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 September 30, 2009      

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 October 31, 2009 there were 404,730,758 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 Operation (Unaudited) 3
  Consolidated Statement of Stockholders’ Equity (Unaudited) 4
  Consolidated Statements of Cash Flows (Unaudited) 5
  Notes to Consolidated Financial Statements 6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
  and  
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 42
ITEM 4. Controls and Procedures 98
 
Part Two—Other Information:
 
ITEM 1. Legal Proceedings

99

ITEM 1A Risk Factors 102
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 118
ITEM 3. Defaults Upon Senior Securities 118
ITEM 4. Submission of Matters to a Vote of Security Holders 118
ITEM 5. Other Information 119
ITEM 6. Exhibits 119
Signatures 124

1



Part One—Financial Information

ITEM 1. Consolidated Financial Statements
CIT GROUP INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS (Unaudited) (dollars in millions – except share data)
  September 30,   December 31,
  2009   2008
 
 
Assets              
Cash and due from banks $ 343.1       $ 592.5  
Deposits with banks, including restricted balances of $904.1 and $2,102.5
at September 30, 2009 and December 31, 2008, respectively
  5,467.6       7,773.3  
Trading assets at fair value - derivatives   1,032.7       139.4  
Investments - retained interests in securitizations   165.3       229.4  
Assets held for sale   436.9       156.1  
Loans (see Note 4 for amounts pledged)   45,280.9       53,126.6  
Allowance for loan losses   (1,363.2 )     (1,096.2 )
 
   
 
Total loans, net of allowance for loan losses   43,917.7       52,030.4  
Operating lease equipment, net (see Note 4 for amounts pledged)   13,233.6       12,706.4  
Derivative counterparty assets at fair value   20.3       1,489.5  
Goodwill and intangible assets, net         698.6  
Other assets including advances of $1,522.6 and $1,492.6 at June 30, 2009 and
December 31, 2008 respectively, associated with a lending facility structured as a TRS
  4,571.4       4,589.1  
Assets of discontinued operation         44.2  
 
   
 
Total Assets $ 69,188.6     $ 80,448.9  
 
   
 
Liabilities              
Deposits $ 5,233.7     $ 2,626.8  
Trading liabilities at fair value - derivatives   423.9       127.4  
Credit balances of factoring clients   898.3       3,049.9  
Derivative counterparty liabilities at fair value   233.0       433.7  
Other liabilities   2,533.5       2,291.3  
Long-term borrowings, including $12,965.9 and $18,199.6 contractually due              
within twelve months at September 30, 2009 and December 31, 2008, respectively   54,745.3       63,750.7  
 
   
 
Total Liabilities   64,067.7       72,279.8  
 
   
 
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
    Series C 11,500,000 with a liquidation preference of $50 per share   575.0       575.0  
    Series D 2,330,000 with a liquidation preference of $1,000 per share   2,083.8       1,911.3  
Common stock: $0.01 par value, 600,000,000 authorized              
Issued: 398,355,014 and 395,068,272 at September 30, 2009 and              
December 31, 2008, respectively   4.0       3.9  
Outstanding: 392,104,656 and 388,740,428 at September 30, 2009 and              
December 31, 2008, respectively              
Paid-in capital, net of deferred compensation of $24.3 and $40.3 at              
September 30, 2009 and December 31, 2008, respectively   11,273.0       11,469.6  
Accumulated deficit   (8,971.1 )     (5,814.0 )
Accumulated other comprehensive loss   (68.5 )     (205.6 )
Less: treasury stock, 6,250,358 and 6,327,844 shares, at September              
30, 2009 and December 31, 2008 at cost, respectively   (310.4 )       (315.9 )
 
   
 
Total Common Stockholders’ Equity   1,927.0       5,138.0  
 
   
 
Total Stockholders’ Equity   5,085.8       8,124.3  
Noncontrolling Minority Interests   35.1       44.8  
 
   
 
Total Equity   5,120.9       8,169.1  
 
   
 
Total Liabilities and Equity $ 69,188.6     $ 80,448.9  
 
   
 

See Notes to Consolidated Financial Statements.

2




CIT GROUP INC. AND SUBSIDIARIES


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

  Quarters Ended September 30,
  Nine Months Ended September 30,
  2009
  2008
  2009
  2008
Interest Income                              
   Interest and fees on loans $ 549.6       $ 852.3       $ 1,784.7       $ 2,651.1  
   Interest and dividends on investments   7.0       55.4       26.0       163.0  
 
   
   
   
 
      Interest income   556.6       907.7       1,810.7       2,814.1  
 
   
   
   
 
Interest Expense                              
   Interest on deposits   (45.8 )     (22.0 )     (107.6 )     (76.9 )
   Interest on short-term borrowings         (0.3 )           (31.9 )
   Interest on long-term borrowings   (648.0 )     (743.0 )     (1,876.9 )     (2,235.7 )
 
   
   
   
 
      Interest expense   (693.8 )     (765.3 )     (1,984.5 )     (2,344.5 )
 
   
   
   
 
Net interest revenue   (137.2 )     142.4       (173.8 )     469.6  
Provision for credit losses   (701.8 )     (210.3 )     (1,825.7 )     (609.2 )
 
   
   
   
 
Net interest revenue, after                              
credit provision   (839.0 )     (67.9 )     (1,999.5 )     (139.6 )
 
   
   
   
 
Other income                              
   Rental income on operating leases   471.7       492.2       1,420.4       1,491.2  
   Other   (166.8 )     142.7       (177.6 )     372.6  
 
   
   
   
 
      Total other income   304.9       634.9       1,242.8       1,863.8  
 
   
   
   
 
Total net revenue, net of interest                              
expense and credit provision   (534.1 )     567.0       (756.7 )     1,724.2  
 
   
   
   
 
Other expenses                              
   Depreciation on operating                              
   lease equipment   (282.6 )     (284.7 )     (851.2 )     (859.4 )
   Goodwill and intangible assets                              
   impairment charges         (455.1 )     (692.4 )     (455.1 )
   Other   (249.7 )     (334.6 )     (706.2 )     (1,185.1 )
 
   
   
   
 
      Total other expenses   (532.3 )     (1,074.4 )     (2,249.8 )     (2,499.6 )
 
   
   
   
 
Loss from continuing operations                              
before income taxes   (1,066.4 )     (507.4 )     (3,006.5 )     (775.4 )
Benefit for income taxes   33.1       206.3       12.4       281.5  
 
   
   
   
 
Loss from continuing                              
operations   (1,033.3 )     (301.1 )     (2,994.1 )     (493.9 )
 
   
   
   
 
Discontinued Operation                              
   Income (loss) from discontinued operation                              
   before income taxes         42.1             (2,704.8 )
   (Provision) benefit for income taxes         (37.7 )           595.4  
 
   
   
   
 
      Income (loss) from discontinued operation         4.4             (2,109.4 )
 
   
   
   
 
Loss before preferred stock                              
dividends   (1,033.3 )     (296.7 )     (2,994.1 )     (2,603.3 )
Preferred stock dividends and amortization
of discount
  (41.2 )     (20.1 )     (163.2 )     (44.3 )
 
   
   
   
 
Net loss before attribution of                              
noncontrolling interests   (1,074.5 )     (316.8 )     (3,157.3 )     (2,647.6 )
(Income) loss attributable to                              
noncontrolling interests, after tax         (0.5 )     0.2       (11.3 )
 
   
   
   
 
Net loss attributable to                              
common stockholders $ (1,074.5 )   $ (317.3 )   $ (3,157.1 )   $ (2,658.9 )
 
   
   
   
 
Basic and Diluted Earnings                              
Per Common Share data                              
Loss from continuing                              
operations $ (2.74 )    $ (1.13 )    $ (8.08 )    $ (2.22 )
Loss from discontinued                              
operation         0.02             (8.54 )
 
   
   
   
 
Net loss attributable to                              
common shareholders $ (2.74 )   $ (1.11 )   $ (8.08 )   $ (10.76 )
 
   
   
   
 
Average number of shares –                              
   basic and diluted                              
   (in thousands)   392,195       285,509       390,614       247,191  
                               
Cash dividends per                              
   common share $     $ 0.10     $ 0.02     $ 0.45  

See Notes to 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

   Noncontrolling
Interest in
Subsidiaries

   Total
Stockholders’
Equity

December 31, 2008 $ 2,986.3     $ 3.9    $ 11,469.6       $ (5,814.0 )     $ (205.6 )     $ (315.9 )     $ 44.8       $ 8,169.1  
                                                     
 
Designation of                                                          
TARP warrant as a                                                          
liability effective                                                          
January 1, 2009   136.8           (418.7 )                                     (281.9 )
Reclassification of                                                          
TARP warrant from                                                          
liability to equity               211.2                                       211.2  
                                                     
 
Net loss before                                                          
preferred stock                                                          
dividends                       (2,993.9 )                     (0.2 )     (2,994.1 )
Foreign currency                                                          
translation                                                          
adjustments                               0.3                       0.3  
Change in fair                                                          
values of                                                          
derivatives                                                          
qualifying as cash                                                          
flow hedges                               127.1                       127.1  
Unrealized loss on                                                          
available for sale                                                          
equity and                                                          
securitization                                                          
investments, net                               (0.9 )                     (0.9 )
Minimum pension                                                          
liability adjustment                               10.6                       10.6  
                                                     
 
Total                                                          
comprehensive                                                          
loss                                                       (2,857.0 )
                                                     
 
Cash dividends -                                                          
common               (3.2 )                                     (3.2 )
Cash dividends -                                                          
preferred                       (127.5 )                             (127.5 )
Amortization of                                                          
discount on                                                          
preferred stock -                                                          
series D   35.7                   (35.7 )                              
Distribution of                                                          
earnings                                               (9.5 )     (9.5 )
Restricted stock                                                          
expense               8.5                       (0.1 )             8.4  
Stock option                                                          
expense               7.3                                       7.3  
Issuance of                                                          
common stock         0.1     7.5                                       7.6  
Employee stock                                                          
purchase plan                                                          
participation, other               (9.2 )                     5.6               (3.6 )
 
 
 
   
   
   
   
   
 
September 30, 2009 $ 3,158.8   $ 4.0   $ 11,273.0     $ (8,971.1 )   $ (68.5 )   $ (310.4 )   $ 35.1     $ 5,120.9  
 
 
 
   
   
   
   
   
 

See Notes to Consolidated Financial Statements.

4




CIT GROUP INC. AND SUBSIDIARIES


Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, (dollars in million)

  2009
  2008
Cash Flows From Operations              
Net (loss) before preferred stock dividends $ (2,993.9 )   $ (2,614.6 )
Adjustments to reconcile net loss to net cash flows from operations:              
    Provision for credit losses   1,825.7       609.2  
    Depreciation, amortization and accretion   1,055.5       977.1  
    Goodwill and intangible assets impairment charges   692.4       455.1  
    Loss (gains) on equipment, receivable and investment sales   462.6       (119.2 )
    Valuation allowance for assets held for sale   51.7       126.9  
    Warrant fair value adjustment   (70.6 )      
    (Gain) loss on debt and debt-related derivative extinguishments   (207.2 )     142.6  
    (Benefit) provision for deferred income taxes   (2.9 )     (932.0 )
    Decrease in assets held for sale   19.4       159.1  
    Decrease in other assets   (1.2 )     404.5  
    Increase in accrued liabilities and payables   560.4       (1,174.7 )
    Loss on disposal of discontinued operation, net of tax         1,859.2  
    Provision for credit losses – discontinued operation         608.6  
 
   
 
Net cash flows provided by operations   1,391.9       501.8  
 
   
 
Cash Flows From Investing Activities              
Finance receivables extended and purchased   (21,457.7 )     (46,212.3 )
Principal collections of finance receivables and investments   24,831.4       41,641.4  
Proceeds from asset and receivable sales   1,850.0       4,685.6  
Purchases of assets to be leased and other equipment   (1,177.3 )     (1,897.4 )
Net increase in short-term factoring receivables   (120.5 )     (740.9 )
Net proceeds from sale of discontinued operation   44.2       1,555.6  
 
   
 
Net cash flows provided by (used for) investing activities   3,970.1       (968.0 )
 
   
 
Cash Flows From Financing Activities              
Net decrease in commercial paper         (2,822.3 )
Proceeds from the issuance of term debt   7,966.7       14,857.8  
Repayments of term debt   (17,181.9 )     (12,333.1 )
Net increase (decrease) in deposits   2,606.9       (497.5 )
Net repayments of non-recourse leveraged lease debt   (28.6 )     (20.1 )
Proceeds from sale of stock   7.6       1,535.4  
Collection of security deposits and maintenance funds   700.1       1,653.3  
Repayment of security deposits and maintenance funds   (637.3 )     (1,563.5 )
Treasury stock issuances   5.5       31.2  
Cash dividends paid   (91.3 )     (150.2 )
Other   (66.4 )     (16.5 )
 
   
 
Net cash flows (used for) provided by financing activities   (6,718.7 )     674.5  
 
   
 
Net (decrease) increase in cash and cash equivalents   (1,356.7 )     208.3  
Unrestricted cash and cash equivalents, beginning of period   6,263.3       6,313.1  
 
   
 
Unrestricted cash and cash equivalents, end of period $ 4,906.6     $ 6,521.4  
 
   
 
Supplementary Cash Flow Disclosure              
Interest paid $ 1,820.0       $ 2,371.2  
Federal, foreign, state and local income taxes refunded, net $ (75.9 )   $ 3.0  
               
Supplementary Non Cash Flow Disclosures              
Net transfer of finance receivables from held for
   investment to held for sale
$ 458.3       $ 1,548.7  
Vendor receivables previously off balance sheet and brought
   on-balance sheet
$ 454.4     $  
Vendor related debt previously off balance sheet and brought
   on-balance sheet
$ 454.4     $  
               

See Notes to 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, Restructuring Events and Basis of Presentation

The accompanying consolidated financial statements include the accounts of CIT Group Inc. and its majority owned subsidiaries, including CIT Bank (collectively, “CIT” or the “Company”), and those variable interest entities (VIEs) where the Company is the primary beneficiary. All significant inter-company 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.

These financial statements, which 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 financial statements included in the Company’s Form 8-K dated October 1, 2009. 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 in accordance with GAAP.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates and assumptions.

Negative economic conditions and Company performance have materially and adversely affected CIT’s liquidity position and operating results. The Company has reported net losses since the second quarter of 2007 due to deteriorating economic conditions and credit quality issues within CIT’s portfolio that have caused management to record provisions for credit losses, other than temporary impairment charges, restructuring charges, greater interest charges on debt, and losses associated with asset sales at depressed prices. In addition to these adverse effects on operations, the Company’s liquidity and funding strategy have been materially adversely affected by the on-going stress in the financial markets, and downgrades in the Company’s credit ratings.

On December 22, 2008, the Company became a bank holding company, and as part of its overall plan to transition to a bank-centric business model, the Company (1) applied to participate in the Federal Deposit Insurance Corporation’s (“FDIC”) Temporary Liquidity Guarantee Program (“TLGP”), which would have enabled the Company to issue government guaranteed debt of up to $10 billion and (2) applied for exemptions under Section 23A of the Federal Reserve Act (“Section 23A”) to transfer a significant portion of its U.S. assets to CIT Bank, which would have enabled the Company to generate liquidity by leveraging the deposit-taking capabilities of CIT Bank. In April 2009, the Federal Reserve granted the Company a partial Section 23A waiver to transfer $5.7 billion of government-guaranteed student loans to CIT Bank. In connection with this transaction, CIT Bank assumed $3.5 billion in debt and paid $1.6 billion in cash to CIT Group Inc.

6




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

On July 15, 2009, the Company was advised by its bank regulators that there was no appreciable likelihood of FDIC approving CIT’s participation in the TLGP or further waivers being granted by the Federal Reserve to permit asset transfers under its pending Section 23A exemption request. Following the announcement of these developments, the Company experienced higher draws on financing commitments which accelerated the degradation of its liquidity position.

Accordingly, the Company and its Board of Directors, in consultation with its advisors, developed and continue to enhance and execute an overall business restructuring strategy, which has the following objectives:

Financial Strength

Business Model

By successfully implementing its business restructuring strategy, the Company expects to transition to a smaller company focused on serving small - and mid-sized commercial businesses. The Company’s goals are:

Ultimately, the Company established and embarked upon a 3-phase restructuring plan as summarized below.

7




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

The Company commenced execution of its restructuring plan by entering into the Credit Facility and consummating the cash tender offer for the outstanding floating rate senior notes due August 17, 2009. The plan was furthered on October 1, 2009, when the Company launched exchange offers for certain unsecured notes and a concurrent debt holder solicitation to approve a prepackaged plan of reorganization (the “Offering Memorandum and Disclosure Statement”). In connection with the solicitation, the Company entered into the Expansion Credit Facility. The results of the solicitation indicated the conditions required for the exchange offers were not satisfied, but sufficient holders voted to accept the prepackaged plan of reorganization.

All classes voted to accept the prepackaged plan with all votes substantially exceeding the required thresholds for a successful solicitation. Over 80% of the Company’s eligible debt participated in the solicitation, and over 90% of participating debt supported the prepackaged plan of reorganization. Similarly, approximately 90% of the number of debtholders voting, both large and small, cast affirmative votes for the prepackaged plan. Upon reviewing the results, CIT’s Board of Directors proceeded with a voluntary prepackaged bankruptcy filing in order to restructure the Company’s debt and streamline the Company’s capital structure. Accordingly, on November 1, 2009, CIT Group Inc., and CIT Group Funding Company of Delaware LLC (“Delaware Funding”) filed voluntary petitions for relief under the United States Code (the “Bankruptcy Code”), in the United States Bankruptcy Court for the Southern District of New York (the “Court”). The Company’s operating subsidiaries are not part of the filing and continue to conduct business. See Note 17 for additional disclosures.

On November 3, 2009 the Debtors received approval for all the Company’s “first day” motions, allowing the Company’s operations to continue in the ordinary course through its reorganization. The Company received permission to, among other things, pay employee wages, salaries and benefits, pay its vendors and certain other creditors and use its cash collateral. Additionally, the Court has scheduled a hearing to consider the confirmation of the prepackaged plan of reorganization for December 8, 2009.

Management believes a successful implementation of its capital restructuring strategy, including a swift emergence from bankruptcy, will be viewed favorably by the Company’s regulators and will position it to transfer certain business platforms into CIT Bank. However, if the Company’s plan of reorganization is not confirmed on a timely basis, the Federal Reserve or the FDIC could take action to require the Company to divest its interest in CIT Bank or continue to limit access to CIT Bank by the Company or its creditors.

The restructuring strategy and related measures described above are intended to restore the Company’s access to liquidity and competitively priced funding to support its long-term business model. These measures are subject to a number of uncertainties, however, and there can be no assurance that they will be successfully completed. If completed these measures may not achieve their anticipated benefits. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming the Company is a going concern and do not reflect any adjustments that may arise from this uncertainty.

Goodwill and Intangible Assets

The Company performed goodwill and intangible asset impairment testing on a quarterly basis through June 30, 2009. Based on the results of the analysis at June 30, 2009, CIT recorded a pretax goodwill impairment charge of $567.6 million and an intangible asset impairment pretax charge of $124.8 million the second quarter, representing the remaining balance for each.

Goodwill was assigned to reporting units at the date the goodwill was initially recorded. Once goodwill had been assigned to reporting units, it no longer retained its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, were available to support the value of the goodwill. Goodwill impairment testing was performed at the segment (or “reporting unit”) level.

Income Taxes

CIT’s tax benefit for continuing operations for the quarter ended September 30, 2009 of $33.1 million equated to a 3.1% effective tax rate, compared with an effective tax rate for continuing operations of 40.7% for the quarter ended September 30, 2008. The effective tax rate is the result of U.S. federal and state valuation allowances recorded against deferred tax assets resulting from U.S. losses, and taxes on international operations, which decreased the tax benefit recorded against these losses.

As of September 30, 2009, CIT had U.S. federal net operating losses of approximately $6 billion which will expire beginning in 2027. Beginning in 2008, a full valuation allowance was recorded against the federal and much of the state net deferred tax assets as CIT has not relied on future income from operations in recognizing the tax benefit for these losses. Tax benefit with respect to deferred tax assets has been realized to the extent that CIT has identified taxable income within the carryforward period related to reversing deferred taxes and liabilities recorded in accordance with accounting standards on uncertainty in income taxes.

CIT’s effective tax rate differs from the U.S. federal tax rate of 35% primarily due to federal and state tax valuation allowance, separate state and local income taxes, international results taxed at lower rates, and permanent differences between the book and tax treatment of certain items.

Included in the third quarter 2009 tax provision is $34.0 million in net tax benefit related primarily to the reclassification out of other comprehensive income into continuing operations of the deferred tax asset on the cash flow hedges, which were unwound during the quarter. A $1.3 million net increase in liabilities related to uncertain tax positions in accordance with accounting standards on uncertainty in income taxes and related interest is included. The Company believes that there may be no change in the total unrecognized tax benefits prior to September 30, 2010 in relation to the settlement of audits and the expiration of various statutes of limitations.

8




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

As of December 31, 2008, Federal income taxes have not been provided on approximately $1.5 billion of cumulative earnings of foreign subsidiaries that management has determined to be permanently reinvested. The restructuring plan may impact this assertion and, if so, the assertion that some or all of the unremitted foreign earnings are permanently reinvested may be reversed.

Accounting Pronouncements

Effective January 1, 2009, the Company prospectively adopted the FASB’s requirements for Contracts in an Entity’s Own Equity. Upon adoption of these requirements, management determined the warrant issued to the U.S. Treasury in conjunction with the Trouble Asset Relief Program (TARP) no longer qualified as equity and should be accounted for as a derivative liability. As a result, the Company classified $281.9 million of amounts recorded in Paid-in Capital at January 1, 2009 to Other liabilities. On May 12, 2009, upon shareholder approval of the issuance of common stock related to the potential exercise of the warrant by the Treasury, the liability was reclassified to permanent equity in the amount of $211.2 million. The decline in the fair value of the warrant between January 1, 2009 and May 12, 2009 totaled $70.6 million, of which $95.8 million was added to other income in the first quarter (representing the first quarter reduction in the fair value of the warrant liability), and $25.2 million was charged to other income in the second quarter (representing the second quarter increase in the fair value of the warrant liability until the requirements were met to record it as equity).

In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The Codification simplifies the classification of accounting standards into one online database under a common referencing system, organized into eight areas, ranging from industry-specific to general financial statement matters. Use of the Codification is effective for interim and annual periods ending after September 15, 2009. The Company began to use the Codification on the effective date, and it had no impact on its Consolidated Financial Statements. However, throughout this Form 10-Q, all references to prior FASB, AICPA and EITF accounting pronouncements have been removed, and all non-SEC accounting guidance is referred to in terms of the applicable subject matter.

In June 2009, the FASB issued amended requirements relating to the Consolidation of Variable Interest Entities, which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting, or similar rights, should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This new guidance will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. These new requirements will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. The Company will adopt these new requirements effective January 1, 2010. The Company is currently evaluating the effect of these requirements on its consolidated financial statements.

In June 2009, the FASB issued new requirements relating to the Accounting for Transfers of Financial Assets. This new guidance will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and requires additional disclosures. These requirements will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. The Company will adopt these new requirements effective January 1, 2010. The Company is currently evaluating the effect

9




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

of these requirements on its consolidated financial statements.

NOTE 2 – LOANS

The following tables present loans (including loans and finance leases) for each segment based on obligor location.


Loans (dollars in millions)

  September 30, 2009
  December 31, 2008
  Domestic
  Foreign
  Total
  Domestic
  Foreign
  Total
Corporate Finance $ 13,777.6     $ 3,108.7     $ 16,886.3     $ 17,201.3     $ 3,567.5     $ 20,768.8
Transportation Finance   1,917.1     440.6     2,357.7     2,146.1     501.5     2,647.6
Trade Finance   3,466.7     422.5     3,889.2     5,329.0     709.0     6,038.0
Vendor Finance   5,891.4     4,669.7     10,561.1     6,363.8     4,835.8     11,199.6
Consumer   11,552.2     34.4     11,586.6     12,438.7     33.9     12,472.6
 
 
 
 
 
 
Total $ 36,605.0   $ 8,675.9   $ 45,280.9   $ 43,478.9   $ 9,647.7   $ 53,126.6
 
 
 
 
 
 

The following table contains information on loans evaluated for impairment and the related reserves for credit losses. Loans evaluated for impairment include receivables of $0.5 million or greater that are on non-accrual status. Excluded from impaired loans are: 1) certain individual commercial loans for which the collateral value supports the outstanding balance and the continuation of earning status, 2) small ticket leasing and other homogeneous pools of loans, which are subject to automatic charge-off procedures, and 3) short-term factoring customer loans, generally having terms up to 30 days. Non-accruing consumer balances excluded from the balances reported below totaled approximately $197 million and $194 million at September 30, 2009 and December 31, 2008, and non-accruing commercial loans less than $0.5 billion totaled approximately $190 million and $185 million at September 30, 2009 and December 31, 2008, respectively.


Loans Evaluated for Impairment and Related Reserves (dollars in millions)

  September 30, 2009
    December 31, 2008
Finance receivables considered for impairment $ 2,052.0   $ 1,035.1
Impaired finance receivables with specific allowance(1) $ 335.4   $ 803.3
Allowance(1) $ 134.9   $ 334.4
Impaired finance receivables with no specific allowance(2) $ 1,716.6   $ 231.8
Year-to-date average investment in impaired finance receivables $ 1,745.3   $ 698.4

(1)      Impaired loans are those loans whose estimated recoverable value is less than the current recorded value. The allowance is the difference between these two amounts.
 
(2)      In these cases, the expected proceeds from collateral liquidation and other cash flow sources are currently expected to be sufficient to recover the receivable balances.

The increase in impaired loans is primarily attributed to Corporate Finance. The decrease in impaired finance receivables with specific allowance corresponds to charge-offs recorded during the period. The balance of impaired finance receivables with no specific allowance at September 30, 2009, is mostly comprised of finance receivables for which the Company has recorded partial charge-offs. See Note 3 for additional information.

10



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

NOTE 3 – RESERVE FOR CREDIT LOSSES

The following table presents changes in the reserve for credit losses for continuing operations

  Quarters Ended
September 30,

  Nine Months Ended
September 30,

  2009
  2008
  2009
  2008
Balance, beginning of period $ 1,538.4       $ 780.8       $ 1,096.2       $ 574.3  
 
   
   
   
 
Provision for credit losses   701.8       210.3       1,825.7       609.2  
Reserve changes relating to foreign currency translation, other(1)   (0.9 )     (7.9 )     (13.6 )     (15.4 )
 
   
   
   
 
Net additions to the reserve for credit losses   700.9       202.4       1,812.1       593.8  
 
   
   
   
 
Charged-off - finance receivables   (898.7 )     (147.6 )     (1,601.7 )     (361.5 )
Recoveries of amounts previously charged-off   22.6       20.1       56.6       49.1  
 
   
   
   
 
Net credit losses   (876.1 )     (127.5 )     (1,545.1 )     (312.4 )
 
   
   
   
 
Balance, end of period $ 1,363.2     $ 855.7     $ 1,363.2     $ 855.7  
 
   
   
   
 
                               
Reserve for credit losses as a percentage of finance receivables                   3.01 %     1.57 %
Reserve for credit losses (excluding specific reserves) as a percentage of finance
receivables, excluding guaranteed student loans(2)
                  3.34 %     1.32 %

(1) Amounts reflect reserve reductions for portfolio sales and reserves established for estimated losses inherent in portfolios acquired through purchases or business combinations, as well as foreign currency translation adjustments.
   
(2) Loans guaranteed by the U.S. government are excluded from the calculation.

Finance receivables are reviewed periodically to determine the probability of loss. Prior to the third quarter of 2009 charge-offs were taken after considering such factors as the borrower’s financial condition and the value of the underlying collateral and guarantees and the status of collection activities. This quarter the Company accelerated certain charge-offs on loans where CIT had previously provided specific reserves. The acceleration of certain charge-offs on certain loans had no material impact on the provision for credit losses. These accelerated charge-offs were taken against the existing related specific reserves on impaired loans, pursuant to the Written Agreement that the Company entered into on August 12, 2009 with the Federal Reserve Bank, reflecting the view that losses on impaired loans should be recognized as charge-offs prior to final resolution. During the third quarter, approximately $500 million in accelerated charge-offs were taken, principally on Corporate Finance accounts that were specifically reserved as of June 30, 2009, or would have been specifically reserved during the third quarter under our prior practices. Accelerated charge-offs contributed to the decline in the total reserve for credit losses to $1,363.2 million at September 30, 2009 from $1,538.4 million at June 30, 2009.

NOTE 4 – DEBT

Outstanding debt balances follow:


Debt (dollars in millions)
  September 30, 2009
  December 31, 2008
    Secured credit facility $ 2,861.7   $
    Secured borrowings   16,596.9     19,084.4
    Unsecured bank lines   3,100.0     5,200.0
    Senior unsecured notes - variable   6,516.4     12,754.4
    Senior unsecured notes - fixed   23,571.4     24,613.0
    Junior, subordinated notes, and junior subordinated equity units   2,098.9     2,098.9
 
 
Total debt $ 54,745.3     $ 63,750.7
 
 

11



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

The senior unsecured notes included in the table above have been issued by both the parent company and subsidiaries.


Senior Unsecured Notes Summary (dollars in millions)

  September 30, 2009
  December 31, 2008
  CIT Group Inc.
  Subsidiaries
  Total
  Total
Variable - Rate $ 6,385.8     $ 130.6     $ 6,516.4     $ 12,754.4
Fixed - Rate   20,464.2     3,107.2     23,571.4     24,613.0
 
 
 
 
Total senior unsecured notes $ 26,850.0   $ 3,237.8   $ 30,087.8   $ 37,367.4
 
 
 
 

Included in the subsidiary unsecured debt is $2.2 billion of debt issued by Delaware Funding, a wholly owned finance subsidiary, and fully guaranteed by CIT Group Inc. At the time that the debt was issued, Delaware Funding was a Canadian legal entity. In December 2007, as part of an internal tax reorganization, CIT redomesticated the legal entity in Delaware. Delaware Funding is a finance company whose sole business is to issue debt, the proceeds of which were lent to an affiliate to fund its business. Delaware Funding’s assets consist of notes receivable from this affiliate.

Secured Credit Facility and Expansion Credit Facility

On July 20, 2009, CIT entered into the Credit Facility. The Credit Facility matures in January 2012 and bears interest at LIBOR plus 10%, with a 3% LIBOR floor, payable monthly. It provides for (1) a commitment fee of 5% of the total advances made under the Credit Facility, payable upon the funding of each advance, (2) an unused line fee with respect to undrawn commitments at the rate of 1% per annum and (3) a 2% exit fee on amounts prepaid or repaid and the unused portion of any commitment. The Credit Facility is secured by a perfected first priority lien on substantially all unencumbered assets of the Borrowers and Guarantors, which includes 65% of the voting and 100% of the non-voting stock of other first-tier foreign subsidiaries (other than direct subsidiaries of the Company, in each case owned by a Guarantor), 100% of the stock of CIT Aerospace International (except one nominee share) and between 49% and 65% of certain other material non-U.S., non-regulated subsidiaries.

On October 28, 2009, CIT expanded its borrowing under this facility through the Expansion Credit Facility for up to an additional $4.5 billion. Certain provisions of the Credit Facility were changed or omitted. The Expansion Credit Facility is subject to a fair value collateral coverage covenant (based on accounting valuation methodology) of 2.5x the outstanding loan balance tested quarterly and upon the financing, disposition or release of certain collateral, while the book value coverage covenant no longer applies. Additionally, the Expansion Credit Facility includes certain additional terms, including a cash sweep provision that will accelerate the repayment of the Credit Facility, Expansion Credit Facility, New Notes, and Junior Credit Facilities. The new Expansion Credit Facility term loan matures in January 2012, with an option to extend maturity until January 2013. Under the terms of the Expansion Credit Facility, the proceeds of the term loans are required to be used for specific purposes: (i) $500 million for general corporate purposes; (ii) $500 million to secure obligations under letter of credit facilities; (iii) $3.5 billion to refinance specific debt facilities and to pay the make whole and other payments due under the Goldman Sachs Securities based financing facility.

On October 30, 2009, CIT secured an incremental $1 billion committed line of credit. This new line of credit may be drawn by the Company on or prior to December 31, 2009, subject to definitive documentation and other customary conditions, and may be drawn as debtor-in-possession financing. The line of credit was established as a backup facility to ensure CIT’s liquidity during the execution of its restructuring plan.

12



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

Set forth below are borrowings and pledged assets primarily owned by consolidated special purpose entities. The creditors of these special purpose entities have received ownership and/or security interests in the assets. These special purpose entities are intended to be bankruptcy remote so that such assets are not available to the creditors of CIT (or any affiliates of CIT) that sold assets to the respective special purpose entities. The transactions do not meet the accounting guidance requirements for sales treatment and are, therefore, recorded as secured borrowings in the Company’s financial statements. Except as otherwise noted, the pledged assets listed below are not pledged to the lenders under the Credit Facility or Expansion Credit Facility.

Excluded from the table are the debt and pledged collateral relating to the $3 billion Credit Facility CIT executed in July 2009.

  September 30, 2009
  December 31, 2008
  Secured
Borrowing
  Assets
Pledged
  Secured
Borrowing
  Assets
Pledged
Consumer (student lending) $ 6,582.0     $ 8,013.3      $ 9,326.2     $ 10,410.0
Consumer (student lending)(1)   596.8     700.6        
Trade Finance (factoring receivable)(2)   1,012.4     2,215.6     1,043.7     4,642.9
Corporate Finance(1)   2,188.1     3,289.4     2,539.8     3,785.6
Corporate Finance(3)           603.8     694.1
Corporate Finance (small business lending)(1)   142.6     245.1     140.1     253.9
Corporate Finance (energy project finance)   271.2     270.3     244.9     244.9
Corporate Finance(4)   258.8     366.5     79.5     103.2
Vendor Finance (acquisition financing)   159.7     439.7     592.5     878.6
Vendor Finance(5)   714.7     948.2     2,107.1     2,946.7
Vendor Finance(6)   809.2     986.4        
Vendor Finance(7)   638.8     659.8        
Shared facility (Corporate                      
Finance/Vendor Finance)   617.7     671.1     218.3     314.0
 
 
 
 
Subtotal - Finance Receivables   13,992.0     18,806.0     16,895.9     24,273.9
Transportation Finance - Aero(1)   570.7     1,454.5     617.3     1,461.5
Transportation Finance - Rail   949.3     1,449.2     1,026.1     1,514.0
Transportation Finance - ECA(8)   1,084.9     1,309.6     545.1     648.2
 
 
 
 
Subtotal - Equipment under operating leases   2,604.9     4,213.3     2,188.5     3,623.7
 
 
 
 
Total $ 16,596.9   $ 23,019.3   $ 19,084.4   $ 27,897.6
 
 
 
 
(1) Reflects advances associated with the Goldman Sachs facility. See Note 5 for additional information regarding this facility, including its amendment on October 28, 2009.
(2) Excludes credit balances of factoring clients. On October 30, 2009, the facility was terminated and paid off. Assets used to secure the facility were released and are now pledged to the lenders under the Credit Facility and Expansion Credit Facility.
(3) Includes financing executed via total return swaps under which CIT retains control of and risk associated with the pledged assets.
(4) Reflects advances associated with the Wells Fargo facility. On October 30, 2009 the Wells Fargo facility was terminated and paid off. In connection with the termination, CIT paid Wells Fargo $55 million as a make whole payment under the terms of the facility. Assets used to secure the facility were released and are now pledged to the lenders under the Credit Facility and Expansion Credit Facility.
(5) Reflects the repurchase of assets previously securitized off-balance sheet and the associated secured debt.
(6) Equipment lease securitization under the Federal Reserve Bank of New York’s Term Asset-Backed Securities Loan Facility (TALF).
(7) Reflects the repurchase of assets previously sold and the associated secured debt.
(8) Secured aircraft financing facility for the purchase of specified Airbus aircraft under operating leases.

 

13




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

NOTE 5 – DERIVATIVE FINANCIAL INSTRUMENTS

As part of managing economic risk and exposure to interest rate, foreign currency and, in limited instances, credit risk, CIT has historically entered into various derivative transactions in over-the-counter markets with other financial institutions. The contractual terms of the Company’s various derivative counterparty arrangements generally require CIT to maintain investment grade ratings. Following the Company’s loss of such ratings, the Company and its counterparties began terminating derivatives. With the announcement of management’s restructuring plan in the third quarter, further derivative terminations followed.

Effective July 20, 2009, the date the Company announced it would be commencing the restructuring of its liabilities, the Company’s cash flow and fair value hedges related to unsecured debt no longer met the criteria for hedge accounting prospectively. Accordingly, the changes in fair value of derivatives previously qualifying as cash flow hedges subsequent to that date were recorded in earnings. These derivatives are classified as non-qualifying hedges in trading assets or liabilities at quarter end. The change in fair value of those derivatives previously qualifying as fair value hedges continues to be recorded in earnings. These non-qualifying hedges are also classified as trading assets or liabilities at period end.

Subsequent to quarter end, as a result of the announced plan of reorganization, approximately $2.8 billion and $16.7 billion of qualified and non-qualified derivatives for hedge accounting, respectively, were either terminated or unwound. While some of these derivatives hedged foreign currency denominated debt which is expected to be redenominated to US dollars as part of the plan of reorganization, other terminations included positions that economically hedged our investments in foreign subsidiaries or were required to better match our mix of assets to our debt. The Company expects to reassess its hedge requirements while reestablishing counterparty relationships upon consummation of the plan of reorganization to facilitate placement of required hedges where economically appropriate.

The following table presents the fair values and notional values of derivative financial instruments that qualify for hedge accounting and those that did not qualify for hedge accounting during the quarter.

14




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

 


(dollars in millions)


  At September 30, 2009       At December
31, 2008
 
 
Qualifying Hedges, classified as either
derivative counterparty assets or liabilities
Notional
Amount
       Asset
Fair Value
     Liability
Fair
Value
     Notional
Amount


   
 
 
Cross currency swaps - fair value hedges $   $   $     $ 4,205.3
Cross currency swaps - net investment hedges   2,003.0         (178.4 )     164.4
Interest rate swaps - cash flow hedges   171.2         (15.2 )     4,975.1
Interest rate swaps - fair value hedges                 9,778.1
                         
Foreign currency forward exchange contracts -
cash flow hedges
  49.2         (5.7 )     521.0
                         
Foreign currency forward exchange contracts -
net investment hedges
  1,265.6     20.3     (33.7 )     3,584.3
 
   
 
   
Total Qualifying Hedges $ 3,489.0   $ 20.3   $ (233.0 )   $ 23,228.2
 
   
 
   
                         
Non-Qualifying Hedges, classified as either
trading assets or liabilities

                       
Cross currency swaps $ 3,327.9   $ 579.1   $ (27.8 )   $ 408.7
Interest rate swaps   18,158.6     414.4     (88.8 )     15,665.0
Foreign currency forward exchange contracts   1,497.6     39.2     (22.3 )     940.0
Credit default swaps                 39.0
TRS   735.9         (285.0 )    
 
   
 
   
Total Non-qualifying hedges $ 23,720.0   $ 1,032.7   $ (423.9 )   $ 17,052.7
 
 
 
   

15



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

The following table presents the profit and loss impact of the following on the statement of operations for the quarter and nine month periods ended September 30, 2009: (1) ineffectiveness of derivative instruments designated as hedging instruments, (2) discontinuance of cash flow and fair value hedge accounting, (3) reclassification of accumulated other comprehensive loss to earnings for cash flow hedges as it is no longer probable that the forecasted transaction will occur and (4) derivative instruments not designated as hedging instruments:


(dollars in millions)


              Gain / (Loss)
       
Derivative instruments   Line-item of Gain / (Loss)
Recognized in Statement of
Income
  Quarter    Nine
Months
 

 
 
 
 
Derivatives Designated as Hedging Instruments       Ended September 30, 2009
Ineffectiveness of derivative instruments designated as hedging instruments                  
                   
Cash flow hedges – interest rate swaps   Other income (expense)   $   $ 3.9  
Fair value hedges – cross currency swaps   Interest income (expense)     7.1     (6.2 )
       
 

        $ 7.1   $ (2.3 )
       
 

                   
Discontinuance of cash flow and fair value hedge accounting                  
                   
Cash flow hedges – interest rate swaps   Other income (expense)   $ (32.3 ) $ (32.3 )
Fair value hedges – interest rate swaps   Interest income (expense)     63.9     63.9  
Fair value hedges – cross currency swaps   Interest income (expense)     21.7     21.7  
       
 
 
        $ 53.3   $ 53.3  
       
 
 
                   
Reclassification of accumulated other comprehensive loss to earnings for cash flow hedges                  
                   
Cash flow hedges – interest rate swaps   Interest income (expense)   $ (53.9 ) $ (53.9 )
       
 
 
                   
Total Derivatives Designated as Hedging Instruments       $ 6.5   $ (2.9 )
       
 
 
 
Derivatives Not Designated as Hedging Instruments                  
                   
Cross currency swaps   Other income (expense)   $ (1.1 ) $ (42.3 )
Interest rate swaps   Other income (expense)     35.4     67.3  
Foreign currency forward exchange contracts   Other income (expense)     3.5     5.0  
Total return swap(A)   Other income (expense)     (285.0 )   (285.0 )
Warrant   Other income (expense)         70.6  
       
 
 
Derivatives not qualifying as hedges       $ (247.2 ) $ (184.4 )
       
 
 
Total Derivatives-income statement impact       $ (240.7 ) $ (181.5 )
       
 
 

(A)   effect of change in valuation of derivative related to GSI facility

The borrowing facility with Goldman Sachs International (“GSI”) is structured as a total return swap (TRS) and as a result amounts available for advances under the TRS are accounted for as a derivative. The estimated fair value of the derivative (the unfunded commitment) is based on a hypothetical transfer value, considering current market conditions and CIT’s specific financial and business situation. On October 28, 2009 the Company and GSI agreed to reduce the notional amount of the TRS and effectively eliminate the portion of the arrangement that had been accounted for as a derivative at September 30, 2009. The estimated fair value of the derivative as of September 30, 2009 was $285 million, which approximated the make whole payment to GSI to amend the TRS. See Note 17 for more detail.

16



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

NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE LOSS

The total comprehensive loss before preferred dividends for the quarter ended September 30, 2009 was $1.0 billion, versus $0.4 billion in the prior year quarter. For the nine months ended September 30, 2009 and 2008, the balances were losses of $2.9 billion and $2.7 billion. The following table details the components of accumulated other comprehensive loss, net of tax.


Accumulated Other Comprehensive Loss (dollars in millions)

  September 30, 2009
  December 31, 2008
               
Benefit plan net (loss) and prior service (cost), net of tax $ (88.1 )   $ (98.7 )
Changes in fair values of derivatives qualifying as cash flow hedges   (9.8 )     (136.9 )
Foreign currency translation adjustments   31.6       31.3  
Unrealized (loss) on equity and securitization investments   (2.2 )     (1.3 )
 
   
 
Total accumulated other comprehensive income $ (68.5 )     $ (205.6 )
 
   
 

The change in the foreign currency translation adjustments as of September 30, 2009 reflects the strengthening of the U.S. dollar in relation to various foreign currencies, including the Euro and the Canadian Dollar, partially offset by corresponding hedging activity, on an after tax basis.

The change in the unrealized loss on equity and securitization investments primarily reflects the change in the fair value of these assets.

The change in fair values of derivatives qualifying as cash flow hedges relates to variations in market interest rates, as these derivatives hedge the interest rate variability associated with an equivalent amount of variable-rate debt, and due to the Company no longer being able to apply hedge accounting on most cash flow hedges and recording the change through income for those amounts in which it is now probable that the forecasted transaction will not occur. See Note 5 – Derivative Financial Instruments for additional information.

NOTE 7 – FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

Assets and liabilities measured at estimated fair value on a recurring basis are summarized below. Such assets and liabilities are classified in their entirety based on the highest priority ranking of input that is significant to the fair value measurement. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and the determination of fair value requires significant judgment or estimation. Financial assets at estimated fair value classified within Level 3 totaled $165.3 million, or 0.2% of total assets as of September 30, 2009.

17



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

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

September 30, 2009
  Total
  Level 1
  Level 2
  Level 3
Assets                        
Securities available for sale     $ 20.4     $ 20.4     $   $
Retained interests in securitizations     165.3             165.3
Trading assets at fair value - derivatives     1,032.7         1,032.7    
Derivative counterparty assets at fair value     20.3         20.3    
   
 
 
 
Total Assets   $ 1,238.7   $ 20.4   $ 1,053.0   $ 165.3
   
 
 
 
Liabilities                        
Trading liabilities at fair value - derivatives   $ 423.9   $   $ 131.1   $ 292.8
Derivative counterparty liabilities at fair value     233.0         233.0    
   
 
 
 
Total Liabilities   $ 656.9   $   $ 364.1   $ 292.8
   
 
 
 
December 31, 2008
                       
Assets                        
Securities available for sale   $ 88.5   $ 88.5   $   $
Retained interests in securitizations     229.4             229.4
Trading assets at fair value - derivatives     139.4         121.8     17.6
Derivative counterparty assets at fair value     1,489.5         1,489.5      
   
 
 
 
Total Assets   $ 1,946.8   $ 88.5   $ 1,611.3   $ 247.0
   
 
 
 
Liabilities                        
Trading liabilities at fair value - derivatives   $ 127.4   $   $ 105.0   $ 22.4
Derivative counterparty liabilities at fair value     433.7         433.7    
   
 
 
 
Total Liabilities   $ 561.1   $   $ 538.7   $ 22.4
   
 
 
 

Securities available for sale

Securities available for sale includes available-for-sale marketable equity securities, whose fair value is determined using quoted market prices. Such items are classified in Level 1.

Retained Interests in Securitizations

Retained interests from securitization activities do not trade in an active, open market with readily observable prices. Accordingly, the retained interests fall within Level 3 of the fair value hierarchy and the fair value 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.

Derivatives

The Company’s derivative contracts are not generally listed on an exchange. Thus the derivative positions are valued using models in which the inputs are predominately determined using readily

18



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

observable market data. The models utilized 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 both the counterparty and CIT. Credit risk is factored into the fair value of derivative positions via a credit adjustment based upon observable market data such as the counterparty’s credit default swap (CDS) spreads, in the case of net asset positions, and CIT’s CDS spreads, in the case of net liabilities. In measuring the credit adjustment, the application of netting by counterparty is consistent with the ISDA master agreements that govern the terms and conditions of the Company’s derivative transactions.

The majority of the Company’s derivatives including interest rate swaps and option contracts fall within Level 2 of the fair value hierarchy because the significant inputs to the models are readily observable in actively quoted markets. Selected foreign currency interest rate 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. Also within Level 3 of the fair value hierarchy is the amount available for advances under the borrowing facility with GSI (liability of $285 million), which is structured and documented as a total return swap (TRS). The TRS is accounted for as a derivative financial instrument. The estimated fair value of the derivative (the unfunded commitment) is based on a hypothetical transfer value, considering current market conditions and CIT’s specific financial and business situation.

Level 3 Gains and Losses

The tables below set forth a summary of changes in the estimated fair value of the Company’s Level 3 financial assets and liabilities as of the quarter and nine months ended September 30, 2009 and 2008.

  Total
Retained Interests in
securitizations
Derivatives
June 30, 2009 $ 153.9   $ 169.5   $ (15.6 )
Gains or losses realized/unrealized                  
    Included in other income   (274.3 )   2.9     (277.2 )
    Included in other comprehensive income   (0.8 )   (0.8 )    
Other net   (6.3 )   (6.3 )    
 
 
 
 
September 30, 2009 $ (127.5 ) $ 165.3   $ (292.8 )
 
 
 
 
December 31, 2008 $ 224.6   $ 229.4   $ (4.8 )
Gains or losses realized/unrealized                  
    Included in other income   (314.6 )   (10.0 )   (304.6 )
    Included in other comprehensive income   14.1     (2.5 )   16.6  
Other net   (51.6 )   (51.6 )    
 
 
 
 
September 30, 2009 $ (127.5 ) $ 165.3   $ (292.8 )
 
 
 
 
June 30, 2008 $ 1,191.1   $ 1,216.3   $ (25.2 )
Gains or losses realized/unrealized                  
    Included in other income   39.6     13.2     26.4  
    Included in other comprehensive income   6.5     6.5      
Other net   (23.6 )   (23.6 )    
 
 
 
 
September 30, 2008 $ 1,213.6   $ 1,212.4   $ 1.2  
 
 
 
 
December 31, 2007 $ 1,165.8   $ 1,170.0   $ (4.2 )
Gains or losses realized/unrealized                  
    Included in other income   7.9     (7.3 )   15.2  
    Included in other comprehensive income   (7.9 )   1.9     (9.8 )
Other net   47.8     47.8      
 
 
 
 
September 30, 2008 $ 1,213.6   $ 1,212.4   $ 1.2  
 
 
 
 

19



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

The loss on Level 3 derivatives in the table above, principally pertains to the total return swap with GSI. A portion of the loss relates to certain cross-currency swaps that economically hedge currency exposures, but do not qualify for hedge accounting; such losses were essentially offset by gains on corresponding currency transactional exposures.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Certain assets and liabilities are measured at estimated fair value on a non-recurring 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 valuation hierarchy (as described above) as of September 30, 2009 and December 31, 2008 for which a non-recurring change in fair value has been recorded. The “Total Net Losses” reflect the amounts recorded during the applicable quarter on the respective “Total” asset category.

        Fair Value Measurements at Reporting Date Using:
September 30, 2009 Total   Level 1   Level 2   Level 3   Total Net Losses
 
 
 
 
 
 
Assets                              
Assets Held for Sale $ 27.2   $   $ 27.2   $   $ (10.5 )
Investments   6.1             6.1     (1.9 )
Impaired loans   931.0             931.0     (296.2 )
 
 
 
 
 
 
Total $ 964.3   $   $ 27.2   $ 937.1   $ (308.6 )
 
 
 
 
 
 
 
        Fair Value Measurements at Reporting Date Using:
December 31, 2008 Total     Level 1     Level 2    Level 3     Total Net Losses
 
 
 
 
 
 
Assets                              
Assets Held for Sale $   $   $   $   $  
Impaired loans   774.5             774.5     (289.8 )
 
 
 
 
 
 
Total $ 774.5   $   $   $ 774.5   $ (289.8 )
 
 
 
 
 
 

Assets held for sale

Assets held for sale are comprised of loans and operating lease equipment. 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 loans that have been sold. 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.

Operating lease equipment held for sale consists of aircraft as of September 30, 2009 and is classified within Level 2. Similar to loans held for sale, the estimated fair values of these assets is calculated using observable market information, including bids from prospective purchasers, pricing from similar market transactions where available, and appraisal data.

Loans and operating lease equipment designated for sale, securitization or syndication are classified as assets held for sale and are carried at lower of cost or fair value. The amount by which costs exceeds fair value is recorded as a valuation allowance. Subsequent changes in the valuation allowance are included in the determination of net income in the period in which the change occurs.

20



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

Investments

The investments category includes nonpublic investments in private equity and debt issued by such companies. Determining the fair value of nonpublic securities involves a significant degree of management resources and judgment as no quoted prices exist and such securities are generally very thinly traded. The Company uses an established process for determining the fair value of such securities, using commonly accepted valuation techniques, including the use of earnings multiples based on comparable public securities, industry specific non-earnings-based multiples and discounted cash flow models. In determining the fair value of nonpublic securities, the Company also considers events such as a proposed sale of the investee company, initial public offerings, equity issuances, or other observable transactions. Private equity securities are generally classified in Level 3 of the fair-value hierarchy.

Impaired Loans

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Impaired loans are reported at estimated fair value on a non-recurring basis, both at initial recognition of impairment and on an on-going basis until recovery or charge-off of the loan amount. 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 affect the level of the reserve for credit losses.

21



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

FAIR VALUES OF FINANCIAL INSTRUMENTS

Accounting standards on financial instruments reporting require an entity to provide disclosures about fair value of financial instruments in interim financial information. Estimated fair values, recorded carrying values and various assumptions used in valuing CIT’s financial instruments are set forth below. The estimated fair values presented in the table below will not correspond to fair value adjustments that will be recorded in conjunction with the application of fresh start accounting upon the Company’s emergence from bankruptcy, as fresh start adjustments will be based on market conditions at the emergence date and the financial instruments presented below exclude certain balance sheet assets (including leases and certain other assets) that will be subject to fair value adjustments.


Fair Value of Financial Instruments (dollars in millions)

  September 30, 2009
Asset/(Liability)
  December 31, 2008
Asset/(Liability)
  Carrying
Value
  Estimated
Fair Value
  Carrying
Value
  Estimated
Fair Value
Finance receivables-loans(1) $ 35,693.6       $ 31,228.4       $ 39,352.9       $ 31,036.0  
Assets held for sale(2)   436.9       436.9       156.1       156.1  
Retained interest in securitizations(2)   165.3       165.3       229.4       229.4  
Other assets(3)   2,722.9       2,722.9       2,862.0       2,862.0  
Bank credit facilities (including accrued interest                              
payable)   (3,100.9 )     (2,106.2 )     (5,200.0 )     (4,627.5 )
Deposits (including accrued interest payable)(4)   (5,235.6 )     (5,346.7 )     (2,651.9 )     (2,774.2 )
Variable-rate senior notes (including accrued                              
interest payable)(5)   (6,520.6 )     (4,261.8 )     (12,824.0 )     (10,605.4 )
Fixed-rate senior notes (including accrued                              
interest payable)(5)   (23,948.7 )     (15,341.5 )     (25,022.6 )     (17,703.5 )
Secured credit facility (including accrued                              
interest payable)   (2,904.0 )     (2,983.8 )            
Non-recourse, secured borrowings (including                              
accrued interest payable)(6)   (16,615.3 )     (14,866.2 )     (19,119.0 )     (15,811.4 )
Junior, subordinated notes and convertible                              
debt (including accrued interest payable)   (2,163.2 )     (576.5 )     (2,098.9 )     (1,263.5 )
Other liabilities(7)   (2,034.6 )     (2,034.6 )     (1,895.4 )     (1,895.4 )
Derivative financial instruments(8)   396.1       396.1       1,067.8       1,067.8  

(1)      The fair value of performing fixed-rate loans was estimated based upon a present value discounted cash flow analysis, using interest rates that were being offered at the end of the period for loans with similar terms to borrowers of similar credit quality. Discount rates used in the present value calculation range from 5.4% to 13.6% for September 30, 2009 and 13.3% to 23.4% for December 31, 2008 based on individual business units. For floating-rate loans we used average LIBOR spreads which ranged between 5.2% and 9.1% and between 11.6% and 16.7% to approximate carrying values as of September 30, 2009 and December 31, 2008, respectively. The net carrying value of lease finance receivables that are not subject to fair value disclosure totaled $8.3 billion at September 30, 2009 and $9.6 billion at December 31, 2008. Finance receivables are net of balances of factoring clients.
 
(2)      Assets held for sale are recorded at lower of cost or market on the balance sheet. Given current market conditions, lower of cost or market is equal to fair value. Fair values of retained interests in securitizations are calculated utilizing current and anticipated credit losses, prepayment speeds and discount rates.
 
(3)      Other assets subject to fair value disclosure include accrued interest receivable, certain investment securities, servicing assets and miscellaneous other assets. The carrying amount of accrued interest receivable approximates fair value. The carrying value of other assets that are not subject to fair value disclosure totaled $1.8 billion at September 30, 2009 and $1.7 billion at December 31, 2008.
 
(4)      The fair value of deposits was estimated based upon a present value discounted cash flow analysis. Discount rates used in the present value calculation range from 0.65% to 4.15% at September 30, 2009 and 1.55% to 4.65% at December 31, 2008.
 
(5)      The difference between the carrying value of fixed-rate senior notes and variable-rate senior notes and the corresponding balances reflected in the consolidated balance sheets is accrued interest payable. These amounts are excluded from the other liabilities balances in this table. Most fixed-rate notes were valued from quoted market estimates. In rare instances where market estimates were not available, values were computed using a present value discounted cash flow analysis with a discount rate approximating current market rates for issuances by CIT of similar term debt at the end of the year. Discount rates used in the present value calculation ranged 3.31% to 16.88% at December 31, 2008. The spread was substantially wider during the first nine months of 2009 due to the low interest rate environment and the widening of CIT credit spreads.
 
(6)      Non-recourse secured borrowing includes Trade Finance where the fair value is approximately par.
 
(7)      Other liabilities include accrued liabilities and deferred federal income taxes. Accrued liabilities and payables with no stated maturities have an estimated fair value that approximates carrying value. The carrying value of other liabilities that are not subject to fair value disclosure totaled $0.5 billion at June 30, 2009 and $0.1 billion at December 31, 2008.
 
(8)      CIT enters into derivative financial instruments for hedging purposes only. The estimated fair values are calculated internally using market data and represent the net amount receivable or payable to terminate the agreement, taking into account current market rates. See Note 5 — “Derivative Financial Instruments” for notional principal amounts and fair values associated with the instruments.

22



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

NOTE 8 – REGULATORY CAPITAL

On December 22, 2008, The Board of Governors of the Federal Reserve (“FRB”) approved the Company’s application to become a bank holding company under the Bank Holding Company Act of 1956, as amended. On December 22, 2008, CIT Bank converted its charter as an industrial loan company to a non-member commercial bank, which continues to be supervised by the FDIC and the Utah Department of Financial Institutions.

The Company and CIT Bank are each subject to various regulatory capital requirements administered by the FRB and the FDIC, respectively. Failure to meet minimum capital requirements can result in regulators taking certain mandatory, or in some circumstances discretionary actions (including being required to divest CIT Bank or CIT Bank becoming subject to FDIC conservatorship or receivership) that could have a direct material adverse effect on the Company.

Under applicable Agency capital adequacy guidelines and, with respect to CIT Bank, the regulatory framework for prompt corrective action (“PCA”), the Company and CIT Bank must meet specific capital guidelines that involve quantitative measures of each institution’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Each institution’s regulatory capital amounts and CIT Bank’s PCA classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Losses during 2009 have reduced the Company’s level of Total Capital to below the agreed-upon 13% level. The consummation of the Plan of Reorganization along with the implementation of the business restructuring strategy being developed by management and the Steering Committee is in part aimed at improving CIT’s capital levels.

On July 16, 2009, the FDIC and the Utah Department of Financial Institutions (the “UDFI”) each issued an order to cease and desist to CIT Bank in connection with the diminished liquidity of CIT. CIT Bank, without admitting or denying any allegations made by the FDIC and UDFI, consented and agreed to the issuances of the FDIC and the UDFI orders (together, the “Orders”). The Company does not believe that these cease and desist orders will have an immediate adverse impact on the Company based on the relatively small size of CIT Bank. In the long term, the Company will need to obtain flexibility in developing CIT Bank, including building a retail branch network in order to complete its transformation to a deposit funded institution.

Each of the Orders directs CIT Bank to take certain affirmative actions, including among other things, ensuring that it does not allow any “extension of credit” to CIT or any other affiliate of CIT Bank or engage in any “covered transaction,” declaring or paying any dividends or other reductions in capital and from increasing the amount of “Brokered Deposits” above the $5.527 billion held on July 16, without the prior written consent of the FDIC and the UDFI. Since the receipt of the Orders, the Company has been originating new corporate finance business outside of the bank operations. Further, on August 14, 2009, CIT Bank provided to the FDIC and the UDFI a contingency plan that ensures the continuous, satisfactory servicing of CIT Bank’s loans if CIT is unable to perform such services. Both Orders prohibit making payments that represent a reduction in capital.

On August 12, 2009, the Company entered into a Written Agreement (the “Written Agreement”) between the Company and the Federal Reserve Bank of New York (the “Reserve Bank”). The Written Agreement

23



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

requires regular reporting to the Reserve Bank, the submission of plans related to corporate governance, credit risk management, capital, liquidity and funds management, the Company’s business and the review and revision, as appropriate, of the Company’s consolidated allowances for loan and lease losses methodology. Prior written approval by the Reserve Bank is required for payment of dividends and distributions, incurrence of debt, other than in the ordinary course of business, and the purchase or redemption of stock. The Company has obtained approval of the Reserve Bank in connection with the issuance of the New Notes contemplated in the Offering Memorandum and Disclosure Statement.

The Written Agreement requires notifying the Reserve Bank prior to the appointment of new directors or senior executive officers, and restrictions on indemnifications and severance payments. Regarding the pending changes to the board of directors as outlined in the Offering Memorandum and Disclosure Statement, the candidates recommended by the Steering Committee and 1% bondholders that are approved by the Nominating and Governance Committee of the Board of Directors will be reviewed with the Federal Reserve Bank of New York.

Pursuant to the Written Agreement, the board of directors of the Company appointed a special compliance committee to monitor and oversee the Company’s compliance with the Written Agreement. The Company submitted a capital plan and a liquidity plan, as well as a draft of the recapitalization plan, on August 27, 2009, and its credit risk management plan on October 8, 2009 as required by the Written Agreement. Further, the Company prepared and submitted its corporate governance plan and its business plan to the Federal Reserve Bank of New York on October 26, 2009. The Company is continuing to provide periodic reports to the Federal Reserve Bank of New York as required by the Written Agreement. The Written Agreement will not be affected by the consummation of the Plan of Reorganization.

Quantitative measures established by regulation to ensure capital adequacy require that the Company and CIT Bank each maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). In connection with becoming a bank holding company, the Company committed to a minimum level of total risk based capital of 13% of risk-weighted assets. In connection with CIT Bank’s conversion to a commercial bank, CIT Bank committed to maintaining for three years a Tier 1 leverage ratio of at least 15%. At September 30, 2009, the Company’s total risk based capital decreased to 11.6%, below the level that the Company committed to maintain (13%). The Company is currently developing a plan to maintain sufficient capital, which it will submit to the Federal Reserve.

Subsequent to the plan of reorganization, the Company’s capital structure will be significantly less leveraged than shown in the following table and the capital ratios are expected to exceed the Company’s committed regulatory standards.

The calculation of the Company’s regulatory capital ratios are subject to review and consultation with the FRB, which may result in refinements to the estimated amount reported as of September 30, 2009.

CIT Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Institution’s category.

24



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


Regulatory Capital Ratios (dollars in millions)

    Ratio for
Capital Adequacy
Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
  Actual
  Amount
   Ratio
Total Capital (to risk weighted assets):                  
Consolidated(1) September 30, 2009 $ 7,862.7   11.6 % 13.0 % N/A  
  December 31, 2008 $ 10,369.7   13.1 % 13.0 % N/A  
CIT Bank September 30, 2009 $ 1,865.1   47.3 % 8.0 % 10.0 %
  December 31, 2008 $ 563.7   23.5 % 8.0 % 10.0 %
Tier 1 Capital (to risk weighted assets):                  
Consolidated September 30, 2009 $ 5,107.7   7.6 % 4.0 % N/A  
  December 31, 2008 $ 7,498.8   9.4 % 4.0 % N/A  
CIT Bank September 30, 2009 $ 1,820.3   46.2 % 4.0 % 6.0 %
  December 31, 2008 $ 533.4   22.2 % 4.0 % 6.0 %
Tier 1 Capital (to average assets)(Leverage Ratio):                  
Consolidated September 30, 2009 $ 5,107.7   7.2 % 4.0 % N/A  
  December 31, 2008 $ 7,498.8   9.6 % 4.0 % N/A  
CIT Bank(1) September 30, 2009 $ 1,820.3   17.6 % 15.0 % 5.0 %
  December 31, 2008 $ 533.4   15.8 % 15.0 % 5.0 %

(1) The Company has committed to maintaining capital ratios above regulatory minimum levels as explained in the paragraphs preceding the table.

The following table presents the components of Tier 1 capital and Total capital for the Company and CIT Bank at September 30, 2009 and December 31, 2008.


Regulatory Capital Ratios (dollars in millions)

  CIT Group Inc.
  CIT Bank
Tier 1 Capital September 30,
2009
  December 31,
2008(1)
  September 30,
2009
  December 31,
2008
 
 
 
 
Total stockholders’ equity $ 5,085.8       $ 8,124.3       $ 1,820.6       $ 533.4  
Effect of certain items in accumulated other                              
comprehensive loss excluded from Tier 1                              
Capital   97.9       138.5       (0.3 )      
 
   
   
   
 
    Adjusted total equity   5,183.7       8,262.8       1,820.3       533.4  
Qualifying noncontrolling interest   31.9       33.0              
Less: Goodwill         (568.1 )            
    Disallowed intangible assets         (130.5 )            
    Investment in certain subsidiaries   (1.4 )     (22.0 )            
    Other Tier 1 components(2)   (106.5 )     (76.4 )            
 
   
   
   
 
Tier 1 Capital   5,107.7       7,498.8       1,820.3       533.4  
Tier 2 Capital                              
Long-term debt and other instruments                              
qualifying as Tier 2 Capital   1,899.0       1,899.0              
Qualifying reserve for credit losses   857.4       993.8       44.6       30.3  
Other Tier 2 components   (1.4 )     (21.9 )     0.2        
 
   
   
   
 
Total qualifying capital $ 7,862.7     $ 10,369.7     $ 1,865.1     $ 563.7  
 
   
   
   
 
Risk-weighted assets $ 67,596.9     $ 79,403.2     $ 3,941.3     $ 2,400.8  
 
   
   
   
 
Tier 1 Capital Ratio   7.6 %     9.4 %     46.2 %     22.2 %
Total Capital Ratio   11.6 %     13.1 %     47.3 %     23.5 %

(1) Reclassified to conform to current quarter’s presentation.
   
(2) Includes the portion of net deferred tax assets that does not qualify for inclusion in Tier 1 capital based on the capital guidelines, the Tier 1 capital charge for nonfinancial equity investments, and the Tier 1 capital deduction for net unrealized losses on available-for-sale marketable equity securities (net of tax).


25



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

NOTE 9 – EARNINGS (LOSS) PER COMMON SHARE

The following table displays the computation of basic and diluted (loss) earnings per common share:


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

  Quarters Ended September 30,
    Nine Months Ended September 30,
  2009
  2008
  2009
  2008
Earnings / (Loss)                              
Net loss from continuing operations,                              
before preferred stock dividends $ (1,033.3 )     $ (301.1 )     $ (2,994.1 )      $ (493.9 )
Income (loss) from discontinued                              
operation         4.4             (2,109.4 )
 
   
   
   
 
Net loss before preferred stock dividends   (1,033.3 )     (296.7 )     (2,994.1 )     (2,603.3 )
Preferred stock dividends and                              
amortization of discount   (41.2 )     (20.1 )     (163.2 )     (44.3 )
(Income) loss attributable to                              
noncontrolling interests, after tax         (0.5 )     0.2       (11.3 )
 
   
   
   
 
Net loss attributable to common                              
stockholders - diluted $ (1,074.5 )   $ (317.3 )   $ (3,157.1 )   $ (2,658.9 )
 
   
   
   
 
Weighted Average Common Shares                              
Outstanding                              
Basic and diluted shares outstanding(1)   392,195       285,509       390,614       247,191  
Basic and diluted earnings per                              
common share data                              
Loss from continuing operations(2) $ (2.74 )   $ (1.13 )   $ (8.08 )   $ (2.22 )
Income (loss) from discontinued                              
operation         0.02             (8.54 )
 
   
   
   
 
Net loss per share attributable to common                              
shareholders $ (2.74 )   $ (1.11 )   $ (8.08 )   $ (10.76 )
 
   
   
   
 

(1) Weighted average options and restricted shares that were excluded from diluted shares outstanding totaled 24.1 million and 17.1 million for the quarters ended September 30, 2009 and 2008, and 23.9 million and 15.3 million for the nine months ended September 30, 2009 and 2008. Also excluded as the effect was anti-dilutive were the potential dilution of 88.7 million common shares issuable to the U.S. Department of the Treasury under a 10-year warrant at an exercise price of $3.94.
   
(2) Amount is net of preferred stock dividends and non-controlling minority interests.

Impact of Plan of Reorganization

The above table does not give effect to the potential impact of the pre-packaged plan of reorganization, including cancellation of indebtedness income, cancellation of the existing common shares, and issuance of new common shares, as detailed in the Offering Memorandum dated October 1, 2009. Upon exiting, new common shares will be issued and the current common shares will be cancelled. See Notes 1 and 17 for further information.

26



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

NOTE 10 – RETIREMENT AND POSTRETIREMENT BENEFIT PLANS

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

  Quarters Ended September 30,
  Nine Months Ended September 30,
  2009
  2008
  2009
  2008
Retirement Plans                              
Service cost $ 4.7       $ 5.4       $ 14.2       $ 16.8  
Interest cost   6.1       6.2       18.0       18.6  
Expected return on plan assets   (4.6 )     (5.0 )     (14.0 )     (15.3 )
Amortization of net loss   3.7       0.5       11.1       1.2  
Amortization of prior service cost   0.5       0.6       1.5       1.8  
Loss due to settlements & curtailments         0.1       (0.4 )     5.2  
Termination benefits         0.1       0.4       0.8  
 
   
   
   
 
Net periodic benefit cost $ 10.4     $ 7.9     $ 30.8     $ 29.1  
 
   
   
   
 
Postretirement Plans                              
Service cost $ 0.2     $ 0.3     $ 0.8     $ 0.9  
Interest cost   0.8       0.8       2.3       2.4  
Amortization of net (gain) loss               (0.1 )     (0.1 )
Amortization of prior service cost                     (0.1 )
Loss due to settlements & curtailments               (0.1 )     0.5  
Remeasurement/plan establishment                     0.9  
 
   
   
   
 
Net periodic benefit cost $ 1.0     $ 1.1     $ 2.9     $ 4.5  
 
   
   
   
 

For the nine months ended September 30, 2009, CIT contributed $54.3 million to the retirement plans, including a contribution of approximately $45.8 million to the U.S. Retirement Plan, and currently expects to contribute an additional $2.4 million in the fourth quarter of 2009, for a total of $56.7 million. CIT contributed $3.9 million to the postretirement plans for the nine months ended September 30, 2009, and currently expects to contribute an additional $1.0 million in the fourth quarter of 2009, for a total of $4.9 million.

NOTE 11 – COMMITMENTS

The accompanying table summarizes credit-related commitments, as well as purchase and funding commitments related to continuing operations. Descriptions of these items follow the table.


Commitments (dollars in millions)

  September 30, 2009
  December 31,
2008
  Due to Expire
  Total
Outstanding
 
  Within
One Year
  After
One Year
    Total
Outstanding
Financing Commitments                      
    Financing and leasing assets $ 754.2     $ 3,030.3     $ 3,784.5     $ 5,526.0
    Vendor receivables   549.7     456.9     1,006.6    
Letters of credit and acceptances                      
    Standby letters of credit   204.9     370.1     575.0     646.5
    Other letters of credit   136.1     4.3     140.4     245.7
    Guarantees, acceptances and other recourse obligations   1,115.7         1,115.7     748.4
Purchase and Funding Commitments                      
    Aerospace and other manufacturer purchase commitments   491.6     4,490.9     4,982.5     5,559.9
    Sale-leaseback payments   164.0     1,510.7     1,674.7     1,815.3
Other                      
    Liabilities for unrecognized tax benefits       41.1     41.1     110.9

27


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

Financing Commitments

Financing commitments, referred to as loan commitments, or lines of credit, are agreements to lend to customers, subject to the customers’ compliance with contractual obligations. Given that these commitments are not typically fully drawn, may expire unused or be reduced or cancelled at the customer’s request and require the customer to be in compliance with certain conditions, the total commitment amount does not necessarily reflect the actual future cash flow requirements.

Financing commitments declined from $4.5 billion at June 30, 2009, to $3.8 billion at September 30, 2009, excluding the impact of an approximate $1.0 billion increase in additional funding commitments associated with vendor receivables described below. The decline from year end reflected an increase in covenant restrictions combined with the expiration and utilization of financing commitments during the period. The Company experienced higher than usual utilization of financing commitments beginning the end of June that continued through mid-July. Specifically, over $700 million of draws on unfunded commitments occurred during the week of July 13, 2009 just prior to the Company obtaining the $3 billion secured credit facility. The greatest level of drawdowns were from asset-based loans for which CIT was the lead agent, which totaled approximately $500 million. The increase in customer draws against unfunded commitments also resulted in a reduction to credit balances due to factoring clients. At September 30, 2009, unfunded commitments related to lead agented asset-based loans totaled $760 million, down from $1,085 million at June 30, 2009. Subsequent to securing the $3 billion secured credit facility in July, the Company experienced a modest level of net repayments of lines. Since announcing the filing of its pre-packaged plan of reorganization on November 1, 2009, the Company has not experienced any unusual increase in usage of unfunded financing commitments.

During the second quarter, a Vendor Finance contract with a particular manufacturer was renegotiated and the receivables and associated commitments that were previously off-balance sheet were brought on-balance sheet. The manufacturer is obligated to provide CIT the funds necessary for CIT to disburse to the customer, therefore these arrangements do not present liquidity risk to the Company. Financing commitments shown above also exclude roughly $2.7 billion of commitments that were not available for draw due to requirements for asset / collateral availability or covenant conditions at September 30, 2009, relatively unchanged from June 30, 2009.

The Company does not include in the previous table unused cancelable lines of credit to customers in connection with select 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 related to vendor programs typically do not seek to exercise their entire available line of credit at any point in time. These lines of credit include vendor finance programs for Dell customers. See Note 13Certain Relationships and Related Transactions for additional information regarding Dell.

Letters of Credit and Guarantees

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 client’s customer is unable to pay according to the contractual terms, then CIT purchases the receivables from the client. Guarantee activity has been increasing during 2009 as the factoring volumes have been declining. At September 30, 2009, the outstanding guarantees for Trade Finance were $1.1 billion, up from $0.7 billion at December 31, 2008. As of September 30, 2009 and December 31, 2008, CIT had no outstanding liabilities relating to these credit-related commitments or guarantees, as amounts are generally billed and collected on a monthly basis.

Purchase and Funding Commitments

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 Industries and The Boeing Company. 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

28



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

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 price increases relating to inflation and manufacturing components. Accordingly, the commitment amounts detailed in the preceding table are based on the contracted purchase price less payments to date for pre-delivery payments and exclude buyer furnished equipment to be selected by the initial lessee. Pursuant to existing contractual commitments, 103 aircraft remain to be purchased (16 within the next twelve months). Lease commitments are in place for 13 of the 16 aircraft to be delivered over the next twelve months. The aircraft deliveries to CIT are scheduled periodically through 2018.

Outstanding commitments to purchase equipment to be leased to customers, other than aircraft, relate 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.

CIT is party to sale-leaseback transactions involving railcars and two business aircraft, under which it is obligated to pay a remaining total of $1,674.7 million, with annual amounts ranging from $141 million to $164 million per year for 2010 through 2014, 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 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 16 – 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 – CONTINGENCIES

Securities Class Action

In July and August 2008, putative class action lawsuits were filed in the United States District Court for the Southern District of New York (the “New York District Court”) against CIT, its Chief Executive Officer and its Chief Financial Officer. In August 2008, a putative class action lawsuit was filed in the New York District Court by a holder of CIT-PrZ equity units against CIT, its CEO, CFO, former Executive Vice President and Controller and members of its Board of Directors. In May 2009, the Court consolidated these three shareholder actions into a single action and appointed Pensioenfonds Horeca & Catering as Lead Plaintiff to represent the proposed class, which consists of all acquirers of CIT securities from December 12, 2006 through March 5, 2008, who allegedly were damaged, including acquirers of CIT-PrZ preferred stock pursuant to the October 17, 2007 offering of such preferred stock.

In July 2009, the Lead Plaintiff filed a consolidated amended complaint alleging violations of the Securities Exchange Act of 1934 (“1934 Act”) and the Securities Act of 1933 (“1933 Act”). Specifically, it is alleged that the Company, its CEO, CFO, former Executive Vice President and Controller, and a former Vice Chairman violated Section 10(b) of the 1934 Act by allegedly making false and misleading statements and omissions regarding CIT’s subprime home lending and student lending businesses. The allegations relating to the Company’s student lending businesses are based upon the assertion that the Company failed to account in its financial statements or, in the case of the preferred stockholders, its registration statement and prospectus, for private loans to students of a helicopter pilot training school, which it is alleged were highly unlikely to be repaid and should have been written off. The allegations relating to the Company’s home lending business are based on the assertion that the Company failed to fully disclose the risks in the Company’s portfolio of subprime mortgage loans. It also is alleged that its CEO, CFO, former Executive Vice President and Controller and a former Vice Chairman violated Section 20(a) of the 1934 Act as controlling persons of the Company. Lead Plaintiff also alleges that the Company, its CEO, CFO,

29



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

and former Executive Vice President and Controller and those Directors of the Company who signed the registration statement in connection with the October 2007 CIT-PrZ preferred offering violated Sections 11 and/or 12 of the 1933 Act by making false and misleading statements concerning the Company’s student lending business as described above. It also is alleged that its CEO and CFO, as well as the Directors who signed the registration statement, violated Section 15 of the 1933 Act as controlling persons of the Company.

In September 2008, a shareholder derivative lawsuit was filed in the New York District Court on behalf of CIT against its CEO and members of its Board of Directors, alleging defendants breached their fiduciary duties to CIT and abused the trust placed in them by wasting, diverting and misappropriating CIT’s corporate assets. Also in September 2008, a similar purported shareholder derivative action was filed in New York County Supreme Court against CIT’s CEO, CFO, and members of its Board of Directors. On October 10, 2009, the derivative shareholder plaintiffs served their amended derivative complaint, generally alleging that certain CIT directors and officers breached their fiduciary duties to CIT and its shareholders and unjustly enriched themselves by taking compensation and causing CIT to engage in risky subprime and student lending businesses and failing to disclose this “high-risk” activity to shareholders. In addition to certain current and former CIT directors, the amended derivative complaint names as defendants, CIT’s CEO, CFO, former Executive Vice President and Controller and a former Vice Chairman.

In these shareholder and derivative lawsuits, plaintiffs seek, among other relief, unspecified damages and interest. CIT believes the allegations in these complaints are without merit and intends to vigorously defend against the allegations.

Pilot Training School Bankruptcy

In February 2008, a helicopter pilot training school (the “Pilot School”) filed for bankruptcy and ceased operating. Student Loan Xpress, Inc. (“SLX”), a subsidiary of CIT engaged in the student lending business, had originated private (non-government guaranteed) loans to approximately 2,600 students of the Pilot School, which totaled approximately $196.8 million in principal and accrued interest. SLX ceased originating new loans to students of this school in September 2007, but a majority of SLX’s student borrowers had not completed their training when the school ceased operations.

After the Pilot School filed for bankruptcy and ceased operations, SLX voluntarily placed those students who were attending school at the time of the closure “in grace” such that no payments under their loans have been required to be made and no interest on their loans have been accruing. Multiple lawsuits, including putative class action lawsuits and collective actions, have been filed against SLX and other lenders alleging, among other things, violations of state consumer protection laws. SLX participated in a mediation with several class counsels and the parties have reached an agreement pursuant to which a nationwide class of students who were in attendance at the Pilot School when it closed will be formed and their claims against SLX will be resolved. The settlement agreement was submitted to the United States District Court for the Middle District of Florida for approval on October 27, 2009. Upon preliminary approval of the settlement by the Court and after giving notice to the students, the students will have the right to opt out of the class settlement. Based on the assumption that no students will opt out of the class settlement and the Court will overrule any objections and finally approve the settlement, CIT expects to charge-off approximately $120 million in the fourth quarter, which was fully reserved at September 30, 2009. SLX also completed a settlement of a mass action commenced by students in Georgia, which is binding upon 37 SLX borrowers. The Attorneys General of several states also engaged in a review of the impact of the Pilot School’s closure on the student borrowers and any possible role of SLX. SLX cooperated in the review and has reached agreement with twelve state Attorneys General, pursuant to which, among other things, the Attorneys General support the class settlement SLX has filed with the court.

Noteholder Actions Concerning $3 Billion Facility

In September 2009, three noteholders filed a derivative action in the Delaware Chancery Court (the “Delaware Action”) against the directors of CIT Group Funding Company of Delaware, LLC (“CIT Funding”), alleging that the

30



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

directors breached their fiduciary duties to CIT Funding by allowing CIT Funding to guaranty and grant liens upon its assets in connection with the $3 billion financing facility entered into by the Company in July 2009 (the “Funding Facility”).

On the same date, a group of noteholders, including the plaintiffs in the Delaware Action, commenced an action in the United States District Court for the Southern District of New York against CIT Funding and many of the lenders involved in the Funding Facility. Plaintiffs brought the action on behalf of themselves and a purported class of all holders or owners of notes issued by CIT Funding. Plaintiffs assert the Funding Facility constituted a fraudulent transfer under New York law, and accordingly should be annulled. Plaintiffs also allege that additional claims against the defendants and others may exist in the event of a bankruptcy filing by CIT Group Inc. and/or any of its affiliates.

The parties have reached an agreement in principle pursuant to which these actions will be dismissed with prejudice following the effective date of the Company’s Amended Plan of Reorganization.

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. Certain state authorities, including California, have been conducting a parallel investigation. The investigations are being conducted under the Federal False Claims Act and its state law equivalents. CIT is cooperating with these investigations, and substantial progress has been made towards a resolution of the investigations. Based on the facts known to date, CIT believes its exposure will not be material.

31



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

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.

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 DFS joint venture. CIT maintains the right to provide 25% (of sales volume) funding to DFS in 2009. CIT also retains the 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. 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 $1.7 billion at September 30, 2009 and $2.2 billion at December 31, 2008. Securitized assets included in owned and securitized assets were just under $0.1 billion at September 30, 2009 and $0.2 billion at December 31, 2008.

On July 16, 2009, Snap-on Incorporated (“Snap-on”) terminated a joint venture arrangement with CIT, which had been scheduled to terminate January 2010. The joint venture with Snap-on had a similar business purpose and model to the DFS arrangement described above, including limited credit recourse on defaulted receivables. CIT and Snap-on had 50% ownership interests, 50% board of directors’ representation, and shared income and losses equally. The Snap-on joint venture was accounted for under the equity method and was not consolidated in CIT’s consolidated financial statements. In connection with the termination, Snap-On has acquired CIT’s interest in the joint venture for a payment of approximately $8 million and will continue to service the portfolio owned by CIT. The termination of the joint venture is not expected to have a material impact on CIT’s origination volume, asset levels or net income prior to the first or second quarter of 2010. Financing and leasing assets on CIT’s balance sheet

32



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

related to the Snap-on program were approximately $0.8 billion at September 30, 2009 and $1.0 billion at December 31, 2008.

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 $348 million at September 30, 2009 and $385 million at December 31, 2008.

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 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 in Care, which is currently carried at approximately $61 million. During the nine months ended September 30, 2009, CIT recorded impairment charges of approximately $14 million. A subsidiary of CIT provides services to Care pursuant to a management agreement. The investment in Care is accounted for under the equity method.

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 these entities were entered into in the ordinary course of business. Other assets included approximately $9.3 million at September 30, 2009 and $11.8 million at December 31, 2008 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.

33



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

NOTE 14 – BUSINESS SEGMENT INFORMATION

The following table presents our business segment financial information for continuing operations:


Business Segments (dollars in millions)

  Corporate
Finance

    Transportation
Finance

    Trade
Finance

    Vendor
Finance

    Commercial
Segments

    Consumer
    Total
Segments

    Corporate
and Other

    Continuing
Operations

 
Quarter ended September 30, 2009                                                                      
Interest income $ 229.0       $ 39.6       $ 33.1       $ 184.2       $ 485.9       $ 63.9       $ 549.8       $ 6.8       $ 556.6  
Interest expense   (115.4 )     (134.5 )     (17.4 )     (138.3 )     (405.6 )     (65.3 )     (470.9 )     (222.9 )     (693.8 )
Provision for credit losses   (473.4 )     (2.2 )     (11.4 )     (152.6 )     (639.6 )     (52.1 )     (691.7 )     (10.1 )     (701.8 )
Rental income on operating leases   10.4       343.3             118.6       472.3             472.3       (0.6 )     471.7  
Other income, excluding rental income on
operating leases
  (31.4 )     4.5       50.1       22.8       46.0       2.9       48.9       (215.7 )     (166.8 )
Depreciation on operating lease equipment   (6.6 )     (170.0 )      –       (106.2 )     (282.8 )      –       (282.8 )     0.2       (282.6 )
Other expenses, excluding depreciation on
operating lease equipment
  (92.8 )     (38.2 )     (33.1 )     (87.7 )     (251.8 )     (15.8 )     (267.6 )     17.9       (249.7 )
(Provision) benefit for income taxes and                                                                      
noncontrolling interests, after tax   216.7       0.6       (7.2 )     70.8       280.9       24.6       305.5       (272.4 )     33.1  
 
   
   
   
   
   
   
   
   
 
Net (loss) income from continuing
operations, before preferred stock
dividends
$ (263.5 )   $ 43.1     $ 14.1     $ (88.4 )   $ (294.7 )   $ (41.8 )   $ (336.5 )   $ (696.8 )   $ (1,033.3 )
 
   
   
   
   
   
   
   
   
 
Select Period End Balances                                                                      
Loans including receivables pledged $ 16,886.3     $ 2,357.7     $ 3,889.2     $ 10,561.1     $ 33,694.3     $ 11,586.6     $ 45,280.9           $ 45,280.9  
Credit balances of factoring clients               (898.3 )           (898.3 )           (898.3 )           (898.3 )
Assets held for sale   365.0       25.0                   390.0       46.9       436.9             436.9  
Operating lease equipment, net   193.7       12,237.6             802.3       13,233.6             13,233.6             13,233.6  
Securitized assets   591.0                   389.1       980.1             980.1             980.1  
                                                                       
Quarter ended September 30, 2008                                                                      
Interest income $ 351.1     $ 46.9     $ 51.8     $ 270.4     $ 720.2     $ 142.7     $ 862.9     $ 44.8     $ 907.7  
Interest expense   (209.0 )     (142.0 )     (20.2 )     (162.1 )     (533.3 )     (104.0 )     (637.3 )     (128.0 )     (765.3 )
Provision for credit losses   (77.2 )     0.7       (22.3 )     (54.1 )     (152.9 )     (65.8 )     (218.7 )     8.4       (210.3 )
Rental income on operating leases   13.5       336.9             142.3       492.7             492.7       (0.5 )     492.2  
Other income, excluding rental income on
operating leases
  47.7       15.1       63.6       18.8       145.2       1.1       146.3       (3.6 )     142.7  
Depreciation on operating lease equipment   (8.1 )     (148.1 )             (128.5 )     (284.7 )             (284.7 )           (284.7 )
Other expenses, excluding depreciation on
operating lease equipment
  (98.5 )     (31.8 )     (34.2 )     (99.2 )     (263.7 )     (16.9 )     (280.6 )     (54.0 )     (334.6 )
Goodwill and intangible impairment charges                     (455.1 )     (455.1 )           (455.1 )           (455.1 )
(Provision) benefit for income taxes and                                                                      
noncontrolling interests, after tax   (1.5 )     (8.5 )     (14.3 )     110.3       86.0       19.1       105.1       100.7       205.8  
 
   
   
   
   
   
   
   
   
 
Net (loss) income from continuing
operations, before preferred stock
dividends
$ 18.0     $ 69.2     $ 24.4     $ (357.2 )   $ (245.6 )   $ (23.8 )   $ (269.4 )   $ (32.2 )   $ (301.6 )
 
   
   
   
   
   
   
   
   
 
Select Period End Balances                                                                      
Loans including receivables pledged $ 21,294.3     $ 2,665.7     $ 6,972.9     $ 10,882.2     $ 41,815.1     $ 12,718.9     $ 54,534.0     $     $ 54,534.0  
Credit balances of factoring clients               (3,551.7 )           (3,551.7 )           (3,551.7 )           (3,551.7 )
Assets held for sale   254.9       254.3       8.0       16.8       534.0       73.0       607.0             607.0  
Operating lease equipment, net   287.4       11,011.4             1,060.7       12,359.5             12,359.5             12,359.5  
Securitized assets   954.5                   2,440.6       3,395.1             3,395.1             3,395.1  

34



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

  Corporate
Finance

    Transportation
Finance

    Trade
Finance

    Vendor
Finance

    Commercial
Segments

    Consumer
    Total
Segments

    Corporate
and Other

    Continuing
Operations

 
Nine months ended September 30, 2009                                                                      
Interest income $ 728.3       $ 124.1       $ 95.5       $ 639.0       $ 1,586.9       $ 199.8       $ 1,786.7       $ 24.0       $ 1,810.7  
Interest expense   (391.8 )     (410.3 )     (46.6 )     (423.2 )     (1,271.9 )     (223.3 )     (1,495.2 )     (489.3 )     (1,984.5 )
Provision for credit losses   (1,297.2 )     (0.8 )     (48.1 )     (310.7 )     (1,656.8 )     (124.7 )     (1,781.5 )     (44.2 )     (1,825.7 )
Rental income on operating leases   33.4       1,017.6             371.0       1,422.0             1,422.0       (1.6 )     1,420.4  
Other income, excluding rental income on
operating leases
  (265.9 )     27.8       160.2       64.3       (13.6 )     (9.0 )     (22.6 )     (155.0 )     (177.6 )
Depreciation on operating lease equipment   (21.9 )     (497.1 )      –       (333.0 )     (852.0 )           (852.0 )     0.8       (851.2 )
Goodwill and intangible impairment charges   (316.8 )           (363.8 )     (11.8 )     (692.4 )           (692.4 )           (692.4 )
Other expenses, excluding depreciation on
operating lease equipment
  (293.7 )     (113.5 )     (102.2 )     (259.2 )     (768.6 )     (52.8 )     (821.4 )     115.2       (706.2 )
(Provision) benefit for income taxes and                                                                      
noncontrolling interests, after tax   658.7       (9.4 )     111.9       114.0       875.2       79.3       954.5       (941.9 )     12.6  
 
   
   
   
   
   
   
   
   
 
Net (loss) income from continuing operations,                                                                      
before preferred stock dividends $ (1,166.9 )   $ 138.4     $ (193.1 )   $ (149.6 )   $ (1,371.2 )   $ (130.7 )   $ (1,501.9 )   $ (1,492.0 )   $ (2,993.9 )
 
   
   
   
   
   
   
   
   
 
 
Nine months ended September 30, 2008                                                                      
Interest income $ 1,130.6     $ 149.0     $ 162.0     $ 809.1     $ 2,250.7     $ 448.8     $ 2,699.5     $ 114.6     $ 2,814.1  
Interest expense   (676.4 )     (432.4 )     (63.3 )     (477.8 )     (1,649.9 )     (343.9 )     (1,993.8 )     (350.7 )     (2,344.5 )
Provision for credit losses   (212.9 )     1.2       (68.4 )     (104.9 )     (385.0 )     (248.5 )     (633.5 )     24.3       (609.2 )
Rental income on operating leases   43.2       1,015.5             434.0       1,492.7             1,492.7       (1.5 )     1,491.2  
Other income, excluding rental income on
operating leases
  57.9       89.2       183.6       46.6       377.3       (6.4 )     370.9       1.7       372.6  
Depreciation on operating lease equipment   (25.5 )     (439.8 )           (394.4 )     (859.7 )           (859.7 )     0.3       (859.4 )
Goodwill and intangible impairment charges                     (455.1 )     (455.1 )           (455.1 )           (455.1 )
Other expenses, excluding depreciation on
operating lease equipment
  (309.4 )     (106.6 )     (106.7 )     (301.0 )     (823.7 )     (53.7 )     (877.4 )     (307.7 )     (1,185.1 )
(Provision) benefit for income taxes and                                                                      
noncontrolling interests, after tax   6.2       (30.8 )     (38.2 )     103.8       41.0       85.0       126.0       144.2       270.2  
 
   
   
   
   
   
   
   
   
 
Net (loss) income from continuing operations,
before preferred stock dividends
$ 13.7     $ 245.3     $ 69.0     $ (339.7 )   $ (11.7 )   $ (118.7 )   $ (130.4 )   $ (374.8 )   $ (505.2 )
 
   
   
   
   
   
   
   
   
 

NOTE 15 – SEVERANCE AND FACILITIES EXITING RESERVES

The following table summarizes activities during 2009:


Severance and Facilities Exit Reserves (dollars in millions)

  Severance
  Facilities
  Total
Reserves
  Number of
Employees
  Reserve
    Number of
Facilities
  Reserve
   
Balance at December 31, 2008 175       $ 42.9       12       $ 7.7     $ 50.6  
Additions and adjustments 264       30.7     3       9.9       40.6  
Utilization (353 )     (46.4 )   (4 )     (7.8 )     (54.2 )
 
   
   
   
   
 
Balance at September 30, 2009 86       27.2     11       9.8       37.0  
 
   
   
   
   
 

35



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

The severance additions during 2009 primarily relate to employee termination benefits incurred in conjunction with various organization efficiency and cost reduction initiatives, primarily in Corporate Finance, Trade Finance and Vendor Finance. These additions, along with charges related to accelerated vesting of equity and other benefits, were recorded as part of the $42.9 million provision. The ending facilities reserves relate primarily to shortfalls in sublease transactions and will be utilized over the remaining terms which range up to approximately 7 years.

NOTE 16 – 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. All of the guaranteed debt has now been repaid in full and in October 2009, and as part of an internal restructuring CIT Holdings LLC was merged into its parent company C.I.T. Leasing Corporation. CIT has not presented related financial statements or other information for this subsidiary on a stand-alone basis. Also presented are condensed financial statements for Delaware Funding, a wholly owned finance subsidiary whose sole business was to issue debt with the proceeds lent to an affiliate to fund its business, for which CIT has fully and unconditionally guaranteed the debt securities. At the time that the debt was issued, Delaware Funding was a Canadian legal entity. In December, 2007, as part of an internal tax reorganization, CIT redomesticated the legal entity in Delaware. Delaware Funding assets consist of notes receivable from this affiliate, which notes are currently pledged to another affiliate to secure a forward purchase obligation of such affiliates stock. During the second quarter of 2009, $5.7 billion of government guaranteed student loans were transferred from “Other Subsidiaries” to CIT Bank, which assumed $3.5 billion of debt and paid $1.6 billion of cash to “CIT Group Inc”. No subsidiaries within “Other Subsidiaries” in the following tables have unconditionally guaranteed debt securities for any other CIT subsidiary.

36



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


CONDENSED CONSOLIDATING BALANCE SHEETS (dollars in millions)

CONSOLIDATING
BALANCE SHEETS

 CIT
Group Inc.

     CIT Holdings
LLC

   CIT
Bank

   Delaware
Funding Co.

     Other
Subsidiaries

     Eliminations
     Total
September 30, 2009                                                
                                                 
ASSETS                                                
Net loans $     $ 2,923.3   $ 7,429.5   $     $ 33,564.9     $     $ 43,917.7
Operating lease equipment, net         246.9               12,986.7             13,233.6
Assets held for sale         318.6     46.9           71.4             436.9
Cash and deposits with banks   388.8       177.0     1,320.7     1.4       3,922.8             5,810.7
Other assets   54,186.1       1,005.9     568.8     12.6       2,323.6       (52,307.3 )     5,789.7
 
   
 
 
   
   
   
   Total Assets $ 54,574.9     $ 4,671.7   $ 9,365.9   $ 14.0     $ 52,869.4     $ (52,307.3 )   $ 69,188.6
 
   
 
 
   
   
   
LIABILITIES AND STOCKHOLDERS’ EQUITY                                                
Debt, including deposits $ 32,526.0       $ 661.8     $ 7,416.5     $ 2,196.9       $ 17,177.8     $     $ 59,979.0
Credit balances of factoring clients                       898.3             898.3
Other liabilities   16,963.1       2,933.0     128.8     (2,391.2 )     (14,443.3 )           3,190.4
 
   
 
 
   
   
   
   Total Liabilities   49,489.1       3,594.8     7,545.3     (194.3 )     3,632.8             64,067.7
 
   
 
 
   
   
   
Total Stockholders’ Equity   5,085.8       1,076.9     1,820.6     208.3       49,201.5       (52,307.3 )     5,085.8
Noncontrolling Minority Interests                       35.1             35.1
 
   
 
 
   
   
   
Total Equity   5,085.8       1,076.9     1,820.6     208.3       49,236.6       (52,307.3 )     5,120.9
 
   
 
 
   
   
   
Total Liabilities and                                                
Stockholders’ Equity $ 54,574.9     $ 4,671.7   $ 9,365.9   $ 14.0     $ 52,869.4     $ (52,307.3 )   $ 69,188.6
 
   
 
 
   
   
   

37



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


CONDENSED CONSOLIDATING STATEMENT OF INCOME (dollars in millions)

CONSOLIDATING
STATEMENTS OF INCOME
CIT
Group Inc.
    CIT Holdings
LLC
    CIT
Bank
    Delaware
Funding
    Other
Subsidiaries
    Eliminations
  Total
 
Nine Months Ended Ended September 30, 2009                                                    
Interest income $ 6.9       $ 103.9       $ 211.7       $ 71.4       $ 1,416.8       $     $ 1,810.7  
Interest expense   (421.2 )     160.6       (145.7 )     (62.2 )     (1,516.0 )         (1,984.5 )
 
   
   
   
   
   
 
 
Net interest revenue   (414.3 )     264.5       66.0       9.2       (99.2 )         (173.8 )
Provision for credit losses         (64.0 )     (45.3 )           (1,716.4 )         (1,825.7 )
 
   
   
   
   
   
 
 
Net interest revenue, after credit provision   (414.3 )     200.5       20.7       9.2       (1,815.6 )         (1,999.5 )
Equity in net income of subsidiaries   (2,916.9 )                             2,916.9      
Other Income                                                    
    Rental income on operating leases         65.9                   1,354.5           1,420.4  
    Other   62.3       (118.9 )     58.3       (8.0 )     (171.3 )         (177.6 )
 
   
   
   
   
   
 
 
        Total other income   62.3       (53.0 )     58.3       (8.0 )     1,183.2           1,242.8  
 
   
   
   
   
   
 
 
Total net revenue, net of interest expense and credit                                                    
provision   (3,268.9 )     147.5       79.0       1.2       (632.4 )     2,916.9     (756.7 )
 
   
   
   
   
   
 
 
Other expenses                                                    
    Depreciation on operating lease equipment         (54.0 )                 (797.2 )         (851.2 )
    Goodwill and intangible assets impairment charges                           (692.4 )         (692.4 )
    Other   41.1       (43.9 )     (51.9 )           (651.5 )         (706.2 )
 
   
   
   
   
   
 
 
        Total other expenses   41.1       (97.9 )     (51.9 )           (2,141.1 )         (2,249.8 )
 
   
   
   
   
   
 
 
 
(Loss) Income from continuing operations before                                                    
income taxes   (3,227.8 )     49.6       27.1       1.2       (2,773.5 )     2,916.9     (3,006.5 )
Benefit (provision) for income taxes   233.7       (18.8 )     (10.1 )           (192.4 )         12.4  
 
   
   
   
   
   
 
 
 
Net (loss) income from continuing operations, before                                                    
preferred stock dividends   (2,994.1 )     30.8       17.0       1.2       (2,965.9 )     2,916.9     (2,994.1 )
Preferred stock dividends   (163.2 )                                 (163.2 )
 
   
   
   
   
   
 
 
Net (Loss) before attribution of noncontrolling interests   (3,157.3 )     30.8       17.0       1.2       (2,965.9 )     2,916.9     (3,157.3 )
(Loss) attributable to noncontrolling interests, after tax                           0.2           0.2  
 
   
   
   
   
   
 
 
Net (loss) income (attributable) available to common                                                    
stockholders $ (3,157.3 )   $ 30.8     $ 17.0     $ 1.2     $ (2,965.7 )   $ 2,916.9   $ (3,157.1 )
 
   
   
   
   
   
 
 

38



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
     CIT Bank      Delaware
Funding
     Other
Subsidiaries
     Eliminations      Total  
 
   
   
   
   
   
   
 
Nine Months Ended September 30, 2009                                                      
Cash Flows From Operations:                                                      
Net cash flows provided                                                      
   by (used for) operations $ (333.3 )   $ 5,538.2     $ 283.0     $ 8.0     $ (4,104.0 )   $     $ 1,391.9  
 
   
   
   
   
   
   
 
Cash Flows From Investing Activities:                                                      
Net (increase) decrease in financing and                                                      
   leasing assets   0.3       (178.2 )     (5,553.7 )           9,701.7             3,970.1  
Decrease in inter-company loans                                                      
   and investments   5,115.7                                 (5,115.7 )      
 
   
   
   
   
   
   
 
Net cash flows (used for) provided by                                                      
  investing activities   5,116.0       (178.2 )     (5,553.7 )           9,701.7       (5,115.7 )     3,970.1  
 
   
   
   
   
   
   
 
Cash Flows From Financing Activities:                                                      
Net increase (decrease) in debt   (8,654.5 )     441.7       4,504.1       (3.1 )     (2,915.6 )           (6,627.4 )
Inter-company financing         (5,807.9 )     1,270.0       (17.3 )     (560.5 )     5,115.7        
Cash dividends paid   (91.3 )                                   (91.3 )
 
   
   
   
   
   
   
 
Net cash flows provided by (used for)                                                      
  financing activities   (8,745.8 )     (5,366.2 )     5,774.1       (20.4 )     (3,476.1 )     5,115.7       (6,718.7 )
 
   
   
   
   
   
   
 
Net (decrease) increase in cash and                                                      
   cash equivalents   (3,963.1 )     (6.2 )     503.4       (12.4 )     2,121.6             (1,356.7 )
Cash and cash equivalents, beginning of period   4,351.9       183.2       817.3       13.8       897.1             6,263.3  
 
   
   
   
   
   
   
 
Cash and cash equivalents, end of period $ 388.8     $ 177.0     $ 1,320.7     $ 1.4     $ 3,018.7     $     $ 4,906.6  
 
   
   
   
   
   
   
 

39



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

NOTE 17 – SUBSEQUENT EVENTS

In accordance with current accounting literature, this subsequent events note is updated through November 16, 2009.

Results of Offerings and Plan of Reorganization

On October 1, 2009, CIT filed an Offering Memorandum and Disclosure Statement and Solicitation of Acceptances of a Prepackaged Plan of Reorganization (as amended on October 16, 2009 and supplemented on October 23, 2009), which commenced a series of offers to exchange certain outstanding series of notes and concurrently began a solicitation for votes for a voluntary prepackaged plan of reorganization.

On November 1, 2009, CIT Group Inc., and CIT Group Funding Company of Delaware LLC (“Delaware Funding” and together with the Company, the “Debtors”) filed voluntary petitions for relief under the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Court”). The Debtors will continue to manage their properties and operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court.

On November 3, 2009, CIT Group Inc. and Delaware Funding received the relief they sought from the Court with respect to its “first day” motions, allowing the Company to continue to operate in the ordinary course. In addition, a hearing to consider the confirmation of reorangization was scheduled for December 8, 2009. See Note 1 for further information.

Expansion Credit Facility

On October 28, 2009, the Company and certain of its subsidiaries amended and restated their existing $3 billion Credit Facility to expand the commitments thereunder through an additional $4.5 billion Expansion Credit Facility. The Expansion Credit Facility is secured by substantially the same assets as the Credit Facility, plus any additional collateral that becomes available as a result of the Company’s repayment of certain refinanced indebtedness. The full $4.5 billion of term loans were borrowed on October 28, 2009. See Note 1 for further information.

Committed Line of Credit

On October 30, 2009, the Company secured an incremental $1 billion committed line of credit to provide supplemental liquidity for CIT as it pursues its restructuring plan. This new line of credit may be drawn by the Company on or prior to December 31, 2009, subject to definitive documentation and other customary conditions, and may be drawn as debtor-in-possession financing. The line of credit was established as a backup facility to ensure CIT’s liquidity during the execution of its restructuring plan.

Goldman Sachs Facility

CIT Financial Ltd. (“CFL”), a wholly owned subsidiary of CIT Group Inc., on October 28, 2009, amended its $3 billion securities-based financing facility (the “GSI Facility”) with Goldman Sachs International (“GSI”). Pursuant to the amendment, the commitment amount of the GSI Facility has been reduced to $2.125 billion, effectively eliminating the currently unused portion of the facility, and CFL has agreed to post additional collateral to secure amounts due to GSI under the GSI Facility. In connection with the reduction of the commitment amount of the GSI Facility, on October 29, 2009 CFL made a payment of approximately $285 million representing the proportional termination fee payment to GSI as required for any such reduction under the original terms of the GSI Facility. CFL has initially posted additional collateral in the amount of $250 million, which amount will fluctuate over time pursuant to the terms of the

40



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

amendment. In consideration of these amendments to the GSI Facility, and subject to certain additional terms, GSI has agreed to forbear from exercising its right to terminate the GSI Facility to the extent that such right arises from a bankruptcy of CIT, which guarantees the obligations of CFL under the GSI Facility. The forbearance agreement is subject to specified limitations as to the nature and duration of the bankruptcy proceedings affecting CIT and continued compliance by CFL with the other terms of the GSI Facility, and during any bankruptcy proceedings additional financing may not be obtained under the GSI Facility. No amendment fee was paid to GSI under the terms of the amendment. All other material terms of the GSI Facility remain unchanged, including the facility fee in the amount of 285 basis points.

 

41


ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
  and
   
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk


OVERVIEW

CIT Group Inc., (“we,” “CIT” or the “Company”), is a bank holding company that provides financing and leasing capital for commercial companies throughout the world. Covering a wide variety of industries, we offer vendor, equipment, commercial, and structured financing products, as well as factoring and management advisory services. CIT is the parent of CIT Bank, a Utah state bank. CIT operates primarily in North America, with locations in Europe, Latin America, Australia and the Asia-Pacific region. CIT has been providing capital solutions since its formation in 1908. The Company became a bank holding company in late 2008.

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 “Item 1. Business” in our Form 10-K for the year ended December 31, 2008, as updated on Form 8-K dated October 1, 2009.

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.


FUNDING AND LIQUIDITY UPDATES

Background, Restructuring Strategy and Prepackaged Plan of Reorganization

The global financial market crisis and negative economic conditions have materially and adversely affected CIT’s liquidity position and operating results. The Company has reported net losses since the second quarter of 2007 due primarily to deteriorating economic conditions, and credit quality issues within CIT’s portfolio, that caused management to record provisions for credit losses, impairment charges, restructuring charges, greater interest charges on debt, and losses associated with asset sales at depressed prices. In addition to these adverse effects on operations, the Company’s liquidity and funding strategy have been materially adversely affected by the on-going stress in the financial markets, and downgrades in the Company’s credit ratings. As a result, at the end of December 2008, the Company applied for and became a bank holding company.

42


On July 15, 2009, the Company was advised that there was no appreciable likelihood of additional government support being provided in the near term, through either participation in the Federal Deposit Insurance Corporation’s (“FDIC”) Temporary Liquidity Guarantee Program (“TLGP”) or further approvals of asset transfers under its pending Section 23A exemption request. Following the announcement of these developments, the Company experienced higher draws on financing commitments which accelerated the degradation of its liquidity position.

Accordingly, the Company and its Board of Directors, in consultation with its advisors, developed and continue to enhance and execute an overall business restructuring strategy, which has the following objectives:

Financial Strength

Business Model

By successfully implementing its business restructuring strategy, the Company expects to transition to a smaller company focused on serving small - and mid-sized commercial businesses. The Company’s goals are:

Ultimately, the Company established and embarked upon a 3-phase restructuring plan as summarized below and detailed in the subsequent sections.

43


Management believes that the benefits of the restructuring plan are as follows:

Management believes a successful implementation of its business restructuring strategy, including swift emergence from bankruptcy, will be viewed favorably by the Company’s regulators and will position it to transfer certain business platforms into CIT Bank.

Phase 1 – Address Liquidity Challenges

On July 20, 2009, CIT entered into the $3 billion Credit Facility with Barclays Bank PLC and other lenders largely comprised of the Company’s existing bondholders. Additionally, on July 20, 2009, the Company commenced a cash tender offer for its outstanding floating rate senior notes due August 17, 2009 (the “August 17 Notes”). The offer for the August 17 Notes was amended on August 3, 2009, and consummated on August 17, 2009.

As of August 4, 2009, the Company had drawn the entire $3 billion in financing under the Credit Facility. The Company and certain of its subsidiaries are borrowers under the Credit Facility (collectively the “Borrowers”). The Company and all current and future domestic wholly-owned subsidiaries of the Company, with the exception of CIT Bank and other regulated subsidiaries, special-purpose entities, and immaterial subsidiaries, are guarantors of the Credit Facility (the “Guarantors”).

The Credit Facility provided for the Company to continue to underwrite and conduct business activities in the ordinary course, but also contained affirmative and negative covenants, including, among other things and subject to certain exceptions, limitations on the ability of Borrowers and subsidiaries to incur additional indebtedness, grant liens, make material non-ordinary course asset sales, make certain restricted payments (including paying any dividends without the consent of a majority of the members of a steering committee comprised of certain leading bondholders (the “Steering Committee”)), make investments, engage in certain fundamental changes, engage in sale and leaseback transactions, engage in transactions with affiliates, and prepay certain indebtedness.

The Credit Facility required the Company to adopt and comply with a restructuring plan acceptable to a majority in number of the Steering Committee by October 1, 2009. This requirement was subject to the fiduciary duty of the Company’s board of directors to act in the best interests of the Company and its stakeholders. The approved restructuring plan, developed in consultation with the Steering Committee and commenced by the Company on October 1, 2009, involved offers to exchange select existing outstanding notes of the Company in exchange for a series of newly issued secured notes and newly issued preferred stock, along with solicitation of acceptances of a prepackaged plan of reorganization (the “Offers”). Acceptance of the exchange offers was subject to certain liquidity and leverage conditions being met.

On October 28, 2009, the Company and certain of its subsidiaries amended and restated the $3 billion Credit Facility to expand the commitments thereunder by an incremental $4.5 billion through the Expansion Credit Facility. The Expansion Credit Facility is secured by substantially the same assets as the Credit Facility, plus any additional collateral which becomes available as a result of the Company’s repayment of certain refinanced indebtedness.

The Expansion Credit Facility provided additional commitments for multiple-draw senior secured term loans in an aggregate principal amount not to exceed $4.5 billion. The full $4.5 billion of term loans were

44


borrowed on October 28, 2009 and were used, or are expected to be used, (i) for general corporate purposes in an aggregate principal amount of up to $500 million; (ii) to cash collateralize obligations in respect of letters of credit having a face amount of up to $500 million issued under existing and new facilities for the benefit of the Company and its subsidiaries; (iii) to refinance an existing on-balance sheet trade receivables conduit facility and to fund the trade finance business; (iv) to refinance an existing commercial loan secured credit facility; (v) to refinance indebtedness and obligations under aircraft financings or railcar leases; and (vi) to pay a make-whole and other payments pursuant to an amendment of a total return swap with Goldman Sachs. At or shortly after closing, the Company used approximately $1.8 billion of the proceeds for the designated purposes.

The Expansion Credit Facility is subject to certain provisions restrictions, including the elimination of the Company and its subsidiaries’ ability to invest in certain subsidiaries, and permits the addition of certain borrowers and the refinancing of certain existing indebtedness of the Company and its subsidiaries upon the release or repurchase of collateral securing such refinanced debt, which may include, but shall not be limited to (i) trade receivables, proceeds, collections and documents related thereto, and related equipment and accounts; (ii) asset-based securities that are backed predominantly by aircraft leases, railcar leases, other equipment loans or leases, student loans, commercial loans (including but not limited to collateralized loan obligations), vendor finance obligations and trade finance obligations; (iii) commercial loan assets and related documents; (iv) aircraft and related rights and documents, including lease rights; and (v) railcars and underlying subleases subject to head leases.

The new Expansion Credit Facility term loan matures in January 2012, with an option to extend maturity until January 2013, and bears interest at LIBOR plus 7.5%, with a 2% LIBOR floor, payable monthly. The Expansion Credit Facility provides for (i) commitment fees of 2.5% of the commitment amount, payable upon signing, and 2.5% of the drawn amount, payable upon the funding date, and (ii) a 2% call premium during the first year of the facility.

The Expansion Credit Facility is subject to a fair value coverage covenant (based on accounting valuation methodology) of 2.5x the outstanding loan balance tested quarterly and upon the financing, disposition or release of certain collateral. At October 28, 2009, the fair value coverage was greater than 3x. Additionally, the Expansion Credit Facility amends certain covenants and related defined terms, and includes a cash sweep provision, which effectively accelerates the repayment of the Credit Facility, the Expansion Credit Facility, the New Notes, and the Junior Credit Facilities and makes non-bank assets liquidating portfolios. See ‘Secured Borrowing and On-balance Sheet Securitization Transactions’ section for sweep account detail.

On October 30, 2009, CIT secured an incremental $1 billion committed line of credit. This new line of credit may be drawn by the Company on or prior to December 31, 2009, subject to definitive documentation and other customary conditions, and may be drawn as debtor-in-possession financing. The line of credit was established as a backup facility to ensure CIT’s liquidity during the execution of its restructuring plan.

Phase 2 – Recapitalize the Balance Sheet

On October 1, 2009, the Company commenced its recapitalization plan with the primary objectives of enhancing capital levels, improving liquidity and accelerating the Company’s return to profitability. Under the plan, which was approved by the Company’s Board of Directors and by the Steering Committee of CIT’s bondholders, CIT Group Inc. (“CIT”)and CIT Group Funding Company of Delaware LLC (“Delaware Funding”) launched exchange offers for certain unsecured notes and a concurrent debt holder solicitation to approve a prepackaged plan of reorganization. Consummation of the exchange offers was conditioned upon satisfying certain conditions and approval of the prepackaged plan of reorganization required votes in favor from at least two-thirds of principal amount voted, and over half of the number of voters returning ballots, in each class.

45


The largest of the offers expired on October 29, 2009 and the remaining expired on November 5 and November 13. The results were overwhelmingly in support of the prepackaged plan of reorganization, and the conditions were not satisfied for the exchange offers. All classes voted to accept the prepackaged plan with all votes substantially exceeding the required thresholds for a successful solicitation. Over 80% of the Company’s eligible debt participated in the solicitation, and over 90% of participating debt supported the prepackaged plan of reorganization. Similarly, approximately 90% of the number of debtholders voting, both large and small, cast affirmative votes for the prepackaged plan.

Accordingly, on November 1, 2009, CIT’s Board of Directors proceeded with a voluntary prepackaged bankruptcy filing in order to restructure its debt and streamline its capital structure. CIT and Delaware Funding filed voluntary prepackaged bankruptcy petitions. The Company’s operating subsidiaries are not part of the filing and continue to conduct business on an uninterrupted basis. Pursuit of this plan was reviewed with the Company’s primary regulators.

The tables below summarize the proposed treatment of various existing securities under the plan of reorganization:


Summary of consideration paid to existing security holders under the plan of reorganization.

  New 2nd Lien Debt
paid per $1,000
Aggregate % of New
Common Equity(1)
Long-term Debt    
   Secured Borrowings and Secured Credit Facilities Not Impacted N/A
   Unsecured Bank Lines $ 700   9.37 %
   Senior Unsecured Notes – Canadian / Delaware Funding $ 1,000   0.00 %
   Senior Unsecured Notes – Long-dated notes approving the plan(2) $ 700   3.59 %
   Senior Unsecured Notes – Other senior debt & convertible equity units $ 700   78.04 %
   Senior Subordinated Note Claims(3) $ 0   7.50 %
   Junior Subordinated Note Claims(3) $ 0   1.50 %
Preferred Stockholder’s Equity(3) $ 0   0.00 %
Common Stockholder’s Equity $ 0   0.00 %
Total       100.00 %

(1)      Equity allocations assume 100% of long-dated notes approve the plan and may differ based on foreign exchange rates.
(2)      Long-dated senior unsecured notes not approving the plan will retain their existing securities.
(3)      Receive contingent value rights as described in the plan of reorganization.

46




Adjusted Debt Balances Under the Plan of Reorganization; Pre “Fresh-Start “Accounting (amounts in millions)

  As of September 30, 2009
  Actual
As Adjusted
Secured borrowings $ 16,596.9    $ 16,596.9   
Secured credit facility(1)   2,861.7     2,861.7  
Unsecured bank lines   3,100.0      
Senior unsecured notes(2)   30,087.8     1,504.8  
Senior and junior subordinated notes and convertible equity units(3)   2,098.9      
New Series A Notes(2)       18,901.1  
New Series B Notes       2,196.9  
New Junior credit facilities(4)       2,170.0  
 
 
 
Total Debt $ 54,745.3   $ 44,231.4  
 
 
 

(1)      Does not include the $4.5 billion expansion completed in October 2009.
(2)      Assumes 100% of holders of long-dated senior unsecured notes approve the plan.
(3)      The equity units are dissolved under the plan with the bond treated as senior unsecured debt and the equity contract terminated.
(4)      Assumes 100% of holders of unsecured bank facilities opt for new junior credit facilities in lieu of New Notes.

Existing preferred stock and common equity will be cancelled under the Plan of Reorganization. New common equity will be valued based on “Fresh Start” accounting.

In addition to the debt and equity restructuring actions described above, the plan of reorganization includes a cash sweep mechanism that is designed to accelerate the repayment of the new debt with excess cash generated from asset collections. The plan of reorganization also includes corporate governance changes that will result in a significant change in the composition of the Board of Directors.

Due to the overwhelming level of support from its debtholders, the Company asked for a quick confirmation of the plan. At a hearing on November 3, 2009, CIT and Delaware Funding received approval for all of the Company’s requested “first day” motions, allowing the Company’s operations to continue in the ordinary course through its reorganization. The Company received permission to, among other things, pay employee wages, salaries, benefits, pay its vendors and certain other creditors and obtained authority to enter into a new letter of credit facility. Additionally, a hearing to consider the confirmation of the prepackaged plan of reorganization was scheduled for December 8, 2009. As a result, the Company expects to emerge from bankruptcy potentially as early as December 9, 2009 and most likely prior to December 31, 2009.

Financial Impact of Emergence from Bankruptcy

Upon approval and exit from bankruptcy, CIT’s financial statements will be impacted significantly in accordance with “Fresh-start Accounting” rules. Under these rules:

47


Under the plan, CIT expects to:

The Company estimates its direct bankruptcy costs to be in excess of $1.0 billion, including secured facility fees $450 million, make-whole payments $340 million and professional fees $180 million. Other costs of bankruptcy, including impacts to vendor, client and employee relationships, are more difficult to quantify and may be realized over time.

At December 31, 2009 the Company’s financial statements will reflect the assets and liabilities of the Company, inclusive of adjustments for fresh start accounting. The Company will present a Statement of Operations for (1) the period from January 1, 2009 until the date of emergence from bankruptcy, which is expected to be in December 2009 and (2) the period from emergence date until December 31, 2009.

Phase 3 – Execute Business Restructuring

Following the confirmation of the Plan of Reorganization, and subject to changes adopted by the new Board of Directors and management team, the Company will continue to pursue its broader business restructuring strategy with an enhanced capital structure and liquidity position. Management’s expectations are that CIT’s financing needs would be significantly reduced over the next three years and its capital ratio would be in excess of commitments made to our regulators, although the ultimate capital ratio will be dependent on market conditions, valuations and other factors. A strong capital position and liquidity profile should afford CIT the time and resources required to execute on its broad business restructuring strategy, including refinement of its business model, liquidation or sale of select businesses or portfolios, efficiency enhancements and implementation of a long term bank-centric funding strategy.

CIT will continue to focus on providing financing solutions to small and medium size businesses, a market segment that remains relatively underserved by both large national banks and smaller regional and local banks. We believe that the opportunities in this segment will be even more compelling in the future as many independent financing companies have not been able to survive the current economic downturn and few banks have the focused sales, underwriting and operational know-how required to serve this niche market. The Company continues to have regular discussions with its regulators and expects to emerge from the restructuring with the bank holding company as a source of strength for CIT Bank.

Our favored scenario, at this time, is to transfer our most bank-like business lending operations, or platforms, to CIT Bank and to have substantially all future originations occur in the bank. Corporate finance, trade finance, vendor finance and small business lending are the business platforms most suitable to operate in CIT Bank. If these platforms are transferred, the legacy portfolios will remain at their current non-bank subsidiaries and will be managed to maximize returns and we intend to use cash generated from interest and principal payments on such legacy portfolios to reduce holding company indebtedness. Non-transferred businesses will be evaluated with a view to maximizing long term value. Asset impairments often result from significant actions such as the sale of assets or exiting a business. While at present no final decisions have been made that require asset impairment recognition, future decisions in connection with the reorganization plan could result in future asset impairment losses. Business originations at non-bank subsidiaries will likely remain curtailed. In the long term, the Company plans to diversify its funding base at CIT Bank by adding commercial and retail deposits through organic growth and potential strategic transactions.

If the Company is unsuccessful in obtaining approval to transfer business platforms into CIT Bank, we would plan to continue to constrain new business volumes and pursue alternative paths to maximize franchise value, including the potential sale or joint venture of businesses and possibly the bank itself and/or portfolio liquidations. These actions would likely be accompanied by a further reduction in business overhead in order to maintain profitability.

At the completion of the restructuring efforts, the Company believes it will be a more streamlined commercial lender focused on serving small and medium-sized businesses. Subject to regulatory approvals, most of its core platforms would be integrated into CIT Bank, providing an opportunity to access cost-efficient funding through deposits in the short term and expanded deposits (both commercial and retail) and capital markets in the long term. CIT’s streamlined business model combined with stable and competitive funding would position it to quickly return to profitability.

48


Immediately upon confirmation of CIT’s plan of reorganization, significant changes to the Board of Directors will likely be effective and the Board will consist of a majority of individuals who were identified by bondholders. Additionally, effective December 31, 2009, Jeffrey M. Peek, chairman and chief executive officer of CIT Group Inc., will resign as chairman and chief executive officer, and as a director. Accordingly, the new Board of Directors and management team may decide to pursue a strategy that differs from the above to maximize value.

U.S. Federal Income Tax Consequences to the Company

For U.S. federal income tax purposes, we have consolidated NOL carryforwards of approximately $3.6 billion as of the end of 2008. In addition, as of September 30, 2009, we estimate that we have incurred additional net operating losses of approximately $2.4 billion and expect to incur additional losses for the current taxable year ending December 31, 2009. As discussed below, in connection with the Plan of Reorganization, the amount of our consolidated NOL carryforwards as well as other tax attributes may be significantly reduced or eliminated.

Cancellation of Indebtedness Income (COD Income)

The Tax Code provides that the amount of any COD income of a taxpayer is included in income. The amount of COD income realized is generally the excess of the amount of indebtedness discharged over the value of any consideration given in exchange. However, COD income is excluded from income if the COD income is realized pursuant to a confirmed plan of reorganization in a Chapter 11 bankruptcy case, such as the Plan of Reorganization.

When the bankruptcy exception to income inclusion applies, a taxpayer must reduce certain of its tax attributes—such as NOLs, capital losses, tax credits, and tax basis in assets—by the amount of any COD excluded from income. The taxpayer can elect to reduce the basis of depreciable property prior to any reduction in its NOLs or other tax attributes. Where a consolidated U.S. federal income tax return is filed, certain tax attributes of the consolidated subsidiaries of the taxpayer and other members of the group must be reduced. If the amount of COD income exceeds available NOLs and other tax attributes, such excess is permanently excluded from income.

We expect to realize a substantial amount of COD income as a result of restructuring our debt obligations. The amount of COD we realize will depend on the issue price of the New Notes and the value of the New Preferred Stock, New Common Interests, and Contingent Value Rights issued in satisfaction of our debt obligations.

Under current law, The American Recovery and Reinvestment Act of 2009, we can elect to defer the inclusion of any portion of the COD income resulting from the restructuring of our debt obligations, with the amount of deferred COD income includible in our income ratably over a five-taxable year period beginning in 2014. This election would also require us to defer the deduction of a portion of the OID on the New Notes over a similar period. The collateral tax consequences of making this election are complex, and we are analyzing whether and to what extent the deferral election would be advantageous to us.

Net Operating Losses-Section 382

We believe that all or substantially all of our NOLs and certain other tax attributes may be utilized as a result of COD income realized from the Plan of Reorganization. Our ability to utilize any remaining NOLs or other tax attributes after consummation of the Plan of Reorganization to offset our expected future taxable income is likely to be limited as a result of Section 382 of the Tax Code. In general, under Section 382, whenever there is a more than fifty percent ownership change of a corporation during a three-year testing period (an “ownership change”), the ability of the corporation to utilize its NOLs and certain other tax attributes to offset future taxable income is subject to an annual limitation, equal to the product of (i) the “long-term tax-exempt rate” (for example, 4.48 percent for ownership changes occurring

49


during the month of October 2009) and (ii) the fair market value of the stock of the corporation immediately before the ownership change occurs. We anticipate that we will experience an ownership change as a result of the issuance of equity pursuant to the Plan of Reorganization.

In a Chapter 11 bankruptcy case, two special relief provisions may be available and the application of Section 382 could be materially different from that described above. Under one relief provision, if we qualify, we would be permitted to avoid any limitation on the use of NOLs, but the amount of the NOLs would be calculated without taking into account deductions for certain interest with respect to the Old Notes that are exchanged for equity pursuant to the Plan of Reorganization and if we undergo another ownership change within two years, the limitation with respect to that ownership change would be zero, effectively eliminating use of the remaining NOLs. Under the other relief provision, the annual limitation still applies but the calculation is based on a different value (generally, the lesser of the value of our equity immediately after the ownership change or the value of our assets immediately before the ownership change). Although such calculation may substantially increase our annual Section 382 limitation, our use of any NOLs or other tax attributes remaining after implementation of the Plan of Reorganization may still be substantially limited after an ownership change.

We have not yet determined which relief provision we would seek to apply to the ownership change arising from the consummation of the Plan of Reorganization.

Non-financial Subsequent Events

Resignation of Chief Executive Officer

On October 9, 2009, Jeffrey M. Peek, chairman and chief executive officer of CIT Group Inc., advised the Board of Directors that he will resign as chairman and chief executive officer, and as a director, effective December 31, 2009. The Board of Directors has hired a search firm to identify CEO candidates and the Board is forming a committee to recommend CEO candidates to the full Board for approval.

Resignation of Director

On October 22, 2009, Susan M. Lyne notified the Company that she was resigning as a member of the Board of Directors, effective October 31, 2009. Ms. Lyne, Chief Executive Officer of Gilt Groupe Inc. and a member of the Company’s Compensation Committee, advised the Company that her decision was based on the increased time demands on directors of the Company over the prior year and time constraints related to her other professional commitments and responsibilities.

Accelerated Process for Appointing New Directors

On October 28, 2009, CIT announced a modification of its Amended Offering Memorandum (dated October 16, 2009 and supplemented October 23, 2009) that will accelerate changes to its Board of Directors. Immediately upon effectiveness of CIT’s plan of reorganization, a majority of the Directors will be individuals who were identified by bondholders. Upon the effective date of the potential prepackaged plan of reorganization, it is the Company’s intent that the Board will consist of 13 Directors, including 12 independent Directors and the future CEO, upon his or her appointment by the new Board. The 12 independent Directors will include:

With respect to the four candidates to be identified by the Steering Committee of Lenders, the Steering Committee has agreed to allow Mr. Carl Icahn, a large senior debtholder, to recommend one of the candidates.

With respect to the three candidates to be identified by other senior debtholders, any senior debtholder (other than a Steering Committee member) who holds at least 1% of the aggregate outstanding principal amount of CIT senior notes and unsecured bank debt will have the right to recommend up to three candidates to the N&GC. The N&GC will select three candidates from among those recommended, provided that not more than one candidate put forward by any one bondholder is selected.

The appointment of all Directors is subject to prior notice to the Federal Reserve Bank of New York, and there can be no assurances that the Federal Reserve Bank of New York will not disapprove of a particular candidate. If the Federal Reserve Bank of New York disapproves of any candidate, another individual identified by the Steering Committee or other bondholders, as applicable, will be appointed.

50




A director search firm has been engaged to assist the N&GC in identifying candidates for the expanded board of directors. Additionally, the new Board will form a committee to recommend CEO candidates to the full Board for approval. The size and mandate of the committee will be determined by the new Board, but it is intended that non-incumbent Directors would constitute a majority of any such committee.

Notice of Delisting

On November 2, 2009, NYSE Regulation, Inc. (“NYSE Regulation”) announced that it determined that listing of the Company’s (1) common stock (ticker symbol: CIT); (2) 6.350% Non-Cumulative Preferred Stock, Series A (ticker symbol: CIT PR A); (3) 8.75% Non-Cumulative Perpetual Convertible Preferred Stock, Series C (ticker symbol: CIT PR C); and (4) equity units (ticker symbol: CIT PR Z), in each case on the New York Stock Exchange (the “NYSE”), should be suspended from trading on the NYSE, and subsequently trading was suspended prior to the market opening on November 3, 2009. The Company intends to relist its common stock upon emergence from bankruptcy.


BANK HOLDING COMPANY AND CIT BANK

The Company and CIT Bank are each subject to various regulatory capital requirements set by the Federal Reserve Board and the FDIC, respectively. Failure to meet minimum capital requirements can result in regulators taking certain mandatory, or in some circumstances discretionary, actions that could have a direct material adverse effect on the Company. Losses during 2009 have reduced the Company’s level of Total Capital to below the agreed-upon 13% level. The consummation of the Plan of Reorganization along with the implementation of the business restructuring strategy being developed by management and the Steering Committee is in part aimed at improving our capital levels.

If the Company does not maintain sufficient regulatory capital, the Company may become subject to enforcement actions (including being required to divest CIT Bank or CIT Bank becoming subject to FDIC conservatorship or receivership) or otherwise be unable to successfully execute its business plan. Such actions could have a material adverse effect on its business, results of operations, and financial position. Also, if the Company’s plan of reorganization is not confirmed on a timely basis, the Federal Reserve or the FDIC could take action to require the Company to divest its interest in CIT Bank or continue to limit access to CIT Bank by the Company or its creditors. No such action regarding CIT Bank has been taken to date.

On July 16, 2009, the FDIC and the Utah Department of Financial Institutions (the “UDFI”) each issued an order to cease and desist to CIT Bank. These orders were in connection with the diminished liquidity of CIT and not reflective of the health of CIT Bank. The Company does not believe that these cease and desist orders will have an immediate adverse impact on CIT Bank. CIT Bank, without admitting or denying any allegations made by the FDIC and UDFI, consented and agreed to the issuances of the FDIC and the UDFI orders (together, the “Orders”). In the long term, the Company will need to obtain some flexibility in developing CIT Bank or continue building a retail branch network in order to complete its transformation to a deposit funded institution.

Each of the Orders directs CIT Bank to take certain affirmative actions, including among other things, ensuring that it does not allow any “extension of credit” to CIT or any other affiliate of CIT Bank or engage in any “covered transaction,” declaring or paying any dividends or other reductions in capital and from increasing the amount of “Brokered Deposits” above the $5.527 billion held as of July 16, 2009, without the prior written consent of the FDIC and the UDFI. Since the receipt of the Orders, we have been originating new corporate finance business outside of the bank operations. Further, on August 14, 2009, CIT Bank

51


provided to the FDIC and the UDFI a contingency plan that ensures the continuous, satisfactory servicing of CIT Bank’s loans if CIT is unable to perform such servicing. Both Orders prohibit making payments that represent a reduction in capital.

On August 12, 2009, the Company entered into a Written Agreement (the “Written Agreement”) between the Company and the Federal Reserve Bank of New York (the “Reserve Bank”). The Written Agreement requires regular reporting to the Reserve Bank, the submission of plans related to corporate governance, credit risk management, capital, liquidity and funds management, the Company’s business and the review and revision, as appropriate, of the Company’s consolidated allowances for loan and lease losses methodology. Prior written approval by the Reserve Bank is required for payment of dividends and distributions, incurrence of debt, other than in the ordinary course of business, and the purchase or redemption of stock. The Company has obtained approval of the Reserve Bank in connection with the issuance of the New Notes contemplated in the Offering Memorandum and Disclosure Statement.

The Written Agreement requires notifying the Reserve Bank prior to the appointment of new directors or senior executive officers, and restrictions on indemnifications and severance payments. Regarding the pending changes to the board of directors as outlined in the Offering Memorandum and Disclosure Statement, the candidates recommended by the Steering Committee or other bondholders that are approved by the Nominating and Governance Committee of the board of directors will be reviewed with the Federal Reserve Bank of New York.

Pursuant to the Written Agreement, the board of directors of the Company appointed a special compliance committee to monitor and coordinate the Company’s compliance with the Written Agreement. The Company submitted a capital plan and a liquidity plan, as well as a draft of the recapitalization plan, on August 27, 2009, and its credit risk management plan on October 8, 2009 as required by the Written Agreement. Further, the Company has prepared and submitted its corporate governance plan and its business plan to the Federal Reserve Bank of New York on October 26, 2009. The Company is continuing to provide periodic reports to the Federal Reserve Bank of New York as required by the Written Agreement. The Written Agreement will not be affected by the consummation of the Plan of Reorganization.

Our consolidated Tier 1 and Total Capital Ratios were 7.6% and 11.6% at September 30, 2009, down from 8.8% and 12.8% at June 30, 2009. During the quarter we reduced risk-weighted assets to $68 billion from $70 billion at June 30, 2009.

At September 30, 2009, assets at CIT Bank totaled $9.4 billion, down from $9.9 billion at June 30, 2009. Deposits totaled $5.2 billion, down from $5.4 billion at June 30, 2009. For the nine months ended September 30, 2009, the bank recorded net income of $17 million, and total capital ended at $1.8 billion. CIT Bank’s Tier 1 and Total Capital Ratios were 46.2% and 47.3% at September 30, 2009, up from 38.4% and 39.7% at June 30, 2009, respectively.


FINANCIAL PERFORMANCE REVIEW

The third quarter and nine months performances reflect the liquidity constraints that we have been working under, coupled with the weak economic environment that has weighed heavily on our credit quality, resulting in losses of $1.1 billion, $2.74 per share, for the September quarter, and $3.2 billion, $8.08 per share, year to date.

The third quarter included the following noteworthy items:

52


In addition to these quarterly items, previous 2009 noteworthy items included:

     Second Quarter:

     First Quarter:

The weak economic environment prevalent throughout 2009 has directly impacted our credit costs. The provision for credit losses and non-accrual accounts and charge-offs increased from the prior quarter. In light of these trends, we have increased our reserve for credit losses by $267 million for the year. We expect non-accrual loans and charge-off levels to remain elevated through at least the remainder of 2009.

The interest margin declined in the third quarter, impacted by increased secured borrowing costs, joint venture termination premium adjustment and losses on terminated derivatives no longer qualifying for hedge accounting.

Salaries and general operating expenses are below prior year levels but increased from last quarter as lower employee costs were offset by higher professional fees associated with the previously mentioned restructuring initiatives.

From a segment perspective, during 2009:

53


particularly the railcar leasing industry, has been hit harder during this economic downturn, reflected by declines in rail car utilization and lease rates.


Selected Financial Data (dollars in millions, except per share data)

  Quarters Ended
  Nine Months Ended September 30,
 
  September 30,
2009
  June 30,
2009
  September 30,
2008
  2009
  2008
 
Selected Income Statement Data                              
Net interest revenue $ (137.2 ) $ (19.1 ) $ 142.4   $ (173.8 ) $ 469.6  
Provision for credit losses   (701.8 )   (588.5 )   (210.3 )   (1,825.7 )   (609.2 )
Total other income   304.9     274.7     634.9     1,242.8     1,863.8  
Total other expenses   (532.3 )   (1,272.9 )   (1,074.4 )   (2,249.8 )   (2,499.6 )
Loss from continuing                              
operations   (1,033.3 )   (1,618.5 )   (301.1 )   (2,994.1 )   (493.9 )
Loss attributable to                              
common stockholders   (1,074.5 )   (1,679.4 )   (317.3 )   (3,157.1 )   (2,658.9 )
Average number of                              
common shares - diluted                              
(thousands)   392,195     390,535     285,509     390,614     247,191  
Performance Ratios                              
Net finance revenue(1) as                              
a percentage of AEA   0.35 %   1.10 %   2.20 %   0.86 %   2.27 %
Return on AEA   (7.17 )%   (10.97 )%   (2.02 )%   (6.88 )%   (1.13 )%
Per Common Share Data                              
Diluted earnings per                              
share $ (2.74 ) $ (4.30 ) $ (1.11 ) $ (8.08 ) $ (10.76 )
Tangible book value per                              
common share(2) $ 4.91   $ 7.48   $ 13.84              
Outstanding common                              
shares (in millions)   392.1     392.1     285.5              
Financial Ratios                              
Tier I capital   7.6 %   8.8 %   N/A              
Total capital   11.6 %   12.8 %   N/A              
Tangible common equity                              
(TCE) ratio(3)   2.8 %   4.1 %   4.9 %            
Selected Balance Sheet Data                              
Finance receivables $ 45,280.9   $ 48,730.3   $ 54,534.0              
Allowance for loan losses   (1,363.2 )   (1,538.4 )   (855.7 )            
Operating lease                              
equipment, net   13,233.6     13,380.1     12,359.5              
Total assets   69,188.6     71,019.2     80,845.3              
Deposits   5,233.7     5,378.7     2,248.3              
Total Long-term                              
borrowings   54,745.3     54,087.6     65,664.3              
Total Common                              
Stockholders’ Equity   1,927.0     2,932.2     4,641.0              
Total Equity   5,120.9     6,118.0     5,716.0              

(1)      Net finance revenue is the sum of net interest revenue plus rentals on operating leases less depreciation on operating lease equipment.
(2)      The 2009 balances exclude the potential dilution related to a warrant to purchase approximately 88.7 million common shares at an initial price of $3.94.
(3) TCE equals total common stockholders’ equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets.

54





Quarterly Average Balances(1)  and Associated Income (dollars in millions)

  September 30, 2009
  June 30, 2009
  September 30, 2008
 
  Average
Balance
   Interest
   Average
Rate (%)
  Average
Balance
   Interest
   Average
Rat
e (%)
  Average
Balance
   Interest
   Average
Rate (%)
 
Deposits with banks $ 5,433.7   $ 6.3   0.46 % $ 4,826.4   $ 6.3   0.52 % $ 7,464.3   $ 54.5   2.92 %
                                                 
Investments(2)   435.1     0.7   0.64 %   475.0     1.7   1.43 %   454.2     0.9   0.79 %
Loans and leases                                                
(including held for                                                
sale)(3)(4)                                                
                                                 
   U.S.   39,513.1     377.3   3.97 %   41,946.2     438.4   4.46 %   43,938.2     627.9   6.18 %
                                                 
   Non-U.S.   8,271.3     172.3   8.36 %   8,519.6     168.1   7.92 %   10,771.3     224.4   8.36 %
 
  
    
  
    
  
    
Total loans and leases(3)   47,784.4     549.6   4.75 %   50,465.8     606.5   5.08 %   54,709.5     852.3   6.63 %
 
  
    
  
    
  
    
Total interest earning                                                
assets / interest                                                
income(3)(4)   53,653.2     556.6   4.27 %   55,767.2     614.5   4.63 %   62,628.0     907.7   6.12 %
 
  
    
  
    
  
    
Operating lease                                                
equipment, net(5)                                                
   U.S. Operating lease                                                
   equipment, net(5)   6,266.0     71.3   4.55 %   6,327.0     67.6   4.27 %   6,250.9     88.3   5.65 %
   Non-U.S. operating lease                                                
   equipment, net(5)   7,003.2     117.8   6.73 %   6,913.3     119.3   6.90 %   6,325.6     119.2   7.54 %
 
  
    
  
    
  
    
Total operating lease                                                
equipment, net(2)   13,269.2     189.1   5.70 %   13,240.3     186.9   5.65 %   12,576.5     207.5   6.60 %
 
  
    
  
    
  
    
Total earning assets(3)   66,922.4   $ 745.7   4.56 %   69,007.5   $ 801.4   4.83 %   75,204.5   $ 1,115.2   6.20 %
 
  
    
  
    
  
    
Non interest earning                                                
assets                                                
   Cash due from banks   356.4               331.0               480.2            
   Allowance for loan losses   (1,485.8 )             (1,366.5 )             (795.8 )          
   All other non-interest                                                
   earning assets(6)   5,428.7               6,006.2               7,995.0            
 
         
         
         
Total Average Assets $ 71,221.7             $ 73,978.2             $ 82,883.9            
 
         
         
         
Average Liabilities                                                
Borrowings                                                
   Deposits $ 5,406.4   $ 45.8   3.39 % $ 4,276.9   $ 37.4   3.50 % $ 1,709.0   $ 22.0   5.15 %
   Short-term borrowings                           29.4     0.3   4.08 %
   Long-term borrowings   55,553.5     648.0   4.67 %   56,588.3     596.2   4.21 %   66,552.5     743.0   4.47 %
 
  
    
  
    
  
    
Total interest-bearing                                                
liabilities   60,959.9   $ 693.8   4.55 %   60,865.2   $ 633.6   4.16 %   68,290.9   $ 765.3   4.48 %
 
  
    
  
    
  
    
U.S. credit balances of                                                
factoring clients   1,462.8               2,657.0               3,267.4            
Non-U.S. credit balances                                                
of factoring clients   28.1               32.2               35.9            
Non-interest bearing liabilities,                                                
noncontrolling interests                                                
and shareholders’ equity                                                
Other liabilities   2,930.6               3,257.6               5,199.3            
Noncontrolling interests   43.6               43.0               53.4            
Stockholders’ equity   5,796.7               7,123.2               6,037.0            
 
         
         
         
Total Average Liabilities                                                
and Stockholders’                                                
Equity $ 71,221.7             $ 73,978.2             $ 82,883.9            
 
         
         
         
                                                 
Net revenue spread             0.01 %             0.67 %             1.72 %
Impact of non-interest                                                
bearing sources(6)             0.31 %             0.34 %             0.23 %
           
           
           
 
Net revenue/yield on                                                
earning assets(3)       $ 51.9   0.32 %       $ 167.8   1.01 %       $ 349.9   1.95 %
      
  
      
  
      
  
 

55



Nine Month Average Balances(1)  and Associated Income (dollars in millions)

  September 30, 2009
  September 30, 2008
 
  Average
Balance
   Interest    Average
Rate (%)
  Average
Balance
   Interest    Average
Rate (%)
 
 
 
 
 
 
 
 
Deposits with banks $ 5,776.0   $ 22.3   0.51 % $ 7,194.7   $ 157.3   2.92 %
Investments(2)   462.8     3.7   1.07 %   427.1     5.7   1.78 %
Loans and leases (including held for sale)(3)(4)                                
   U.S.   41,684.7     1,277.4   4.31 %   44,664.8     1,959.7   6.35 %
   Non-U.S.   8,420.3     507.3   8.06 %   11,006.0     691.4   8.41 %
 
 
     
 
     
Total loans and leases(3)   50,105.0     1,784.7   4.97 %   55,670.8     2,651.1   6.78 %
 
 
     
 
     
Total interest earning assets / interest income(3)(4)   56,343.8     1,810.7   4.46 %   63,292.6     2,814.1   6.28 %
 
 
     
 
     
Operating lease equipment, net(5)                                
   U.S. Operating lease equipment, net(5)   6,285.6     222.7   4.72 %   6,193.5     279.5   6.02 %
   Non-U.S. operating lease equipment, net(5)   6,835.0     346.5   6.76 %   6,378.4     352.3   7.36 %
 
 
     
 
     
Total operating lease equipment, net(2)   13,120.6     569.2   5.78 %   12,571.9     631.8   6.70 %
 
 
     
 
     
Total earning assets (3)   69,464.4   $ 2,379.9   4.72 %   75,864.5   $ 3,445.9   6.35 %
 
 
     
 
     
Non interest earning assets                                
   Cash due from banks   403.9               519.8            
   Allowance for loan losses   (1,319.2 )             (704.0 )          
   All other non-interest earning assets(6)   6,028.6               12,425.4            
 
         
         
Total Average Assets $ 74,577.7             $ 88,105.7            
 
         
         
Average Liabilities                                
Borrowings                                
   Deposits $ 3,971.5   $ 107.6   3.61 % $ 2,000.0   $ 76.9   5.13 %
   Short-term borrowings               1,012.0     31.9   4.20 %
   Long-term borrowings   58,070.4     1,876.9   4.31 %   67,247.8     2,235.7   4.43 %
 
 
     
 
     
Total interest-bearing liabilities   62,041.9   $ 1,984.5   4.26 %   70,259.8   $ 2,344.5   4.45 %
 
 
     
 
     
U.S. credit balances of factoring clients   2,193.7               3,521.7            
Non-U.S. credit balances of factoring clients   32.6               38.0            
Non-interest bearing liabilities, noncontrolling interests and                                
shareholders’ equity                                
   Other liabilities   3,382.6               7,434.1            
   Noncontrolling interests   44.2               54.7            
   Stockholders’ equity   6,882.7               6,797.4            
 
         
         
Total Average Liabilities and Stockholders’ Equity $ 74,577.7             $ 88,105.7            
 
         
         
Net revenue spread             0.46 %             1.90 %
Impact of non-interest bearing sources(6)             0.32 %             0.13 %
         
         
 
Net revenue/yield on earning assets(3)       $ 395.7   0.78 %       $ 1,101.4   2.03 %
     
 
     
 
 

(1)      The average balances presented are derived based on month end balances during the year. Tax exempt income was not significant in any of the years presented.
 
(2)      Investments are included in “Other Assets” on the Consolidated Balance Sheets and do not include ‘retained interests in securitizations’ as revenues from these are part of “other income”. Average yields reflect average historical cost.
 
(3)      The rate presented is calculated net of average credit balances for factoring clients.
 
(4)      Non-accrual loans and related income are included in the respective categories.
 
(5)      Operating lease rental income is a significant source of revenue; therefore, we have presented the net revenues.
 
(6)      The 2008 rates reflect the weighting impact of the ‘Assets of discontinued operation’ as part of the non-earning asset denominator while not including any earnings associated with these assets.

56




NET FINANCE REVENUE

The following tables present management’s view of the consolidated margin and includes the net interest spread we make on loans plus the net spread on the equipment we lease, in dollars and as a percent of average earning assets. Average earning assets in the presentation below are less than comparable balances in the preceding table due to the inclusion of credit balances of factoring clients and the exclusion of deposits with banks and other investments. Factors contributing to the decreases in net finance revenue in dollars and as a percent of average earning assets as compared to the prior year amounts included higher funding costs, lower asset yields, lower asset levels and higher costs for maintaining liquidity reserves.


Net Finance Revenue (dollars in millions)

    Quarter Ended
Nine Months Ended
  September 30,
2009

June 30,
2009

September 30,
2008

September 30,
2009

September 30,
2008

Interest income $ 556.6   $ 614.5   $ 907.7   $ 1,810.7   $ 2,814.1  
Rental income on operating leases   471.7     473.5     492.2     1,420.4     1,491.2  
 
 
 
 
 
 
  Finance revenue   1,028.3     1,088.0     1,399.9     3,231.1     4,305.3  
Less: interest expense   (693.8 )   (633.6 )   (765.3 )   (1,984.5 )   (2,344.5 )
      Depreciation on operating lease equipment   (282.6 )   (286.6 )   (284.7 )   (851.2 )   (859.4 )
 
 
 
 
 
 
  Net finance revenue $ 51.9   $ 167.8   $ 349.9   $ 395.4   $ 1,101.4  
 
 
 
 
 
 
Average Earnings Assets (“AEA”) $ 59,947.5   $ 61,261.4   $ 63,742.6   $ 61,202.0   $ 64,594.6  
 
 
 
 
 
 
As a % of AEA:                              
Interest income   3.71 %   4.01 %   5.70 %   3.94 %   5.81 %
Rental income on operating leases   3.15 %   3.09 %   3.09 %   3.09 %   3.07 %
 
 
 
 
 
 
  Finance revenue   6.86 %   7.10 %   8.79 %   7.03 %   8.88 %
Less: interest expense   (4.63 )%   (4.13 )%   (4.80 )%   (4.32 )%   (4.84 )%
      Depreciation on operating lease equipment   (1.88 )%   (1.87 )%   (1.79 )%   (1.85 )%   (1.77 )%
 
 
 
 
 
 
  Net finance revenue   0.35 %   1.10 %   2.20 %   0.86 %   2.27 %
 
 
 
 
 
 
As a % of AEA by Segment:                              
Corporate Finance   2.51 %   2.42 %   2.72 %   2.34 %   2.79 %
Transportation Finance   2.13 %   2.00 %   2.70 %   2.13 %   2.81 %
Trade Finance   2.19 %   2.95 %   3.78 %   2.43 %   4.06 %
Vendor Finance   1.97 %   3.15 %   4.08 %   2.82 %   4.12 %
  Commercial Segments   2.24 %   2.50 %   3.12 %   2.40 %   3.20 %
Consumer   (0.05 )%   (0.49 )%   1.20 %   (0.26 )%   1.08 %
  Consolidated net finance revenue   0.35 %   1.10 %   2.20 %   0.86 %   2.27 %

57


The variances in the net finance revenue percentages are summarized in the table below:


Change in Net Finance Revenue as a % of AEA , periods ended September 30, 2009

  Quarter ended
Nine months ended
 
Net finance revenue - prior quarter / year 1.10 % 2.27 %
Secured borrowing costs (0.57 ) (0.45 )
Terminated cash flow swaps (0.35 ) (0.12 )
Joint venture termination premium adjustment (0.30 ) (0.10 )
TRS termination fee 0.13   (0.04 )
Asset/liability resets 0.30   (0.06 )
Lower operating lease margins   (0.24 )
Increased non-accrual accounts   (0.11 )
Maintaining cash balances   (0.08 )
Dell conduit restructure 0.05   (0.13 )
Other (0.01 ) (0.08 )
 
 
 
Net finance revenue - current quarter / year 0.35 % 0.86 %
 
 
 

Net finance revenue of $ 51.9 million was 69% below the 2009 second quarter and 85% below the 2008 third quarter, on a smaller asset base, as the Company continues to manage liquidity and limit origination volumes. The decline from the 2009 second quarter is mostly due to incremental borrowing costs associated with the $3 billion secured credit facility entered into during the quarter, acceleration of the amortization of the accumulated losses in the Other Comprehensive Loss account related to un-wound terminated cash flow swaps and a premium adjustment recognized on the termination of the Snap-on vendor agreement, partially offset by the favorable interest rate resets on our floating rate assets and liabilities, and non-recurring costs recognized in the prior quarter (TRS termination fee and Dell conduit restructuring). As a percentage of average earning assets, net revenue decreased to 0.35% from 1.10% in the prior quarter and 2.20% in the prior year quarter.


Net Operating Lease Revenue as a % of Average Operating Leases (AOL) (dollars in millions)

  Quarters ended
Nine months ended
  September 30,
2009

June 30,
2009

September 30,
2008

September 30,
2009

September 30,
2008

Rental income on operating leases   14.22 %   14.30 %   15.65 %   14.43 %   15.82 %
Depreciation on operating lease equipment   (8.52 )%   (8.66 )%   (9.05 )%   (8.65 )%   (9.11 )%
 
 
 
 
 
 
    Net operating lease revenue   5.70 %   5.64 %   6.60 %   5.78 %   6.71 %
 
 
 
 
 
 
Average Operating Lease Equipment (“AOL”) $ 13,269.2   $ 13,240.3   $ 12,576.5   $ 13,120.6   $ 12,571.9  
 
 
 
 
 
 

58


Net operating lease revenue for the 2009 third quarter of $189.1 million was slightly higher than last quarter and down 9% from the 2008 third quarter, while year to date it is down 10%. The slight improvement from prior quarter is due to higher Aerospace remarketing rentals and lower Vendor depreciation due to portfolio run-off, partially offset by lower Rail rentals. Rail lease rates and utilization continue to be under pressure as carriers and shippers continue to reduce their fleets and return cars. At September 30, 2009, rail utilization decreased to 90%. In aerospace, the remaining 2009 aircraft order book and 55% of the aircraft in our 2010 delivery order book have been placed on lease. See “Concentrations – Operating Leases” for additional information regarding operating lease assets.


CREDIT METRICS

Third quarter credit metrics, including charge-offs and loan loss reserve levels, continue to reflect the impacts on the loan portfolio of the ongoing economic weakness globally.

Finance receivables are reviewed periodically to determine the probability of loss. Prior to the third quarter of 2009 charge-offs were taken after considering such factors as the borrower’s financial condition and the value of the underlying collateral and guarantees and the status of collection activities. This quarter we accelerated certain charge-offs on loans where we had previously provided specific reserves. The acceleration of charge-offs on certain loans had no material impact on the provision for credit losses. These accelerated charge-offs were taken against the existing related specific reserves on impaired loans, pursuant to the Written Agreement that the Company entered into on August 12, 2009 with the Federal Reserve Bank, reflecting the view that losses on impaired loans should be recognized as charge-offs prior to final resolution. During the third quarter, approximately $500 million in accelerated charge-offs were taken, principally on Corporate Finance accounts that were specifically reserved as of June 30, 2009, or would have been specifically reserved during the third quarter under our prior practices.

Consolidated net charge-offs before such acceleration of charge-offs totaled 3.14% up from 2.81% in the June 2009 quarter. Consolidated charge-offs including the aforementioned change in timing of charge-offs were 7.34% of average finance receivables.

Our Corporate Finance business continues to be the most severely impacted by the weak global economic environment due to a higher proportion of leveraged cash flow loans and weaker performance in industries most impacted by the economic slowdown particularly those related to discretionary spending, such as print, media and gaming, as well as commercial real estate and energy. For the nine months ended September 30, 2009, nearly 85% of CIT’s commercial losses were in these sectors.

In line with these trends and adding an element to the reserve for probable higher charge-offs from the Company’s planned restructuring, unallocated reserves were increased $482 million for the nine months ended September 30, 2009 ($273 million in the third quarter). The change in timing of charge-offs described above decreased the overall reserve as specific reserves on loans classified as impaired at June 30, 2009 were charged-off during the quarter. Overall, specific reserves at September 30, 2009 declined to $134.9 million from $573.2 million at June 30, 2009. The total reserve for credit losses declined to $1,363.2 million at September 30, 2009 from $1,538.4 million at June 30, 2009 with the September reserve containing a higher proportion of general reserve than prior quarters. The overall reserve remained slightly over 3% of finance receivables.

The activity in the Reserve and Provision for Credit Losses is shown in the table below:

59



Reserve and Provision for Credit Losses for the quarters ended, (dollars in millions)

  Quarters Ended
Nine Months Ended
  September 30,
2009

June 30,
2009

September 30,
2008

September 30,
2009

September 30,
2008

Reserve balance - beginning of period $ 1,538.4   $ 1,316.3   $ 780.8   $ 1,096.2   $ 574.3  
 
 
 
 
 
 
Provision for credit losses   701.8     588.5     210.3     1,825.7     609.2  
Reserves relating to foreign currency translation, other(1)   (0.9 )   (10.5 )   (7.9 )   (13.6 )   (15.4 )
 
 
 
 
 
 
Net additions to the reserve for credit losses   700.9     578.0     202.4     1,812.1     593.8  
 
 
 
 
 
 
Gross charge-offs                              
   Corporate Finance   686.5     210.5     42.6     1,087.5     111.1  
   Transportation Finance       1.2         3.4      
   Trade Finance   45.3     14.8     18.1     78.0     40.3  
   Vendor Finance   47.5     44.0     26.0     111.5     44.3  
   Consumer   37.2     33.5     31.2     109.5     93.7  
   Foreign - commercial(2)   82.2     71.8     29.7     211.8     72.1  
 
 
 
 
 
 
Total gross charge-offs   898.7     375.8     147.6     1,601.7     361.5  
 
 
 
 
 
 
Recoveries                              
   Corporate Finance   1.7     2.3     4.0     5.8     10.7  
   Transportation Finance           0.7     0.9     1.3  
   Trade Finance   1.8     0.6     0.5     2.6     1.5  
   Vendor Finance   5.9     6.0     6.0     16.6     15.1  
   Consumer   1.5     2.2     1.3     5.8     4.8  
   Foreign - commercial(2)   11.7     8.8     7.6     24.9     15.7  
 
 
 
 
 
 
Total recoveries   22.6     19.9     20.1     56.6     49.1  
 
 
 
 
 
 
Net Credit losses   876.1     355.9     127.5     1,545.1     312.4  
 
 
 
 
 
 
Reserve balance - end of period $ 1,363.2   $ 1,538.4   $ 855.7   $ 1,363.2   $ 855.7  
 
 
 
 
 
 
Reserve for credit losses as a percentage of finance receivables                     3.01 %   1.57 %
Reserve for credit losses as a percentage of non-accrual loans                     51.7 %   85.8 %
Reserve for credit losses (excluding specific reserves) as a
percentage of finance receivables, excluding guaranteed
student loans
                    3.34 %   1.32 %
Net charge-offs as a percentage of average finance receivables                     4.11 %   0.76 %

(1)     

Amounts reflect reserve reductions for portfolio sales and reserves established for estimated losses inherent in portfolios acquired through purchases or business combinations as well as foreign translation adjustments.

   
(2)      Reflects total foreign balances of commercial segments.

Our third quarter reserving actions reflect, in large part, the continuing impact on the three sectors noted earlier, and also take into account continued elevated defaults in most other sectors. It is our objective to actively manage our portfolio to mitigate the severity of losses.

The consolidated reserve for credit losses is intended to provide for losses inherent in the portfolio based on estimates of the ultimate outcome of collection efforts, realization of collateral values, if applicable, and other pertinent factors such as estimation risk. In conjunction with this, we may make additions or reductions to the consolidated reserve level depending on changes to economic conditions or credit metrics, including non-accrual loans, or other events affecting obligors or industries. The total reserve for credit losses of $1,363.2 million (3.01% of finance receivables) at September 30, 2009 represents management’s best estimate of credit losses inherent in the portfolio based on currently available information.

60


See Risk Factors for additional disclosure on approach and reserve adequacy.

The reserve for credit losses includes three key components: (1) specific reserves for loans that are impaired, (2) reserves for estimated losses incurred in the portfolio based on historic and projected charge-offs, and (3) reserves for incurred estimated losses in the portfolio based upon economic risks, industry and geographic concentrations and other factors.


Net Charge-offs (charge-offs net of recoveries)
(dollars in millions, % as a percentage of average owned finance receivables)

  Quarters Ended
Nine Months Ended
  September 30,
2009

June 30,
2009

September 30,
2008

September 30,
2009

September 30,
2008

Owned                                                  
Corporate Finance $ 711.3    15.63 % $ 235.4    4.78 % $ 40.8   0.77 % $ 1,157.9    7.93 % $ 105.5   0.65 %
Transportation Finance         1.2   0.19 %   (0.7 ) (0.11 )%   2.5   0.13 %   (1.3 ) (0.07 )%
Trade Finance   43.4   3.99 %   14.2   1.09 %   17.7   1.08 %   80.0   2.14 %   38.8   0.77 %
Vendor Finance   85.7   3.11 %   73.8   2.63 %   39.8   1.46 %   201.0   2.41 %   80.5   1.00 %
 
     
     
     
     
     
     Commercial Segments   840.4   9.34 %   324.6   3.36 %   97.6   0.95 %   1,441.4   5.04 %   223.5   0.71 %
Consumer   35.7   1.22 %   31.3   1.04 %   29.9   0.93 %   103.7   1.15 %   88.9   0.92 %
 
     
     
     
     
     
Total $ 876.1   7.34 % $ 355.9   2.81 % $ 127.5   0.94 % $ 1,545.1   4.11 % $ 312.4   0.76 %
 
     
     
     
     
     

Non-accruing Loans as a Percentage of Finance Receivables September 30, 2009
June 30, 2009
December 31, 2008
Corporate Finance $ 1,982.2 11.73 % $ 1,708.0 9.45 % $ 946.6 4.56 %
Transportation Finance   8.6 0.37 %   10.7 0.44 %   24.3 0.92 %
Trade Finance   162.5 4.18 %   144.2 2.85 %   81.5 1.35 %
Vendor Finance   285.5 2.70 %   268.2 2.37 %   168.1 1.50 %
 
   
   
   
    Commercial Segments   2,438.8 7.24 %   2,131.1 5.78 %   1,220.5 3.00 %
Consumer   197.1 1.70 %   196.3 1.65 %   194.1 1.56 %
 
   
   
   
Total $ 2,635.9 5.82 % $ 2,327.4 4.78 % $ 1,414.6 2.66 %
 
   
   
   

As previously mentioned, the accelerated recognition of charge-offs of specifically reserved for accounts increased charge-offs for all Commercial Segments except Transportation Finance during the quarter.

Corporate Finance charge-offs increased significantly to $711 million during the third quarter of 2009 from $235 million for the 2009 second quarter with approximately $450 million related to the refinement in the charge-off process. Losses remain concentrated in three sectors: media, commercial real estate, and energy. See Concentrations section for additional information. Although we remain selectively active in the media and energy markets, we ceased extending credit to the commercial real estate sector in late 2007 and are managing that portfolio as a run-off portfolio through a centralized team of dedicated professionals. Approximately 73% of the charge-offs for the nine months ended September 30, 2009, were on cash flow type loans, while 16% were related to real estate, and the remaining were asset-based or equipment loans. The increase in Corporate Finance non-accruing loans was largely in the media/publishing, real estate, and small business lending portfolios reflecting the continued weakness in those sectors and is a key factor in our decision to continue increasing the general reserve.

61


There were no Transportation Finance charge-offs in the third quarter. Although credit metrics, including non-accruals, in this segment remain strong, it is anticipated the current economic climate will continue to put pressure on the underlying operators and clients.

Trade Finance net-charge-offs increased to $43 million for the September 2009 quarter from $14 million last quarter, principally due to the aforementioned acceleration of charge-off recognition of specifically reserved accounts. Specific reserves declined from $31 million at June 30, 2009 to $3 million at September 30, 2009. Net charge-offs as a percentage of average finance receivables were also impacted by lower average finance receivables (proactive liquidity management and lower demand) due to a continuing effort to selectively reduce credit exposure to weaker participants in this industry. The increase in Trade Finance non-accruing loans is related to one large client, which is well collateralized and unlikely to result in charge-offs. It is our current expectation that the retail environment will remain challenged into 2010.

Vendor Finance net charge-offs were up $12 million after a $32 million increase during the second quarter, mostly due to the aforementioned acceleration of charge-off recognition of specifically reserved accounts. Given the focus on smaller balance, higher volume business in this portfolio, the refinement in charge-off process had less of an impact on Vendor Finance increasing charge-offs this quarter compared to the second quarter by approximately $25 million. Non-accrual loans increased from last quarter as the economic environment continued to impact portfolio performance. The impact was broad based but continued to be particularly severe in the US and Europe.

Consumer charge-offs were up slightly from the prior quarter and prior year due to the continued liquidation of these portfolios. Management anticipates that these metrics will fluctuate over the coming quarters as the underlying portfolios season and more accounts enter payment status.


Finance receivables (dollars in millions)

  September 30, 2009
June 30, 2009
December 31, 2008
Corporate Finance $ 16,886.3    $ 18,053.6    $ 20,768.8
Transportation Finance   2,357.7     2,424.1     2,647.6
Trade Finance   3,889.2     5,055.8     6,038.0
Vendor Finance   10,561.1     11,331.6     11,199.6
 
 
 
     Commercial Segments   33,694.3     36,865.1     40,654.0
Consumer   11,586.6     11,865.2     12,472.6
 
 
 
Total $ 45,280.9   $ 48,730.3   $ 53,126.6
 
 
 
                 
Credit Reserves for Finance Receivables                
Commercial $ 1,103.9   $ 1,295.5   $ 857.9
Consumer   259.3     242.9     238.3
 
 
 
  $ 1,363.2   $ 1,538.4   $ 1,096.2
 
 
 

62



Non-accrual and Past Due Loans (dollars in millions)


  September 30, 2009
June 30, 2009
December 31, 2008
Non-accrual Loans                  
U.S. $ 2,208.0    $ 1,890.6    $ 1,081.7   
Foreign   230.8     240.5     138.8  
 
 
 
 
   Commercial Segment   2,438.8     2,131.1     1,220.5  
Consumer   197.1     196.3     194.1  
 
 
 
 
Non accrual loans $ 2,635.9   $ 2,327.4   $ 1,414.6  
 
 
 
 
 
Accruing loans past due 90 days or more(1) $ 579.2   $ 637.8   $ 669.6  
 
 
 
 

(1)      The accruing loans past due 90 days or more primarily relate to student loans.

We anticipate that the challenging economic and market environment impacting our clients will persist for the remainder of 2009 and into 2010. As a result, we expect continued weakness across a broad dispersion of industry sectors as our customers and clients face weak demand for their products and increased cost of capital.


OTHER INCOME


Other income (dollars in millions)
  Quarters Ended
Nine Months Ended
  September 30,
2009

June 30
2009

September 30,
2008

September 30,
2009

September 30,
2008

Rental income on operating leases $ 471.7   $ 473.5   $ 492.2   $ 1,420.4   $ 1,491.2  
Other:                              
   Fees and commissions   97.9     4.5     69.7     133.0     208.8  
   Factoring commissions   41.4     46.8     52.3     132.3     148.4  
   Gains on sales of leasing equipment   21.2     20.4     26.8     58.0     130.6  
   Gains (losses) on securitizations   0.6             0.6     (7.1 )
   Change in estimated fair value TARP Warrant liability       (25.2 )       70.6      
   Investment (losses)   (10.3 )   (30.1 )   (19.7 )   (40.7 )   (19.2 )
   Valuation allowance for receivables held for sale   (10.5 )   (37.9 )       (51.7 )   (103.9 )
   (Losses) gains on loan sales and syndication fees   (22.1 )