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 June 30, 2010    

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, a non-accelerated filer or a smaller reporting company. 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|

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes |X| No |_|

As of July 30, 2010 there were 200,257,088 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 6-26
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
and
 
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 27-65
ITEM 4. Controls and Procedures 65

Part Two—Other Information:
ITEM 1. Legal Proceedings 66
ITEM 1A.    Risk Factors 67
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 67
ITEM 6. Exhibits 67
Signatures 70

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)
  June 30,          December 31,
  2010       2009
 
     
Assets            
Cash and due from banks $ 1,060.7     $ 1,289.5
Interest bearing deposits, including restricted balances of $1,179.0 at June 30, 2010 and            
$1,420.7 at December 31, 2009(1)   9,605.7       8,536.4
Trading assets at fair value – derivatives   216.1       44.1
Assets held for sale(1)   572.5       343.8
Loans (see Note 3 for amounts pledged)   28,883.2       34,865.8
Allowance for loan losses   (337.8 )    
 

   

Total loans, net of allowance for loan losses(1)   28,545.4       34,865.8
Operating lease equipment, net (see Note 3 for amounts pledged)(1)   10,950.7       10,910.0
Unsecured counterparty receivable   818.7       1,094.5
Goodwill   239.4       239.4
Intangible assets, net   168.5       225.1
Other assets   2,739.1       2,480.5
 

   

Total Assets $ 54,916.8     $ 60,029.1
 

   

Liabilities            
Deposits $ 4,708.9     $ 5,218.6
Trading liabilities at fair value – derivatives   46.9       41.9
Credit balances of factoring clients   877.3       892.9
Other liabilities   2,373.3       2,211.3
Long-term borrowings, including $3,396.8 and $4,629.5 contractually due within twelve months            
at June 30, 2010 and December 31, 2009, respectively(1)   38,276.5       43,263.0
 

   

Total Liabilities   46,282.9       51,627.7
 

   

Stockholders’ Equity            
Common stock: $0.01 par value, 600,000,000 authorized            
   Issued: 200,374,631 at June 30, 2010 and 200,035,561 at December 31, 2009   2.0       2.0
   Outstanding: 200,257,088 at June 30, 2010 and 200,035,561 at December 31, 2009            
Paid-in capital   8,419.1       8,398.0
Retained earnings   225.0      
Accumulated other comprehensive loss   (9.7 )    
Treasury stock: 117,543 shares at June 30, 2010 at cost   (4.0 )    
 

   

Total Common Stockholders’ Equity   8,632.4       8,400.0
Noncontrolling minority interests   1.5       1.4
 

   

Total Equity   8,633.9       8,401.4
 

   

Total Liabilities and Equity $ 54,916.8     $ 60,029.1
 

   

(1) The following table presents information on assets and liabilities related to Variable Interest Entities (VIEs) that are consolidated by the Company. The difference between total VIE assets and liabilities represents the Company’s interests in those entities, which were eliminated in consolidation. The assets of the consolidated VIEs will be used to settle the liabilities of those entities and, except for the Company’s interest in the VIEs, are not available to the creditors of CIT or any affiliates of CIT.

Assets             
Interest bearing deposits, including restricted balances of $872.0 at June 30, 2010 and $655.3 at            
December 31, 2009 $ 872.0     $ 655.3
Assets held for sale   312.9       6.6
Total loans, net of allowance for loan losses   13,186.9       13,501.9
Operating lease equipment, net (see Note 3 for amounts pledged)   2,605.7       3,689.8
 

   

Total Assets $ 16,977.5     $ 17,853.6
 

   

Liabilities            
Beneficial interests issued by consolidated VIEs – (classified as long-term borrowings) $ 12,047.1     $ 13,662.7
 

   

Total Liabilities $ 12,047.1     $ 13,662.7
 

   

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 June 30,
      Six Months Ended June 30,
 
       
 
Predecessor          
 
Predecessor
    CIT 2010     CIT 2009       CIT 2010     CIT 2009  
   
   
     
   
 
Interest income                          
   Interest and fees on loans $ 987.2   $ 606.5       $ 2,030.7   $ 1,235.1  
   Interest and dividends on investments   6.3     8.0       11.8     19.0  
 

 

   

 

 
      Interest income   993.5     614.5       2,042.5     1,254.1  
 

 

   

 

 
Interest expense                          
   Interest on long-term borrowings   (784.7 )   (596.2 )     (1,592.4 )   (1,228.9 )
   Interest on deposits   (28.9 )   (37.4 )     (59.0 )   (61.8 )
 

 

   

 

 
      Interest expense   (813.6 )   (633.6 )     (1,651.4 )   (1,290.7 )
 

 

   

 

 
Net interest revenue   179.9     (19.1 )     391.1     (36.6 )
Provision for credit losses   (260.7 )   (588.5 )     (447.3 )   (1,123.9 )
 

 

   

 

 
Net interest revenue, after credit provision   (80.8 )   (607.6 )     (56.2 )   (1,160.5 )
 

 

   

 

 
Other income                          
   Rental income on operating leases   419.7     473.5       837.9     948.7  
   Other   330.6     (198.8 )     462.8     (10.8 )
 

 

   

 

 
      Total other income   750.3     274.7       1,300.7     937.9  
 

 

   

 

 
Total revenue, net of interest expense and credit                          
provision   669.5     (332.9 )     1,244.5     (222.6 )
 

 

   

 

 
Other expenses                          
   Depreciation on operating lease equipment   (179.0 )   (286.6 )     (352.5 )   (568.6 )
   Operating expenses   (277.0 )   (293.9 )     (538.9 )   (456.5 )
   Goodwill and intangible assets impairment charges       (692.4 )         (692.4 )
 

 

   

 

 
      Total other expenses   (456.0 )   (1,272.9 )     (891.4 )   (1,717.5 )
 

 

   

 

 
Income (loss) before provision for income taxes   213.5     (1,605.8 )     353.1     (1,940.1 )
Provision for income taxes   (71.1 )   (12.7 )     (113.6 )   (20.7 )
 

 

   

 

 
Net income (loss) before attribution of noncontrolling                          
interests and preferred stock dividends   142.4     (1,618.5 )     239.5     (1,960.8 )
Loss (income) attributable to noncontrolling interests,                          
after tax   (0.3 )   0.7       (0.1 )   0.2  
 

 

   

 

 
Net income (loss) before preferred stock dividends   142.1     (1,617.8 )     239.4     (1,960.6 )
Preferred stock dividends       (61.6 )         (122.0 )
 

 

   

 

 
Net income (loss) available (attributable) to                          
   common stockholders $ 142.1   $ (1,679.4 )   $ 239.4   $ (2,082.6 )
 

 

   

 

 
                           
Basic earnings (loss) per common share $ 0.71   $ (4.30 )   $ 1.20   $ (5.34 )
Diluted earnings (loss) per common share $ 0.71   $ (4.30 )   $ 1.19   $ (5.34 )
Average number of shares – basic (thousands)   200,075     390,535       200,057     389,741  
Average number of shares – diluted (thousands)   200,644     390,535       200,359     389,741  
Cash dividends per common share                 0.02  

See Notes to Consolidated Financial Statements.

3




CIT GROUP INC. AND SUBSIDIARIES


Consolidated Statement of Stockholders’ Equity (Unaudited) (dollars in millions)
  Common
Stock
   Paid-in
Capital
   Retained
Earnings
    Accumulated
Other
Comprehensive
Income / (Loss)
    Treasury
Stock
   Noncontrolling
Interest in
Subsidiaries
   Total
Stockholders’
Equity
December 31, 2009 $ 2.0  
$
8,398.0   $      $     $     $ 1.4   $ 8,401.4  
                                           


Adoption of new accounting                                                
pronouncement               (14.4 )                            (14.4 )
                                           


Net income               239.4                       0.1     239.5  
Foreign currency translation                                                
adjustments                       (11.4 )                   (11.4 )
Change in fair values of derivatives                                                
qualifying as cash flow hedges                       (0.1 )                   (0.1 )
Unrealized gain on available for sale                                                
equity investments, net                       2.0                     2.0  
                                                 
Minimum pension liability adjustment                       (0.2 )                   (0.2 )
                                           


Total comprehensive income                                             229.8  
                                           


Restricted stock and stock option                                                
expenses         21.1                     (4.0 )           17.1  
 

 

 


 


 


 

 


June 30, 2010 $ 2.0  
$
8,419.1   $ 225.0     $ (9.7 )   $ (4.0 )   $ 1.5   $ 8,633.9  
 

 

 


 


 


 

 


See Notes to Consolidated Financial Statements.

4




CIT GROUP INC. AND SUBSIDIARIES


Consolidated Statements of Cash Flows (Unaudited) (dollars in millions)
  Six Months Ended June 30,
  CIT
2010
        Predecessor CIT
2009

 
Cash Flows From Operations               
Net income (loss) before preferred stock dividends $ 239.4     $ (1,960.6 )
Adjustments to reconcile net income to net cash flows from operations:              
   Provision for credit losses   447.3       1,123.9  
   Net depreciation, amortization and (accretion)   (300.8 )     695.7  
   Goodwill and intangible assets impairment charges         692.4  
   Net (gains) / losses on equipment, receivable and investment sales   (187.6 )     171.9  
   Valuation allowance for assets held for sale         38.0  
   Provision for deferred income taxes   69.6       33.4  
   Decrease in finance receivables held for sale   5.6       11.3  
   Warrant fair value adjustment         (70.6 )
   Gain on debt and debt-related derivative extinguishments         (139.4 )
   (Increase) decrease in other assets   (151.3 )     209.3  
   Increase (decrease) in accrued liabilities and payables   55.9       69.8  
 


 


Net cash flows provided by operations   178.1       875.1  
 


 


Cash Flows From Investing Activities              
Loans extended and purchased   (9,100.5 )     (13,534.3 )
Principal collections of loans and investments   14,029.2       15,724.0  
Proceeds from asset and receivable sales   2,415.6       1,515.2  
Purchases of assets to be leased and other equipment   (616.6 )     (1,057.4 )
Net decrease in short-term factoring receivables   395.1       549.4  
Net proceeds from sale of discontinued operation         44.2  
 


 


Net cash flows provided by investing activities   7,122.8       3,241.1  
 


 


Cash Flows From Financing Activities              
Proceeds from the issuance of term debt   2,156.1       4,145.4  
Repayments of term debt   (7,887.1 )     (13,802.7 )
Net (decrease) increase in deposits   (490.8 )     2,751.9  
Net repayments of non-recourse leveraged lease debt   (14.3 )     (19.7 )
Collection of security deposits and maintenance funds   346.6       516.1  
Repayment of security deposits and maintenance funds   (329.2 )     (459.3 )
Cash dividends paid         (91.3 )
Other         (56.5 )
 


 


Net cash flows used in financing activities   (6,218.7 )     (7,016.1 )
 


 


Increase (decrease) in unrestricted cash and cash equivalents   1,082.2       (2,899.9 )
Unrestricted cash and cash equivalents, beginning of period   8,405.2       6,263.3  
 


 


Unrestricted cash and cash equivalents, end of period $ 9,487.4     $ 3,363.4  
 


 


               
Supplementary Cash Flow Disclosure              
Interest paid $ 1,468.3     $ 1,287.7  
Federal, foreign, state and local income taxes paid (refunded), net $ 11.1     $ (67.9 )
Supplementary Non Cash Flow Disclosure              
Net transfer of finance receivables from held for investment to held for sale $ 1,597.8     $ 412.4

The accompanying notes are an integral part of these consolidated financial statements.

5




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


NOTE 1 – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include financial information related to 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 primary beneficiary. CIT is a bank holding company and provides commercial financing and leasing products and other services to small and middle market companies in a wide variety of industries.

On November 1, 2009, CIT Group Inc. (“Predecessor CIT”) and CIT Group Funding Company of Delaware LLC (“Delaware Funding” and together with Predecessor CIT, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”). As a result of the Debtors’ emergence from bankruptcy and implementation of the Modified Second Amended Prepackaged Reorganization Plan of Debtors (the “Plan”) on December 10, 2009 (the “Emergence Date”), CIT Group Inc. (“Successor CIT”) became a new reporting entity for financial reporting purposes, with a new basis in identifiable assets and liabilities assumed, a new capital structure and no retained earnings or accumulated losses. Predecessor CIT’s Consolidated Statements of Operation for the quarter and six months ended June 30, 2009 and Cash Flows for the six months ended June 30, 2009 are not comparable to the consolidated financial statements for the respective 2010 periods and are presented separately from Successor CIT. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (Form 10-K), Note 1 and Note 2 for additional Fresh Start Accounting (“FSA”) and reorganization information.

The terms “CIT” and “Company”, when used with respect to periods commencing after emergence from bankruptcy, are references to Successor CIT and when used with respect to periods prior to emergence, are references to Predecessor CIT. These references include subsidiaries of Successor CIT or Predecessor CIT, unless otherwise indicated or the context requires otherwise.

The consolidated financial statements include effects of adopting FSA upon emergence from bankruptcy, as required by accounting principles generally accepted in the United States of America (“GAAP”). In applying FSA, the Company designated December 31, 2009 as a convenience date (the “Convenience Date”) for recording fair value adjustments to assets, liabilities and equity. Accretion and amortization of certain FSA adjustments are included in the Statement of Operations for the quarter and six months ended June 30, 2010.

These consolidated financial statements, which have been prepared in accordance with the instructions to Form 10-Q, do not include all information and note disclosures required by GAAP. The financial statements in this Form 10-Q have not been audited by an independent registered public accounting firm in accordance with 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. These consolidated financial statements should be read in conjunction with our Form 10-K.

On January 1, 2010, the Company implemented new consolidation accounting guidance related to VIEs. The new guidance eliminated the concept of qualified special purpose entities (“QSPEs”) that were previously exempt from consolidation, and introduced a new framework for determining the primary beneficiary of a VIE. The primary beneficiary of a VIE is required to consolidate the assets and liabilities of the VIE. Under the new guidance, the primary beneficiary is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Consolidation eliminated the retained interest and increased Cash ($105 million), Loans ($821 million), Allowance for loan losses ($40 million), Long-term borrowings ($738 million), and Other liabilities ($17 million) as of January 1, 2010. Equity decreased by approximately $14 million as of January 1, 2010.

All significant inter-company accounts and transactions have been eliminated. 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 an ability to exercise significant influence over operations and financial decisions using the equity method of accounting. These investments are included in Other Assets and the Company’s proportionate share of net income or loss is included in Other Income.

The preparation of 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. Some of the more significant estimates include: fresh start accounting fair values; valuation of deferred tax assets; lease residual values and depreciation of operating lease equipment; and allowance for loan losses. Actual results could differ from those estimates and assumptions. Additionally, where applicable, policies conform to accounting and reporting guidelines prescribed by bank regulatory authorities.

6




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


On July 16, 2009, the FDIC and the Utah Department of Financial Institutions (the “UDFI”) each issued cease and desist orders to CIT Bank (together, the “Orders”). The Orders were in connection with the diminished liquidity of Predecessor CIT. CIT Bank, without admitting or denying any allegations made by the FDIC and UDFI, consented and agreed to the issuances of the Orders.

On August 12, 2009, CIT entered into a Written Agreement with the Federal Reserve Bank of New York. The Company continues to provide required periodic reports relating to: corporate governance, credit risk management, capital, liquidity and funds management, business trends, as appropriate, and the allowance for loan losses methodology.

Accounting Pronouncements

On January 1, 2010, the Company adopted Accounting Standards Update 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash. These amendments clarify that the stock portion of a distribution to shareholders, which allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate, is considered a share issuance, will be reflected in earnings per share prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). These amendments were effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. Adoption of these amendments did not materially impact the Company’s financial condition and results of operations.

In January 2010, FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820). This update enhances disclosures about (1) different classes of assets and liabilities measured at fair value, (2) valuation techniques and inputs used, (3) transfers between Levels 1, 2, and 3, and (4) activity in Level 3 fair value measurements. Except for the detailed Level 3 rollforward disclosures, this guidance was adopted and did not have a material impact on the Company’s financial condition and results of operations. Disclosure of activity in Level 3 fair value measurements is effective for fiscal years and interim periods beginning after December 15, 2010. Adoption of this amendment will not materially impact the Company’s financial condition and results of operations.

In March 2010, FASB issued Accounting Standards Update 2010-11, Scope Exception Related to Embedded Credit Derivatives (Topic 815), which clarifies that the only exception to the requirement that an embedded credit derivative feature should be assessed for potential bifurcation and separate accounting applies to the transfer of credit risk in the form of subordination of one financial instrument to another. In addition, this update provides guidance for determining whether other credit derivative features qualify for the scope exception. The amendments in this update are effective at the beginning of the first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this update. Adoption of this update will not materially impact the Company’s financial condition and results of operation.

In April 2010, FASB issued Accounting Standards Update 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset (Topic 310) which provides guidance concerning whether an individual loan that is part of a pool of loans accounted for as a single asset should be removed from the pool upon modifications that would otherwise qualify as a troubled debt restructuring. The guidance in this update is effective (and applied prospectively) for any modification of a loan accounted for within a pool occurring in interim or annual periods beginning on or after July 15, 2010, with earlier application permitted. Upon adoption, a one-time election may be made to terminate prospectively (on a pool-by-pool basis) accounting for loans as a pool; note, though, that such an election does not preclude accounting for future loan acquisitions as a pooled unit of accounting. The adoption of this update will not materially impact the Company’s financial condition and results of operations.

In July 2010, the FASB issued Accounting Standards Update 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which provides guidance that will require enhanced disclosures surrounding the credit characteristics of the Company’s loan portfolio. Under the new guidance, the Company will be required to disclose its accounting policies, the methods it uses to determine the components of the allowance for credit losses, and qualitative and quantitative information about the credit risk inherent in the loan portfolio, including additional information on certain types of loan modifications. For the Company, the new disclosures are effective for the 2010 Annual Report. The new disclosures on the rollforward of the allowance for credit losses and the new disclosures about troubled debt modifications are effective for the first quarter 2011 Form 10-Q. The adoption of this guidance will only affect CIT’s disclosures of loans and not its financial condition or results of operations.

NOTE 2 – LOANS AND RESERVE FOR CREDIT LOSSES

The following table presents loans, direct financing leases and leveraged leases held for investment, by segment based on obligor location:


Loans (dollars in millions)
  June 30, 2010
  December 31, 2009
  Domestic   Foreign   Total   Domestic   Foreign   Total
 
 
 
 
 
 
Corporate Finance $ 7,558.2     $   2,287.5    $ 9,845.7    $ 9,611.2    $ 2,539.1    $ 12,150.3
Transportation Finance   1,349.3     322.0     1,671.3     1,528.7     324.3     1,853.0
Trade Finance   2,259.5     255.1     2,514.6     2,602.6     388.4     2,991.0
Vendor Finance   3,564.4     2,501.7     6,066.1     4,363.8     3,824.0     8,187.8
Consumer   8,766.2     19.3     8,785.5     9,664.3     19.4     9,683.7
 

 

 

 

 

 

Total $ 23,497.6   $ 5,385.6   $ 28,883.2   $ 27,770.6   $ 7,095.2   $ 34,865.8
 

 

 

 

 

 


7




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


The following table contains information on finance receivables evaluated for impairment and the related reserve for credit losses. The Company excludes homogenous loans such as consumer loans, small-ticket loans and lease receivables, short-term and factoring customer finance receivables from receivables evaluated for impairment. For purposes of this presentation, finance receivables that were impaired at the Convenience Date and impaired loans identified in 2010 are presented separately below. The Company is applying the income recognition and disclosure guidance in ASC 310-30-5 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) to loans considered impaired in FSA. The balance of loans under the guidance of ASC 310-30-5 was $1,231.7 million at June 30, 2010.


Loans Evaluated for Impairment / Reserve for Credit Losses, at or for the Six Months Ended June 30, 2010 (dollars in millions)
  Total
   2010
Impaired Loans
   Impaired Loans
Identified in FSA
(December 31, 2009
and prior)
Finance receivables considered for impairment $ 1,846.7   $ 794.3   $ 1,052.4
Impaired finance receivables with specific allowance   180.7     103.5     77.2
Specific allowance for impaired receivables   36.5     16.0     20.5
Impaired finance receivables with no specific allowance   1,666.0     690.8     975.2
Average investment in impaired finance receivables   1,700.0     402.3     1,297.7

The Company’s policy is to review finance receivables greater than $500 thousand placed on non-accrual status for impairment. As a result, the amounts in the table above considered for impairment exclude small-ticket leasing accounts and other homogeneous pools of loans that are included in reported non-accrual balances.

The following table sets forth non-performing assets which reflect both loans on non-accrual (primarily loans ninety days or more delinquent) and assets received in satisfaction of loans (repossessed assets).


Non-performing assets (dollars in millions)
  June 30, 2010     December 31, 2009
 
 
 
Non-accrual loans $ 2,052.4   $ 1,574.4
Assets received in satisfaction of loans   42.8     36.3
 

 

Total non-performing assets $ 2,095.2   $ 1,610.7
 

 

Accruing loans past due 90 days or more(1) $
437.7
  $
570.1
 

 

(1) Balance includes $428.2 million and $480.7 million as of June 30, 2010 and December 31, 2009, respectively, of government-guaranteed loans.

At June 30, 2010 and December 31, 2009, there were $7.0 million and $14.8 million, respectively, of commitments to lend additional funds to debtors owing loans whose terms have been modified in troubled debt restructurings.

Upon implementation of FSA, the Company assigned non-accretable discount to both non-accrual loans and certain higher risk performing accounts. Effective as of April 1, 2010, the Company corrected the accounting for the performing loans in the Corporate Finance and Transportation Finance segments to account for and report the related fresh start discount in a manner consistent with the Company’s performing loans in these segments. As a result, the following adjustments were recorded in the second quarter related to the three months ended March 31, 2010:

Management has concluded that the adjustments were not individually or in the aggregate material to the consolidated financial statements, as of and for the periods ended June 30, 2010, or to any of the preceding periods as reported.

8




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


At June 30, 2010, the remaining principal balance of finance receivables held at the time of FSA that have shown evidence of credit deterioration since origination was $2,392.3 million. The following table presents the changes to the accretable discount since December 31, 2009.


Accretable discount activity for loans accounted for under ASC 310-30-5 at Emergence Date (dollars in millions):
  Quarter Ended
June 30, 2010
  Six Months Ended
June 30, 2010
Accretable discount, beginning of period $ 332.0       $ 454.8  
Accretion   (9.9 )     (40.4 )
Disposals/transfers   (99.1 )     (191.4 )
 


 


Accretable discount, end of period $ 223.0     $ 223.0  
 

   


The following table presents changes in allowance for credit losses:


Changes in Allowance for Credit Losses (dollars in millions)
  Quarters Ended June 30,
Six Months Ended June 30,
  CIT
2010
      Predecessor CIT
2009

   CIT
2010
    Predecessor CIT
2009

Balance, beginning of period $ 180.8     $ 1,316.3     $        $ 1,096.2  
 


 


 


   


Provision for credit losses   260.7       588.5       447.3         1,123.9  
Reserve change relating to new accounting
pronouncement
              39.7          
Reserve changes relating to sales,
foreign currency translation, other
  2.6       (10.5 )     (0.6 )       (12.7 )
 


 


 


     

Net additions to the reserve for credit losses   263.3       578.0       486.4         1,111.2  
 


 


 


     

Charged-off – finance receivables   (113.3 )     (375.8 )     (157.7 )       (703.0 )
Recoveries(1)   7.0       19.9       9.1         34.0  
 


 


 


     

Net charge-offs   (106.3 )     (355.9 )     (148.6 )       (669.0 )
 


 


 


     

Reserve balance – end of period $ 337.8     $ 1,538.4     $ 337.8       $ 1,538.4  
 


 


 


   



(1)      Recoveries for the three and six months ended June 30, 2010, respectively do not include $113.3 million and $157.1 million of recoveries on accounts that were charged-off pre-FSA, which are included in Other Income.

NOTE 3 – LONG-TERM BORROWINGS

The following table presents outstanding long-term borrowings:


Outstanding Long-term Borrowings (dollars in millions)
  June 30, 2010
  December 31,
2009
  CIT Group Inc.   Subsidiaries   Total   Total
 
 
 
 
Secured borrowings $    $ 12,403.1    $ 12,403.1    $ 14,346.5
Secured credit facility and expansion credit facility   301.0     4,295.9     4,596.9     7,716.6
Senior unsecured notes   85.8     113.8     199.6     268.1
Series A Notes   18,882.2         18,882.2     18,733.6
Series B Notes       2,194.7     2,194.7     2,198.2
 

 

 

 

Total $ 19,269.0   $ 19,007.5   $ 38,276.5   $ 43,263.0
 

 

 

 


9




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


Secured Borrowings

Set forth below are borrowings and pledged assets primarily owned by consolidated special purpose entities. Creditors of these special purpose entities 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 creditors of CIT or any affiliates of CIT. These transactions do not meet accounting requirements for sales treatment and are recorded as secured borrowings. Except as otherwise noted, pledged assets listed below are not included in the collateral available to lenders under the Credit Facility or Expansion Credit Facility described below.

    June 30, 2010   December 31, 2009
   
 
    Secured
Borrowing
    Assets
Pledged
    Secured
Borrowing
    Assets
Pledged
         
   
   
   
   
Education trusts and conduits (student loans) $ 4,787.8    $ 5,893.2    $ 5,864.3    $ 6,864.7
Goldman Sachs International (GSI) TRS(1)   2,122.0     2,950.8     2,552.7     3,429.6
Vendor Finance(2)   664.0     869.6     1,120.7     1,589.4
Equipment lease securitizations (Vendor)   1,078.4     1,132.1     706.0     762.2
Trade Finance   550.0     1,634.5        
Canadian equipment receivables financing   534.8     578.7     543.0     557.6
Corporate Finance (energy project finance)   286.9     312.8     288.9     305.0
Corporate Finance (SBL)(2)   259.9     297.0        
 

 

 

 

Subtotal – finance receivables   10,283.8     13,668.7     11,075.6     13,508.5
 

 

 

 

ECA financing (Aero)(3)   1,057.5     1,204.1     1,097.4     1,212.2
Transportation Finance – Rail   151.4     147.6     907.4     1,276.7
GSI TRS (Aero)   551.9     1,141.7     582.2     1,154.3
Other structures   113.0     135.3     61.2     69.8
 

 

 

 

Subtotal – Equipment under operating leases   1,873.8     2,628.7     2,648.2     3,713.0
 

 

 

 

Vendor Finance(4)   169.2     202.8     469.8     903.3
FHLB borrowings (CIT Bank)(5)   76.3     132.1     152.9     150.8
 

 

 

 

Total $ 12,403.1   $ 16,632.3   $ 14,346.5   $ 18,275.6
 

 

 

 

(1) June 30, 2010 financing is secured by $2.1 billion corporate finance receivables, $0.6 billion student loans, and $0.2 billion small business lending loans.

(2) Includes repurchase of assets previously sold or securitized and the associated secured debt.

(3) Secured aircraft financing facility for the purchase of specified Airbus aircraft.

(4) International facilities collateralized by local assets.

(5) Collateralized with Government Debentures and Certificates of Deposit.

Secured Credit Facility and Expansion Credit Facility

The Secured Credit Facility and Expansion Credit Facility (the “First Lien Facilities”) are secured by a first lien on substantially all U.S. assets that are not pledged to secure the borrowings of special purpose entities as described above under “Secured Borrowings”, 65% of the voting and 100% of the non-voting stock of first-tier foreign subsidiaries, 100% of the stock of CIT Aerospace International (except one nominee share) and between 49% and 65% of certain other non-U.S., non-regulated subsidiaries. The First Lien Facilities are 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. The agreement evidencing the First Lien Facilities includes certain additional terms, including a cash sweep that under certain circumstances will accelerate repayment of the First Lien Facilities. See the Company’s Form 10-K, Note 9 – Long-term Borrowings for a description of these terms. See Note 13 – Subsequent Event for refinancing of the First Lien Facilities.

Series A and B Notes

The Series A Notes and Series B Notes (“Second Lien Notes”) are secured by second-priority security interests in substantially all the assets securing the First Lien Facilities. The Series B Notes are further secured by Delaware Funding’s pledge of inter-company notes issued by CIT Financial Ltd., which are the primary assets of Delaware Funding.

10




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


The Second Lien Notes Indentures likewise limit the ability of the Company, Delaware Funding and the Company’s restricted subsidiaries to make certain payments or investments, incur indebtedness (including guarantees), issue preferred stock, incur liens, enter into sale and leaseback transactions, pay dividends, sell assets, and enter into transactions with affiliates.

Further information on Long-term Borrowings can be found in the Company’s 2009 Form 10-K.

NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS

See the Company’s Form 10-K Note 10 for a description of its derivative transaction policies.

Due to the reorganization (see Note 1) none of the Company’s derivatives entered into prior to December 31, 2009 achieve hedge accounting. The Company continues reassessing hedge requirements and reestablishing counterparty relationships to facilitate placement of hedges where economically appropriate. New derivative instruments are cash collateralized.

The following table presents fair values and notional values of derivative financial instruments:


Fair and Notional Values of Derivative Financial Instruments (dollars in millions)
  June 30, 2010
  December 31, 2009
Qualifying Hedges Notional
Amount
  Asset Fair
Value
  Liability Fair
Value
  Notional
Amount
  Asset Fair
Value
  Liability
Fair Value
Cross currency swaps $ 329.0    $ 9.0    $      $    $    $  
Foreign currency forward exchange – cash flow hedges   73.7     3.9                    
Foreign currency forward exchange – net investment hedges   1,020.4     21.4     (0.1 )              
 

 

 


 

 

 


Total Qualifying Hedges $ 1,423.1   $ 34.3   $ (0.1 )   $   $   $  
 

 

 


 

 

 


Non-Qualifying Hedges                                      
Cross currency swaps $ 1,735.2   $ 108.5   $ (1.9 )   $ 646.7   $   $ (8.8 )
Interest rate swaps   1,273.6     7.9     (41.0 )     3,165.9     23.4     (25.7 )
Written options   788.6               1,009.8         (0.1 )
Purchased options   1,508.2     6.7           1,524.1     18.4      
Foreign currency forward exchange contracts   1,877.4     93.0     (4.0 )     1,055.1     2.3     (7.3 )
TRS   261.2               107.9          
 

 

 


 

 

 


Total Non-qualifying Hedges $ 7,444.2   $ 216.1   $ (46.9 )   $ 7,509.5   $ 44.1   $ (41.9 )
 

 

 


 

 

 


A financing facility with Goldman Sachs International (GSI) is structured as a total return swap (TRS). Amounts available for advances are accounted for as a derivative. Estimated fair value is based on a hypothetical transfer value, considering current market conditions and other factors. At June 30, 2010 and December 31, 2009, the estimated fair value was not significant.

The following table presents the impact of derivatives on the statement of operations:


Derivative Instrument Gains and Losses (dollars in millions)
    Quarters Ended June 30,     Six Months Ended June 30,
   
   
    CIT
2010

     Predecessor
CIT

2009

  CIT
2010

    Predecessor
CIT

2009

         
Derivative Instruments Gain / (Loss) Recognized      


      
Qualifying Hedges                                                      
Interest rate swaps – cash flow                                
hedges Other income $     $ 3.9     $     $ 3.9  
Interest rate swaps – fair value                                
hedges Other income         14.3             13.3  
Foreign currency forward                                
exchange – cash flow hedges Other income   9.3             9.3        
   


 


   


 


Total Qualifying Hedges   $ 9.3     $ 18.2     $ 9.3     $ 17.2  
   


 


 


 


                                  
Non Qualifying Hedges                                
Cross currency swaps Other income $ 103.8     $ (32.5 )   $ 113.1     $ (41.2 )
Interest rate swaps Other income   (30.7 )     29.7       (50.1 )     31.1  
Foreign currency forward                                
exchange contracts Other income   94.7       (4.9 )     164.8       0.8  
Warrants Other income         (25.2 )           70.6  
   


 


 


 


Total Non-qualifying Hedges   $ 167.8     $ (32.9 )   $ 227.8     $ 61.3  
   


 


 


 


11




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


The gains and (losses) on qualifying and non-qualifying hedges are recorded in other Income and are partially offset by the impact of foreign currency changes.

NOTE 5 – FAIR VALUE

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial instruments required to be valued on a recurring basis based on priority ranking of valuation inputs are presented in the following tables:


Assets and Liabilities Measured at Fair Value on a Recurring Basis (dollars in millions):
June 30, 2010 Total   Level 1   Level 2    Level 3
 
 
 
 
Assets                            
Trading assets at fair value – derivatives $ 216.1       $    $ 216.1      $  
Derivative counterparty assets at fair value   34.3           34.3        
 


 

 


 


Total Assets $ 250.4     $   $ 250.4     $  
 


 

 


 


Liabilities                            
Trading liabilities at fair value – derivatives $ (46.9 )   $   $ (46.3 )   $ (0.6 )
Derivative counterparty liabilities at fair value   (0.1 )         (0.1 )      
 


 

 


 


Total Liabilities $ (47.0 )   $   $ (46.4 )   $ (0.6 )
 


 

 


 


 
December 31, 2009                            
Assets                            
Retained interests – securitizations $ 139.7     $   $     $ 139.7  
Trading assets – derivatives   44.1           44.1        
 


 

 


 


Total Assets $ 183.8     $   $ 44.1     $ 139.7  
 


 

 


 


Liabilities                            
Trading liabilities – derivatives $ (41.9 )   $   $ (40.4 )   $ (1.5 )
 


 

 


 



Level 3 Gains and Losses

The tables below set forth changes in Level 3 estimated fair value of financial instruments:


Level 3 Gains and Losses (dollars in millions)
CIT Total
   Retained
Interests in

Securitizations
   Derivatives
March 31, 2010 $ (0.9 )   $     $ (0.9 )
Gains or (losses) realized/unrealized                      
   Included in Other income   0.3             0.3  
 


 


 


June 30, 2010 $ (0.6 )   $     $ (0.6 )
 


 


 


December 31, 2009 $ 138.2     $ 139.7     $ (1.5 )
Gains or (losses) realized/unrealized                      
   Included in Other income   0.9             0.9  
   Included in Other comprehensive income                
Other (retained interest)(1)   (139.7 )     (139.7 )      
 


 


 


June 30, 2010 $ (0.6 )   $     $ (0.6 )
 


 


 


Predecessor CIT                      
March 31, 2009 $ 194.5     $ 192.0     $ 2.5  
Gains or (losses) realized/unrealized                      
   Included in Other income   (22.8 )     1.0       (23.8 )
   Included in Other comprehensive income   7.0       1.3       5.7  
Other (retained interest)   (24.8 )     (24.8 )      
 


 


 


June 30, 2009 $ 153.9     $ 169.5     $ (15.6 )
 


 


 


December 31, 2008 $ 224.6     $ 229.4     $ (4.8 )
Gains or (losses) realized/unrealized                      
   Included in Other income   (40.3 )     (12.9 )     (27.4 )
   Included in Other comprehensive income   14.9       (1.7 )     16.6  
Other (retained interest)   (45.3 )     (45.3 )      
 


 


 


June 30, 2009 $ 153.9     $ 169.5     $ (15.6 )
 


 


 


(1) The change in the retained interest in 2010 is attributed to a new accounting pronouncement effective January 1, 2010.

12




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


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

The following tables present financial instruments for which a non-recurring change in fair value has been recorded:


Assets and Liabilities Measured at Fair Value on a Non-recurring Basis (dollars in millions):
                          Total
Net Losses(1)

June 30, 2010 Total
  Level 1
  Level 2
  Level 3
 
Assets                              
Assets held for sale $ 103.3    $    $    $ 103.3    $ (5.5 )
Impaired loans   36.6             36.6     (16.5 )
 

 

 

 

 


Total $ 139.9   $   $   $ 139.9   $ (22.0 )
 

 

 

 

 


(1) Reflects pretax amounts recorded in provision for loan losses (Impaired loans) in the Statements of Operation for declines in fair values.

See Form 10-K, Note 10, for complete listing of non-recurring changes in fair value as of December 31, 2009.

The carrying and estimated fair values of financial instruments presented below exclude leases and certain other assets, which are not required for disclosure:


Financial Instruments at Carrying and Fair Values (dollars in millions)
  June 30, 2010
  December 31, 2009
  Carrying
Value
  Estimated
Fair Value
  Carrying
Value
  Estimated
Fair Value
       
       
Assets                                
Trading assets – derivatives $ 216.1     $ 216.1      $ 44.1        $ 44.1  
Derivative counterparty assets at fair value (component of Other                                
Assets)   34.3        34.3                
Investments – retained interest in securitizations (component of                                
Other Assets)               139.7         139.7  
Assets held for sale   572.5       572.5       343.8         343.8  
Loans (excluding leases)   22,246.7       22,759.7       27,291.3         27,291.3  
Other assets and unsecured counterparty receivable (1)   2,090.2       2,090.2       2,336.2         2,336.2  

Liabilities                                
Deposits (2) $ (4,736.6 )   $ (4,723.4 )   $ (5,253.1 )   $ (5,253.1 )
Trading liabilities – derivatives   (46.9 )     (46.9 )     (41.9 )       (41.9 )
Derivative counterparty liabilities at fair value   (0.1 )     (0.1 )              
Long-term borrowings (2)   (38,546.8 )     (38,900.1 )     (43,441.5 )     (43,441.5 )
                                 
Other liabilities (3)   (1,743.9 )     (1,743.9 )     (1,701.7 )       (1,701.7 )

(1) 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.

(2) Deposits and long-term borrowings include accrued interest

(3) Other liabilities have a fair value that approximates carrying value due to the short term duration.

13




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


Assumptions used in valuing financial instruments as of June 30, 2010 are the same as disclosed in Note 12 of Form 10-K.

The net carrying value of lease finance receivables not subject to fair value disclosure totaled $5.4 billion at June 30, 2010.

NOTE 6 – INCOME TAXES

CIT’s tax provision of $71.1 million for the quarter and $113.6 million for the six months ended June 30, 2010, equated to 33.3% and 32.2% effective tax rates, respectively, compared with (0.8%) and (1.1%) for the respective 2009 periods. The effective tax rate is primarily reflective of taxes on certain international operations and valuation allowances recorded against U.S. losses.

Included in the second quarter and year to date 2010 tax provisions are $14.3 million and $23.6 million of tax expense related to valuation allowances recorded against international deferred tax assets and changes in liabilities for uncertain tax positions. The Company anticipates that it is reasonably possible that the total unrecognized tax benefits will decrease due to the settlement of audits and the expiration of statute of limitations prior to June 30, 2011 in the range of $5-20 million.

As of December 31, 2009, we had net operating losses (NOL’s) of $7.6 billion prior to cancellation of indebtedness income. After cancellation of indebtedness income, we estimate that we currently have remaining NOL carryforwards of $2.6 billion, which expire from 2027 through 2029. FSA adjustments are excluded from the calculation of U.S. taxable income. Excluding FSA adjustments, second quarter 2010 U.S. results were a loss of approximately $625 million ($1 billion year to date), which will increase, net of book / tax differences, the Company’s U.S. NOL carryforwards. These losses would not be subject to Section 382 limitations.

In 2009, CIT’s reorganization constituted an ownership change under Section 382 of the Code, which places an annual dollar limit on the use of NOL carry forwards. There are two relief provisions for limitations on NOL usage in Chapter 11 bankruptcy. Under one relief provision, the Company avoids any limitation on our use of NOL carry forwards, but the amount of the NOL is calculated without taking into account deductions for certain interest expense with respect to notes that were exchanged for equity, effectively reducing the Company’s NOL. In addition, if the Company undergoes an ownership change within two years of the reorganization, our remaining NOL carry forwards, if any, would be entirely eliminated. To reduce this risk, the Company’s Certificate of Incorporation was amended to include restrictions on trading of the Company’s Common Stock. Under the second relief provision, the calculation of the annual limitation of usage of NOL’s is based on the value of equity immediately after any ownership change. If the Company elects this second provision, the Company estimates its NOL usage will be limited to $230 million per annum; however, the requirement to eliminate unused NOL carry forwards upon a change of ownership within two years of the reorganization would not apply. The Company has not yet made its determination of which relief provision it will select. See the Company’s 10-K for December 31, 2009 for further information regarding the two relief provisions and the effects of the 2009 reorganization.

NOTE 7 – STOCKHOLDERS’ EQUITY

Total comprehensive income was $93.5 million for the June 30, 2010 quarter and $229.8 million for the six months ended June 30, 2010, versus comprehensive losses of $1.5 billion and $1.9 billion in the comparable periods in the prior year. The following table details the components of Accumulated Other Comprehensive Loss, net of tax:


Accumulated Other Comprehensive (loss) Income (dollars in millions)
  June 30, 2010
 
Foreign currency translation adjustments $ (11.4 )
Unrealized gain on available for sale equity investments, net   2.0  
Changes in fair values of derivatives qualifying as cash flow hedges   (0.1 )
Minimum pension liability adjustment   (0.2 )
 


Total accumulated other comprehensive loss $ (9.7 )
 


The change in the foreign currency translation adjustments reflects the strengthening of the U.S. dollar, net of hedges, against foreign currencies, primarily the Euro and Swedish krona, partially offset by weakness against the Canadian dollar.

NOTE 8 – REGULATORY CAPITAL

The Company and CIT Bank are each subject to various regulatory capital requirements administered by the Federal Reserve Bank (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”). See Form 10-K for details on requirements.

Quantitative measures established by regulation to ensure capital adequacy require that the Company and CIT Bank each maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, subject to any agreement with regulators to maintain higher capital levels. In connection with becoming a bank holding company in December 2008, the Company committed to a minimum level of total risk based capital of 13%. In connection with CIT Bank’s conversion to a Utah state bank in December 2008, CIT Bank committed to maintaining for three years a leverage ratio of at least 15%.

14




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


The calculation of the Company’s regulatory capital ratios are subject to review and consultation with the Federal Reserve Bank, which may result in refinements to amounts reported at June 30, 2010.


Tier 1 Capital and Total Capital Components (dollars in millions)
  CIT
  CIT Bank
  June 30,
2010
  December 31,
2009(1)
  June 30,
2010
  December 31,
2009 
Tier 1 Capital                              
Total stockholders’ equity $ 8,632.4      $ 8,400.0      $ 1,720.6      $ 1,590.1  
Items in Accumulated other comprehensive                              
income excluded from Tier 1 Capital   (1.7 )           (0.2 )      
 

   

   

   

 
Adjusted total equity   8,630.7       8,400.0       1,720.4       1,590.1  
Less: Goodwill   (239.4 )     (239.4 )            
Disallowed intangible assets   (168.5 )     (225.1 )            
Investment in certain subsidiaries         (2.8 )            
Other Tier 1 components(2)   (88.5 )     (98.5 )     (147.6 )     (196.9 )
 

   

   

   

 
Tier 1 Capital   8,134.3       7,834.2       1,572.8       1,393.2  
                                
Tier 2 Capital                              
Qualifying reserve for credit losses   337.8             4.0        
Other Tier 2 components(3)   1.0             0.1        
 

   

   

   

 
Total qualifying capital $ 8,473.1     $ 7,834.2     $ 1,576.9     $ 1,393.2  
 

   

   

   

 
Risk-weighted assets $ 46,624.3     $ 54,352.7     $ 2,660.4     $ 3,200.5  
 

   

   

   

 
                               
Total Capital (to risk weighted assets):                          
Actual 18.2 %   14.4 %   59.3 %   43.5 %
Required Ratio for Capital Adequacy Purposes 13.0 %(4)   13.0 %(4)   8.0 %   8.0 %
                        
Tier 1 Capital (to risk weighted assets):                      
Actual 17.4 %   14.4 %   59.1 %   43.5 %
Required Ratio for Capital Adequacy Purposes 4.0 %   4.0 %   4.0 %   4.0 %
                        
Tier 1 Capital (to average assets) (Leverage Ratio):                      
Actual 14.6 %   11.3 %   20.6 %   15.4 %
Required Ratio for Capital Adequacy Purposes 4.0 %   4.0 %   15.0 %(4)   15.0 %(4)

(1) Amounts reclassified to conform to the 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 and the Tier 1 capital charge for nonfinancial equity investments.

(3) Banking organizations are permitted to include in Tier 2 Capital up to 45% of net unrealized pretax gains on available-for-sale equity securities with readily determinable fair values.

(4) The Company has committed to maintaining capital ratios above regulatory minimum levels.

15




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


NOTE 9 – COMMITMENTS

The table below summarizes credit-related commitments, as well as purchase and funding commitments:


Commitments (dollars in millions)
  June 30, 2010
  December 31,
2009

  Due to Expire
       
  Within
One Year
  After
One Year
  Total
Outstanding
  Total
Outstanding
Financing Commitments                      
   Financing and leasing assets $ 505.2    $ 2,358.9    $
2,864.1
   $ 3,735.8
   Vendor receivables               889.1
Letters of credit and acceptances                      
   Standby letters of credit   70.3     188.2     258.5     539.2
   Other letters of credit   132.0     0.6     132.6     139.2
   Guarantees and acceptances   1,232.6     8.4     1,241.0     1,396.6
Purchase and Funding Commitments                      
   Aerospace and other manufacturer purchase commitments   524.5     3,824.5     4,349.0     4,777.3
Other                      
   Liabilities for unrecognized tax benefits   5.0     53.9     58.9     50.1

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 actual future cash flow requirements. Financing commitments shown above exclude $1.5 billion of commitments not available for draw due to requirements for asset / collateral availability or covenant conditions at June 30, 2010.

At June 30, 2010, substantially all financing commitments were senior facilities, with approximately 49% secured by equipment or other assets and the remainder comprised of unsecured facilities relying upon cash-flow or enterprise value. The vast majority of these commitments are syndicated transactions. CIT is lead agent in 37% of the facilities. Most of our undrawn and available financing commitments are in Corporate Finance with an average facility balance of $4.8 million. The top ten undrawn commitments totaled $419 million.

The table above excludes 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 exercise their line of credit only when they need to purchase new products from a vendor and do not seek to exercise their entire available line of credit at any point in time.

Letters of Credit and Guarantees

In the normal course of meeting the needs of clients, the Company enters into agreements to provide financing, letters of credit and deferred purchase credit protection agreements (“DP Agreements”). Standby letters of credit obligate the issuer of the letter of credit to pay the beneficiary if a client on whose behalf the letter of credit was issued does not meet its obligation. These financial instruments generate fees and involve, to varying degrees, elements of credit risk in excess of amounts recognized in the Consolidated Balance Sheets. To minimize potential credit risk, CIT generally requires collateral and in some cases additional forms of credit support from the client.

DP Agreements are provided primarily in conjunction with factoring, whereby we provide the client with credit protection for trade receivables without purchasing the receivables. The trade terms are generally sixty days or less. If the client’s customer is unable to pay an undisputed receivable solely as the result of credit risk, then CIT purchases the receivable from the client.

16




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


Purchase and Funding Commitments

CIT’s firm purchase commitments relate predominantly to purchases of commercial aircraft and rail equipment. Commitments to purchase new commercial aircraft are with Airbus Industries and The Boeing Company. Aerospace equipment purchases are contracted for specific models, using 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 change depending on final specifications. Equipment purchases are recorded at delivery date. Commitment amounts in the preceding table are based on contracted purchase prices less pre-delivery payments to date and exclude buyer furnished equipment selected by the lessee. Pursuant to existing contractual commitments, 87 aircraft remain to be purchased. Lease commitments are in place for the 19 aircraft to be delivered over the next twelve months. Commitments exclude unexercised options to purchase aircraft. Aircraft deliveries are scheduled periodically through 2018. Other manufacturing purchase commitments relate primarily to rail equipment.

NOTE 10 – CONTINGENCIES

In accordance with ASC 450 (formerly SFAS 5), the Company establishes accruals for litigation and regulatory matters when those matters present loss contingencies that both are probable and can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. In view of the inherent unpredictability of litigation and regulatory matters, particularly where the damages sought are substantial or indeterminate, the investigations or proceedings are in the early stages, or the matters involve novel legal theories or a large number of parties, the Company cannot state with certainty the timing or ultimate resolution of litigation and regulatory matters, and the actual costs of resolving litigation and regulatory matters may be substantially higher or lower than the amounts accrued for those matters.

Subject to the foregoing, it is the opinion of the Company’s management, based on current knowledge and after taking into account available insurance coverage and its current accruals, that the eventual outcome of such matters would not be likely to have a material adverse effect on the consolidated financial condition of the Company. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material adverse effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods.

NOTE 11 – BUSINESS SEGMENT INFORMATION

The following table presents our business segment financial information:


Business Segments (dollars in millions)
CIT Corporate
Finance

    Transportation
Finance

    Trade
Finance

    Vendor
Finance

    Total
Commercial
Segments

    Consumer
    Total
Segments

    Corporate
and Other

    Consolidated
Total

 
For the quarter ended June 30, 2010                                                                      
Interest income $ 481.7      $ 53.4      $ 24.4      $ 333.2      $ 892.7      $ 95.8      $ 988.5      $ 5.0      $ 993.5  
Interest expense   (273.6 )     (234.6 )     (45.1 )     (190.4 )     (743.7 )     (64.2 )     (807.9 )     (5.7 )     (813.6 )
Provision for credit losses   (109.2 )     (3.0 )     (12.3 )     (111.9 )     (236.4 )     (9.3 )     (245.7 )     (15.0 )     (260.7 )
Rental income on operating leases   7.3       316.8             96.1       420.2             420.2       (0.5 )     419.7  
Other income, excluding rental income on operating leases   205.9       18.2       47.0       26.2       297.3       18.3       315.6       15.0       330.6  
Depreciation on operating lease                                                                      
equipment   (5.6 )     (85.9 )           (87.8 )     (179.3 )           (179.3 )     0.3       (179.0 )
Other expenses excluding depreciation on operating lease equipment   (89.7 )     (45.5 )     (33.0 )     (86.3 )     (254.5 )     (22.7 )     (277.2 )     0.2       (277.0 )
 
(Provision) benefit for income taxes                                                                      
and noncontrolling interests, after tax   (10.4 )     5.7       3.0       (41.2 )     (42.9 )     (3.7 )     (46.6 )     (24.8 )     (71.4 )
 


 


 


 


 


 


 


 


 


Net income (loss) $ 206.4     $ 25.1     $ (16.0 )   $ (62.1 )   $ 153.4     $ 14.2     $ 167.6     $ (25.5 )   $ 142.1  
 


 


 


 


 


 


 


 


 


Select Period End Balances                                                                      
Loans including receivables pledged $ 9,845.7     $ 1,671.3     $ 2,514.6     $ 6,066.1     $ 20,097.7     $ 8,785.5     $ 28,883.2     $     $ 28,883.2  
Credit balances of factoring clients               (877.3 )           (877.3 )           (877.3 )           (877.3 )
Assets held for sale   514.8       10.4             18.8       544.0       28.5       572.5             572.5  
Operating lease equipment, net   104.2       10,296.9             549.6       10,950.7             10,950.7             10,950.7  

17




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


Corporate
Finance

    Transportation
Finance

    Trade
Finance

    Vendor
Finance

    Total
Commercial
Segments

    Consumer
    Total
Segments

    Corporate
and Other

    Consolidated
Total

 
Predecessor CIT
                                                                     
For the quarter ended June 30, 2009                                                            
Interest income $ 243.7      $ 39.9      $ 31.0     $ 224.8      $ 539.4     $ 68.5     $ 607.9     $ 6.6      $ 614.5  
Interest expense   (126.4 )     (139.2 )     (13.1 )     (140.5 )     (419.2 )     (83.4 )     (502.6 )     (131.0 )     (633.6 )
Provision for credit losses   (430.4 )     (0.2 )     (20.1 )      (77.4 )     (528.1 )      (32.5      (560.6 )      (27.9 )     (588.5 )
 
Rental income on operating leases   11.3       337.5             125.2       474.0             474.0       (0.5 )     473.5  
Other income, excluding rental income                                                                      
on operating leases   (234.2 )     14.6       55.7       15.2       (148.7 )     (8.3 )     (157.0 )     (41.8 )     (198.8 )
Depreciation on operating lease                                                                      
equipment   (7.6 )     (165.0 )           (114.3 )     (286.9 )           (286.9 )     0.3       (286.6 )
Goodwill and intangible asset impairment                                                                      
charges   (316.8 )           (363.8 )     (11.8 )     (692.4 )           (692.4 )           (692.4 )
Other expenses, excluding depreciation                                                                      
on operating lease equipment                                                                      
and goodwill and intangible assets impairment                                                                      
charges   (94.1 )     (34.2 )     (32.7 )     (84.1 )     (245.1 )     (14.4 )     (259.5 )     (34.4 )     (293.9 )
 
(Provision) benefit for income taxes                                                                      
and noncontrolling interests, after tax   291.4       (4.1 )     126.7       27.0       441.0       27.7       468.7       (480.7 )     (12.0 )
 


 


 


 


 


 


 


 


 


Net (loss) income before                                                                      
preferred stock dividends $ (663.1 )   $ 49.3     $ (216.3 )   $ (35.9 )   $ (866.0 )   $ (42.4 )   $ (908.4 )   $ (709.4 )   $ (1,617.8 )
 


 


 


 


 


 


 


 


 


Select Period End Balances                                                                      
 
Loans including receivables pledged $ 18,053.6     $ 2,424.1     $ 5,055.8     $ 11,331.6     $ 36,865.1     $ 11,865.2     $ 48,730.3     $     $ 48,730.3  
 
Credit balances of factoring clients               (2,671.8 )           (2,671.8 )           (2,671.8 )           (2,671.8 )
Assets held for sale   361.7       10.8             0.7       373.2       54.1       427.3             427.3  
Operating lease equipment, net   206.0       12,309.5             864.6       13,380.1             13,380.1             13,380.1  
Securitized assets   645.8                   470.1       1,115.9             1,115.9             1,115.9  
 
CIT                                                                      
Six months ended June 30, 2010                                                                      
Interest income $ 985.7     $ 110.9     $ 54.9     $ 692.8     $ 1,844.3     $ 188.6     $ 2,032.9     $ 9.6     $ 2,042.5  
Interest expense   (570.6 )     (493.1 )     (83.6 )     (358.3 )     (1,505.6 )     (135.1 )     (1,640.7 )     (10.7 )     (1,651.4 )
Provision for credit losses   (203.6 )     (4.3 )     (46.2 )     (164.4 )     (418.5 )     (13.8 )     (432.3 )     (15.0 )     (447.3 )
 
Rental income on operating leases   16.1       616.0             206.9       839.0             839.0       (1.1 )     837.9  
Other income, excluding rental                                                                      
income on operating leases   309.0       40.4       93.1       53.4       495.9       24.1       520.0       (57.2 )     462.8  
Depreciation on operating lease                                                                      
equipment   (10.0 )     (164.5 )           (178.5 )     (353.0 )           (353.0 )     0.5       (352.5 )
Other expenses, excluding                                                                      
depreciation on operating lease                                                                      
equipment   (169.1 )     (85.1 )     (65.0 )     (173.2 )     (492.4 )     (44.2 )     (536.6 )     (2.3 )     (538.9 )
 
(Provision) benefit for income taxes                                                                      
and noncontrolling interests, after tax   (22.8 )     (3.0 )     3.0       (44.2 )     (67.0 )     (0.2 )     (67.2 )     (46.5 )     (113.7 )
 


 


 


 


 


 


 


 


 


Net income (loss) $ 334.7     $ 17.3     $ (43.8 )   $ 34.5     $ 342.7     $ 19.4     $ 362.1     $ (122.7 )   $ 239.4  
 


 


 


 


 


 


 


 


 



18




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


Corporate
Finance

    Transportation
Finance

    Trade
Finance

    Vendor
Finance

    Total
Commercial
Segments

    Consumer
    Total
Segments

    Corporate
and Other

    Consolidated
Total

 
Predecessor CIT                                                                      
Six months ended June 30, 2009                                                            
                                                                       
Interest income $ 499.3      $ 84.5      $ 62.4      $ 454.8       $ 1,101.0       $ 135.9      $ 1,236.9      $ 17.2      $ 1,254.1  
Interest expense   (276.4 )     (275.8 )     (29.2 )     (284.9 )     (866.3 )     (158.0 )     (1,024.3 )     (266.4 )     (1,290.7 )
Provision for credit losses   (823.8 )     1.4       (36.7 )     (158.1 )     (1,017.2 )     (72.6 )     (1,089.8 )     (34.1 )     (1,123.9 )
Rental income on operating leases   23.0       674.3             252.4       949.7             949.7       (1.0 )     948.7  
Other income, excluding rental                                                                      
income on operating leases   (234.5 )     23.3       110.1       41.5       (59.6 )     (11.9 )     (71.5 )     60.7       (10.8 )
Depreciation on operating lease                                                                      
equipment   (15.3 )     (327.1 )           (226.8 )     (569.2 )           (569.2 )     0.6       (568.6 )
Goodwill and intangible asset impairment                                                                      
charges   (316.8 )           (363.8 )     (11.8 )     (692.4 )           (692.4 )           (692.4 )
                                                                       
Other expenses, excluding                                                                      
depreciation on operating lease                                                                      
equipment and goodwill and                                                                      
intangible asset impairment charges   (200.9 )     (75.3 )     (69.1 )     (171.5 )     (516.8 )     (37.0 )     (553.8 )     97.3       (456.5 )
                                                                       
(Provision) benefit for income taxes                                                                      
and noncontrolling interests, after tax   442.0       (10.0 )     119.1       43.2       594.3       54.7       649.0       (669.5 )     (20.5 )
 


 


 


 


 


 


 


 


 


                                                                       
                                                                       
Net (loss) income before preferred                                                                      
stock dividends $ (903.4 )   $ 95.3     $ (207.2 )   $ (61.2 )   $ (1,076.5 )   $ (88.9 )   $ (1,165.4 )   $ (795.2 )   $ (1,960.6 )
 


 


 


 


 


 


 


 


 


                                                                       

NOTE 12 – SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARIES

In accordance with the First Lien Facilities as well as requirements in the prepackaged bankruptcy, including the Series A Notes and Series B Notes, the following tables present three mutually exclusive sets of condensed consolidating financial statements, reflecting the following:

19



CONDENSED CONSOLIDATING BALANCE SHEETS (dollars in millions)

  CIT Group
Inc.

   CIT Group
Funding
Company of
Delaware

   C.I.T. Leasing
Corporation

   CIT Financial
Ltd

   CIT Bank
   Other
Subsidiaries

   Eliminations
   Consolidated
Total

June 30, 2010                                                      
ASSETS:                                                      
Net loans $   $     $ 906.8      $ 1,937.4   $ 5,185.6   $ 20,809.3     $ (293.7 )   $ 28,545.4
Operating lease                                                      
equipment, net             1,131.2       56.8         9,800.5       (37.8 )     10,950.7
Assets held for sale             10.3           28.5     533.7             572.5
Cash and deposits with                                                      
banks   1,597.4     7.1       2.5       146.6     1,661.9     7,250.9             10,666.4
Other assets   31,100.1           18,797.1       1,245.9     692.6     1,415.0       (49,068.9 )     4,181.8
 
 
   
   
 
 
   
   
        Total Assets $ 32,697.5   $ 7.1     $ 20,847.9     $ 3,386.7   $ 7,568.6   $ 39,809.4     $ (49,400.4 )   $ 54,916.8
 
 
   
   
 
 
   
   
LIABILITIES AND                                                      
EQUITY:                                                      
Long-term borrowings,                                                      
including deposits $ 19,254.7   $ 2,194.7     $ 397.6     $ 0.9   $ 5,812.5   $ 15,336.4     $ (11.4 )   $ 42,985.4
Credit balances of                                                      
factoring clients                           877.3             877.3
Other liabilities   4,810.4     (2,314.9 )     5,027.5       2,394.5     35.5     (7,246.3 )     (286.5 )     2,420.2
 
 
   
   
 
 
   
   
        Total Liabilities   24,065.1     (120.2 )     5,425.1       2,395.4     5,848.0     8,967.4       (297.9 )     46,282.9
 
 
   
   
 
 
   
   
Total Stockholders’                                                      
Equity   8,632.4     127.3       15,422.8       991.3     1,720.6     30,840.5       (49,102.5 )     8,632.4
Noncontrolling minority                                                      
interests                           1.5             1.5
 
 
   
   
 
 
   
   
        Total Equity   8,632.4     127.3       15,422.8       991.3     1,720.6     30,842.0       (49,102.5 )     8,633.9
 
 
   
   
 
 
   
   
        Total Liabilities and                                                      
        Equity $ 32,697.5   $ 7.1     $ 20,847.9     $ 3,386.7   $ 7,568.6   $ 39,809.4     $ (49,400.4 )   $ 54,916.8
 
 
   
   
 
 
   
   
 
December 31, 2009                                                      
ASSETS:                                                      
Net loans $   $     $ 925.3     $ 1,976.3   $ 6,467.3   $ 25,868.7     $ (371.8 )   $ 34,865.8
Operating lease                                                      
equipment, net             1,088.3       47.4         9,834.7       (60.4 )     10,910.0
Assets held for sale             13.5       272.2     34.0     24.1             343.8
Cash and deposits with                                                      
banks   1,099.1     1.4       0.3       510.3     1,705.4     6,509.5       (0.1 )     9,825.9
Other assets   29,309.7     9.9       18,550.6       1,591.4     763.8     1,421.8       (47,563.6 )     4,083.6
 
 
   
   
 
 
   
   
        Total Assets $ 30,408.8   $ 11.3     $ 20,578.0     $ 4,397.6   $ 8,970.5   $ 43,658.8     $ (47,995.9 )   $ 60,029.1
 
 
   
   
 
 
   
   
LIABILITIES AND                                                      
EQUITY:                                                      
Long-term borrowings,                                                      
including deposits $ 19,340.5   $ 2,198.2     $ 630.6     $ 37.0   $ 7,326.0   $ 19,104.3     $ (155.0 )   $ 48,481.6
Credit balances of                                                      
factoring clients                           892.9             892.9
Other liabilities   2,674.7     (2,389.9 )     4,719.6       3,362.3     54.4     (5,883.6 )     (284.3 )     2,253.2
 
 
   
   
 
 
   
   
        Total Liabilities   22,015.2     (191.7 )     5,350.2       3,399.3     7,380.4     14,113.6       (439.3 )     51,627.7
 
 
   
   
 
 
   
   
Total Stockholders’                                                      
Equity   8,393.6     203.0       15,227.8       998.3     1,590.1     29,543.8       (47,556.6 )     8,400.0
Noncontrolling minority                                                      
interests                           1.4             1.4
 
 
   
   
 
 
   
   
        Total Equity   8,393.6     203.0       15,227.8       998.3     1,590.1     29,545.2       (47,556.6 )     8,401.4
 
 
   
   
 
 
   
   
        Total Liabilities and                                                      
        Equity $ 30,408.8   $ 11.3     $ 20,578.0     $ 4,397.6   $ 8,970.5   $ 43,658.8     $ (47,995.9 )   $ 60,029.1
 
 
   
   
 
 
   
   

20



CONSOLIDATING STATEMENTS OF OPERATION (dollars in millions)

  CIT Group
Inc.

   CIT Group
Funding
Company of
Delaware

   C.I.T. Leasing
Corporation

   CIT Financial
Ltd

   CIT Bank
   Other
Subsidiaries

   Eliminations
   Consolidated
Total

Six Months Ended June 30, 2010                             
Interest income $ 1.0     $ 30.9     $ 50.4     $ 92.3     $ 163.5     $ 1,717.0     $ (12.6 )   $ 2,042.5  
Interest expense   (892.2 )     (106.7 )     (127.9 )     12.8       (70.6 )     (479.4 )     12.6       (1,651.4 )
 
   
   
   
   
   
   
   
 
Net interest revenue   (891.2 )     (75.8 )     (77.5 )     105.1       92.9       1,237.6             391.1  
Provision for credit                                                              
losses   (11.1 )           (1.8 )     (28.5 )     (11.5 )     (394.4 )           (447.3 )
 
   
   
   
   
   
   
   
 
Net interest revenue,                                                              
after credit provision   (902.3 )     (75.8 )     (79.3 )     76.6       81.4       843.2             (56.2 )
Equity in net income of                                                              
subsidiaries   798.0             665.8       (2.4 )           385.5       (1,846.9 )      
Other Income                                                              
Rental income on                                                              
operating leases               84.5       14.4             740.0       (1.0 )     837.9  
Other   234.6             6.0       140.8       24.2       57.7       (0.5 )     462.8  
 
   
   
   
   
   
   
   
 
         Total other income   234.6             90.5       155.2       24.2       797.7       (1.5 )     1,300.7  
 
   
   
   
   
   
   
   
 
Total net revenue, net of                                                              
interest expense and                                                              
credit provision   130.3       (75.8 )     677.0       229.4       105.6       2,026.4       (1,848.4 )     1,244.5  
 
   
   
   
   
   
   
   
 
Other Expenses                                                              
Depreciation on                                                              
operating lease                                                              
equipment               (34.2 )     (10.0 )           (308.8 )     0.5       (352.5 )
Operating expenses   17.3             (42.1 )     (20.9 )     (22.7 )     (486.3 )     15.8       (538.9 )
 
   
   
   
   
   
   
   
 
         Total other expenses   17.3             (76.3 )     (30.9 )     (22.7 )     (795.1 )     16.3       (891.4 )
 
   
   
   
   
   
   
   
 
Income (loss) before                                                              
income taxes   147.6       (75.8 )     600.7       198.5       82.9       1,231.3       (1,832.1 )     353.1  
Benefit (provision) for                                                              
income taxes   91.9                   (63.5 )     (31.7 )     (110.3 )           (113.6 )
 
   
   
   
   
   
   
   
 
 
Income (loss) before                                                              
attribution of                                                              
noncontrolling interests   239.5       (75.8 )     600.7       135.0       51.2       1,121.0       (1,832.1 )     239.5  
Income attributable to                                                              
noncontrolling interests,                                                              
after tax                                 (0.1 )           (0.1 )
 
   
   
   
   
   
   
   
 
Net income (loss) $ 239.5     $ (75.8 )   $ 600.7     $ 135.0     $ 51.2     $ 1,120.9     $ (1,832.1 )   $ 239.4  
 
   
   
   
   
   
   
   
 

21



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS(dollars in millions)

  CIT Group
Inc.

   CIT Group
Funding
Company of
Delaware

   C.I.T. Leasing
Corporation

   CIT Financial
Ltd

   CIT Bank
   Other
Subsidiaries

   Eliminations
   Consolidated
Total

Six Months Ended June 30, 2010
 
Cash Flows From                                                              
Operating Activities:                                                              
 
Net cash flows provided                                                              
by (used for) operations $ (578.3 )   $ (49.4 )   $ 712.0     $ 189.0     $ 113.4     $ (208.6 )   $     $ 178.1  
 
   
   
   
   
   
   
   
 
Cash Flows From                                                              
Investing Activities:                                                              
 
Net decrease in financing                                                              
and leasing assets and                                                              
other investing activities   3.8             (57.2 )     286.0       1,288.5       5,601.7             7,122.8  
(Increase) decrease in                                                              
inter-company loans and                                                              
investments   1,158.5                                     (1,158.5 )      
 
   
   
   
   
   
   
   
 
Net cash flows (used for)                                                              
provided by investing                                                              
activities   1,162.3             (57.2 )     286.0       1,288.5       5,601.7       (1,158.5 )     7,122.8  
 
   
   
   
   
   
   
   
 
Cash Flows From                                                              
Financing Activities:                                                              
Net decrease                                                              
in debt and other                                                              
financing activities   (85.8 )     (3.5 )     (233.0 )     (36.1 )     (1,513.5 )     (4,346.8 )           (6,218.7 )
 
Inter-company financing         58.6       (419.6 )     (802.6 )     72.8       (67.7 )     1,158.5        
 
   
   
   
   
   
   
   
 
Net cash flows provided                                                              
by (used for) financing                                                              
activities   (85.8 )     55.1       (652.6 )     (838.7 )     (1,440.7 )     (4,414.5 )     1,158.5       (6,218.7 )
 
   
   
   
   
   
   
   
 
Net (decrease) increase                                                              
in unrestricted cash                                                              
and cash equivalents   498.2       5.7       2.2       (363.7 )     (38.8 )     978.6             1,082.2  
Unrestricted cash and cash                                                              
equivalents, beginning of                                                              
period   1,099.1       1.4       0.3       510.3       1,617.6       5,176.5             8,405.2  
 
   
   
   
   
   
   
   
 
Unrestricted cash and cash                                                              
equivalents, end of                                                              
period $ 1,597.3     $ 7.1     $ 2.5     $ 146.6     $ 1,578.8     $ 6,155.1     $     $ 9,487.4  
 
   
   
   
   
   
   
   
 

22




CONDENSED CONSOLIDATING BALANCE SHEETS (dollars in millions)

  Guarantor
Entities
   Non-Guarantor
Entities
   Eliminations
   Consolidated
Total
June 30, 2010                          
ASSETS:                          
Net loans $ 10,399.1   $ 18,438.7     $ (292.4 )   $ 28,545.4
Operating lease equipment, net   9,162.0     1,827.5       (38.8 )     10,950.7
Assets held for sale   444.8     127.7             572.5
Cash and deposits with banks   7,045.2     3,621.2             10,666.4
Other assets   26,042.2     3,020.7       (24,881.1 )     4,181.8
 
 
   
   
         Total Assets $ 53,093.3   $ 27,035.8     $ (25,212.3 )   $ 54,916.8
 
 
   
   
LIABILITIES AND EQUITY:                          
 
Long-term borrowings, including deposits $ 27,007.3   $ 16,209.1     $ (231.0 )   $ 42,985.4
Credit balances of factoring clients   861.7     15.7       (0.1 )     877.3
Other liabilities   14,845.9     (12,146.8 )     (278.9 )     2,420.2
 
 
   
   
         Total Liabilities   42,714.9     4,078.0       (510.0 )     46,282.9
 
 
   
   
Total Stockholders’ Equity   10,378.1     22,957.7       (24,703.4 )     8,632.4
Noncontrolling minority interests   0.3     0.1       1.1       1.5
 
 
   
   
         Total Equity   10,378.4     22,957.8       (24,702.3 )     8,633.9
 
 
   
   
         Total Liabilities and Equity $ 53,093.3   $ 27,035.8     $ (25,212.3 )   $ 54,916.8
 
 
   
   
 
December 31, 2009                          
ASSETS:                          
Net loans $ 15,373.1   $ 19,863.1     $ (370.4 )   $ 34,865.8
Operating lease equipment, net   7,936.5     3,033.9       (60.4 )     10,910.0
Assets held for sale   303.1     40.7             343.8
Cash and deposits with banks   6,772.4     3,053.6       (0.1 )     9,825.9
Other assets   23,650.2     3,390.5       (22,957.1 )     4,083.6
 
 
   
   
         Total Assets $ 54,035.3   $ 29,381.8     $ (23,388.0 )   $ 60,029.1
 
 
   
   
LIABILITIES AND EQUITY:                          
 
Long-term borrowings, including deposits $ 30,665.7   $ 18,138.8     $ (322.9 )   $ 48,481.6
Credit balances of factoring clients   871.7     21.2             892.9
Other liabilities   12,102.0     (9,547.9 )     (300.9 )     2,253.2
 
 
   
   
         Total Liabilities   43,639.4     8,612.1       (623.8 )     51,627.7
 
 
   
   
Total Stockholders’ Equity   10,394.6     20,769.6       (22,764.2 )     8,400.0
Noncontrolling minority interests   1.3     0.1             1.4
 
 
   
   
         Total Equity   10,395.9     20,769.7       (22,764.2 )     8,401.4
 
 
   
   
         Total Liabilities and Equity $ 54,035.3   $ 29,381.8     $ (23,388.0 )   $ 60,029.1
 
 
   
   

23




CONSOLIDATING STATEMENTS OF OPERATION (dollars in millions)

  Guarantor
Entities
   Non-Guarantor
Entities
   Eliminations
   Consolidated
Total
Six Months Ended June 30, 2010                              
Interest income $ 1,199.7     $ 868.3     $ (25.5 )   $ 2,042.5  
Interest expense   (1,397.5 )     (267.2 )     13.3       (1,651.4 )
 
   
   
   
 
Net interest revenue   (197.8 )     601.1       (12.2 )     391.1  
Provision for credit losses   (312.4 )     (141.8 )     6.9       (447.3 )
 
   
   
   
 
Net interest revenue, after credit provision   (510.2 )     459.3       (5.3 )     (56.2 )
Equity in net income of subsidiaries   608.2       261.3       (869.5 )    
 
Other Income                              
Rental income on operating leases   656.9       182.0       (1.0 )     837.9  
Other   459.0       14.3       (10.5 )     462.8  
 
   
   
   
 
         Total other income   1,115.9       196.3       (11.5 )     1,300.7  
 
   
   
   
 
Total net revenue, net of interest                              
expense and credit provision   1,213.9       916.9       (886.3 )     1,244.5  
 
   
   
   
 
Other Expenses                              
Depreciation on operating lease equipment   (269.3 )     (83.7 )     0.5       (352.5 )
Operating expenses   (465.8 )     (98.9 )     25.8       (538.9 )
 
   
   
   
 
         Total other expenses   (735.1 )     (182.6 )     26.3       (891.4 )
 
   
   
   
 
Income (loss) before income taxes   478.8       734.3       (860.0 )     353.1  
Benefit (provision) for income taxes   19.3       (133.5 )     0.6       (113.6 )
 
   
   
   
 
Income (loss) before attribution of                              
noncontrolling interests   498.1       600.8       (859.4 )     239.5  
Income attributable to noncontrolling                              
interests, after tax         0.4       (0.5 )     (0.1 )
 
   
   
   
 
Net income (loss) $ 498.1     $ 601.2     $ (859.9 )   $ 239.4  
 
   
   
   
 


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (dollars in millions)

  Guarantor
Entities
   Non-Guarantor
Entities
   Eliminations
   Consolidated
Total
Six Months Ended June 30, 2010                              
 
Cash Flows From Operating Activities:                              
Net cash flows provided by (used for)                              
operations $ 3,320.3     $ (3,142.2 )   $     $ 178.1  
 
   
   
   
 
 
Cash Flows From Investing Activities:                              
 
Net decrease in financing and leasing assets and other investing activities   3,068.8       4,054.0             7,122.8  
(Increase) decrease in inter-company loans                              
and investments   1,158.5             (1,158.5 )      
 
   
   
   
 
Net cash flows (used for) provided by investing                              
activities   4,227.3       4,054.0       (1,158.5 )     7,122.8  
 
   
   
   
 
 
Cash Flows From Financing Activities:                              
Net decrease in debt and other financing activities   (3,658.4 )     (2,560.3 )           (6,218.7 )
Inter-company financing   (3,616.4 )     2,457.9       1,158.5        
 
   
   
   
 
Net cash flows provided by (used for) financing                              
activities   (7,274.8 )     (102.4 )     1,158.5       (6,218.7 )
 
   
   
   
 
Net increase in unrestricted cash and cash                              
equivalents   272.8       809.4             1,082.2  
Unrestricted cash and cash equivalents, beginning of                              
period   6,772.4       1,632.8             8,405.2  
 
   
   
   
 
Unrestricted cash and cash equivalents, end of period $ 7,045.2     $ 2,442.2     $     $ 9,487.4  
 
   
   
   
 

24




CONDENSED CONSOLIDATING BALANCE SHEETS (dollars in millions)

  Restricted
Entities
   Unrestricted
Entities
   Eliminations
   Consolidated
Total
June 30, 2010                            
ASSETS:                            
Net loans $ 10,549.9     $ 18,287.9     $ (292.4 )   $ 28,545.4
Operating lease equipment, net   9,258.5       1,731.0       (38.8 )     10,950.7
Assets held for sale   463.6       108.9             572.5
Cash and deposits with banks   5,675.0       4,991.4             10,666.4
Other assets   9,846.6       32,037.7       (37,702.5 )     4,181.8
 
   
   
   
         Total Assets $ 35,793.6     $ 57,156.9     $ (38,033.7 )   $ 54,916.8
 
   
   
   
 
LIABILITIES AND EQUITY:                            
Long-term borrowings,                            
including deposits $ 7,583.4     $ 35,633.0     $ (231.0 )   $ 42,985.4
Credit balances of factoring clients   861.7       15.7       (0.1 )     877.3
Other liabilities   (2,588.2 )     5,287.3       (278.9 )     2,420.2
 
   
   
   
         Total Liabilities   5,856.9       40,936.0       (510.0 )     46,282.9
 
   
   
   
Total Stockholders’ Equity   29,936.4       16,220.8       (37,524.8 )     8,632.4
Noncontrolling minority interests   0.3       0.1       1.1       1.5
 
   
   
   
         Total Equity   29,936.7       16,220.9       (37,523.7 )     8,633.9
 
   
   
   
         Total Liabilities and Equity $ 35,793.6     $ 57,156.9     $ (38,033.7 )   $ 54,916.8
 
   
   
   
 
December 31, 2009                            
ASSETS:                            
Net loans $ 16,364.5     $ 18,871.7     $ (370.4 )   $ 34,865.8
Operating lease equipment, net   8,140.2       2,830.2       (60.4 )     10,910.0
Assets held for sale   303.1       40.7             343.8
Cash and deposits with banks   5,734.8       4,091.2       (0.1 )     9,825.9
Other assets   8,154.3       30,524.0       (34,594.7 )     4,083.6
 
   
   
   
         Total Assets $ 38,696.9     $ 56,357.8     $ (35,025.6 )   $ 60,029.1
 
   
   
   
 
LIABILITIES AND EQUITY:                            
Long-term borrowings,                            
including deposits $ 11,339.6     $ 37,464.9     $ (322.9 )   $ 48,481.6
Credit balances of factoring clients   871.7       21.2             892.9
Other liabilities   (2,605.1 )     5,159.3       (301.0 )     2,253.2
 
   
   
   
         Total Liabilities   9,606.2       42,645.4       (623.9 )     51,627.7
 
   
   
   
Total Stockholders’ Equity   29,089.1       13,712.6       (34,401.7 )     8,400.0
Noncontrolling minority interests   1.6       (0.2 )           1.4
 
   
   
   
         Total Equity   29,090.7       13,712.4       (34,401.7 )     8,401.4
 
   
   
   
         Total Liabilities and Equity $ 38,696.9     $ 56,357.8     $ (35,025.6 )   $ 60,029.1
 
   
   
   

25




CONSOLIDATING STATEMENTS OF OPERATION (dollars in millions)

  Restricted
Entities
   Unrestricted
Entities
   Eliminations
   Consolidated
Total
Six Months Ended June 30, 2010
Interest income $ 1,254.1     $ 813.9     $ (25.5 )   $ 2,042.5  
Interest expense   (304.0 )     (1,360.7 )     13.3       (1,651.4 )
 
   
   
   
 
Net interest revenue   950.1       (546.8 )     (12.2 )     391.1  
Provision for credit losses   (328.0 )     (126.2 )     6.9       (447.3 )
 
   
   
   
 
Net interest revenue, after credit provision   622.1       (673.0 )     (5.3 )     (56.2 )
Equity in net income of subsidiaries   149.3       893.9       (1,043.2 )      
Other Income                              
Rental income on operating leases   669.8       169.1       (1.0 )     837.9  
Other   314.0       159.3       (10.5 )     462.8  
 
   
   
   
 
                  Total other income   983.8       328.4       (11.5 )     1,300.7  
 
   
   
   
 
Total net revenue, net of interest expense                              
and credit provision   1,755.2       549.3       (1,060.0 )     1,244.5  
 
   
   
   
 
Other Expenses                              
Depreciation on operating lease equipment   (286.5 )     (66.5 )     0.5       (352.5 )
Operating expenses   (494.7 )     (70.0 )     25.8       (538.9 )
 
   
   
   
 
                  Total other expenses   (781.2 )     (136.5 )     26.3       (891.4 )
 
   
   
   
 
Income (loss) before income taxes   974.0       412.8       (1,033.7 )     353.1  
Benefit (provision) for income taxes   (83.0 )     (31.2 )     0.6       (113.6 )
 
   
   
   
 
Net income (loss) before attribution                              
of noncontrolling interests   891.0       381.6       (1,033.1 )     239.5  
Loss (income) attributable to                              
noncontrolling interests, after tax   0.3             (0.4 )     (0.1 )
 
   
   
   
 
Net income (loss) $ 891.3     $ 381.6     $ (1,033.5 )   $ 239.4  
 
   
   
   
 

NOTE 13 – SUBSEQUENT EVENT

On July 27, 2010, CIT announced its intention to explore refinancing the First Lien Facilities with investors. CIT plans to repay approximately $1 billion using cash and refinance the remaining $3 billion through a new first lien facility with an expected term of five years at a rate of LIBOR plus 4.5%, with a 1.75% floor. Necessary lender commitments were received on August 3, 2010 and the Company expects the transaction to close the week of August 9, 2010.

26


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

OVERVIEW

CIT Group Inc. is a bank holding company that provides financing and leasing capital principally for small businesses and middle market companies worldwide. We serve a wide variety of industries and offer vendor, equipment, commercial and structured financing products, as well as factoring and management advisory services. CIT is the parent of CIT Bank, a state-chartered bank in Utah. We operate primarily in North America, with locations in Europe, Latin America and Asia. CIT, which became a bank holding company (“BHC”) in 2008, has been providing financial solutions to its clients since its formation in 1908.

On November 1, 2009, CIT Group Inc. and CIT Group Funding Company of Delaware LLC filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. Both companies emerged on December 10, 2009 after cancelling the preferred and common stock of CIT Group Inc. and discharging their obligations to holders of certain senior debt, junior subordinated debt and equity units in exchange for issuing new senior notes (Series A and Series B) and new common stock of CIT Group Inc. To preserve valuable tax attributes following emergence from bankruptcy, we included restrictions in our Certificate of Incorporation on any shareholder who owns five percent or more of their new common stock. See “Income Taxes”. The terms “CIT” and “Company”, when used with respect to periods commencing after emergence from bankruptcy, are references to Successor CIT and when used with respect to periods prior to emergence, are references to Predecessor CIT. These references include subsidiaries of Successor CIT or Predecessor CIT, unless otherwise indicated or the context requires otherwise. Financial information about Successor CIT reflects the impact of fresh start accounting (“FSA”) unless otherwise indicated.

Additional information regarding the Company, including a description of its 2009 restructuring and its stated 2010 priorities and performance expectations, can be found in Item 7 and Item 7A Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk in our Form 10-K for the year ended December 31, 2009.

In the following discussion, we use financial terms that are relevant to our business. You can find a glossary of these terms in Item 1 Business Overview in our Form 10-K for the year ended December 31, 2009.

FINANCIAL PERFORMANCE OVERVIEW AND FRESH START ACCOUNTING

We continued to execute on the strategic priorities outlined earlier in the year. We have substantially completed the build out of our senior corporate leadership team including the hiring of a new Chief Financial Officer, Chief Administrative Officer and Head of Strategy, Chief Risk Officer, Chief Credit Officer, Chief Regulatory Officer, and Head of Human Resources in the second quarter and a new Controller and Head of Communications, Marketing and Government Relations since the end of the quarter. We have identified a candidate for one additional leadership position who we expect to hire upon receipt of all necessary regulatory approvals.

We made progress paying down our high cost first lien debt and re-accessing the capital markets for cost-efficient financing. Through the first six months of 2010, we repaid slightly over $3 billion of first lien facilities and made an additional repayment the first week of July reducing the principal amount of outstanding first lien debt to $4.0 billion. We also raised over $2.5 billion of secured debt in 2010 in the capital markets across a variety of asset classes, including trade and vendor receivables, aircraft and other lease equipment. These financings have all been at attractive rates, with costs averaging approximately 4% including amortization of related fees.

We made progress optimizing our asset portfolio. We sold over $3 billion of non-strategic assets year-to-date including non-core operations in Australia and Canada, certain Corporate Finance loans, and approximately 6% of our liquidating student loan portfolio. These sales have, in aggregate, occurred at prices above our FSA adjusted carrying values and provided liquidity for the aforementioned debt repayments.

We continue to work with our regulators in a constructive manner addressing the issues cited in our Written Agreement with the Federal Reserve Bank of New York. Much of that effort focuses on enhancing our overall risk and credit management policies, procedures and practices. Finally, we remain focused on expenses and we have and will continue to make progress driving operating efficiencies. However, we are equally committed to further investing in the risk management and control functions necessary to successfully operate as a bank holding company.

Our year-to-date financial results reflect the progress we have made on our initiatives. The balance sheet has contracted, reflecting our pro-active efforts to optimize our debt refinancing strategies, and we have increased our capital, built reserves and hold in excess of $10 billion of cash. We reported net income of nearly $240 million for the first half of the year, due in large part to the favorable accretion benefits stemming from FSA. Those benefits exceeded our initial forecasts as cash prepayments on loans were particularly strong in the first half of the year, resulting in accelerated accretion of FSA discounts.

27



As a result of our successes, our Tier One and Total Capital Ratios improved to 17.4% and 18.2%, respectively, and our book value per share increased to $43.11 at June 30, 2010.

In reviewing our second quarter results, this management discussion and analysis focuses on sequential trends as prior year comparisons to Predecessor CIT lack relevance given the impact of FSA. In the second quarter, net income was up on higher other income partially offset by higher credit provisioning.

Net income for the quarter was $142 million, $0.71 per share, up from $97 million, $0.49 per share in the first quarter. Net income benefitted from $407 million pretax net accretion and lower depreciation due to FSA adjustments during the second quarter, compared to $421 million pre-tax net accretion in the first quarter. The increased earnings contributed to higher book value per common share ($43.11 at June 30, 2010 and $42.63 at March 31, 2010) and tangible book value per common share ($41.07 at June 30, 2010 and $40.43 at March 31, 2010).

Net interest revenue declined $31 million on lower financing assets and less net FSA accretion. However, total net revenues(1) increased 28% sequentially as an increase in Other Income offset the decline in net interest revenue.

Net finance revenue(1) (which includes operating lease rentals and depreciation) as a percentage of average earning assets was 4.03% compared to 4.09% last quarter and includes a 3.72% benefit from FSA. Excluding the impact from FSA and the prepayment penalty fees on the prepayment of high cost first lien debt, margin was 0.68% up slightly from the first quarter.

Other income (excluding operating lease rentals) increased from last quarter due to $130 million of gains on receivable and asset sales and $113 million of recoveries on receivables charged-off prior to the adoption of FSA. The 2010 first quarter included losses on foreign currency exposures that were largely hedged during the second quarter.

Non-personnel operating expenses were down. Salaries and compensation expenses increased from the first quarter on costs related to an employee retention program established last quarter. We are currently evaluating office space needs and plan to exit certain premises in the second half of 2010. Based on the alternatives being evaluated and current market conditions this evaluation could result in a charge of between $40 and $55 million in the second half of 2010.

Cash was up from the first quarter and consisted of unrestricted cash of $6.1 billion at the bank holding company, $1.7 billion at CIT Bank, $1.7 billion at operating subsidiaries and $1.2 billion in other restricted cash. We are developing access to more cost-efficient funding sources to support lending to our small business and middle market customers. We completed a new $650 million committed conduit facility for Trade Finance and a £100 million (approximately $150 million) committed Vendor Finance U.K. conduit facility, Vendor Finance’s first conduit facility outside of North America, during the second quarter. These transactions, when combined with first quarter financings, aggregate to over $2.5 billion in funding capacity. Our strengthened balance sheet and profitability resulted in improved capital ratios. Tier 1 and Total Capital ratios improved to 17.4% and 18.2%, respectively, from 15.7% and 16.1% at March 31, 2010.

Financing and leasing assets were reduced by almost $4 billion, through the combination of strategic asset sales and net portfolio collections. New business volume increased 14% from the first quarter to over $1 billion, with the greatest increase in Corporate Finance.

Debt was reduced by $3 billion during the quarter, primarily related to pre-payments on first lien facilities and secured borrowings. $2.3 billion of first lien debt was prepaid during the quarter ($1.5 billion in April and $0.8 billion in June). Approximately $450 million was prepaid just after the June 30, 2010 quarter-end, leaving $4 billion of the original $7.5 billion first lien debt outstanding on July 1, 2010.

On July 27, 2010, we announced that we intend to explore refinancing the first lien debt with investors. Our plan is to repay approximately $1 billion using cash and refinancing the remaining $3 billion through a new first lien facility with an expected term of five years at a rate of LIBOR plus 4.5%, with a 1.75% floor. Necessary lender commitments were received on August 3, 2010 and we expect the transaction to close the week of August 9, 2010.

Net charge-offs of $106 million were up $64 million from the first quarter driven principally by smaller balance loans where the marks were established on a portfolio basis. Non-accrual loans of $2.1 billion increased $120 million from the first quarter, driven primarily by Corporate Finance. These credit metrics include asset marks and other FSA-related items. However, net charge-offs do not reflect recoveries of pre-FSA charge-offs recorded in other income, which were $113 million in the second quarter and $44 million in the first quarter.

Management also evaluates credit performance using credit metrics that exclude the impact of FSA. On this basis, gross charge-offs were $252 million, up $16 million from last quarter, driven by real estate and energy-related loans. These gross charge-offs also exclude recoveries of pre-FSA charge-offs recorded in other income. Non-accrual loans of $3.0 billion decreased $54 million from the first quarter. In aggregate, portfolio credit quality was at levels similar to the first quarter.

The provision for credit losses increased $74.1 million from the first quarter primarily due to some incremental deterioration on loans previously discounted in FSA.


(1) Total net revenue and net finance revenue are non-GAAP measures. See Non-GAAP Financial Measurements section for reconciliation of non-GAAP to GAAP financial information.

28



Corporate Finance, Transportation Finance, Trade Finance and Consumer results improved from last quarter, while Vendor Finance results declined.

Business trends are discussed further in “Results by Business Segment”.

Discussion of Results in Comparison to 2009

The following discussion highlights certain year over year results. However, FSA adjustments reflected in 2010 impact the usefulness and comparability of year over year comparisons.

Net income for the quarter ended June 30, 2010, of $142.1 million, improved from the prior year loss of $1.7 billion, which included a $692 million goodwill and intangible assets impairment charge and approximately $200 million in losses on assets sales and related valuations. In contrast, 2010 results included $130 million in asset sale gains and $113 million in recoveries on pre-emergence charge-offs reported in other revenue. The 2010 provision for credit losses declined $328 million from the prior year, largely due to FSA discount reducing reported charge-offs in the current year. Even prior to FSA, gross charge-offs were $124 million below 2009. The current period results also benefitted from $407 million in net accretion of FSA adjustments as discussed previously. Net finance revenue margins (including net operating lease income) prior to FSA and excluding current period prepayment charges on debt repayments were 0.68% versus 1.10% in 2009, largely reflecting the high cost debt issued in the reorganization and the cost of additional liquidity.

Net income for the six months ended June 30, 2010, of $239.4 million, improved from the prior year loss of $2.1 billion, reflecting the same trends and factors that drove the second quarter comparison. For the first half, the provision for credit losses was $677 million below 2009. Net finance margin was down, as 2010 net finance revenue margins prior to FSA and excluding current period prepayment charges were 0.67% versus 1.11% in the prior year.

Fresh Start Accounting

Upon emergence from bankruptcy, CIT adopted FSA. As a result, assets, liabilities and equity were reflected in our financial statements at fair value at December 31, 2009. FSA adjustments are reflected in 2010 and December 31, 2009 ending balances, while accretion and amortization of certain FSA adjustments are reflected in operating results for the quarters ended June 30 and March 31, 2010. Therefore, June 30, 2010 financial data is not comparable to June 30, 2009 data and comparisons throughout this document are primarily sequential.

The following table presents FSA adjustments by balance sheet caption:


Fresh Start Accounting (Discount) / Premium (dollars in millions)
    At June 30, 2010       At March 31, 2010       At December 31, 2009  
    Accretable     Non-accretable       Accretable     Non-accretable       Accretable     Non-accretable  
 
   
      
   
   
   
 
Loans(1) $ (2,369.8 )    $ (1,184.9 )   $ (3,030.0 )    $ (1,566.0 )    $ (3,507.3 )    $ (1,755.1 )
Operating lease
equipment, net
  (3,109.3 )           (3,153.4 )           (3,239.7 )      
Goodwill and
intangible assets
  168.5       239.4       201.5       239.4       225.1       239.4  
Other assets   (261.2 )           (285.2 )           (321.0 )      
 

 
 

 
 

 
Total $ (5,571.8 )   $ (945.5 )   $ (6,267.1 )   $ (1,326.6 )   $ (6,842.9 )   $ (1,515.7 )
 


 


 

 


 


 


Deposits $ 112.3     $     $ 121.6     $     $ 131.4     $  
Long-term
borrowings
  (3,195.0 )           (3,284.9 )           (3,394.4 )      
Other liabilities         285.4             306.7             336.6  
 
 
 
 
 
 
Total $ (3,082.7 )   $ 285.4     $ (3,163.3 )   $ 306.7     $ (3,263.0 )   $ 336.6  
 


 

 

 

 


 


(1) The June 2010 balances do not include approximately $255 million of discounts associated with loans which were transferred to assets held for sale in the quarter ended June 30, 2010.

In addition to the accretion of the loans’ FSA adjustment recorded in interest income ($418 million in the second quarter), the accretable balance declined from March as a result of asset sales and transfers to held for sale. The decline in non-accretable balance is due to charge-offs, prepayments, asset sales and transfer of loan non-accretable discount to accretable discount. See Note 2 for additional information on this transfer.

29



The following table summarizes the impact of accretion and amortization of fresh start accounting adjustments on the Consolidated Statement of Operations:


Accretion / (Amortization) of Fresh Start Accounting Adjustments (dollars in millions)
    Corporate
Finance
      Transportation
Finance
      Trade       Vendor
Finance
              Corporate
and Other
      Total
CIT
 
Quarter Ended June 30, 2010             Finance             Consumer              
 
 
 
 
 
 
 
Interest income $ 304.8      $ 20.6      $ 2.9      $ 58.4     $ 30.2      $ 0.9      $ 417.8  
Interest expense   (45.2 )     (16.5 )     (1.6 )     (7.3 )     (9.4 )     (0.1 )     (80.1 )
Rental income on operating                                                      
leases         (24.8 )                             (24.8 )
                                                       
Depreciation expense   3.6       59.4             7.1                   70.1  
                                                       
Other income   18.4       3.7                   1.8             23.9  
 
 
 
 
 
 
 
Total $ 281.6     $ 42.4     $ 1.3     $ 58.2     $ 22.6     $ 0.8     $ 406.9  
 
 
 

 
 
 

 
Six Months Ended June 30,                                                      
2010                                                      
Interest income $ 634.9     $ 43.5     $ 9.6     $ 121.4     $ 59.8     $ 0.2     $ 869.4  
Interest expense   (93.6 )     (45.7 )     (3.6 )     (18.3 )     (19.8 )     0.2       (180.8 )
Rental income on operating                                                      
leases         (58.6 )    
                        (58.6 )
                                                       
Depreciation expense   5.0       116.9      
      16.0                   137.9  
                                                       
Other income   45.9       9.2      
            4.6             59.7  
 
 
 
 
 
 
 
Total $ 592.2     $ 65.3     $ 6.0     $ 119.1     $ 44.6     $ 0.4     $ 827.6  
 
 
 

 
 
 

 

Due to market conditions, there has been a high level of loan prepayments in the first half of 2010, resulting in higher accretion of interest income than was anticipated. For the three and six months ended June 30, 2010, the accretion income related to prepayments of loans was $135 million and $279 million, respectively, primarily related to Corporate Finance, and is included in interest income.


NET FINANCE REVENUE


Net Finance Revenue (dollars in millions)
  Quarters Ended
  Six Months Ended
  CIT
      Predecessor CIT
  CIT
      Predecessor CIT
  June 30,
2010
  March 31,
2010
  June 30,
2009
  June 30,
2010
  June 30,
2009
 
 
 
 
 
Interest income $ 993.5      $ 1,049.0      $ 614.5      $ 2,042.5      $ 1,254.1  
Rental income on operating leases   419.7       418.2       473.5       837.9       948.7  
 
 
 
 
 
Finance revenue   1,413.2       1,467.2       1,088.0       2,880.4       2,202.8  
Interest expense   (813.6 )     (837.8 )     (633.6 )     (1,651.4 )     (1,290.7 )
Depreciation on operating lease equipment   (179.0 )     (173.5 )     (286.6 )     (352.5 )     (568.6 )
 
 
 
 
 
Net finance revenue $ 420.6     $ 455.9     $ 167.8     $ 876.5     $ 343.5  
 

 

 

 
 
Average Earnings Assets (“AEA”) $ 41,747.3     $ 44,642.1     $ 61,261.4     $ 43,223.1     $ 61,816.3  
 

 

 

 
 
As a % of AEA:                                      
Interest income   9.52 %     9.40 %     4.01 %     9.45 %     4.06 %
Rental income on operating leases   4.02 %     3.75 %     3.09 %     3.88 %     3.07 %
 
 
 
 
 
Finance revenue   13.54 %     13.15 %     7.10 %     13.33 %     7.13 %
Interest expense   -7.80 %     -7.51 %     -4.13 %     -7.64 %     -4.18 %
Depreciation on operating lease equipment   -1.71 %     -1.55 %     -1.87 %     -1.63 %     -1.84 %
 
 
 
 
 
Net finance revenue   4.03 %     4.09 %     1.10 %     4.06 %     1.11 %
 

 

 

 
 
As a % of AEA by Segment:                                      
Corporate Finance   7.30 %     6.71 %     2.42 %     6.97 %     2.27 %
Transportation Finance   1.65 %     0.65 %     2.00 %     1.15 %     2.14 %
Trade Finance   -4.85 %     -1.72 %     2.95 %     -3.22 %     2.57 %
Vendor Finance   8.13 %     9.91 %     3.15 %     9.06 %     3.24 %
     Commercial Segments   4.78 %     4.97 %     2.50 %     4.87 %     2.48 %
Consumer   1.39 %     0.91 %     -0.49 %     1.14 %     -0.36 %

30



Net finance revenue was favorably impacted by FSA accretion and depreciation adjustments, as detailed in the prior table. Excluding FSA adjustments and debt prepayment penalty fees of approximately $45 million in the second quarter and $15 million in the first quarter, net finance revenue totaled $83 million, down slightly from $86 million last quarter. The decline in interest income was primarily due to lower asset levels. Average earning assets were down $2.9 billion as sales and collection activity outpaced new business originations. Interest expense was down sequentially due to lower debt balances, but remains elevated.

As detailed in the following table, net finance revenue as a percentage of AEA for the 2010 periods includes significant favorable impact from net accretion and lower depreciation as a result of FSA.


Net Finance Revenue as a % of AEA
  Quarters Ended
  Six Months Ended
  June 30,
2010
  March 31,
2010
  June 30,
2010
 

 

 

Net finance revenue % 4.03 %    4.09 %     4.06 %
Impact from FSA -3.72 %   -3.55 %   -3.63 %
Secured credit facility prepayment penalty fee 0.37 %   0.11 %   0.24 %
 

 

 

Net Finance Revenue 0.68 %   0.65 %   0.67 %
 

 

 

Although up a few basis points sequentially, high debt costs remain a prominent factor in the low margin rate. To lower future borrowing costs, we prepaid approximately $3.5 billion of our high cost first lien facilities (including amounts after second quarter end) and completed lower cost financings of $2.5 billion during the first six months of 2010. See “Financial Performance Overview” for current refinancing transaction. The increase in net margins was driven by reduction in high cost first lien debt and new lower cost secured financings but muted by the contraction in average earnings assets and higher cash balances.


Net Operating Lease Revenue as a % of Average Operating Leases (AOL) (dollars in millions)
  Quarters Ended
  Six Months Ended
   
  CIT
     Predecessor CIT
  CIT
     Predecessor CIT
            
  June 30,
2010
  March 31,
2010
  June 30,
2009
  June 30,
2010
  June 30,
2009
         
 


 


 


 


 


Rental income on operating leases   15.30 %      15.28 %     14.30 %      15.29 %     14.53 %
Depreciation on operating lease equipment   -6.52 %     -6.34 %     -8.66 %     -6.43 %     -8.71 %
 


 


 


 


 


Net operating lease revenue   8.78 %     8.94 %     5.64 %     8.86 %     5.82 %
 


 


 


 


 


Net operating lease revenue, excluding FSA   5.54 %     5.96 %     5.64 %     5.75 %     5.82 %
 


 


 


 


 


Average Operating Lease Equipment (“AOL”) $ 10,973.5     $ 10,945.2     $ 13,240.3     $ 10,962.5     $ 13,052.6  
 


 


 


 


 


Net operating lease revenue included an FSA benefit of $45 million in the current quarter ($79 million year-to-date) as lower depreciation helped offset reduced rental income on operating leases. Before FSA adjustments, net operating lease revenue declined $15 million sequentially due to lower balances of smaller ticket equipment, which also contributed to the lower margin percentage. Net operating lease revenue is primarily generated from aircraft and rail transportation portfolios. Utilization remained strong in aerospace and all of the new aircraft to be delivered over the next twelve months from our order book are placed on lease. Rail lease and utilization rates improved from last quarter to 93% on modest increases in activity across most major car types, and rents improved on usage-based contracts. See “Concentrations — Operating Leases”.


CREDIT METRICS

Management analyzes credit trends both before and after FSA in order to provide comparability with our longer-term credit trends (which included pre-emergence / historical accounting) and credit trends experienced by other market participants.

Our credit metrics included the following trends:

31


Allowance for Loan Losses and Provision for Credit Losses

As a result of adopting FSA, the allowance for loan losses at December 31, 2009 was eliminated and effectively recorded as discounts on loans as part of the fair value of finance receivables. A portion of the discount attributable to embedded credit losses is recorded as non-accretable discount and utilized as such losses occur, primarily on impaired, non-accrual loans. Any incremental deterioration on loans in this group will result in incremental provisions or charge-offs. Improvements or increases in forecasted cash flows in excess of non-accretable discount will reduce any allowance on the loan established after emergence from bankruptcy. Once such allowance (if any) has been reduced the non-accretable discount will be reclassified to accretable discount and will be recorded as finance income over the remaining life of the account. Recoveries on pre-emergence (2009 and prior) charge-offs are reflected in other income.

For performing pre-emergence loans, a provision for credit losses is recorded to reflect an estimate of losses in excess of FSA discount.

The second quarter provision for credit losses increased $74.1 million from the first quarter, as an incremental change in credit quality, which resulted in additional specific reserves and higher charge-offs in excess of FSA discounts, was partially offset by lower non-specific provisioning on new origination volume and performing pre-emergence loans. With respect to the incremental credit charges, the charge-offs are prior to $113 million and $157 million in recoveries for the second quarter and the first half of 2010, respectively, related to pre-emergence charge-offs. Incremental specific reserves in excess of FSA marks include charges related to a liquidating consumer portfolio in Vendor Finance.

At June 30, 2010, the $337.8 million allowance for loan losses reflects the provisioning for the first six months of 2010 of $447 million less net charge-offs of $149 million and also includes $40 million of reserves for securitized loans brought on-balance sheet in conjunction with the new accounting pronouncement related to consolidation of VIEs adopted on January 1, 2010.

The following table summarizes the components of the allowance and provision recorded in 2010:


Components of Allowance and Provision Recorded in 2010 (dollars in millions)
  Provision for Credit Losses      
 
     
  Quarters Ended   Six Months Ended
June 30, 2010
  Allowance for
Loan Losses
  June 30, 2010   March 31, 2010    
 


 

 


 

Reserve Activities                          
New originations and Trade Finance non-specific reserve $ 22.0        $ 37.0    $ 59.0      $ 59.0
Non-specific reserves on performing pre-emergence portfolio   57.0       74.3     131.3       127.0
 


 

 


 

Total Reserve Activities   79.0       111.3     190.3       186.0
Incremental Change in Credit                          
Incremental reserves in excess of FSA marks on pre-emergence loans   79.0       33.0     112.0       112.0
Charge-offs in excess of non-accretable discount   106.3       42.3     148.6      
 


 

 


 

Total Incremental Change in Credit   185.3       75.3     260.6       112.0
Other                          
Establish reserve for Securitized Assets returned to                          
Balance Sheet to comply with new accounting standard
(no P&L impact)
  (3.0 )         (3.0 )     38.0
FX and other adjustments   (0.6 )         (0.6 )     1.8
 


 

 


 

Total $ 260.7     $ 186.6   $ 447.3     $ 337.8
 


 

 


 

The allowance for loan 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, and other pertinent factors such as estimation risk related to performance in prospective periods. We may make adjustments to the allowance depending on general economic conditions and specific industry weakness or trends in our portfolio credit metrics, including non-accrual loans and charge-off levels and realization rates on collateral.

32



Our allowance for loan losses includes: (1) specific reserves for impaired loans and (2) reserves for estimated losses inherent in non-impaired loans based on historic loss experience and our estimates of projected loss levels. Our policy is to recognize losses through charge-offs when there is loss certainty after considering the borrower’s financial condition and underlying collateral and guarantees and the finalization of collection activities.

The following table presents detail on our allowance for loan losses including charge-offs and recoveries:


Reserve and Provision for Credit Losses (dollars in millions)
  Quarters Ended June 30,   Six Months Ended June 30,
 


 


  CIT      Predecessor CIT   CIT     Predecessor CIT
 


 
   

   

  2010       2009       2010       2009  
 


 


 


 


Reserve balance – beginning of period $ 180.8      $ 1,316.3       $      $ 1,096.2  
 


 

   

   


Provision for credit losses   260.7       588.5       447.3       1,123.9  
Reserve changes relating to new accounting pronouncement               39.7        
Reserve changes relating to foreign currency translation, other   2.6       (10.5 )     (0.6 )     (12.7 )
 


 


 


 


Net additions to reserve for credit losses   263.3       578.0       486.4       1,111.2  
 


 


 


 


Gross charge-offs   (113.3 )     (375.8 )     (157.7 )     (703.0 )
Recoveries(1)   7.0       19.9       9.1       34.0  
 


 


 


 


Net charge-offs   (106.3 )     (355.9 )     (148.6 )     (669.0 )
 


 


 


 


Reserve balance – end of period $ 337.8     $ 1,538.4     $ 337.8     $ 1,538.4  
 


 


 


 


(1) Recoveries do not include $113.3 million and $157.1 million for the three and six months ended June 30, 2010, respectively, of recoveries on accounts that were charged-off pre-FSA and are included in other income.

In addition to the reserves shown above, the non-accretable discount established in FSA is available to offset future charge-offs on individual loans. A total of $1.523 billion, comprised of remaining non-accretable discount of $1.185 billion and the allowance for loan losses of $338 million, is available to cover losses.

The decrease in non-accretable discounts during the six months ended June 30, 2010 is largely due to prepayments, asset sales and transfer of non-accretable discount to accretable discount. See Note 2 for additional information on this transfer.

The following table presents charge-offs by business segment. See Results by Business Segment for additional information.


Net Charge-offs (charge-offs net of recoveries) as a Percentage of Average Finance Receivables (dollars in millions)
  Quarters Ended
Six Months Ended
 
  CIT
     Predecessor CIT
CIT
     Predecessor CIT
  June 30, 2010   March 31, 2010   June 30, 2009 June 30, 2010    June 30, 2009
 

 

 
Gross charge-offs                                              
   Corporate Finance $ 53.2     $ 26.9       $ 238.0     $ 80.1       $ 451.2    
   Transportation                                            
   Finance                 1.2               3.4    
   Trade Finance   12.5       2.7         14.8       15.2         37.4    
   Vendor Finance   38.2       10.3         88.3       48.5         138.7    
   Consumer   9.4       4.5         33.5       13.9         72.3    
 

   

     

   

     

   
Total gross charge-offs   113.3       44.4         375.8       157.7         703.0    
 

   

     

   

     

   
Recoveries                                            
   Corporate Finance   1.3       1.3         2.6       2.6         4.6    
   Transportation                                            
   Finance                               0.9    
   Trade Finance   0.1               0.6       0.1         0.8    
   Vendor Finance   5.5       0.8         14.5       6.3         23.4    
   Consumer   0.1               2.2       0.1         4.3    
 

   

     

   

     

   
Total recoveries   7.0       2.1         19.9       9.1         34.0    
 

   

     

   

     

   
                                             
Net charge-offs