any point in time.

In the normal course of meeting the needs of its customers, CIT also enters into commitments to provide financing, letters of credit and guarantees. Standby letters of credit obligate CIT to pay the beneficiary of the letter of credit in the event that a CIT client to whom the letter of credit was issued does not meet its related obligation to the beneficiary. These financial instruments generate fees and involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. To minimize potential credit risk, CIT generally requires collateral and other forms of credit support from the customer.

Guarantees are issued primarily in conjunction with CIT’s factoring product in Trade Finance, whereby CIT provides the client with credit protection for its trade receivables without actually purchasing the receivables. The trade terms are generally sixty days or less. If the customer is unable to pay according to the contractual terms, then CIT purchases the receivables from the client. As of March 31, 2008 and December 31, 2007, CIT had no outstanding liabilities relating to these credit-related commitments or guarantees, as amounts are generally billed and collected on a monthly basis. The table above (in Guarantees, acceptances and other recourse obligations) also includes recourse obligations of approximately $10.7 million at March 31, 2008 and $13.4 million at December 31, 2007 that were incurred in conjunction with financing and leasing asset sales.

CIT’s firm purchase commitments relate predominantly to purchases of commercial aircraft and rail equipment. The commitments to purchase commercial aircraft are with both Airbus Industrie and The Boeing Company. These are fixed price purchase commitments subject to customary price increases for future changes in inflation and manufacturing components. The aerospace equipment purchases are contracted for a specific model aircraft, using a baseline aircraft specification at fixed prices, which reflect discounts from fair market purchase prices prevailing at the time of commitment. The delivery price of an aircraft may also change depending on the final specifications of the aircraft, including engine thrust, aircraft weight and seating configuration. Equipment purchases are recorded at delivery date at the final purchase price paid, which includes purchase price discounts, price changes relating to specification changes and

16 CIT GROUP INC



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

price increases relating to inflation and manufacturing components. Accordingly, the commitment amounts detailed in the preceding table are based on estimated values. Pursuant to existing contractual commitments, 120 aircraft remain to be purchased (23 within the next 12 months). Lease commitments are in place for all of the aircraft to be delivered over the next twelve months. The order amount excludes unexercised CIT options to purchase aircraft. The aircraft deliveries to CIT are scheduled periodically through 2016.

Outstanding commitments to purchase equipment to be leased to customers, other than aircraft, relates primarily to rail equipment. Rail equipment purchase commitments are at fixed prices subject to price increases for inflation and manufacturing components. The time period between commitment and purchase for rail equipment is generally less than 18 months. Additionally, CIT is party to railcar sale-leaseback transactions under which it is obligated to pay a remaining total of $1,824.6 million, or approximately $146.5 million per year for 2009 through 2013, with remaining payments due through 2030. These lease payments are expected to be more than offset by rental income associated with re-leasing the assets, subject to actual railcar utilization and rentals. In conjunction with sale-leaseback transactions, CIT has guaranteed all obligations of the related consolidated lessee entities.

CIT has guaranteed the public and private debt securities of a number of its wholly-owned, consolidated subsidiaries, including those disclosed in Note 18 - Summarized Financial Information of Subsidiaries. In the normal course of business, various consolidated CIT subsidiaries have entered into other credit agreements and certain derivative transactions with financial institutions that are guaranteed by CIT. These transactions are generally used by CIT’s subsidiaries outside of the U.S. to allow the local subsidiary to borrow funds in local currencies.

NOTE 12 – FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

Assets and liabilities measured at fair value on a recurring basis, are summarized below. Such assets and liabilities are classified in their entirety based on the lowest ranking of input that is significant to the fair value measurement. Financial assets at fair value classified within level 3 totaled $1.2 billion, or 1.2% of total Company assets as of March 31, 2008.


Assets and Liabilities Measured at Fair Value on a Recurring Basis (dollars in millions)

  Fair Value Measurements Using:
  Total
Level 1
Level 2
Level 3
Assets            
Retained interests in securitizations $1,153.1   $     – $          –   $1,153.1
Derivatives - counterparty receivable 1,994.8   1,986.8   8.0
Equity Investments in Other Assets 91.1   91.1  
 
 
 
 
 
Total Assets $3,239.0   $91.1 $1,986.8   $1,161.1
 
 
 
 
 
Liabilities            
Liabilities - counterparty liability $1,095.8 $     – $1,079.4 . $    16.4
 
 
 
 
 
Total Derivatives $1,095.8 $     – $1,079.4 $    16.4
 
 
 
 
 

Retained Interest in Securitizations

Retained interests from securitization activities do not trade in an active, open market with readily observable prices. Accordingly, the fair value of retained interests is estimated using discounted cash flow (“DCF”) models. Significant assumptions, including estimated loan pool credit losses, prepayment speeds and discount rates, are utilized to estimate the fair values of retained interests, both at the date of the securitization and in subsequent quarterly valuations. The assumptions reflect the Company’s recent historical experience and anticipated trends with respect to portfolio performances rather than observable inputs from similar transactions in the marketplace. Changes in assumptions may have a significant impact on the valuation of retained interests. See Note 5 for additional information.

Derivatives

The Company’s derivative contracts are not generally listed on an exchange, thus the derivatives positions are valued using models in which the inputs are determined using readily observable market data. The models utilized are widely used within the Financial Services industry and reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit quality of the counterparty. These models do not require a high level of management subjectivity as the methodologies employed do not require significant judgment, and inputs to the models are readily observable from actively quoted markets, as is the case for interest rate swaps, option contracts and credit default swaps. As a result, the majority of the Company’s derivatives fall within level 2 of the fair value

  Item 1: Consolidated Financial Statements 17



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

hierarchy. Selected foreign currency interest rate swaps and two CPI index-based swaps, where inputs are not readily observable market parameters, fall within level 3 of the fair value hierarchy. Receivables and payables are reported on a gross-by-counterparty basis. See Note 7 for additional information.

Equity Investments in Other Assets

Quoted prices available in the active equity markets were used to determine the fair value of equity investment securities, which are classified in level 1 of the valuation hierarchy.

Level 3 Gains and Losses

The table below sets forth a summary of changes in the fair value of the Company’s level 3 financial assets and liabilities for the quarter ended March 31, 2008 as well as the gains and losses for the quarter for all financial assets and liabilities categorized as level 3 as of March 31, 2008.


Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) (dollars in millions)

 
  Total
Retained Interests
in Securitizations

Derivatives
Assets and Liabilities            
Beginning period balance $1,203.9   $1,208.1   $(4.2 )
Gains or losses realized/unrealized            
   Included in other income (20.8 ) (18.5 ) (2.3 )
   Included in other comprehensive income (5.9 ) (4.0 ) (1.9 )
Other, net (32.5 ) (32.5 )  
 
 
 
 
Ending period balance $1,144.7   $1,153.1   $(8.4 )
 
 
 
 

Assets and liabilities measured at fair value on a nonrecurring basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The following table presents the financial instruments on the Consolidated Balance Sheet by caption and by level within the SFAS 157 valuation hierarchy (as described above) as of March 31, 2008, for which a nonrecurring change in fair value has been recorded during the quarter ended March 31, 2008.


Assets Measured at Fair Value on a Non-recurring Basis (dollars in millions)

  Fair Value Measurements Using:
 
  Total
Level 1
Level 2
Level 3
Total Gains
and (Losses)

Assets            
Loans held for sale $1,485.9 $     – $1,485.9 $       – $(125.6 )
Impaired loans (SFAS 114) 238.9 238.9 (14.3 )
 
 
 
 
 
 
Total $1,724.8 $     – $1,485.9 $238.9 $(139.9 )
 
 
 
 
 
 

Loans Held for Sale

The estimated fair value of loans classified as held for sale is calculated using observable market information, including bids from prospective purchasers and pricing from similar market transactions where available. Where bid information is not available for a specific loan, the valuation is principally based upon recent transaction prices for similar sold loans. These comparable loans share characteristics that typically include industry, rating, capital structure, seniority, and consideration of counterparty credit risk. In addition, general market conditions, including prevailing market spreads for credit and liquidity risk, are also considered in the valuation process. Loans held for sale are generally classified within level 2 of the valuation hierarchy. Home Lending loans transferred out of held for sale during the quarter were measured at fair value using level 3 inputs prior to transfer.

Impaired Loans

Impairment of a loan within the scope of SFAS 114 is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or, as a practical expedient, based on a loan’s observable price or the fair value of the collateral if the loan is collateral dependent. Impaired loans for which the carrying amount is based on fair value of the underlying collateral, are included in assets and reported at fair value on a nonrecurring basis, both at initial recognition of impairment and on an outgoing basis until recovery or charge-off. The determination of impairment involves management’s judgment in the use of market data 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.

18 CIT GROUP INC



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

NOTE 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Until December 31, 2007, CIT was a partner with Dell Inc. (“Dell”) in Dell Financial Services L.P. (“DFS”), a joint venture that offered financing to Dell’s customers. The joint venture provided Dell with financing and leasing capabilities that were complementary to its product offerings and provided CIT with a source of new financings. In December 2007, Dell exercised its right to buy CIT’s interest and the Company sold its 30% ownership interest in the Dell Financial Services (DFS) joint venture. CIT has the right to purchase a minimum percentage of DFS finance receivables on a declining scale through January 2010. Prior to and subsequent to the sale, CIT regularly purchases finance receivables from DFS at a premium, portions of which are typically securitized within 90 days of purchase from DFS. CIT has certain recourse to DFS on defaulted contracts. Financing and leasing assets related to the DFS program included in the CIT Consolidated Balance Sheet (but excluding certain related international receivables originated directly by CIT) were approximately $0.6 billion and securitized assets included in managed assets were approximately $2.3 billion at both March 31, 2008 and December 31, 2007, respectively.

CIT also has a joint venture arrangement with Snap-on Incorporated (“Snap-on”) that has a similar business purpose and model to the DFS arrangement described above, including limited credit recourse on defaulted receivables. The agreement with Snap-on extends until January 2009. CIT and Snap-on have 50% ownership interests, 50% board of directors’ representation, and share income and losses equally. The Snap-on joint venture is accounted for under the equity method and is not consolidated in CIT’s financial statements. At both March 31, 2008 and December 31, 2007, financing and leasing assets were approximately $1.0 billion and securitized assets included in managed assets were less than $0.1 billion.

Since December 2000, CIT has been a joint venture partner with Canadian Imperial Bank of Commerce (“CIBC”) in an entity that is engaged in asset-based lending in Canada. Both CIT and CIBC have a 50% ownership interest in the joint venture, and share income and losses equally. This entity is not consolidated in CIT’s financial statements and is accounted for under the equity method. CIT’s investment in and loans to the joint venture were approximately $474 million at March 31, 2008 and $440 million at December 31, 2007.

In the first quarter of 2007, the Company formed Care Investment Trust Inc. (Care), an externally managed real estate investment trust (RElT), formed principally to invest in healthcare-related commercial mortgage debt and real estate. In conjunction with a June 2007 IPO, CIT contributed approximately $280 million of loans to Care in return for cash and a 36% equity investment, worth approximately $79 million, in Care at the initial public offering price. A subsidiary of CIT provides services to Care pursuant to a management agreement. The investment in Care is accounted for under the equity method, as CIT does not have a majority of the economics (expected losses and residual returns) in the entity.

CIT invests in various trusts, partnerships, and limited liability corporations established in conjunction with structured financing transactions of equipment, power and infrastructure projects. CIT’s interests in certain of these entities were acquired by CIT in a 1999 acquisition, and others were subsequently entered into in the normal course of business. Other assets included approximately $12 million at March 31, 2008 and $11 million at December 31, 2007 of investments in non-consolidated entities relating to such transactions that are accounted for under the equity or cost methods.

The combination of investments in and loans to non-consolidated entities represents the Company’s maximum exposure to loss, as the Company does not provide guarantees or other forms of indemnification to non-consolidated entities.

Certain shareholders of CIT provide investment management, banking and investment banking services to the Company in the normal course of business.

  Item 1: Consolidated Financial Statements 19



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

NOTE 14 – BUSINESS SEGMENT INFORMATION

The following table presents our business segment financial information:


Business Segments (dollars in millions)

Corporate
Finance

Transportation
Finance

Trade
Finance

Vendor
Finance

Commercial
Segments

Consumer
Home
Lending

Total
Segments

Corporate
and Other

Consolidated
For the Quarter Ended
  March 31, 2008
                                       
Net finance revenue,
  before depreciation
$    184.4   $    243.5   $     36.2   $    266.3   $    730.4   $      27.2   $    20.3   $     777.9   $(50.0 ) $     727.9  
Other income 63.8   39.7   65.9   11.8   181.2   (8.4 ) (4.4 ) 168.4   5.6   174.0  
Depreciation on operating
   lease equipment
9.2   149.5     136.1   294.8       294.8   (0.2 ) 294.6  
Provision for credit losses 36.6   (0.4 ) 9.5   28.2   73.9   149.6   217.8   441.3   23.2   464.5  
Salaries and general
   operating expenses
114.2   40.6   39.2   104.0   298.0   21.3   20.2   339.5   (21.5 ) 318.0  
Other pre-tax items(1) 117.5         117.5     23.0   140.5   217.2   357.7  
 
 
 
 
 
 
 
 
 
 
 
(Loss) income before provision
   for income taxes
(29.3 ) 93.5   53.4   9.8   127.4   (152.1 ) (245.1 ) (269.8 ) (263.1 ) (532.9 )
Provision for income taxes
   and other after tax items
9.1   (9.0 ) (20.2 ) (3.0 ) (23.1 ) 56.9   91.8   125.6   150.1   275.7  
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income (20.2 ) 84.5   33.2   6.8   104.3   (95.2 ) (153.3 ) (144.2 ) (113.0 ) (257.2 )
 
 
 
 
 
 
 
 
 
 
 
Total financing and
   leasing assets
23,638.3   13,861.4   7,003.9   12,121.8   56,625.4   13,217.3   8,749.2   78,591.9     78,591.9  
Total managed assets 24,986.0   13,861.4   7,003.9   16,075.8   61,927.1   13,217.3   9,401.5   84,545.9     84,545.9  
For the Quarter Ended
   March 31, 2007
                                       
Net finance revenue,
   before depreciation
$    167.5   $    210.8   $     41.4   $    251.5   $    671.2   $      31.9   $    54.0   $     757.1   $(13.6 ) $     743.5  
Other income 102.4   17.7   67.8   111.0   298.9   17.8   11.5   328.2   0.4   328.6  
Depreciation on operating
   lease equipment
9.8   133.5     120.4   263.7       263.7   (0.1 ) 263.6  
Provision for credit losses 20.5   (22.5 ) 8.0   10.4   16.4   7.9   35.3   59.6   11.5   71.1  
Salaries and general
   operating expenses
114.1   33.3   41.3   115.3   304.0   25.5   31.2   360.7   (4.9 ) 355.8  
Other pre-tax items(1)                 139.3   139.3  
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision
  for income taxes
125.5   84.2   59.9   116.4   386.0   16.3   (1.0 ) 401.3   (159.0 ) 242.3  
Provision for income taxes and
   other after tax items
(45.4 ) (7.9 ) (23.3 ) (40.1 ) (116.7 ) (4.9 ) 1.5   (120.1 ) 78.4   (41.7 )
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) 80.1   76.3   36.6   76.3   269.3   11.4   0.5   281.2   (80.6 ) 200.6  
 
 
 
 
 
 
 
 
 
 
 
Total financing and leasing
   assets
21,860.9   12,432.5   6,889.2   10,524.7   51,707.3   10,524.8   11,164.9   73,397.0     73,397.0  
Total managed assets 23,297.4   12,432.5   6,889.2   14,608.0   57,227.1   10,524.8   11,959.7   79,711.6     79,711.6  

(1) Includes valuation allowances, debt and debt related derivative extinguishment charges and severance and real estate exit provisions.

NOTE 15 – LEGAL PROCEEDINGS

STUDENT LOAN INVESTIGATIONS

Student Loan Xpress, Inc. (“SLX”), a subsidiary of CIT, was engaged in the student lending business. In connection with investigations into (i) the relationships between student lenders and the colleges and universities that recommend such lenders to their students, and (ii) the business practices of student lenders, CIT and/or SLX have received requests for information from several state Attorneys General and several federal governmental agencies. In May, 2007, CIT entered into an Assurance of Discontinuance (the “AOD”) with the New York Attorney General (the “NYAG”), pursuant to which CIT contributed $3.0 million into a fund established to educate students and their parents concerning student loans and agreed to cooperate with the NYAG’s investigation, in exchange for which, the NYAG agreed to discontinue its investigation concerning certain alleged conduct by SLX. CIT is fully cooperating with the remaining investigations.

VENDOR FINANCE BILLING AND INVOICING INVESTIGATION

In the second quarter of 2007, the office of the United States Attorney for the Central District of California requested that CIT produce the billing and invoicing histories for a portfolio of customer accounts that CIT purchased from a third-party vendor. The request was made in connection with an ongoing investigation being conducted by federal authorities into billing practices involving that portfolio. State authorities in California have been conducting a parallel investigation. It appears the investigations are being conducted under the Federal False Claims Act and its California equivalent. CIT is cooperating with these investigations. Based on the facts known to date, CIT cannot determine the outcome of these investigations at this time.

OTHER LITIGATION

In addition, there are various legal proceedings and government investigations against or including CIT, which have arisen 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 effect on CIT.

20 CIT GROUP INC



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

NOTE 16 – GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill and intangible assets are presented by segment in the table below:


Goodwill and Intangible Assets (dollars in millions)

  Corporate
Finance

Trade
Finance

Vendor Finance
Total
Goodwill                
Balance at December 31, 2007 $296.9   $271.1   $406.0   $974.0  
Acquisitions, other   0.7   10.1   10.8  
 
 
 
 
 
Balance at March 31, 2008 $296.9   $271.8   $416.1   $984.8  
 
 
 
 
 
Intangible Assets                
Balance at December 31, 2007 $  26.6   $102.8   $  49.1   $178.5  
Acquisitions, other   0.3   0.8   1.1  
Amortization (1.0 ) (1.7 ) (2.2 ) (4.9 )
 
 
 
 
 
Balance at March 31, 2008 $  25.6   $101.4   $  47.7   $174.7  
 
 
 
 
 

The increase to goodwill and intangible assets reflected refinements to fair value adjustments (largely to tax liabilities) related to the first quarter 2007 acquisition of an international vendor finance business, coupled with foreign currency translation adjustments.

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” goodwill is no longer amortized but instead is assessed periodically for impairment. The Company periodically reviews and evaluates its goodwill and intangible assets for potential impairment at a minimum annually, on October 1, or more frequently if circumstances indicate that impairment is possible.

In light of the continued capital markets disruption, and the fact that the Company’s stock has been trading below book value per share for two consecutive quarters, interim impairment testing was performed both at December 31, 2007 and March 31, 2008. As a result of the December impairment test (and subsequent measurement), the Company wrote off all the goodwill and intangible assets related to the student lending business in the Consumer segment. The estimated fair values of the Corporate Finance, Trade Finance and Vendor Finance businesses, at both December 2007 and March 2008, were based on observable market tangible book value and price to earnings multiples of relevant, comparable peer companies. This testing indicated that the estimated fair value of equity exceeded the book value of equity for the businesses in each of the segments in the table above. Therefore, management determined that no goodwill impairment charge for these three segments was required.

Due to the ongoing uncertainty in market conditions, which may continue to negatively impact the performance of the Company’s operating units, management will continue to monitor and evaluate the carrying value of goodwill. Management has a plan to restore the Company’s access to the unsecured debt markets at competitive interest expense levels, and return the Company’s business fundamentals to levels that would support the book value per share, but there is no assurance that the plan will be achieved, or that the market price of the common stock will increase to such levels in the foreseeable future. Further, price to earnings and book value multiples relating to the Company’s segments have generally declined the past two quarters. There is no assurance that valuation multiples will not decline further or that the earnings and book values of the Company’s business segments will not decline. Therefore, an impairment charge may be required to the extent that the book equity value, including goodwill, exceeds the estimated fair value of the segment. Also, if a segment, or a business within a segment, is sold for less than the book value of the assets sold, plus any goodwill or intangible assets attributable to that business, an impairment charge on all or part of the goodwill and intangible assets attributable to that business may be required. If market and economic conditions or business performance deteriorate further, this could increase the likelihood of additional impairment charges.

Other intangible assets, net, are comprised primarily of acquired customer relationships, and are amortized over their corresponding lives ranging from five to twenty years in relation to the related cash flows, where applicable. Amortization expense totaled $4.9 million and $5.7 million for the quarters ended March 31, 2008 and 2007. Accumulated amortization totaled $76.1 million at March 31, 2008 and $71.2 million at December 31, 2007. Projected amortization for the years ended December 31, 2008 through December 31, 2012 is $19.8 million, $18.8 million, $17.8 million, $16.9 million and $16.0 million.

  Item 1: Consolidated Financial Statements 21



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

NOTE 17 – SEVERANCE AND REAL ESTATE EXIT RESERVES

The following table summarizes activities during 2008:


Reserves (dollars in millions)
Severance
Facilities
Total
Reserves

  Number of
Employees

Reserve
Number of
Facilities

Reserve
Balance at December 31, 2007 59   $16.7   36   $8.6   $25.3  
Additions and adjustments 564   58.3     0.3   58.6  
Utilization (319 ) (31.1 ) (4 ) (0.6 ) (31.7 )
 
 
 
 
 
 
Balance at March 31, 2008 304   $43.9   32   $8.3   $52.2  
 
 
 
 
 
 

The severance additions during 2008 primarily relate to employee termination benefits incurred in conjunction with various organization efficiency and cost reduction initiatives. These additions, along with charges related to accelerated vesting of equity and other benefits, were recorded as part of the $69.1 million provision. Outstanding severance liabilities at March 31, 2008 will largely be paid to employees in the second quarter of 2008.

The ending facilities reserves relate primarily to shortfalls in sublease transactions and will be utilized over the remaining terms of approximately 7 years or less.

NOTE 18 – SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARIES

The following presents condensed consolidating financial information for CIT Holdings LLC. CIT has guaranteed on a full and unconditional and a joint and several basis the existing debt securities that were registered under the Securities Act of 1933 and certain other indebtedness of this subsidiary. CIT has not presented related financial statements or other information for this subsidiary on a stand-alone basis. No subsidiaries within “Other Subsidiaries” in the following tables have unconditionally guaranteed debt securities for any other CIT subsidiary. Included under “Other Subsidiaries” is a 100%-owned finance subsidiary of CIT Group Inc., Canadian Funding Company LLC, for which CIT has fully and unconditionally guaranteed the debt securities.

22 CIT GROUP INC



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


CONDENSED CONSOLIDATING BALANCE SHEETS (dollars in millions)

CIT
Group Inc.

CIT
Holdings
LLC

Other
Subsidiaries

Eliminations
Total
March 31, 2008                      
ASSETS                    
Net finance receivables $     719.0   $3,578.6   $58,119.4   $          –   $62,417.0  
Operating lease equipment, net 8.4   301.9   11,893.4     12,203.7  
Finance receivables held for sale   11.8   2,603.9     2,615.7  
Cash and cash equivalents 6,629.7   142.4   3,568.2     10,340.3  
Other assets 14,263.6   260.0   267.0   (6,643.6 ) 8,147.0  
 
 
 
 
 
 
   Total Assets $ 21,620.7   $4,294.7   $76,451.9   $(6,643.6 ) $95,723.7  
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY                    
Debt and deposits $ 55,585.5   $2,204.7   $23,038.0   $          –   $80,828.2  
Credit balances of factoring clients     3,572.9     3,572.9  
Accrued liabilities and payables (40,608.4 ) 1,389.6   43,843.5     4,624.7  
 
 
 
 
 
 
   Total Liabilities 14,977.1   3,594.3   70,454.4     89,025.8  
Minority interest     54.3     54.3  
Total Stockholders’ Equity 6,643.6   700.4   5,943.2   (6,643.6 ) 6,643.6  
 
 
 
 
 
 
   Total Liabilities and Stockholders’ Equity $ 21,620.7   $4,294.7   $76,451.9   $(6,643.6 ) $95,723.7  
 
 
 
 
 
 
December 31, 2007                    
ASSETS                    
Net finance receivables $   2,373.4   $3,358.4   $55,973.2   $          –   $61,705.0  
Operating lease equipment, net 8.6   292.0   12,309.9     12,610.5  
Finance receivables held for sale   253.3   1,352.7     1,606.0  
Cash and cash equivalents 3,171.0   30.5   3,590.8     6,792.3  
Other assets 13,488.9   261.0   1,110.3   (6,960.6 ) 7,899.6  
 
 
 
 
 
 
   Total Assets $ 19,041.9   $4,195.2   $74,336.9   $(6,960.6 ) $90,613.4  
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY                    
Debt and deposits $ 49,525.6   $2,346.7   $21,931.9   $          –   $73,804.2  
Credit balances of factoring clients     4,542.2     4,542.2  
Accrued liabilities and payables (37,444.3 ) 1,164.9   41,528.3     5,248.9  
 
 
 
 
 
 
   Total Liabilities 12,081.3   3,511.6   68,002.4     83,595.3  
Minority interest     57.5     57.5  
Total Stockholders’ Equity 6,960.6   683.6   6,277.0   (6,960.6 ) 6,960.6  
 
 
 
 
 
 
   Total Liabilities and Stockholders’ Equity $ 19,041.9   $4,195.2    $74,336.9   $(6,960.6 ) $90,613.4  
 
 
 
 
 
 

  Item 1: Consolidated Financial Statements 23



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


CONDENSED CONSOLIDATING STATEMENTS OF INCOME (dollars in millions)

CIT
Group Inc.

CIT
Holdings
LLC

Other
Subsidiaries

Eliminations
Total
Three Months Ended March 31, 2008                    
Finance revenue $   23.0   $127.4   $1,531.6   $       –   $1,682.0  
Interest expense 103.8   3.3   847.0     954.1  
Depreciation on operating lease equipment 0.2   21.1   273.3     294.6  
 
 
 
 
 
 
Net finance revenue (81.0 ) 103.0   411.3     433.3  
Provision for credit losses 42.0   10.4   412.1     464.5  
 
 
 
 
 
 
Net finance revenue after credit provision (123.0 ) 92.6   (0.8 )     (31.2 )
Equity in net income of subsidiaries (19.9 )     19.9    
Valuation allowance for receivables held for sale     140.5     140.5  
 
 
 
 
 
 
Net finance revenue, after credit provision and
   valuation allowance
(142.9 ) 92.6   (141.3 ) 19.9   (171.7 )
Other income (34.6 ) 8.2   200.4     174.0  
 
 
 
 
 
 
Total net revenue after valuation allowance (177.5 ) 100.8   59.1   19.9   2.3  
Salaries and general operating expenses 77.3   24.0   216.7     318.0  
Provision for severance and real estate
   exiting activities
    69.1     69.1  
Loss on debt and debt-related derivative
   extinguishments
148.1         148.1  
 
 
 
 
 
 
(Loss) Income before provision for income taxes (402.9 ) 76.8   (226.7 ) 19.9   (532.9 )
Benefit (provision) for income taxes 153.2   (29.2 ) 170.2     294.2  
Minority interest, after tax     (11.0 )   (11.0 )
 
 
 
 
 
 
Net (loss) income before preferred stock dividends (249.7 ) 47.6   (67.5 ) 19.9   (249.7 )
Preferred stock dividends (7.5 )       (7.5 )
 
 
 
 
 
 
Net (loss) income (attributable) available                    
   to common stockholders $(257.2 ) $  47.6   $    (67.5 ) $   19.9   $  (257.2 )
 
 
 
 
 
 
Three Months Ended March 31, 2007                    
Finance revenue $   20.5   $111.8   $1,484.8   $       –   $1,617.1  
Interest expense 5.7   10.4   857.5     873.6  
Depreciation on operating lease equipment 0.1   17.6   245.9     263.6  
 
 
 
 
 
 
Net finance revenue 14.7   83.8   381.4     479.9  
Provision for credit losses 19.2   4.1   47.8     71.1  
 
 
 
 
 
 
Net finance revenue after credit provision (4.5 ) 79.7   333.6       408.8  
Equity in net income of subsidiaries 332.0       (332.0 )  
 
 
 
 
 
 
Net finance revenue, after credit provision and
   valuation allowance
327.5   79.7   333.6   (332.0 ) 408.8  
Other income 1.0   17.8   309.8     328.6  
 
 
 
 
 
 
Total net revenue after valuation allowance 328.5   97.5   643.4   (332.0 ) 737.4  
Salaries and general operating expenses 47.7   10.9   297.2     355.8  
Loss on debt and debt-related derivative
   extinguishments
139.3         139.3  
 
 
 
 
 
 
Income (Loss) before provision for income taxes 141.5   86.6   346.2   (332.0 ) 242.3  
Benefit (provision) for income taxes 66.6   (31.9 ) (68.8 )   (34.1 )
Minority interest, after tax     (0.1 )   (0.1 )
 
 
 
 
 
 
Net income before preferred stock dividends 208.1   54.7   277.3   (332.0 ) 208.1  
Preferred stock dividends (7.5 )       (7.5 )
 
 
 
 
 
 
Net income available to common stockholders $ 200.6   $  54.7   $  277.3   $(332.0 ) $  200.6  
 
 
 
 
 
 

24 CIT GROUP INC



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


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (dollars in millions)

CIT
Group Inc.

CIT
Holdings
LLC

Other
Subsidiaries

Eliminations
Total
Three Months Ended March 31, 2008                    
Cash Flows From Operating Activities:                    
Net cash flows provided by (used for) operations $    (0.5 ) $    (21.6 ) $      248.9   $            –   $     226.8  
 
 
 
 
 
 
Cash Flows From Investing Activities:                    
Net (increase) decrease in financing and leasing assets 1,613.1   (21.1 ) (5,288.2 )   (3,696.2 )
Increase in inter-company loans and investments (4,010.0 )     4,010.0    
 
 
 
 
 
 
Net cash flows (used for) provided by investing activities (2,396.9 ) (21.1 ) (5,288.2 ) 4,010.0   (3,696.2 )
 
 
 
 
 
 
Cash Flows From Financing Activities:                    
Net increase (decrease) in debt 5,911.8   (142.0 ) 488.8     6,258.6  
Inter-company financing   296.6   3,713.4   (4,010.0 )  
Cash dividends paid (55.7 )       (55.7 )
 
 
 
 
 
 
Net cash flows provided by (used for) financing activities 5,856.1   154.6   4,202.2   (4,010.0 ) 6,202.9  
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents 3,458.7   111.9   (837.1 )   2,733.5  
Cash and cash equivalents, beginning of period 3,171.0   30.5   3,111.6     6,313.1  
 
 
 
 
 
 
Cash and cash equivalents, end of period $  6,629.7   $142.4   $  2,274.5   $            –   $  9,046.6  
 
 
 
 
 
 
Three Months Ended March 31, 2007                    
Cash Flows From Operating Activities:                    
Net cash flows provided by (used for) operations $    (279.7 ) $  2,670.6   (1,935.4 ) $            –   $     455.5  
 
 
 
 
 
 
Cash Flows From Investing Activities:                    
Net increase in financing and leasing assets (474.3 ) (305.8 ) (5,279.4 )   (6,059.5 )
Increase in inter-company loans and investments (4,333.1 )     4,333.1    
 
 
 
 
 
 
Net cash flows (used for) provided by investing activities (4,807.4 ) (305.8 ) (5,279.4 ) 4,333.1   (6,059.5 )
 
 
 
 
 
 
Cash Flows From Financing Activities:                    
Net increase (decrease) in debt 4,196.3   117.7   389.7     4,703.7  
Inter-company financing 9.1   (2,515.2 ) 6,839.2   (4,333.1 )  
Cash dividends paid (58.9 )       (58.9 )
 
 
 
 
 
 
Net cash flows provided by (used for) financing activities 4,146.5   (2,397.5 ) 7,228.9   (4,333.1 ) 4,644.8  
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents (940.6 ) (32.7 ) 14.1     (959.2 )
Cash and cash equivalents, beginning of period 3,040.3   227.8   1,011.3     4,279.4  
 
 
 
 
 
 
Cash and cash equivalents, end of period $  2,099.7 $     195.1 $  1,025.4 $           – $  3,320.2
 
 
 
 
 
 

  Item 1: Consolidated Financial Statements 25



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

NOTE 19 – Subsequent Events

On April 21, 2008, the Company sold $1.0 billion or 91,000,000 shares, of common stock and $500 million or 10,000,000 shares of Non-Cumulative Perpetual Convertible Preferred Stock, Series C, with a liquidation preference of $50 per share, subject to the underwriters’ right to purchase an additional 13,650,000 shares of the common stock and 1,500,000 shares of the convertible preferred stock pursuant to overallotment options. On April 23, 2008, the underwriters exercised their entire overallotment option for the preferred stock. On May 6, 2008, 2,558,120 shares of common stock were issued pursuant to the underwriters’ overallotment option.

The common stock offering was priced at $11.00 per share. The net proceeds from the common stock offering, including the portion of the overallotment option exercised, were approximately $978 million, after deducting underwriting commissions. The Company intends to use the net proceeds from the sale of the common stock for general corporate purposes, including the payment of dividends on its outstanding Series A and B preferred stock for the second quarter of 2008 in an amount of approximately $8 million and the payment of interest on its outstanding junior subordinated notes in the third quarter of 2008 in an amount of approximately $23 million.

The net proceeds from the convertible preferred stock offering, including the overallotment option, were approximately $558 million, after deducting underwriting commissions. The Company intends to use the net proceeds from the sale of the convertible preferred stock for general corporate purposes. The convertible preferred stock will pay, only when, as and if declared by CIT’s board of directors or a duly authorized committee of the board, cash dividends on each March 15, June 15, September 15 and December 15, beginning on June 15, 2008, at a rate per annum equal to 8.75%, payable quarterly in arrears on a non-cumulative basis. Each share of convertible preferred stock will be convertible at any time, at the holder’s option, into 3.9526 shares of CIT common stock, plus cash in lieu of fractional shares, (equivalent to an initial conversion price of approximately $12.65 per share of CIT’s common stock). The conversion rate will be subject to customary anti-dilution adjustments and will also be adjusted upon the occurrence of certain other events. In addition, on or after June 20, 2015, CIT may cause some or all of the convertible preferred stock to convert provided that CIT’s common stock has a closing price exceeding 150% of the then applicable conversion price for 20 trading days (whether or not consecutive) during any period of 30 consecutive trading days.

26 CIT GROUP INC



ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

and

ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk

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

In the following discussion we use financial terms that are relevant to our business. You can find a glossary of key terms used in our business in Part I Item 1. Business Section in our Form 10-K for the year ended December 31, 2007.

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” contain certain non-GAAP financial measures. See “Non-GAAP Financial Measurements” for reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures.


LIQUIDITY AND CAPITAL ENHANCEMENT PLAN

During the first quarter of 2008, we initiated a series of actions to improve our liquidity and capital position. The ultimate goal of these actions is to transition CIT to a smaller company primarily focused on serving both middle market commercial businesses and global vendor relationships.

In April and May 2008, the Company issued common and preferred stock for proceeds totaling $1.535 billion (see Note 19–Subsequent Events) and announced a 60% reduction in the quarterly common stock dividend. Additional measures approved by the Company’s Board of Directors and designed to enhance the Company’s capital and liquidity position, include the following:

Sale of $1.4 billion of asset-based loans and $3.2 billion in related unfunded lending commitments, which is expected to close in the second quarter of 2008;
   
Sale of $770 million of commercial aircraft, of which $300 million closed in the first quarter of 2008;
   
Identification of an additional $2 billion in assets to be financed or sold; and
   
Evaluation of strategic alternatives for the Company’s $4 billion rail leasing business.

Our plan is to transition over time to a revised business model with the following attributes:

Primary focus on commercial finance, advisory services and global vendor finance relationships;
   
A strong originations network with solid customer relationships;
   
A diverse asset portfolio, both in terms of industry concentration and geographic spread of risk;
   
Consistent credit discipline emphasizing senior, secured lending to middle-market companies; and
   
Diversified revenue streams, leveraging our intellectual and relationship capital to generate fee-based opportunities.

Our goal is to support this revised business model based on the following capital management and funding approach:

A balanced funding model predicated upon diverse funding sources and deep access to both secured and unsecured markets at consistent and economic cost of funds, as well as bank deposits;
   
Solid capital base with target capital levels developed through a bottoms-up risk analysis;
   
Strong investment grade debt ratings – targeting mid-A or better with “prime” commercial paper ratings (i.e. A-1/P-1 rated); and
   
A dividend payout ratio commensurate with the capital generation of the business.

In light of the continued disruption in the capital markets, we plan to pursue a dual-pronged approach to funding – strengthening the near-term liquidity position, while exploring longer-term, strategic funding options, including the possibility of a strategic funding partner with financing against pools of assets in conjunction with a commitment to fund select originations. Accordingly, the Company’s tactics will reflect the following priorities – enhanced liquidity, franchise value, longstanding and strategic customer relationships, and the restoration of acceptable profitability.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 27


As discussed further in Liquidity Risk Management, we made significant progress with respect to the above plan during the quarter, as committed sources of liquidity are expected to cover requirements for the remainder of 2008 as shown in the tables covering sources and uses of cash below (dollars in billions):

Sources of Cash
Uses of Cash
 
Available – March 31(1) $  8.4 Debt maturities    
Asset-based loan sales 1.4      Commercial Paper $(1.3 )(3)
Equity Issuance        Bank borrowings (2.1 )(3)
     Common 1.0      Unsecured term debt (8.1 )(3)
     Preferred 0.6 Deposit maturities (0.9 )
 
     
     Completed actions 11.4 Aircraft purchases (1.5 )
Future Actions:        
Aircraft sales 0.5      
Available ABS facilities 1.9      
Deposit issuances(2) 0.9      
 
 
 
Total sources $14.7 Total uses $(13.9 )
 
 
 

(1) Excluding $1.9 billion of restricted cash and non-immediately liquid cash amounts
   
(2) To repay maturing deposits
   
(3) Combined commercial paper, bank borrowings and unsecured term debt maturities for the second, third and fourth quarters of 2008 are $5.4 million, $1.5 million and $4.6 million respectively.

The above analysis of cash sources and uses assumes that other asset collections support new originations, resulting in a modest reduction in owned financing and leasing assets due to the asset sales listed above. While the Utah bank has the capacity to issue additional deposits to fund asset growth, the table above assumes resuming taking deposits only to repay maturing deposits at the bank in the second half of 2008.

A key ongoing element of our liquidity plan is to maintain sufficient liquidity to cover our obligations and fund our business in a controlled fashion over the next twelve month timeframe. With this objective in mind, we are currently considering another $8 – 12 billion in financial strategies, summarized below, to further bolster liquidity and capital. We do not expect to execute on all these initiatives in 2008, but view these as potential options available to build additional liquidity in advance of 2009 funding needs.

Asset sales or secured financings of $5 – 7 billion:

Middle market and syndicated loans – remains our largest unencumbered asset base
   
Vendor receivables – evaluating strategic alternatives for select geographies and niche programs
   
Commercial aircraft – currently an asset class with good market interest
   
Student loans – sales of unencumbered guaranteed loans
   
Rail – we have hired advisors to evaluate strategic alternatives for this business
   
Ongoing run-off (liquidation) of the home lending and student lending portfolios

Other Financings of $3 – 5 billion:

Export Credit Agencies (“ECA”) financing for commercial aircraft deliveries
   
Continued execution of Vendor Finance and Corporate Finance secured financings – historic funding source with proven collateral performance
   
Unsecured term debt issuances
   
Eventual return to the commercial paper market as we free available bank line capacity via repayment of existing bank facilities and either restoring “prime” CP credit ratings, or accessing the “non-prime” CP investor market.

28 CIT GROUP INC




PROFITABILITY AND KEY BUSINESS TRENDS

The net loss attributable to common shareholders was $257.2 million for the current quarter, versus net income of $200.6 million for the prior year quarter. Commercial segment earnings were more than offset by a combined net loss in our home lending and consumer lending segments, a charge related to terminated hedges, and employee severance costs.

The following table breaks down our reported results between our ongoing commercial businesses, liquidating consumer segments, and other noteworthy items (dollars in millions):

  Net Income/
(Loss)

EPS
ROE
Net loss – reported results $(257.2 ) $(1.35 ) -15.8 %
Home lending and consumer segments (248.5 ) (1.30 )    
Noteworthy items (165.6 ) (0.87 )    
 
 
     
Commercial results, including corporate $156.9   $ 0.82   12.1 %
 
 
     

Net income for Commercial Segments and Corporate was $156.9 million, down from $267.9 million in the prior year quarter, reflecting lower finance margins, lower other income and higher credit costs.

The noteworthy items in the table above are comprised of the following:

A pretax charge of $117.5 million (decrease to EPS of $0.36) for a lower of cost or market valuation allowance in the Corporate Finance segment, reflecting the agreement to sell $1.4 billion in funded loans (that were classified as held for sale at March 31, 2008) and $3.2 billion in related asset-based lending commitments;
   
A $33 million pretax impairment charge (decrease to EPS of $0.11), that should have been recorded concurrently with the 2007 fourth quarter sale of our Dell Financial Services joint venture equity interest, reflecting the repricing of debt underlying a securitization conduit vehicle in the Vendor Finance segment that was triggered by the purchase of CIT’s joint venture equity interest;
   
A pre-tax charge in corporate and other of approximately $148 million related to losses on swaps that hedged the now inactive commercial paper program (decrease to EPS of $0.47), the majority of which was previously recorded in Other Comprehensive Loss. To maintain the Company’s overall interest sensitivity position, hedge accounting was discontinued on a similar notional amount of fixed-rate to variable rate swaps, with essentially offsetting economics, which previously hedged specific fixed-rate debt. The majority of both of these groups of swaps were terminated in April 2008, with negligible cash impact, as the positive mark on the swaps formerly hedging the debt essentially offset the loss on the commercial paper program swaps. The positive mark has been recorded as a basis adjustment against the fixed-rate debt and will be accreted over the remaining life of the debt;
   
Pre-tax charges of $69 million, primarily reflecting costs in corporate and other associated with severance and termination expenses related to approximately 500 employees (decrease to EPS of $0.22); and
   
Tax benefits of approximately $56 million relating to applying the projected annual effective tax rate for 2008, including the projected income mix between international and domestic operations (increase to EPS of $0.29).

The loss of $248.5 million in the Home Lending and Consumer Segments was primarily driven by $268.8 million in reserve building during the quarter ($150 million for Home Lending and $121.5 million for Student Lending), reflecting seasoning of the home lending portfolio, coupled with deterioration in the residential housing markets and reserves in Student Lending for private (non-government guaranteed) loans, principally to students of a pilot training school that filed for bankruptcy during the quarter.


REVENUE

Total net revenue, comprised of net finance revenue and other income, was down from the 2007 first quarter and the 2007 fourth quarter, on lower other income, reflecting the illiquid markets for syndications and receivable sales and higher funding costs. Total net revenue before valuations and credit provisions was $607.3 million for the current quarter, down from $808.5 million during the 2007 first quarter and $953.5 million last quarter, which included gains totaling $267.1 million on the sales of our interest in the DFS joint venture and of a systems leasing business.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 29



NET FINANCE REVENUE


Net Finance Revenue for the Quarters Ended March 31 (dollars in millions)

  2008
2007
Finance income – loans and capital leases $1,175.3   $1,163.0  
Rental income on operating leases 506.7   454.1  
 
 
 
   Finance revenue 1,682.0   1,617.1  
Less: interest expense 954.1   873.6  
         Depreciation on operating lease equipment 294.6   263.6  
 
 
 
   Net finance revenue $433.3   $479.9  
 
 
 
Average Earnings Assets (“AEA”) $73,869.5   $67,920.9  
 
 
 
As a % of AEA:        
Finance income – loans and capital leases 6.36 % 6.85 %
Rental income on operating leases 2.74 % 2.67 %
 
 
 
   Finance revenue 9.10 % 9.52 %
Less: interest expense 5.16 % 5.14 %
         Depreciation on operating lease equipment 1.59 % 1.55 %
 
 
 
   Net finance revenue 2.35 % 2.83 %
 
 
 
As a % of AEA by Segment:        
Corporate Finance 3.04 % 2.98 %
Transportation Finance 2.73 % 2.53 %
Trade Finance 4.80 % 5.77 %
Vendor Finance 4.30 % 4.85 %
   Commercial Segments 3.35 % 3.46 %
Consumer 0.84 % 1.25 %
Home Lending 0.91 % 2.03 %
   Consolidated net finance revenue 2.35 % 2.83 %

Net finance revenue of $433 million declined 10% from the 2007 first quarter and 11% from last quarter. As a percentage of average earning assets, net finance revenue declined to 2.35% from 2.83% in the 2007 first quarter and 2.67% last quarter. Declining market interest rates, including lower benchmark market interest rates, reduced asset yields as a percentage of average earning assets. However, interest costs did not decline to the same degree as a percentage of average earning assets, as the Company’s borrowing spreads over benchmark rates widened, lower cost unsecured debt was repaid, the Company utilized secured financing structures to a greater degree and the cost of maintaining excess cash liquidity increased. Average earning assets increased 9% over the prior year quarter and 1% over last quarter. Asset growth for the quarter was strategically controlled to balance liquidity.

Our funding costs have not decreased with lower market interest rates, reflecting the constrained capital markets and other factors. As described in Capitalization and in the Liquidity section of Risk Management, beginning in the second half of 2007, commercial paper balances were significantly lowered, as we relied more heavily on secured financing sources and issued a number of higher-cost funding instruments. Further, during the 2008 first quarter, our credit ratings were lowered, effectively eliminating our ability to issue commercial paper to our existing prime commercial paper investor base and we drew upon our back-up bank line facilities.

Net finance revenue for our commercial segments and corporate and other declined to 2.97% as a percentage of average earning assets from 3.35% in the prior year quarter and 3.37% last quarter. The decline was consistent with the decline in our overall results, but to a lesser degree. Net finance revenue for just the commercial segments was 3.35% for the quarter, versus 3.60% in the prior quarter and 3.46% in the first quarter of 2007.

30 CIT GROUP INC


We expect this downward pressure on net finance income to continue through 2008. The following table presents the causes of the reduced net finance revenue percentage from the fourth and first quarters of 2007.


Change in Net Finance Revenue as a % of AEA

 

Quarter
Ended
March 31,
2008


   

Twelve
Months
Ended
March 31,
2008


Net finance revenue – prior period 2.67 %   2.83 %
Treasury gap (including asset/liability mix, changes in liquidity position) -0.07 %   -0.15 %
Yield-related fees     -0.06 %
Asset mix changes, including student lending -0.07 %   -0.09 %
Other factors -0.18 %   -0.18 %
 
   
 
Net finance revenue – March 31, 2008 2.35 %   2.35 %
 
   
 

The increased treasury gap drag on net finance revenue reflects our decision to maintain excess cash balances and the continued disruption of capital markets.


Net Finance Revenue as a % of AOL for the Quarters Ended March 31 (dollars in millions)

  2008
2007
Rental income on operating leases 16.16 % 16.26 %
Depreciation on operating lease equipment 9.40 % 9.44 %
 
 
 
     Net operating lease revenue 6.76 % 6.82 %
 
 
 
Average Operating Lease Equipment (“AOL”) $12,541.4   $11,168.2  
 
 
 

Net operating lease revenue increased 11% over the prior year quarter on strength in the aerospace portfolio, but was down slightly from last quarter as somewhat softer lease rates and lower utilization in certain car types in our rail business, reflecting the weaker economy and in particular residential construction, contributed to the decline.

All of our commercial aircraft are under lease contracts. Additionally, all of the remaining 2008 and 2009 aircraft in our order book are placed with customers. See Concentrations —Operating Leases for additional information regarding operating lease assets.


CREDIT METRICS

Overall credit metrics continued to show higher past due and non-accrual loans and higher overall charge-offs, driven by the seasoning home lending portfolio. Although past due and non accrual loan credit metrics in our commercial businesses weakened from favorable prior period levels, commercial credit quality remained good in the first quarter of 2008. Commercial net charge-offs increased to 0.63% of average finance receivables, reflecting strong prior year recoveries in Transportation Finance and Corporate Finance.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 31



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

  March 31, 2008
December 31, 2007
Owned            
Corporate Finance $   266.6 1.26 % $   194.8 0.91 %
Transportation Finance 14.6 0.56 % 9.8 0.39 %
Trade Finance 86.1 1.23 % 71.1 0.97 %
Vendor Finance 339.6 3.14 % 336.0 3.24 %
 
   
   
   Commercial Segments 706.9 1.70 % 611.7 1.47 %
Home Lending 1,185.8 12.95 % 962.1 9.91 %
Consumer 642.8 4.90 % 600.8 4.93 %
 
   
   
Total $2,535.5 3.97 % $2,174.6 3.43 %
 
   
   
Managed            
Corporate Finance $   291.0 1.19 % $   201.8 0.86 %
Transportation Finance 14.6 0.47 % 9.8 0.39 %
Trade Finance 86.1 1.23 % 71.1 0.97 %
Vendor Finance 510.5 3.41 % 520.7 3.49 %
 
   
   
   Commercial Segments 902.2 1.82 % 803.4 1.68 %
Home Lending 1,251.6 12.76 % 1,031.3 9.92 %
Consumer 642.8 4.87 % 600.8 4.88 %
 
   
   
Total $2,796.6 3.86 % $2,435.5 3.42 %
 
   
   

Corporate Finance delinquency metrics trended up during the quarter primarily due to the addition of accounts in the commercial & industrial and the communications media & entertainment units.

Transportation Finance delinquencies reflected a modest increase in aerospace delinquencies in a small number of accounts and increased from very low year end levels.

Trade Finance delinquencies increased but remained below a year ago.

The Vendor Finance decrease in delinquency in 2008 was driven primarily by lower delinquencies in U.S. operations, as delinquencies associated with the integration and consolidation of leasing platforms in connection with a 2007 acquisition have lessened. This improvement was partly offset by higher international balances, in both Europe and Asia Pacific, driven by several larger accounts. International delinquency remains below the September 2007 high point.

Home Lending metrics are reflected as a percentage of unpaid principal balance. Home Lending delinquencies continued to rise, reflecting expected portfolio seasoning (given the portfolio run-off / liquidating status) coupled with the effects of softer residential real estate and tighter residential mortgage financing and re-financing market conditions. See Concentrations for additional information on Home Lending.

Consumer delinquency increased in 2008 driven by Student Lending. Delinquencies on student loans for which there is a 97% government guarantee totaled $603.1million (5.1%) at March 31, 2008, up from $569.1 million (5.23%) at December 31, 2007. Delinquencies on unguaranteed private loans totaled $25.7 million (3.5%) at March 31, 2008 and $12.7 million (2.03%) at December 31, 2007. Approximately $550 million (75%) of the private loan portfolio is not yet in repayment status, which begins upon graduation, or when a student no longer attends school. As more loans enter repayment status, it is possible that we will experience changes in delinquency rates.

32 CIT GROUP INC



Non-performing Assets (dollars in millions)

  March 31, 2008
December 31, 2007
Corporate Finance $  442.3 2.08 % $  242.2 1.14 %
Transportation Finance 7.9 0.30 % 3.3 0.13 %
Trade Finance 44.4 0.63 % 41.6 0.57 %
Vendor Finance 205.6 1.90 % 190.6 1.84 %
 
   
   
   Commercial Segments 700.2 1.68 % 477.7 1.15 %
 
   
   
Home Lending 1,057.1 11.54 % 892.3 9.19 %
Consumer 87.7 0.67 % 8.5 0.07 %
 
   
   
Total $1,845.0 2.90 % $1,378.5 2.17 %
 
   
   
Non-accrual loans $1,652.3 2.60 % $1,162.7 1.83 %
Repossessed assets 192.7 0.30 % 215.8 0.34 %
 
   
   
   Total non-performing assets $1,845.0 2.90 % $1,378.5 2.17 %
 
   
   

The non-performing asset trends follow those of loan delinquency. Non-performing loans in Corporate Finance increased during the quarter consistent with the previously discussed loan delinquency trends as well as the additions of a commercial real estate development loan and a number of large communications and media and manufacturer loans. Non-performing balances, such as in Corporate Finance, may exceed the delinquency balance as certain loans classified as non-accrual stop accruing income even though they may not be contractually past due. Repossessed assets, which are carried at the lower of book value or estimated fair value, decreased primarily due to Home Lending activity. See Concentrations — Home Lending Business for additional information.


RESERVE FOR CREDIT LOSSES


Reserve and Provision for Credit Losses for the Quarters Ended March 31 (dollars in millions)

  2008
2007
Reserve balance – beginning of period $   831.5   $659.3  
 
 
 
Provision for credit losses – finance receivables (by segment)        
   Corporate Finance 36.6   20.5  
   Transportation Finance (0.4 ) (22.5 )
   Trade Finance 9.5   8.0  
   Vendor Finance 28.2   10.4  
   Home Lending 217.8   35.3  
   Consumer 149.6   7.9  
   Corporate and other, including specific reserving actions 23.2   11.5  
 
 
 
Total provision for credit losses 464.5   71.1  
Reserve changes relating to foreign currency translation, acquisitions, other (8.2 ) 30.8  
 
 
 
Additions to reserve for credit losses, net 456.3   101.9  
Net charge-offs (recoveries)        
   Corporate Finance 39.5   20.8  
   Transportation Finance (0.6 ) (22.5 )
   Trade Finance 8.9   7.0  
   Vendor Finance 19.5   10.0  
   Home Lending 67.8   34.5  
   Consumer 30.8   7.4  
 
 
 
Total net charge-offs 165.9   57.2  
 
 
 
Reserve balance – end of period $1,121.9   $704.0  
 
 
 
Reserve for credit losses as a percentage of finance receivables 1.77 % 1.17 %
Reserve for credit losses, excluding specific reserves, as a percentage of finance        
receivables, excluding student loans and home lending 1.23 % 1.18 %
Reserve for credit losses, excluding specific reserves, as a percentage of finance        
receivables, excluding guaranteed student loans and home lending 1.53 % 1.16 %
Reserve for credit losses as a percentage of non-performing assets, excluding        
student loans and home lending 82.0 % 162.9 %

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 33


The increase in the reserve for credit losses during the first quarter of 2008, as well as the higher provision in relation to the first quarter of 2007, largely reflected $268.8 million of combined provisioning in excess of charge-offs in the Home Lending and Consumer segments. The increased current quarter provision for credit losses in the commercial segments reflects weakened credit metrics from both very favorable prior year levels and unusually high recoveries in the commercial aerospace business in 2007. The reserve for credit losses as a percentage of non-performing assets excluding student loans and Home Lending declined from the prior year due to reduced expected loss severity.

In the Home Lending segment, the provision for the 2008 quarter of $217.8 million, included $150.0 million of reserve increase, reflecting higher loss severity and past due loans due to continued deterioration in the home lending markets during the quarter. The 2008 Consumer segment provision of $149.6 million included $121.5 million of reserve increase. Of this amount, $111.5 million related to loans to students (totaling $194.6 million at March 31, 2008) of a pilot flight training school that filed for bankruptcy during the quarter. The reserving action reflects management’s best estimate of losses, based on information available at this time and the collection strategy that the Company anticipates pursuing. The balance relates to other exposures in the private (unguaranteed) student lending portfolio. See Concentrations for additional information on the Home Lending and Student Lending portfolios.

The reserve for credit losses includes three key components: (1) specific reserves for loans that are impaired under SFAS 114, (2) reserves for estimated losses inherent in the portfolio based upon historical and projected charge-offs, and (3) reserves for inherent estimated losses in the portfolio based upon economic risks, industry and geographic concentrations, estimation risk and other factors. The consolidated reserve for credit losses is intended to provide for losses inherent in the portfolio based on estimates regarding the ultimate outcome of collection efforts and realization of collateral values, among other things. 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 factors affecting specific obligors or industries as well as adjustments for estimation risk. With the exception of home lending and student lending private loan performance, we continue to believe that the credit risk characteristics of the portfolio are well diversified by geography, industry, borrower, and collateral type. 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.

Specific reserves related to impaired loans totaled $61.0 million at March 31, 2008 compared with $52.1 million at December 31, 2007. The specific reserves primarily relate to SFAS 114 impaired accounts within our Corporate Finance and Trade Finance businesses. The reserve for credit losses at March 31, 2008 includes approximately $400 million added in connection with home lending receivables, compared with $250 million at December 31, 2007, and $148 million relating to student loans, compared to $26 million at December 31, 2007.

We believe that our total reserve for credit losses of $1,121.9 million represents management’s best estimate of credit losses incurred in the portfolio based on currently available information. See Risk Factors for additional discussion on reserve adequacy.


Net Charge-offs (charge-offs net of recoveries) for the Quarters Ended March 31
(dollars in millions, % as a percentage of average owned or managed finance receivables)


  2008
2007
Owned                
Corporate Finance $39.5   0.70 % $20.8   0.41 %
Transportation Finance (0.6 ) -0.09 % (22.5 ) -4.15 %
Trade Finance 8.9   0.51 % 7.0   0.42 %
Vendor Finance 19.5   0.73 % 10.0   0.43 %
 
     
     
   Commercial Segments 67.3   0.63 % 15.3   0.16 %
Home Lending 67.8   3.15 % 34.5   1.32 %
Consumer 30.8   0.97 % 7.4   0.30 %
 
     
     
Total $165.9   1.04 % $57.2   0.39 %
 
     
     
Managed                
Corporate Finance $42.2   0.75 % $22.8   0.42 %
Transportation Finance (0.6 ) -0.09 % (22.5 ) -4.15 %
Trade Finance 8.9   0.51 % 7.0   0.42 %
Vendor Finance 29.4   0.80 % 13.4   0.41 %
 
     
     
   Commercial Segments 79.9   0.66 % 20.7   0.19 %
Home Lending 76.0   3.28 % 41.9   1.48 %
Consumer 30.8   0.97 % 7.4   0.30 %
 
     
     
Total $186.7   1.09 % $70.0   0.43 %
 
     
     

34 CIT GROUP INC


Corporate Finance net charge-offs were up in 2008 due to higher charge-offs in energy & infrastructure and lower levels of recoveries partially offset by lower charge-offs in equipment leasing.

Transportation Finance recoveries exceeded charge-offs in both periods, but were down from 2007, which included a large aerospace recovery.

Net charge-offs in Trade Finance increased modestly from low prior year levels.

Net charge-offs in Vendor Finance reflect both higher international and U.S. charge-offs.

Home Lending charge-offs were up due to further portfolio seasoning and increased loss severity driven by further deterioration of the residential real estate and home lending markets.

Charge-offs in Consumer increased due to higher losses on unsecured consumer loans held in the Utah bank as well as increased charge-offs on private (non-U.S. government guaranteed) student loans. Non-student lending consumer loan charge-offs declined from the prior quarter.

Net charge-offs on securitized assets were up from a year ago. As a percentage of average securitized assets, securitized portfolio net charge-offs were 1.36% for the first quarter of 2008, compared with 0.83% in the 2007 first quarter.

Considering current portfolio trends and the economic outlook, we currently expect the following: (1) commercial net charge-offs to increase during 2008 from the low 2007 levels, driven in part by lower recoveries; (2) continued provisioning in the Consumer segment as the private student portfolio continues to season; (3) Home Lending losses to continue at high levels on continued portfolio seasoning, with quarterly loss reserve provisioning required.


NET FINANCE REVENUE, AFTER PROVISION FOR CREDIT LOSSES


Net Finance Revenue, After Provision for Credit Losses for the Quarters Ended March 31, (dollars in millions)

  2008
2007
Net finance revenue $     433.3   $     479.9  
Provision for credit losses 464.5   71.1  
 
 
 
Net finance revenue after credit provision $     (31.2 ) $     408.8  
 
 
 
As a % of AEA:        
Net finance revenue 2.35 % 2.83 %
Provision for credit losses 2.52 % 0.42 %
 
 
 
Net revenue, after credit provision -0.17 % 2.41 %
 
 
 
Average Earnings Asset (“AEA”) $73,869.5   $67,920.9  
 
 
 

Total net revenue, after credit provision was a deficit in 2008 and declined from the prior year quarter and last quarter due to increased charge-offs and reserve building in the consumer businesses, and the margin compression discussed earlier.


NET FINANCE REVENUE, AFTER CREDIT PROVISION AND VALUATION ALLOWANCE

Net finance revenue, after credit provision and valuation allowances, was down from the prior year quarter and last quarter. The valuation allowance recorded during the current quarter (to reduce receivables held for sale to the lower of cost or market) reflected (1) $117.5 million adjustment to the asset-based loans in the Corporate Finance segment as we transferred approximately $1.4 billion of receivables from held for investment in anticipation of sales and (2) $23 million on the home lending receivables (manufactured housing), that were transferred to the held for investment portfolio, because marketing activities have ceased.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 35



OTHER INCOME

Other income for the quarter as a percentage of total net revenue (net finance revenue plus other income) was 32% (excluding the impairment charge discussed below) versus 29% last quarter (excluding significant gains from the sale of our interest in a joint venture and a systems leasing business) and down from 41% in the 2007 first quarter, principally due to lower syndication fees and receivable sales gains. The components of other income are as follows:


Other Income for the Quarters Ended March 31 (dollars in millions)

  2008
2007
Fees and other income $  65.3   $185.5  
Factoring commissions 52.1   52.4  
Gains on sales of leasing equipment 47.8   29.5  
Gains on receivable sales and syndication fees 4.7   53.6  
Gains on securitizations 4.1   7.6  
 
 
 
   Total other revenue $174.0   $328.6  
 
 
 

Fees and other income are comprised of asset management, agent and servicing fees, including securitization-related servicing fees, accretion and impairment charges relating to retained securitization interests, advisory and agent fees, as well as income from joint venture operations. Fees and other income declined from the prior year quarter on lower joint venture earnings, reflecting the 2007 year end sale of our interest in the DFS joint venture. The current quarter also includes a pre-tax $33 million impairment charge reflecting the repricing of debt costs underlying one of our vendor finance securitization conduit vehicles. The 2007 first quarter was particularly strong reflecting high joint venture income and gains on structured finance transactions.

Factoring commissions were essentially flat with the 2007 first quarter reflecting flat factoring volume.

Gains on sales of leasing equipment increased over the 2007 first quarter reflecting gains of $27 million (approximately 9%) from the sales of 11 commercial aircraft this quarter, with a total book value of approximately $300 million.

Gains on receivable sales and syndication fees were down significantly from the 2007 first quarter due to lower syndicated loan fees reflecting the significant contraction in the loan syndication market. Commercial loan sales and syndication volume was $0.5 billion (10% of commercial origination volume), down from $1.4 billion (21%) in the 2007 first quarter. Sales of student loans were also significantly lower, $0.1 billion for the March 2008 quarter, down from about $0.5 billion in the prior year quarter. These decreases are a reflection of continued market illiquidity.

Gains on securitization declined from the 2007 first quarter reflecting reduced origination volume. Gains as a percentage of volume securitized were flat at 0.7% for both quarters (on volume of $0.6 billion and $1.1 billion).


SALARIES AND GENERAL OPERATING EXPENSES


Salaries and General Operating Expenses for the Quarters Ended March 31 (dollars in millions)

  2008
2007
Salaries and employee benefits $190.1   $240.0  
Other general operating expenses 127.9   115.8  
 
 
 
Salaries and general operating expenses $318.0   $355.8  
 
 
 
Provision for severance and real estate expenses $  69.1   $      –  
Efficiency ratio(1) 52.4 % 44.0 %
Headcount 6,100   7,500  

(1) Efficiency ratio is the ratio of salaries and general operating expenses to total net revenues.

36 CIT GROUP INC


Salaries and general operating expenses were down $37.8 million from a year ago, due to reduced salaries and employee benefits. This decrease reflects the significant decrease in employees coupled with lower incentive compensation expense. The increased other operating expenses included higher legal and professional fees as well as higher credit and collection expenses.

Severance and real estate exiting activity charges totaled $69.1 million and reflect staff reductions of approximately 500 throughout the organization, as we continue to streamline current processes and seek to reduce operating costs. Expected annual savings from these actions are approximately $75 million, of which approximately $7 million was realized in the current quarter.

Employee headcount totaled approximately 6,100 at March 31, 2008, down 19% from 7,500 a year ago.

In early April 2008, we ceased the origination of all student lending, including U.S. government guaranteed loans. We expect to record a pretax charge of approximately $20 million ($15 million in the second quarter of 2008) in conjunction with closing the student lending origination platform.

See Note 17 – Severance and Real Estate Exit Reserves for additional information.


INCOME TAXES


Income Tax Data for the Quarters Ended March 31 (dollars in millions)

  2008
2007
(Benefit) provision for income taxes $(294.2 ) $34.1  
Tax liability releases/NOL valuation adjustments 4.9   20.6  
Tax benefit loss on debt extinguishment/hedge loss/valuation adjustment 101.5   59.5  
Tax benefits – home lending losses (net of valuation allowance) and other noteworthy items 235.1    
 
 
 
Provision for income taxes – adjusted $   47.3   $114.2  
 
 
 
Effective tax rate – reported 55.2 % 14.1 %
Effective tax rate – adjusted 20.8 % 29.9 %

CIT’s reported tax provision for the quarter ended March 31, 2008 reflects a tax benefit of $294.2 million, compared with tax expense of $34.1 million in the first quarter of 2007. In 2008, losses in the home lending and consumer segments and significant noteworthy items impacted the relationship between recorded tax benefits and pre-tax earnings. Pre-tax losses of $532.9 million for the quarter ended March 31, 2008 with a corresponding tax benefit of $294.2 million resulted in a reported effective tax rate of 55.2%.

The statutory tax rates (US federal and applicable state tax) applied to the pre-tax losses associated with the home lending and consumer losses and to the significant, noteworthy items were higher than the tax rates applied to the Company’s other pre-tax earnings. Excluding these items, CIT’s projected annual effective tax rate of approximately 21%, as referenced above, which is based on the Company’s full year 2008 earnings projections, differs from the U.S. federal tax rate of 35% primarily due to state and local income taxes, foreign earnings taxed at lower rates, and permanent differences between the book and tax treatment of certain items. Based on the projected annual effective tax rate, additional tax benefits were recorded in the quarter, derived in large part from the disproportionate amount of loss in high tax jurisdictions incurred in the quarter relative to that which is projected for the full year. The combined tax benefit related to the significant, unusual items ($101.5 million) and other noteworthy items ($235.1 million) totaled $336.6 million for the quarter ended March 31, 2008, as shown in the preceding table. These effects are the primary drivers of the significant tax benefit recorded in the first quarter of 2008. In the quarter ended March 31, 2007, the tax provision was favorably impacted by a $59.5 million tax benefit related to the loss on the extinguishment of debt.

The income tax benefit for the quarter ended March 31, 2008 included a $4.9 million net decrease in liabilities related to uncertain tax positions in accordance with Financial Accounting Standards Board Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes. In 2007, the income tax provision included a $20.6 million tax benefit primarily related to the release of certain international liabilities for uncertain tax positions and the release of deferred income tax liabilities associated with the relocation of certain aerospace assets to lower tax jurisdictions. The Company anticipates that it is reasonably possible that the total unrecognized tax benefits will decrease due to the settlement of audits and the expiration of statute of limitations prior to March 31, 2009 in the range of $30-$60 million.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 37



FINANCING AND LEASING ASSETS


Financing and Leasing Assets by Segment (dollars in millions)

March 31,
2008

December 31,
2007

Percentage
Change

Corporate Finance            
   Finance receivables $21,222.0   $21,326.2   (0.5 )%
   Operating lease equipment, net 364.6   459.6   (20.7 )%
   Financing and leasing assets held for sale 1,840.0   669.3   174.9 %


         Owned assets 23,426.6   22,455.1   4.3 %
   Finance receivables securitized and managed by CIT 1,347.7   1,526.7   (11.7 )%


         Managed assets 24,774.3   23,981.8   3.3 %


Transportation Finance            
   Finance receivables 2,620.1   2,551.3   2.7 %
   Operating lease equipment, net 10,740.8   11,031.6   (2.6 )%
   Financing and leasing assets held for sale 500.5     100 %


         Owned assets 13,861.4 (1) 13,582.9   2.1 %


Trade Finance            
   Finance receivables 7,003.9   7,330.4   (4.5 )%


Vendor Finance            
   Finance receivables 10,824.8   10,373.3   4.4 %
   Operating lease equipment, net 1,098.3   1,119.3   (1.9 )%
   Financing and leasing assets held for sale 198.7   460.8   (56.9 )%


         Owned assets 12,121.8   11,953.4   1.4 %
   Finance receivables securitized and managed by CIT 3,954.0   4,104.0   (3.7 )%


         Managed assets 16,075.8   16,057.4   0.1 %


Home Lending            
   Finance receivables 8,749.2   8,775.6   (0.3 )%
   Financing and leasing assets held for sale   345.8   (100.0 )%


         Owned assets 8,749.2   9,121.4   (4.1 )%
   Finance receivables securitized and managed by CIT 652.3   680.5   (4.1 )%


         Managed assets 9,401.5   9,801.9   (4.1 )%


Consumer            
   Finance receivables – student lending 12,561.9   11,499.9   9.2 %
   Finance receivables – other 557.0   679.9   (18.1 )%
   Financing and leasing assets held for sale 76.5   130.1   (41.2 )%


         Owned assets 13,195.4   12,309.9   7.2 %


Other – Equity Investments 233.6   165.8   40.9 %


Managed assets $84,545.9   $83,230.1   1.6 %



(1) Includes $8.3 billion of commercial aerospace and $4.5 billion of rail.

Managed assets growth during the quarter has been and will continue to be carefully controlled to manage our liquidity and strategically target key customers and relationships. We recently announced that we have ceased originating new student loans, and we ceased originating home lending and other unsecured consumer loans in 2007, placing these portfolios in liquidation mode. The student loan growth during the quarter was the result of funding existing commitments of which approximately $200 million remained at March 31, 2008.

Assets held for sale increased $1.0 billion from December to $2,615.7 million at March 31, 2008. In the quarter ended March 31, 2008, management identified $1.4 billion of Corporate Finance funded asset-based loan commitments for sale in the second quarter, and $500 million of commercial aerospace assets for sale in 2008 in conjunction with our plan to sell additional aircraft. Accordingly, such assets are included in financing and leasing assets held for sale.

See Non-GAAP Financial Measurements for reconciliation of managed assets.

38 CIT GROUP INC



BUSINESS VOLUMES

The volume declines, particularly in Corporate Finance, reflect the lack of liquidity in the syndication and loan sale markets, as we previously originated loans with the intent to sell or syndicate them.


Business Volumes for the Quarters Ended March 31 (excluding factoring, dollars in millions)

  2008
2007
Corporate Finance $2,161.2 $3,588.2
Transportation Finance 710.1 686.2
Vendor Finance 2,240.8 2,310.0
 
 
 
   Commercial Segments 5,112.1 6,584.4
Home Lending 7.6 2,193.0
Consumer 1,210.0 2,001.8
 
 
 
Total new business volume $6,329.7 $10,779.2
 
 
 


RESULTS BY BUSINESS SEGMENT


Results by Business Segment (dollars in millions)

  Quarters Ended March 31,
  2008
2007
Net Income (Loss)        
Corporate Finance $(20.2 ) $80.1  
Transportation Finance 84.5   76.3  
Trade Finance 33.2   36.6  
Vendor Finance 6.8   76.3  
 
 
 
   Commercial Segments 104.3   269.3  
Home Lending (153.3 ) 0.5  
Consumer (95.2 ) 11.4  
Corporate & Other (113.0 ) (80.7 )
 
 
 
   Total $(257.2 ) $200.5  
 
 
 
Return on Equity        
Corporate Finance (3.1 )% 13.8 %
Transportation Finance 19.8 % 19.3 %
Trade Finance 15.8 % 17.0 %
Vendor Finance 1.6 % 20.4 %
   Commercial Segments 6.1 % 17.5 %
Home Lending (58.1 )% 0.3 %
Consumer (143.7 )% 9.1 %
Corporate & Other (8.8 )% (3.3 )%
   Total (15.8 )% 11.5 %

The 2008 capital allocations, by segment as a percentage of managed assets, excluding goodwill, are as follows: Corporate Finance – 10%; Transportation Finance – 12%; Trade Finance – 10%; Vendor Finance – 8%; Home Lending 11%; Consumer – 2%. These individual segment amounts exclude the diversity benefit included in the consolidated capital requirement.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 39



Corporate Finance

Net income decreased from the 2007 first quarter and last quarter primarily due to $117.5 million of valuation allowances on assets transferred to held-for-sale for liquidity purposes. Net finance revenue increased on higher assets, but other income declined and credit provisions were higher. Excluding the valuation allowance on assets being sold for liquidity purposes, pre-tax income was $88.2 million, down from $115.6 million last quarter and $125.5 million in the 2007 first quarter. The declines in other income reflect a significantly lower level of loan sales and syndication activity. As a result, return on risk- adjusted capital decreased from the 2007 first quarter and last quarter (11.1%).
   
Total net revenues (net finance revenue plus other income) decreased 8% from the 2007 first quarter and 9% from last quarter. Net finance revenues as a percentage of earning assets have remained stable. Other income was down due to lower syndications fees due to lack of market liquidity which began in the latter half of 2007 and continued during the first quarter 2008.
   
Net charge-offs increased from both the 2007 first quarter and last quarter mainly due to one exposure to a company that filed for bankruptcy during the quarter for which we charged-off approximately $22 million. Delinquencies and non-performing assets increased from last quarter and the 2007 first quarter reflecting the addition of a few accounts across various industries.
   
Total origination volumes declined from the 2007 first quarter and last quarter as we have limited new origination volumes to balance our liquidity goals with franchise value considerations. During the current quarter, CIT Bank funded approximately $335 million of commercial loans.
   
Owned assets were up 7% from last March and 4% from year end. Growth was highlighted by the syndicated loan and commercial, media and entertainment groups and includes modestly higher commitment utilization by clients. Securitized assets were down due to limited market liquidity.


Transportation Finance

Transportation posted strong bottom line performance consistent with the 2007 first quarter and higher than last quarter. This was due to slightly higher finance revenue and higher other income, partially offset by lower recoveries. Return on risk-adjusted capital increased from both the 2007 first quarter and last quarter (14.2%).
   
Total net revenues improved 41% from the 2007 first quarter and 15% from last quarter, due to asset growth and higher gains on equipment sales, particularly in aerospace. Net finance revenue as a percentage of average earning assets after depreciation was up from the 2007 first quarter on strength in non-operating lease margins and aerospace rentals, but down from last quarter on lower rail lease rates.
   
Credit metrics remained strong with net recoveries, and modestly higher aerospace delinquencies and non- performing asset levels.
   
New business volume was up from the 2007 first quarter on higher new aircraft deliveries, but down from the prior quarter. All aircraft scheduled for delivery in our aerospace order book through December 2009 have been placed.
   
Asset growth was 11% over the 2007 first quarter for the segment, driven by new aircraft deliveries from our order book and loans to major carriers, and up modestly from December 2007. Our commercial aircraft portfolio continued to be fully utilized. None of our aircraft were affected by the recent increase in airline bankruptcies. Rail demand experienced some softening during the quarter as utilization declined to approximately 92%. However, including commitments from customers to lease rail cars, our rail assets would be approximately 95% utilized.


Trade Finance

Net income was down 9% from the 2007 first quarter due to lower finance and other income and higher provision for credit losses. Return on risk adjusted capital was 15.8%, down slightly from both last quarter and the 2007 first quarter.
   
Total net revenues were down from both last year and the prior quarter as competitive pressures lowered rates and volumes were down slightly.
   
Net charge-offs were up over last quarter and the 2007 first quarter. Delinquencies and non-performing loans were up from last quarter, but below the 2007 first quarter levels.
   
•  Owned assets increased by 2% from the 2007 first quarter and decreased 4% from last quarter.


Vendor Finance

Net income was down from the 2007 first quarter and last quarter driven by lower other income. The prior quarter included significant gains from the sale of CIT’s 30% interest in the U.S. based Dell Financial Services (DFS) joint venture and the sale of the U.S. Systems Leasing portfolio, while the current quarter included an impairment charge related to a securitization conduit. As a result, return on risk-adjusted capital was down from both periods.
   
Total net revenues were down from both the 2007 first quarter and the prior quarter. Higher finance revenues driven by asset growth were offset by increased funding costs. Other income was down on lower joint venture income (reflecting the termination of our interest in the DFS joint venture), and lower fees, and included a pre-tax $33 million impairment charge reflecting the repricing of debt costs underlying the securitization conduit. Net finance revenue as a percentage of average earning assets after depreciation was down from both periods due to higher borrowing spreads.

40 CIT GROUP INC


Net charge-offs were down from last quarter and up over the 2007 first quarter. Delinquencies and non- performing asset levels increased over both periods as the increases in our international operations offset improved U.S. results.
   
New business volume declined from the 2007 first quarter driven by lower U.S. volumes, as declines in Dell volume were partially offset by new vendor relationships.
   
Owned assets were up 15% from the 2007 first quarter due to an acquisition in the second half of 2007, partially offset by the sale of the systems leasing portfolio in the final quarter of 2007 and the decline in the U.S. Dell program. Securitized assets were essentially flat.


Home Lending (see Home Lending Business in Concentrations for more detail on home lending)

The net losses for the current and prior quarter reflect the increased provisioning for credit losses due to the weak residential housing market, valuation charges and impairment charges on retained interests in securitizations due to deteriorated portfolio credit performance.
   
Total net revenues were down from last year reflecting lower asset balances and higher funding costs (principally on the 2007 third quarter securitization), but above last quarter. Adjustments to the valuation allowance for assets held for sale totaled $23 million for the quarter and related to $338 million (approximately $480 million unpaid principal balance) of manufactured home receivables that have been transferred to assets held for investment at March 31, 2008.
   
Home lending assets held for investment were $8.7 billion at quarter-end, reflecting unpaid principal balance of $9.4 billion and discounts of $0.7 billion. Reserves for credit losses were $400 million at March 31, 2008.
   
Gross charge-offs for the quarter were $272 million, of which $204 million were applied to existing loan level discounts. The current quarter provision for loan losses was $218 million, including an increase to reserves of $150 million. Charge-offs were higher than expected due to higher loss severity rates on both first and second mortgages.
   
Delinquencies and non-performing assets increased from the 2007 first quarter and the prior quarter reflecting continued deterioration in the housing sector. The balance of real estate owned declined from the prior quarter, as the level of sales exceeded new foreclosures.
   
Liquidations in the quarter totaled approximately $330 million, down from approximately $380 million in the prior quarter.


Consumer (see Concentrations section for more information on student lending)

The net loss in the current quarter primarily reflects the higher provision for credit losses in the private, unguaranteed student loan portfolio and lower other income. Last quarter’s net loss reflects $313 million in impairment charges to write-off the goodwill and intangible assets associated with the student lending business and higher provisioning for charge-offs of other unsecured consumer loans.
   
Total net revenues were down from the 2007 first quarter and last quarter. Finance income was down as a result of placing on non-accrual status loans to the students of a helicopter school which filed for bankruptcy and certain loans resetting at lower market interest rates.
   
CIT Bank deposits were down slightly from December 2007, given liquidity at the Bank. During late 2007 we began the Bank’s transition from a consumer-oriented lender to a commercial lender and have recently originated certain loans in conjunction with Corporate Finance. During the current quarter, CIT Bank funded approximately $335 million of commercial loans.
   
Net charge-offs increased in both student loans and unsecured consumer loan portfolios compared with last quarter and the 2007 first quarter. Delinquencies were flat with last quarter, and higher than the 2007 first quarter. Non-performing assets were up reflecting the student loans affected by the bankruptcy of a pilot training school.
   
We announced on April 3, 2008, that we ceased the origination of new government guaranteed student loans and expect to record a pre-tax charge of approximately $20 million related to closing the originations platform of the student lending business, $15 million of which we expect will be recognized in the second quarter of 2008. We will continue to service the current portfolio and fund any remaining commitments, which are estimated to be approximately $200 million.
     
  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 41


Corporate and Other net expenses are shown in the table below:


Corporate Unallocated Expenses (dollars in millions)

  Quarters Ended March 31,
  2008
2007
Unallocated revenues (expenses), net $33.6   $15.2  
Provision for credit losses (13.2 ) (6.7 )
Preferred stock dividends (7.5 ) (7.5 )
Provision for severance and real estate exit activities (41.7 )  
Venture capital operating (losses)   (2.5 )
 
 
 
Subtotal (28.8 ) (1.5 )
Loss on debt and debt-related derivative extinguishments (84.2 ) (79.2 )
 
 
 
Total $(113.0 ) $(80.7 )
 
 
 

Corporate and other, principally contains certain credit loss provisioning, preferred stock dividends and other financing costs. The current period also contains the hedge accounting discontinuation charge for the interest rate swaps related to the commercial paper program, as well as the severance and real estate expenses associated with streamlining efforts.

Results by business segment are discussed in Note 14 – Business Segment Information.


CONCENTRATIONS

Ten Largest Accounts

Our ten largest financing and leasing asset accounts in the aggregate represented 4.0% of our total financing and leasing assets at March 31, 2008 (the largest account being less than1.0%), and 4.1% at year end. The largest accounts primarily consist of companies in the transportation, retail and energy industries.

Operating Leases


Operating Leases (dollars in millions)

  March 31,
2008

December 31,
2007

Transportation Finance – Aerospace(1) $  6,862.2   $  7,206.8  
Transportation Finance – Rail 3,878.6   3,824.8  
Vendor Finance 1,098.3   1,119.3  
Corporate Finance 364.6   459.6  
 
 
 
   Total $12,203.7   $12,610.5  
 
 
 

(1) Aerospace includes commercial, regional and corporate aircraft and equipment.

The decrease in Transportation Finance – Aerospace operating lease assets reflects sales of $300 million of aircraft assets and the transfer of approximately $450 million of assets to held-for-sale, partially offset by deliveries of 7 new commercial aircraft from our order book. We had 220 commercial aircraft on operating lease at March 31, 2008, up from 198 a year ago. Railcar utilization was approximately 92% (95%, including those railcars with commitments in place from customers).

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, one of which was Dell Financial Services (DFS), covering originations in the U.S. The agreement provided Dell with the option to purchase CIT’s 30% interest in DFS, which was exercised during the fourth quarter of 2007. We retain the right to provide 25% (of sales volume) funding to DFS in 2009 and 35% in 2008, compared to 50% in 2007. We also retain vendor finance programs for Dell’s customers in Canada and in more than 40 countries outside the United States that are not affected by Dell’s purchase of our DFS interest.

The joint venture agreement with Snap-on runs through January 2009. The Avaya agreement, which relates to profit sharing on a CIT direct origination program, was extended through September 2009, pursuant to a renewal provision in the agreement.

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. 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 20 – Certain Relationships and Related Transactions.

42 CIT GROUP INC



Joint Venture Relationships (dollars in millions)

  March 31,
2008

December 31,
2007

Owned Financing and Leasing Assets      
Dell – International $1,891.5 $1,748.1  
Snap-on 1,029.7 1,010.5  
Dell U.S. 599.6 604.7  
Avaya Inc. 372.2 399.7  
Securitized Financing and Leasing Assets      
Dell U.S. 2,217.6 2,341.6  
Avaya Inc. 397.1 402.4  
Dell – International 64.5 84.7  
Snap-on 21.0 24.1  

Geographic Concentrations


Geographic Concentration by Obligor (dollars in millions)

  March 31,
2008

December 31,
2007

State        
   California 8.4 % 8.7 %
   New York 6.2 % 6.8 %
   Texas 5.9 % 6.3 %
   All other states 53.2 % 52.4 %


Total U.S. 73.7 % 74.2 %


Country        
   Canada 6.1 % 6.3 %
   England 5.0 % 5.1 %
   Germany 2.2 % 2.2 %
   China 1.5 % 1.5 %
   Mexico 1.4 % 1.4 %
   Australia 1.4 % 1.2 %
   All other countries 8.7 % 8.1 %


Total International 26.3 % 25.8 %



The table summarizes significant state concentrations greater than 5.0% and international concentrations in excess of 1.0% of our owned financing and leasing portfolio assets. Domestic concentrations decreased as a result of asset dispositions in construction and home lending. International assets increased in 2008 due to increased originations and the Barclays acquisition. For each period presented, our managed asset geographic composition did not differ significantly from our owned asset geographic composition.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 43



Industry Composition

Our industry composition is detailed in Note 4 – Concentrations. We believe the following discussions, covering certain industries, are of interest to investors.

Aerospace


Commercial Aerospace Portfolio (dollars in millions)

  March 31, 2008
December 31, 2007
  Net
Investment

Number
Net
Investment

Number
By Region:                
   Europe $2,788.8   90   $2,906.2   94  
   Asia Pacific 2,465.1   84   2,274.9   82  
   U.S. and Canada 1,237.4   62   1,279.5   60  
   Latin America 1,236.9   40   1,136.0   36  
   Africa / Middle East 553.5   13   567.8   15  
 
 
 
 
 
   Total $8,281.7   289   $8,164.4   287  
 
 
 
 
 
By Manufacturer:                
   Airbus $4,698.5   135   $4,575.8   132  
   Boeing 3,574.6   153   3,579.6   154  
   Other 8.6   1   9.0   1  
 
 
 
 
 
   Total $8,281.7   289   $8,164.4   287  
 
 
 
 
 
By Body Type(1):                
   Narrow body $6,217.4   230   $6,136.4   226  
   Intermediate 1,822.6   48   1,821.9   48  
   Wide body 233.1   10   197.1   12  
   Other 8.6   1   9.0   1  
 
 
 
 
 
   Total $8,281.7   289   $8,164.4   287  
 
 
 
 
 
By Product:                
   Operating lease $7,298.8   220   $7,120.1   219  
   Loan 691.8   57   732.6   56  
   Capital lease 208.7   9   225.5   9  
   Leveraged lease (tax optimized) 43.6   1   45.4   1  
   Leveraged lease (other) 38.8   2   40.8   2  
 
 
 
 
 
   Total $8,281.7   289   $8,164.4   287  
 
 
 
 
 
Number of accounts 104       105      
Weighted average age of fleet (years) 6       5      
Largest customer net investment $   286.6       $   287.3      
Off-lease aircraft            

(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.
 

Our top five commercial aerospace exposures totaled $1,312.0 million at March 31, 2008 and are to carriers outside of the U.S. The largest exposure to a U.S. carrier at March 31, 2008 was $233.4 million.

Our aerospace assets include both operating and capital leases as well as secured loans. 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

44 CIT GROUP INC


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 asset, lease rates, remarketing prospects and maintenance costs.

See Item 8. Financial Statements and Supplementary Data, Note 11 – Commitments and Contingencies for additional information regarding commitments to purchase additional aircraft and Note 4 – Concentrations for further discussion on geographic and industry concentrations.

Home Lending Business

The Company entered the home lending business in 1992 in order to provide diversification relative to our commercial finance businesses in an asset class with liquidity, predictable revenue streams and growth opportunities. In the first half of 2007, deteriorating credit performance in the residential mortgage markets, coupled with reduced liquidity in the secondary market for this asset class, resulted in a decline in portfolio and origination economics. In light of these negative developments, other negative trends in the housing market and management’s belief that the residential mortgage business would be weak for an extended period, in the second half of 2007, we ceased originating home lending assets and initiated the orderly run-off of a substantial portion of the then $11.1 billion unpaid principal balance (UPB) of the portfolio. These actions, combined with the deterioration in market conditions related to this asset class, resulted in $1.5 billion in combined valuation allowance and loss provisioning in the second half of 2007.

We recorded a $218 million provision for credit losses, including reserve building of $150 million above the $68 million in reported charge-offs during the quarter ended March 31, 2008. Increased loss severity arising principally from continued deterioration in the residential real estate and lending markets during the quarter, coupled with portfolio seasoning, drove the provision charge. Although lower market interest rates generally reduced re-pricing default risk associated with adjustable rate mortgages (“ARMs”), increased loss severity was experienced in both second and first lien positions. Increased loss severity was evident in cases of full second-lien loan loss which has more frequently become the economic result, when first lien default occurs in the current cycle of declining home values. Gross charge-offs were $272 million of which approximately $204 million were offset by the remaining previously established loan level discounts, with the net balance reflected as charge-offs against the loan loss reserve. The reserve for credit losses totaled $400 million at March 31, 2008, up from $250 million at December 31, 2007.

In addition to the reserving action, we took an additional $23 million pretax valuation charge to adjust the remaining manufactured housing assets classified as available for sale to estimated fair value prior to transferring these assets into the HFI portfolio at March 31, 2008. This decision reflected the lack of financing available to potential buyers. The estimated fair value was determined utilizing discounted cash flow modeling utilizing a remaining lifetime loss assumption of approximately 20% and a discount rate of approximately 15%. We have ceased marketing efforts related to this portfolio and have the ability and intent to hold this portfolio for the foreseeable future.

The following table summarizes the activity for the quarter ended March 31, 2008 in various components of the home lending portfolio.


Home Lending Portfolio (dollars in millions)

  Held for Investment
Held for Sale
Repossessed Assets
  UPB
Discount
Loss
Reserves

UPB
Val allow
UPB(1)
Val allow(1)
Balance at December 31, 2007 $9,228.6 (2) $(453.0 ) $(250.0 ) $ 487.6   $(145.5 ) $344.8   $(138.2 )
Transfer to repossessed assets (54.3 ) 13.9       (2.6 ) 2.6   67.9   (27.5 )
Charge-offs (UPB basis) (250.9 ) 203.8   67.8         (20.7 )  
First quarter provision     (217.8 )        
First quarter valuation charge         (23.0 )    
Accretion of discount   5.7            
Liquidations / other (246.8 ) (9.5 )   (3.4 ) (4.0 ) (59.2 ) 14.2  
Transfer from HFS to HFI 481.6   (169.9 )   (481.6 ) 169.9      
 
 
 
 
 
 
 
 
Balance at March 31, 2008 $9,158.2   $(409.0 ) $(400.0 ) $       –   $       –   $332.8   $(151.5 )
 
 
 
 
 
 
 
 
                             
(1)   Respective amounts at repossession date and transferred to other assets.
(2)   Includes $58.1 million of marine and other loans included in the home lending segment.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 45


The following table summarizes components of the HFI portfolio, including loans pledged in on-balance sheet securitizations at March 31, 2008 and December 31, 2007.


Composition of Loans Held-for-Investment Based on Unpaid Principal Balance, net of Charge-offs (valuations) (dollars in millions)
  March 31, December 31,    
Pool 2008 2007
 

Securitization pools $6,614      $7,074  
Re-performing first lien 1,113   1,226  
Manufactured housing(1) 478    
Other securitization eligible loans 243   210  
HELOCS, second liens, other 710   719  
 
 
 
Total held for investment portfolio $9,158   $9,229  
 
 
 

(1)      Transferred to HFI from HFS at the lower of cost or market in the first quarter of 2008.
 

The Company’s economic exposure to loss related to the home lending portfolio is reconciled to the financial statement carrying values at March 31, 2008 in the following table (dollars in millions):

  Loans
 
  First Second         Repossessed Total
Financial Statements Liens
Liens
Other(1)
Total
Assets
Portfolio
Contractual UPB $8,156   $1,111   $173   $9,440   $ 333   $9,773  
Charge-offs (valuations) (147 ) (134 ) (1 ) (282 ) (152 ) (434 )
 
 
 
 
 
 
 
   UPB, net 8,009   977   172   9,158   181   9,339  
Discount (276 ) (71 ) (62 ) (409 )   (409 )
 
 
 
 
 
 
 
   Receivable carrying value 7,733   906   110   8,749   181   8,930  
Loan loss reserves (279 ) (121 )   (400 )   (400 )
 
 
 
 
 
 
 
   Net receivable carrying value $7,454   $  785   $110   $8,349   $ 181   $8,530  
 
 
 
 
 
 
 
Economic Risk Third parties CIT Total
             


Securitization investments $4,653 $ 1,961   $ 6,614  
Other receivables and assets 3,159   3,159  
Reserves and discounts (1,243 ) (1,243 )
             
 
 
 
   Total – pretax $4,653 $ 3,877   $ 8,530  




Note: Capital allocated to the home lending portfolio approximates $1.0 billion

(1) Other represents primarily vendor originated manufactured housing assets

With respect to the $6.6 billion of securitized home loans, CIT has the risk of first loss of $2.0 billion, representing the junior certificates that we hold and the remaining over-collateralization. The $3.9 billion in the table above represents the Company’s maximum pretax exposure to loss on the home lending portfolio.

The contractual UPB of $9.4 billion of receivables (excluding repossessed assets) has been reduced by charge-offs or impairment valuations of $282 million, remaining discount of $409 million and loss reserves of $400 million, all of which total of $1.091 billion or 11.6% of contractual UPB at March 31, 2008.

From June 30, 2007 through March 31, 2008 the Company has recognized earnings charges totaling $1.770 billion (15.6% of the June 30, 2007 UPB of $11.289 billion) with respect to the home lending portfolio comprised of lower of cost or market valuations of $1.296 billion and provisions for loan loss of $474 million.

Student Lending (Student Loan Xpress)

The Consumer Finance student lending portfolio, which was marketed as Student Loan Xpress, totaled $12.6 billion at March 31, 2008, representing 16% of owned and 15% of managed assets. Loan origination volumes totaled $1.2 billion for the quarter reflecting additional disbursements on existing government-guaranteed student loan commitments.

46 CIT GROUP INC


Finance receivables, including held for sale, by product type for our student lending portfolio are as follows:


Student Lending Receivables by Product Type (dollars in millions)
  March 31, December 31,
  2008
2007
Consolidation loans $  9,452.9   $  9,050.4  
Other U.S. Government guaranteed loans 2,374.6   1,935.3  
Private (non-guaranteed) loans and other 734.4   599.3  
 
 
 
Total $12,561.9   $11,585.0  
 
 
 
Delinquencies (sixty days or more):        
   U.S. Government guaranteed loans $     603.1   $     569.1  
   Private loans $       25.7   $       12.6  
Top state concentrations (%) 36 % 36 %
Top state concentrations California, New York, Texas,   California, New York, Texas,  
  Ohio, Pennsylvania   Ohio, Pennsylvania  

In April 2008, we ceased origination of all student loans, including U.S. government guaranteed loans. This action followed our fourth quarter 2007 decision to cease the origination of private student loans. Prospective fundings will be limited to existing commitments. The funding of private loan commitments as of December 31, 2007 drove the increase in the private loan portfolio for the first quarter.

As discussed in Reserve for Credit Losses, we took significant reserving actions during the quarter ended March 31, 2008 relating to loans to students of a pilot training school that filed for bankruptcy during the quarter. The following table provides additional information with respect to our private loan portfolio at March 31, 2008.

          Grace, Loans in
  Total
In School
Forbearance
repayment
Non-traditional institutions(1) $480.2   $237.6   $158.4   $  84.2  
Traditional institutions 160.7   140.9   4.4   15.4  
Consolidation loans 93.5     10.8   82.7  




  $734.4   $378.5   $173.6   $182.3  




Percentages 100.0 % 51.6 % 23.6 % 24.8 %





(1)      Includes loans totalling $195 million to students of a pilot training school that filed bankruptcy during the first quarter of 2008. The next largest exposure in the private loan portfolio to students attending a single institution is approximately $60 million.
 

Traditional institutions are typically established as a not-for-profit under Federal Tax guidelines, and offer bachelors, associate, masters and PhD’s. A proprietary school (non-traditional) is organized as a standard business and can be privately or publicly owned. Non-traditional institutions generally offer less than two year programs and a high percentage of non-degree granting programs. Private consolidation loans are loans to students who had multiple private loans that are then consolidated into a single loan with Student Loan Xpress.

During the third quarter of 2007, legislation was passed with respect to the student lending business. Among other things, the legislation reduces the maximum interest rates that can be charged by lenders in connection with a variety of loan products, increases loan origination fees paid to the government by lenders, and reduces the lender guarantee percentage. The legislation went into effect for all new FFELP student loans with the first disbursements on or after October 1, 2007.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 47



OTHER ASSETS / ACCRUED LIABILITIES AND PAYABLES

The following tables summarize our other assets and accrued liabilities and payables at March 31, 2008 and December 31, 2007.

  March 31, December 31,
Other Assets 2008
2007
Receivables from derivative counterparties $1,994.8 $1,462.4
Deposits on commercial aerospace equipment 740.6 821.7
Accrued interest and dividends 647.2 703.5
Equity and debt investments 427.7 376.2
Investments in and receivables – non-consolidated subsidiaries 215.1 233.8
Repossessed assets and off-lease equipment 201.4 226.6
Furniture and fixtures 189.5 190.8
Prepaid expenses 119.6 131.4
Miscellaneous receivables and other assets 1,298.5 1,392.7
 
 
 
  $5,834.4 $5,539.1
 
 
 
     
  March 31, December 31,
Accrued liabilities and payables 2008
2007
Payables to derivative counterparties $1,095.8 $ 1,031.2
Accrued interest payable 716.1 638.6
Accounts payable 680.1 587.7
Security and other deposits 516.8 735.6
Accrued expenses 437.5 555.7
Equipment maintenance reserves 437.1 431.8
Current and deferred taxes 379.2 715.3
Other liabilities 362.1 553.0
 
 
 
$4,624.7 $5,248.9
 
 
 



RISK MANAGEMENT

Our business activities involve various elements of risk. We consider the principal types of risk to be market risk (including interest rate, foreign currency and liquidity risk) and credit risk (including credit, collateral and equipment 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 Chief Risk Officer oversees credit and equipment risk management across the businesses while the Vice Chairman and Chief Financial Officer oversees market risk management.

Our Policies and Procedures relating to Credit Risk, Market Risk and Liquidity Risk Management are included in detail in our Form 10-K for the year ended December 31, 2007.

LIQUIDITY RISK MANAGEMENT

As discussed previously in Liquidity and Capital Enhancement Plan, we made significant progress in the first quarter of 2008 toward improving the Company’s liquidity and capital position. We agreed to sell $4.6 billion of asset-based loan commitments, of which $1.4 billion was currently drawn. We agreed to sell $770 million of aircraft at a gain of approximately 10%, of which $300 million closed in the first quarter. We are in the process of identifying another $2.0 billion of receivables that can be either used in secured financings or sold during the second quarter. CIT Bank funded approximately $335 million of first quarter commercial loan originations. We engaged financial advisors to evaluate strategic alternatives for the Company’s $4 billion rail leasing business and to explore various capital raising initiatives, which culminated in the issuance of $1.6 billion of common and preferred stock in April 2008. Additionally, the Board of Directors reduced the quarterly common dividend to $0.10 per share payable on May 30, 2008 to shareholders of record on May 15, 2008, down 60% from $0.25 per share in the first quarter of 2008. See Note 19 – Subsequent Events for additional information regarding the April 2008 issuance of common and preferred equity.

In our 2007 Form 10-K, we discussed our estimated funding requirements for the first half of 2008, which we believed at the time were realistic and achievable. Through the middle of March, we continued to execute secured financings, asset sales and placement of commercial paper. However, events during the quarter involving other financial institutions triggered further disruptions in the market that affected the feasibility of that plan. Recent downgrades in the Company’s short and long-term credit ratings had the practical effect of leaving us without current access to the “A-1/P-1” prime commercial paper market. We concluded that a prudent course of action was to utilize the backup liquidity bank facilities’ we had maintained for this very

48 CIT GROUP INC


purpose. Accordingly, we drew all of the $7.3 billion of our bank lines to maximize our present and forecasted liquidity position and to provide the Company with the greatest degree of flexibility in executing our liquidity and capital plan.

The following table includes information relating to these lines.


Bank Lines Drawn (dollars in millions)
      Total
  Original # of Facility
Maturity Date Term
Banks
Amount
October 10, 2008 5 Year 27 $2,100  
April 14, 2009 5 Year 33 2,100  
April 13, 2010 5 Year 30 2,100  
December 6, 2011 5 Year 37 1,000  
     
 
      $7,300  
     
 

Interest on each of these facilities is based on a credit ratings grid, with the interest rate computed as a spread in basis points over LIBOR, increasing if our credit ratings decrease. At our current ratings, the total weighted average interest rate approximates LIBOR plus 50 basis points. At the lowest credit rating, the weighted average rate is less than LIBOR plus 100 bps. The individual low and high rates depending on our credit ratings are LIBOR plus 29 bps and LIBOR plus 120 bps. The maturities of these facilities reflect the date upon which we must repay the outstanding balance, with no option to extend the term for repayment.

In addition to the bank lines, first quarter 2008 fundings were as follows:

•      $3.2 billion of asset-backed issuance at weighted average cost of approximately LIBOR+100 to 125 bps, including:
 
  •     $2.7 billion on-balance sheet – rail, middle market loans, student loans, trade receivables
   
    •     $0.5 billion off-balance sheet – vendor finance assets
 
•      $0.6 billion in unsecured term retail notes at weighted average coupon of approximately 6.75%
 

As a result, cash increased $3.5 billion during the first quarter, as shown in the following table (dollars in billions):

Balance at December 31, 2007     $  6.8  
Sources of cash        
Bank borrowings 7.3      
Secured financings 3.2      
Unsecured term debt issuance 0.6   11.1  

Uses of cash        
Net portfolio growth, including credit        
balances of factoring clients (3.2 )    
Unsecured term debt maturities (1.6 )    
Commercial paper reduction (1.5 )    
Secured financing maturities (1.0 )    
Net deposit reduction (0.3 ) (7.6 )


Balance at March 31, 2008(1)     $10.3  
 
 
(1) Includes restricted cash balances of $1.3 billion    

Given the draw on the bank lines and our credit ratings downgrades, we are no longer able to access the prime (A-1/P-1 rated) commercial paper markets and expect to pay down, before December 31, 2008, our outstanding commercial paper of approximately $1.3 billion at March 31, 2008.

We maintain registration statements covering debt securities that we may sell in the future. At March 31, 2008, 4 billion euros of registered but unissued debt securities were available under our euro medium-term notes program, under which we may issue debt securities and other capital market securities in multiple currencies. In addition, CIT maintains an effective shelf registration with the Securities and Exchange Commission (SEC) for the issuance of senior and subordinate debt, and other capital market securities that has no specific limit on the amount of debt securities that may be issued.

We have committed international local bank lines of $512.7 million to support our international operations. To further diversify our funding sources, 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. We have committed asset-backed facilities aggregating $13.2 billion (excluding $1.3 billion of facilities in paydown status) covering a variety of asset classes, with approximately $1.9 billion of availability under these facilities as of March 31, 2008. The tenor of these facilities is generally one year. Our ability to sell assets into the committed asset-backed facilities expires at various dates in 2008 through 2011, with $1.3 billion expiring in the second quarter of 2008, $6.2 billion expiring in the third quarter of 2008, $3.3 billion expiring in the fourth quarter of 2008, $1.9 billion expiring in 2009 and the remainder in 2011. Depending on origination volume expectations and financing in the term securitization markets, we intend to renew each of the outstanding facilities as they expire. If we are unable to renew one or more facilities, we will be unable to sell new assets into those facilities, but the assets already held by those facilities will generally remain outstanding and the obligations will be repaid out of cash flows from the assets.

Financing and leasing assets pledged or encumbered totaled $26.3 billion and unencumbered assets totaled $52.1 billion at March 31, 2008. Although the Company has substantial remaining capacity with respect to this funding source, there are limits to the amount of assets that can be encumbered in order to maintain our debt ratings at various levels.

During 2008, deposits at CIT Bank, a Utah industrial bank, decreased by approximately $388 million to $2.4 billion. We are continuing to execute on our liquidity risk management plan to broaden our funding sources and decrease our reliance on the capital markets. At March 31, 2008, the bank’s cash and short-term investments were approximately $1.4 billion, down from $2 billion at December 31, 2007, which is available solely for the bank’s funding and investing requirements pursuant to the bank’s charter. We will continue to redeploy this cash during 2008 by originating certain commercial assets through the bank. During the quarter CIT Bank originated approximately $335 million of commercial loans. Our goal is to increase our total funding base from deposits.

 

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 49


Capital markets dislocations extended into the auction rate note market in 2008 with failed auctions spanning multiple issuers and asset classes. We have $1.175 billion of AAA rated and $150 million of AA rated auction rate securities outstanding linked to seasoned student loan securitizations that reset every 28 days. Failed note auctions typically result in the Company paying an average rate of LIBOR plus 1.5% on the AAA rated securities and LIBOR plus 2.5% on the AA rated securities.

Our credit ratings are an important factor in meeting our earnings and net finance revenue targets as better ratings generally correlate to lower cost of funds and broader market access. Below is a summary of our credit ratings at March 31, 2008. The changes for the quarter include ratings downgrades from Moody’s and Standard & Poors and negative reviews (from stable) for Fitch and DBRS.


Credit Ratings (as of March 31, 2008)
  Short-Term
Long-Term
Outlook
Moody’s P-2 A3 On Review-Negative
Standard & Poor’s A-2 A- Negative
Fitch(1) F1 A On Review-Negative
DBRS R-1L A On Review-Negative

(1)      On May 8, 2008, Fitch downgraded our short-term credit rating to F2 from F1 and our long-term credit rating to A- from A. The ratings outlook remains negative.

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.

Our unsecured notes are issued under indentures containing certain covenants and restrictions on CIT. Among the covenants, which also apply to our credit agreements, is a negative pledge provision that limits the granting or permitting of liens on the assets owned by the holding company. In addition, our credit agreements also contain a requirement that CIT maintain a minimum net worth of $4.0 billion. See Note 18 for consolidating financial statements of CIT Group Inc. (the holding company) and other subsidiaries.

The following tables summarize significant contractual payments and projected cash collections, and contractual commitments at March 31, 2008:


Payments and Collections by Year for the twelve month periods ended March 31(1) (dollars in millions)
  Total
   2009
2010
2011
2012
2013+
Commercial Paper $  1,338.4   $  1,338.4   $           –   $          –   $          –   $           –  
Bank Lines 7,300.0   2,100.0   2,100.0   2,100.0   1,000.0    
Deposits 2,406.5   1,256.4   737.0   169.0   112.8   131.3  
Variable-rate senior unsecured notes 18,584.5   8,773.7   4,355.7   981.0   2,772.0   1,702.1  
Fixed-rate senior unsecured notes 30,668.5   3,376.7   2,773.5   3,047.8   3,654.9   17,815.6  
Variable-rate non-recourse, secured borrowings(6) 19,090.3   2,959.8   1,532.1   1,913.7   1,522.0   11,162.7  
Junior subordinated notes and convertible debt 1,440.0       690.0     750.0  
Credit balances of factoring clients 3,572.9   3,572.9          
Lease rental expense 384.9   43.8   37.6   33.1   31.5   238.9  
 
 
 
 
 
 
 
   Total contractual payments 84,786.0   23,421.7   11,535.9   8,934.6   9,093.2   31,800.6  
 
 
 
 
 
 
 
Finance receivables(2)(6) 63,538.9   13,521.7   5,848.4   5,298.1   4,858.4   34,012.3  
Operating lease rental income(3) 7,648.1   1,740.9   1,475.8   1,109.6   795.2   2,526.6  
Finance receivables held for sale(4) 2,615.7   2,615.7          
Cash – current balance(5) 10,340.3   10,340.3     -–      
Retained interest in securitizations and other investments 1,153.1   384.6   365.5   172.9   68.1   162.0  
 
 
 
 
 
 
 
   Total projected cash collections 85,296.1   28,603.2   7,689.7   6,580.6   5,721.7   36,700.9  
 
 
 
 
 
 
 
Net projected cash collections (payments) $     510.1   $  5,181.5   $(3,846.2 ) $(2,354.0 ) $(3,371.5 ) $  4,900.3  
 
 
 
 
 
 
 

(1)      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.
(2)      Based upon carrying value, including unearned discount; amount could differ due to prepayments, extensions of credit, charge-offs and other factors.
(3)      Rental income balances include payments from lessees on sale-leaseback equipment. See related CIT payment in schedule below.
(4)      Based upon management’s intent to sell, rather than contractual maturities of underlying assets.
(5)      Includes approximately $2 billion of cash held at our Utah bank that can be used solely by the bank to originate loans or repay deposits.
(6)      Non-recourse secured borrowings are generally repaid in conjunction with the pledged receivable maturities. For student lending receivables, due to certain reporting limitations, the repayment of both the receivable and borrowing includes a prepayment component.
 
50 CIT GROUP INC



Commitment Expiration for twelve month periods ended March 31 (dollars in millions)

  Total
2009
2010
 2011
2012
2013+
Credit extensions $10,879.1   $3,427.0   $   865.8   $   892.2   $1,318.6   $4,375.5  
Aircraft purchases 8,054.0   1,389.0   768.0   1,158.0   1,175.0   3,564.0  
Letters of credit 1,054.3   894.2   45.2   11.1   31.9   71.9  
Sale-leaseback payments 1,824.6   142.8   146.8   151.4   146.7   1,236.9  
Manufacturer purchase commitments 640.3   584.5   55.8        
Guarantees, acceptances and other recourse obligations 120.1   112.3     0.7   1.0   6.1  
Liabilities for unrecognized tax obligations(1) 220.9   30.0   190.9        
 
 
 
 
 
 
 
Total contractual commitments $22,793.3   $6,579.8   $2,072.5   $2,213.4   $2,673.2   $9,254.4  
 
 
 
 
 
 
 

(1)      The balance can not be estimated past 2009, therefore the remaining balance is reflected in 2010. See Income Taxes section for discussion of unrecognized tax obligations.
 

Commitments to extend credit declined from $13.1 billion at year end to $10.9 billion at March 31, 2008, as $2.2 billion was either utilized or expired during the first quarter. Included in the March balance are approximately $2.0 billion in vendor program lines that require CIT approval following an asset purchase by the customer, and approximately $2.0 billion in credit lines that are currently unavailable due to requirements for asset / collateral availability or covenant conditions. Additionally, we have agreed to sell (in the second quarter of 2008) $3.2 billion of undrawn asset-based loan commitments outstanding at March 31. Commitments in the table above do not include certain unused, cancelable lines of credit to customers in connection with third-party vendor programs, which can be reduced or cancelled by the Company at any time without notice.

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. See Form 10-K for the year ended December 31, 2007 for further description of these 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.

An immediate hypothetical 100 basis point increase in the yield curve on April 1, 2008 would reduce our net income by an estimated $17 million after-tax over the next twelve months. A corresponding decrease in the yield curve would cause an increase in our net income of a like amount. A 100 basis point increase in the yield curve on April 1, 2007 would have reduced our net income by an estimated $17 million after tax, while a corresponding decrease in the yield curve would have increased our net income by a like amount.

An immediate hypothetical 100 basis point increase in the yield curve on April 1, 2008 would increase our economic value by $214 million before income taxes. A 100 basis point increase in the yield curve on April 1, 2007 would have increased our economic value by $140 million before income taxes.

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.

  Item 2: Management’s Discussion and Analysis and Item 3: Quantitative and Qualitative Disclosures about Market Risk 51



Principal and Interest Rates Before and After Interest Rate Swaps (dollars in millions)
  Before Swaps
After Swaps
For the quarter ended March 31, 2008            
Commercial paper, variable-rate bank credit facilities, variable-rate            
senior notes and secured borrowings $40,835.4 4.47 % $43,160.4 4.88 %
Fixed-rate senior and subordinated notes and deposits 33,793.9 5.39 % 31,468.9 5.46 %
 
   
   
Composite $74,629.3 5.11 % $74,629.3 5.13 %