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

FORM 10-Q

  |X| Quarterly Report Pursuant to Section 13 or 15(d)
or of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2011
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 

Commission File Number: 001-31369

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

Delaware 65-1051192
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
  
11 West 42nd Street New York, New York 10036
(Address of Registrant’s principal executive offices) (Zip Code)
 
(212) 461-5200  
(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 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 29, 2011 there were 200,612,222 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) 4
  Consolidated Statement of Stockholders’ Equity (Unaudited) 5
  Consolidated Statements of Cash Flows (Unaudited) 6
  Notes to Consolidated Financial Statements 7
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 43
  and  
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 43
ITEM 4. Controls and Procedures 98
     
Part Two—Other Information:
ITEM 1. Legal Proceedings 99
ITEM 1A Risk Factors 99
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 99
ITEM 5. Other Information 99
ITEM 6. Exhibits 100
Signatures 105

1



Part One—Financial Information

ITEM 1.   Consolidated Financial Statements

CIT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited) (dollars in millions – except per share data)
  June 30,
2011
  December 31,
2010
 
 
 
 
Assets            
Cash and due from banks $ 818.2   $ 734.1  
Interest bearing deposits, including restricted balances of $2,425.8 at June 30, 2011 and            
$2,553.8 at December 31, 2010(1)   6,537.5     10,469.9  
Investment securities   2,983.3     328.5  
Trading assets at fair value – derivatives   12.6     25.7  
Assets held for sale(1)   1,863.5     1,218.5  
Loans (see Note 5 for amounts pledged)   22,284.7     24,500.5  
Allowance for loan losses   (424.0 )   (416.2 )
 
 
 
Total loans, net of allowance for loan losses(1)   21,860.7     24,084.3  
Operating lease equipment, net (see Note 5 for amounts pledged)(1)   10,920.4     11,136.7  
Unsecured counterparty receivable   528.9     534.5  
Goodwill   264.5     277.4  
Intangible assets, net   84.1     119.2  
Other assets   2,135.9     2,029.4  
 
 
 
Total Assets $ 48,009.6   $ 50,958.2  
 
 
 
 
Liabilities            
Deposits $ 4,428.1   $ 4,536.2  
Trading liabilities at fair value – derivatives   230.6     126.3  
Credit balances of factoring clients   1,084.9     935.3  
Other liabilities   2,432.0     2,466.9  
Long-term borrowings, including $2,487.5 and $3,686.3 contractually due within twelve            
months at June 30, 2011 and December 31, 2010, respectively   30,891.1     33,979.8  
 
 
 
Total Liabilities   39,066.7     42,044.5  
 
 
 
Stockholders’ Equity            
Common stock: $0.01 par value, 600,000,000 authorized            
   Issued: 200,863,106 at June 30, 2011 and 200,690,938 at December 31, 2010   2.0     2.0  
   Outstanding: 200,579,734 at June 30, 2011 and 200,463,197 at December 31, 2010
           
Paid-in capital   8,447.4     8,434.1  
Retained earnings   515.9     498.3  
Accumulated other comprehensive income   (12.3 )   (9.6 )
Treasury stock: 283,372 shares at June 30, 2011 and 227,741 at December 31, 2010, at            
cost   (11.5 )   (8.8 )
 
 
 
Total Common Stockholders’ Equity   8,941.5     8,916.0  
Noncontrolling minority interests   1.4     (2.3 )
 
 
 
Total Equity   8,942.9     8,913.7  
 
 
 
Total Liabilities and Equity $ 48,009.6   $ 50,958.2  
 
 
 

2



(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 generally not available to the creditors of CIT or any affiliates of CIT.

Assets           
Interest bearing deposits, restricted $ 875.7   $ 931.2
Assets held for sale   132.4     100.0
Total loans, net of allowance for loan losses   11,030.7     12,041.5
Operating lease equipment, net   2,974.7     2,900.0
 
 
Total Assets $ 15,013.5   $ 15,972.7
 
 
Liabilities          
Beneficial interests issued by consolidated VIEs (classified as long-term borrowings) $ 9,651.0   $ 10,764.7
 
 
Total Liabilities $ 9,651.0   $ 10,764.7
 
 

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

3




CIT GROUP INC. AND SUBSIDIARIES

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

  Quarters Ended June 30,   Six Months Ended June 30,  
 
 
 
  2011   2010(1) 2011   2010(1)
 
 
 
 
 
Interest income                        
   Interest and fees on loans $ 594.3   $ 1,016.5   $ 1,229.8   $ 2,113.9  
   Interest and dividends on investments   7.8     7.3     15.5     14.6  
 
 
 
 
 
      Interest income   602.1     1,023.8     1,245.3     2,128.5  
 
 
 
 
 
Interest expense                        
   Interest on long-term borrowings   (780.6 )   (789.2 )   (1,455.1 )   (1,599.8 )
   Interest on deposits   (25.1 )   (18.3 )   (49.5 )   (39.1 )
 
 
 
 
 
      Interest expense   (805.7 )   (807.5 )   (1,504.6 )   (1,638.9 )
 
 
 
 
 
Net interest revenue   (203.6 )   216.3     (259.3 )   489.6  
Provision for credit losses   (84.7 )   (246.7 )   (208.1 )   (472.8 )
 
 
 
 
 
Net interest revenue, after credit provision   (288.3 )   (30.4 )   (467.4 )   16.8  
 
 
 
 
 
Other income                        
   Rental income on operating leases   417.9     417.9     831.2     843.7  
   Other   239.9     338.5     518.1     488.9  
 
 
 
 
 
      Total other income   657.8     756.4     1,349.3     1,332.6  
 
 
 
 
 
Total revenue, net of interest expense and credit                        
provision   369.5     726.0     881.9     1,349.4  
 
 
 
 
 
Other expenses                        
   Depreciation on operating lease equipment   (145.5 )   (178.1 )   (306.0 )   (350.8 )
   Operating expenses   (245.8 )   (277.8 )   (462.2 )   (539.5 )
 
 
 
 
 
      Total other expenses   (391.3 )   (455.9 )   (768.2 )   (890.3 )
 
 
 
 
 
Income before provision for income taxes   (21.8 )   270.1     113.7     459.1  
Provision for income taxes   (26.9 )   (88.2 )   (92.6 )   (131.6 )
 
 
 
 
 
Net income before attribution of noncontrolling                        
interests   (48.7 )   181.9     21.1     327.5  
Net income attributable to noncontrolling interests,                        
after tax   0.7     (0.3 )   (3.5 )   (1.3 )
 
 
 
 
 
Net (loss) income $ (48.0 ) $ 181.6   $ 17.6   $ 326.2  
 
 
 
 
 
 
Basic (loss) earnings per common share $ (0.24 ) $ 0.91   $ 0.09   $ 1.63  
Diluted (loss) earnings per common share $ (0.24 ) $ 0.91   $ 0.09   $ 1.63  
Average number of common shares (thousands)                        
   Basic   200,658     200,075     200,631     200,057  
   Diluted   200,658     200,644     200,893     200,359  
   
(1)     

These restated balances were disclosed in Note 26 of the Company’s Form 10-K for the year ended December 31, 2010.

 

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

4




CIT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS 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, 2010 $ 2.0   $ 8,434.1   $ 498.3   $ (9.6 ) $ (8.8 ) $ (2.3 ) $ 8,913.7  
                         
 
Net income               17.6                   3.5     21.1  
Foreign currency                                            
translation adjustments                     (9.0 )                 (9.0 )
Change in fair values of                                            
derivatives qualifying as                                            
cash flow hedges                     0.5                   0.5  
Unrealized gain on                                            
available for sale equity                                            
investments, net                     5.9                   5.9  
                                             
Minimum pension liability                                            
adjustment                     (0.1 )                 (0.1 )
                         
 
Total comprehensive                                            
income                                         18.4  
                         
 
Restricted stock and stock                                            
option expenses         13.3                 (2.7 )         10.6  
Equity distribution                                   0.2     0.2  
 
 
 
 
 
 
 
 
June 30, 2011 $ 2.0   $ 8,447.4   $ 515.9   $ (12.3 ) $ (11.5 ) $ 1.4   $ 8,942.9  
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2009 $ 2.0   $ 8,398.0   $   $     $   $ 1.4   $ 8,401.4  
 
 
Adoption of new accounting                                            
pronouncement               (18.4 )                 (8.4 )   (26.8 )
                         
 
Net income               326.2                   1.3     327.5  
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                                         317.8  
                         
 
Restricted stock and stock                                            
option expenses         21.1                   (4.0 )         17.1  
 
 
 
 
 
 
 
 
June 30, 2010(1) $ 2.0   $ 8,419.1   $ 307.8   $ (9.7 )   $ (4.0 ) $ (5.7 ) $ 8,709.5  
 
 
 
 
 
 
 
 
(1)     

These restated balances were disclosed in Note 26 of the Company’s Form 10-K for the year ended December 31, 2010.

 

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

5




CIT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (dollars in millions)

  Six Months Ended June 30,  
 
 
  2011   2010(1)
 
 
 
 
Cash Flows From Operations            
Net income $ 17.6   $ 326.2  
Adjustments to reconcile net income to net cash flows from operations:            
   Provision for credit losses   208.1     472.8  
   Net depreciation, amortization and (accretion)   315.2     (423.4 )
   Net gains on equipment, receivable and investment sales   (253.7 )   (189.1 )
   Provision for deferred income taxes   16.3     69.6  
   Decrease in finance receivables held for sale   5.7     5.6  
   Increase in other assets   (84.7 )   (151.3 )
   Increase in accrued liabilities and payables   31.1     67.7  
 
 
 
Net cash flows provided by operations   255.6     178.1  
 
 
 
Cash Flows From Investing Activities            
Loans extended and purchased   (10,611.8 )   (9,100.5 )
Principal collections of loans and investments   11,708.3     13,770.5  
Purchases of investment securities   (12,633.4 )    
Proceeds from maturities of investment securities   9,956.2      
Proceeds from asset and receivable sales   1,681.4     2,415.6  
Purchases of assets to be leased and other equipment   (546.5 )   (616.6 )
Net (increase) decrease in short-term factoring receivables   (26.4 )   395.1  
Change in restricted cash   128.0     258.7  
 
 
 
Net cash flows (used in) provided by investing activities   (344.2 )   7,122.8  
 
 
 
Cash Flows From Financing Activities            
Proceeds from the issuance of term debt   2,692.8     2,156.1  
Repayments of term debt   (6,275.6 )   (7,887.1 )
Net decrease in deposits   (94.0 )   (490.8 )
Net repayments of non-recourse leveraged lease debt   (9.6 )   (14.3 )
Collection of security deposits and maintenance funds   264.4     346.6  
Repayment of security deposits and maintenance funds   (209.7 )   (329.2 )
 
 
 
Net cash flows used in financing activities   (3,631.7 )   (6,218.7 )
 
 
 
Decrease in cash and cash equivalents   (3,720.3 )   1,082.2  
Unrestricted cash and cash equivalents, beginning of period   8,650.2     8,405.2  
 
 
 
Unrestricted cash and cash equivalents, end of period $ 4,929.9   $ 9,487.4  
 
 
 
 
Supplementary Cash Flow Disclosure            
Interest paid $ 1,077.6   $ 1,468.3  
Federal, foreign, state and local income taxes paid, net   51.1   $ 11.1  
Supplementary Non Cash Flow Disclosure            
Transfer of finance receivables from held for investment to held for sale $ 1,580.0   $ 1,597.8  
Transfer of finance receivables from held for sale to held for investment $ 54.6   $  
   
(1)     

These restated balances were disclosed in Note 26 of the Company’s Form 10-K for the year ended December 31, 2010.

 

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

6



NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CIT Group Inc. became a bank holding company (“BHC”) in 2008 and has provided financial solutions to its clients since its formation in 1908. We provide financing and leasing capital principally for small businesses and middle market companies in 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.

BASIS OF PRESENTATION

Principles of Consolidation

The accompanying consolidated financial statements include financial information related to CIT Group Inc., a Delaware Corporation, and its majority owned subsidiaries, including CIT Bank (collectively, “CIT” or the “Company”), and those variable interest entities (“VIEs”) where the Company is the primary beneficiary. Assets held in an agency or fiduciary capacity are not included in the consolidated financial statements.

In preparing the consolidated financial statements, all significant intercompany accounts and transactions have been eliminated. 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 generally accepted accounting principles in the United States of America (“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.

The consolidated financial statements include the effects of adopting Fresh Start Accounting (“FSA”) upon emergence from bankruptcy on December 10, 2009, based on a convenience date of December 31, 2009 (the “Convenience Date”), as required by GAAP. Accretion and amortization of certain FSA adjustments began on January 1, 2010, and are included in the Statements of Operations and Cash Flows. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“Form 10-K”), “Notes 1 — Business and Summary of Significant Accounting Policies” and “Note 25 — Fresh Start Accounting”, for additional FSA and reorganization information.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates and assumptions. 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. Additionally, where applicable, the policies conform to accounting and reporting guidelines prescribed by bank regulatory authorities.

Restatement

The June 30, 2010 amounts have been restated to correct for errors found by the Company subsequent to the filing of its third quarter 2010 report on Form 10-Q related primarily to the application of FSA, the effects of which were disclosed in the Company’s December 31, 2010 Form 10-K. The effect of the restatement increased net income for the quarter and six months ended June 30, 2010 by approximately $40 million and $87 million, respectively, to $182 million and $326 million, as compared to the amount originally reported in the June 30, 2010 Form 10-Q. Comparisons to the 2010 second quarter balances

7



are to the restated amounts. See the Company’s December 31, 2010 Form 10-K, Note 26 — Selected Quarterly Financial Data (Unaudited), for further information.

SIGNIFICANT ACCOUNTING POLICIES

Investments

During 2011, the Company utilized cash to invest in securities. Previously, investments were not considered significant and our Form 10-K did not include an investment policy. The following summarizes the Company’s accounting policies relating to investment securities:

NEW ACCOUNTING PRONOUNCEMENTS

Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses, which provides guidance that requires enhanced disclosures surrounding the credit characteristics of the Company’s loan portfolio. The Company adopted the required disclosures of this guidance in its Form 10-K, Notes 1, 2 and 3, which included enhanced qualitative accounting policies and quantitative disclosures on segment and class levels as well as credit characteristics. The new disclosures on the roll forward of the allowance for credit losses were effective from the first quarter 2011 Form 10-Q and are disclosed in Note 3. The adoption of this guidance affects CIT’s disclosures regarding loans and allowance for loan losses, but does not affect its financial condition or results of operations. The FASB deferred the troubled debt restructuring (TDR) disclosure requirements that were part of this ASU to be concurrent with the effective date of recently issued guidance for identifying a TDR (discussed below), in the third quarter of 2011.

Goodwill Impairment Test

In December 2010, FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. Under ASC Topic 350, goodwill is tested for impairment at the reporting unit level utilizing a two-step approach. Step 1 compares the fair value of a reporting unit to its carrying value and if there is a shortfall, then Step 2 is completed. Step 2 measures the amount of impairment. This update requires that the Step 2 test be performed if the reporting unit has zero or negative carrying amount and qualitative factors exist indicating that it is more likely than not that a goodwill impairment exists. No additional disclosures are required by this update. This update is

8



effective for public companies beginning after December 15, 2010. At the date of adoption, a cumulative-effect adjustment to beginning retained earnings should be recorded if impairment of any reporting unit exists. The adoption of the guidance did not have a material impact on the Consolidated Balance Sheets or Statements of Operations.

Troubled Debt Restructurings (TDRs)

In April 2011, the FASB issued ASU 2011-02 to clarify the guidance for accounting for troubled debt restructurings (TDRs). The ASU clarifies the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties, such as:

The guidance will be effective for the Company’s third quarter 2011 Form 10-Q and is to be applied retrospectively to restructurings occurring on or after January 1, 2011. The Company is currently evaluating the potential impact of adopting the ASU.

Comprehensive Income

In June 2011, the FASB issued ASU 2011-05 to amend the guidance on the presentation of comprehensive income in ASC 220, Comprehensive Income that would require companies to present a single statement of comprehensive income or two consecutive statements. The proposed guidance would make the financial statement presentation of other comprehensive income more prominent by eliminating the alternative to present comprehensive income within the statement of equity. The ASU will be effective for annual periods beginning after December 15, 2011. The adoption of the guidance will not affect the Company’s financial condition and will change the presentation of the statement of operations.

NOTE 2 — LOANS

The following table presents finance receivables by segment, based on obligor location:

Finance Receivables (dollars in millions)

  June 30, 2011   December 31, 2010
 
 
  Domestic    Foreign    Total    Domestic    Foreign    Total
 
 
 
 
 
 
Corporate Finance $ 5,630.1   $ 1,793.8   $ 7,423.9   $ 6,482.4   $ 1,999.8   $ 8,482.2
Transportation Finance   1,024.7     331.6     1,356.3     1,098.8     290.1     1,388.9
Trade Finance   2,387.2     151.2     2,538.4     2,207.7     179.7     2,387.4
Vendor Finance   2,359.1     1,581.3     3,940.4     2,582.9     1,583.2     4,166.1
Consumer   7,009.4     16.3     7,025.7     8,058.8     17.1     8,075.9
 
 
 
 
 
 
Total $ 18,410.5   $ 3,874.2   $ 22,284.7   $ 20,430.6   $ 4,069.9   $ 24,500.5
 
 
 
 
 
 

9



The following table presents selected information related to components of the net investment in finance leases, which are included in total finance receivables:

Components of Net Investment in Finance Leases
(dollars in millions)

    June 30, 2011    December 31, 2010
 
 
Unearned income   $(1,228.8 )   $(1,356.3 )
Net unamortized deferred fees and costs   26.6     16.0  
Total finance leases   4,227.7     4,522.1  

Certain of the following tables present credit-related information at the “class” level in accordance with ASU 2010-20, Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses. A class is generally a disaggregation of a portfolio segment. In determining the classes, CIT considered the finance receivable characteristics and methods it applies in monitoring and assessing credit risk and performance.

Credit Quality Information

The following table summarizes finance receivables by the risk ratings that bank regulatory agencies utilize to classify credit exposure and which are consistent with indicators the Company monitors. Risk ratings are reviewed on a regular and ongoing basis by Credit Risk Management and are adjusted as necessary for updated information affecting the borrowers’ ability to fulfill their obligations. Loans rated as substandard, doubtful and loss are considered classified loans. Classified loans plus special mention loans are considered criticized loans.

The definitions of these ratings are as follows:

Substantially all of the commercial Doubtful accounts were on non-accrual status at June 30, 2011 and December 31, 2010, and approximately twenty percent and one-third, respectively, of the Substandard accounts were on non-accrual status as of those dates.

10



Finance Receivables(1) – By Classification (dollars in millions)

June 30, 2011 Corporate
Finance –
Other
  Corporate
Finance –
SBL
  Transportation
Finance
  Trade
Finance
  Vendor
Finance US
  Vendor
Finance
International
  Total
Commercial
  Total
Consumer
  Totals(1)









Grade:
Pass $ 4,313.2 $ 271.4 $ 727.4 $ 2,102.6 $ 2,034.5 $ 1,677.5 $ 11,126.6 $ 6,940.9 $ 18,067.5
Special
mention 1,315.6 241.4 269.1 251.2 129.0 122.7 2,329.0 385.6 2,714.6
Substandard 981.8 175.6 357.9 157.3 142.9 82.9 1,898.4 397.4 2,295.8
Doubtful 347.7 153.4 2.7 27.3 47.7 55.9 634.7 1.1 635.8









Total(1) $ 6,958.3 $ 841.8 $ 1,357.1 $ 2,538.4 $ 2,354.1 $ 1,939.0 $ 15,988.7 $ 7,725.0 $ 23,713.7









Non-accrual
loans $ 627.4 $ 177.0 $ 56.0 $ 73.4 $ 66.8 $ 60.4 $ 1,061.0 $ 0.8 $ 1,061.8









December 31, 2010 Corporate
Finance –
Other
Corporate
Finance –
SBL
Transportation
Finance
Trade
Finance
Vendor
Finance US
Vendor
Finance
International
Total
Commercial
Total
Consumer
Totals(1)









Grade:
Pass $ 4,843.4 $ 360.9 $ 652.3 $ 1,977.9 $ 2,198.5 $ 1,867.9 $ 11,900.9 $ 7,348.4 $ 19,249.3
Special mention 1,275.6 161.0 540.8 244.3 142.5 193.1 2,557.3 358.2 2,915.5
Substandard 1,205.1 211.8 192.4 123.0 180.7 135.4 2,048.4 614.4 2,662.8
Doubtful 460.0 183.6 3.4 42.2 55.4 60.8 805.4 1.6 807.0









Total(1) $ 7,784.1 $ 917.3 $ 1,388.9 $ 2,387.4 $ 2,577.1 $ 2,257.2 $ 17,312.0 $ 8,322.6 $ 25,634.6









Non-accrual loans $ 1,025.4 $ 214.4 $ 63.2 $ 164.4 $ 80.2 $ 67.7 $ 1,615.3 $ 0.7 $ 1,616.0









(1)     

Balances include $1,428.9 million and $1,134.1 million of loans in Assets Held for Sale at June 30, 2011 and December 31, 2010, respectively, which are measured at the lower of cost or fair value. ASU 2010-20 does not require inclusion of these finance receivables in the disclosures above. However, until they are disposed of, the Company manages the credit risk and collections of finance receivables held for sale consistently with its finance receivables held for investment, so that Company data are tracked and used for management purposes on an aggregated basis, as presented above. Other than finance receivables, Assets Held for Sale total on the balance sheet also include operating lease equipment held for sale, which are not included in the above table.

Past Due and Non-accrual Loans

The table that follows presents portfolio delinquency status, regardless of accrual/non-accrual classification:

Finance Receivables(1) – Delinquency Status (dollars in millions)

At June 30, 2011 30–59 Days
Past Due
  60–89 Days
Past Due
  Greater
Than 90
Days
  Total Past Due   Current   Total
Finance
Receivables(1)
 
  
  
  
  
  
Commercial                                  
   Corporate Finance – Other $ 2.9   $ 12.7   $ 93.8   $ 109.4   $ 6,848.9   $ 6,958.3
   Corporate Finance – SBL   11.0     8.0     35.0     54.0     787.8     841.8
   Transportation Finance   5.2     3.7     1.2     10.1     1,347.0     1,357.1
   Trade Finance   37.3     1.2     2.9     41.4     2,497.0     2,538.4
   Vendor Finance – US   38.5     18.3     14.5     71.3     2,282.8     2,354.1
   Vendor Finance – International   15.9     6.8     10.1     32.8     1,906.2     1,939.0
Consumer   257.0     128.3     399.9     785.2     6,939.8     7,725.0
 
 
 
 
 
 
Total $ 367.8   $ 179.0   $ 557.4   $ 1,104.2   $ 22,609.5   $ 23,713.7
 
 
 
 
 
 
At December 31, 2010 30–59 Days
Past Due
  60–89 Days
Past Due
  Greater
Than 90
Days
  Total Past Due   Current   Total
Finance
Receivables(1)
 
 
 
 
 
 
Commercial                                  
   Corporate Finance – Other $ 43.2   $ 33.7   $ 149.2   $ 226.1   $ 7,558.0   $ 7,784.1
   Corporate Finance – SBL   21.8     8.6     73.0     103.4     813.9     917.3
   Transportation Finance   9.0     1.8     0.6     11.4     1,377.5     1,388.9
   Trade Finance   35.0     1.8     1.3     38.1     2,349.3     2,387.4
   Vendor Finance – US   59.4     23.2     20.3     102.9     2,474.2     2,577.1
   Vendor Finance – International   20.2     11.5     10.6     42.3     2,214.9     2,257.2
Consumer   351.4     175.9     434.1     961.4     7,361.2     8,322.6
 
 
 
 
 
 
Total $ 540.0   $ 256.5   $ 689.1   $ 1,485.6   $ 24,149.0   $ 25,634.6
 
 
 
 
 
 
(1)     

Balances include $1,428.9 million and $1,134.1 million of loans in Assets Held for Sale at June 30, 2011 and December 30, 2010, respectively. Other than finance receivables, Assets Held for Sale total on the balance sheet also include operating lease equipment held for sale, which are not included in the above table.

 

11



The following table sets forth non-accrual loans and assets received in satisfaction of loans (repossessed assets). Non-accrual loans include loans greater than $500,000 that are individually evaluated and determined to be impaired, as well as loans less than $500,000 that are delinquent (generally for more than 90 days).

Finance Receivables on Non-accrual Status (dollars in millions)

  June 30, 2011   December 31, 2010
 
 
  Held for
Investment
   Held for
Sale
   Total    Held for
Investment
   Held for
Sale
   Total
 
 
 
 
 
 
Commercial                                  
   Corporate Finance – Other $ 352.0   $ 275.4   $ 627.4   $ 969.3   $ 56.1   $ 1,025.4
   Corporate Finance – SBL   160.3     16.7     177.0     214.4         214.4
   Transportation Finance   56.0         56.0     63.2         63.2
   Trade Finance   73.4         73.4     164.4         164.4
   Vendor Finance – US   66.8         66.8     80.2         80.2
   Vendor Finance – International   28.2     32.2     60.4     40.4     27.3     67.7
Consumer   0.2     0.6     0.8     0.4     0.3     0.7
 
 
 
 
 
 
Total non-accrual loans $ 736.9   $ 324.9   $ 1,061.8   $ 1,532.3   $ 83.7   $ 1,616.0
 
 
     
 
   
Repossessed assets               15.2                 21.1
         
         
Total non-performing assets             $ 1,077.0               $ 1,637.1
         
         
Government guaranteed accruing                                  
loans past due 90 days or more             $ 399.0               $ 433.6
Other accruing loans past due 90 days                                  
or more               5.6                 1.7
         
         
Total accruing loans past due 90 days                                  
or more             $ 404.6               $ 435.3
         
         

Payments received on non-accrual financing receivables are generally applied against outstanding principal.

Impaired Loans

The Company’s policy is to review for impairment finance receivables greater than $500,000 that are on non-accrual status. Consumer loans and small-ticket loan and lease receivables that have not been modified in a troubled debt restructuring, as well as short-term factoring receivables, are included (if appropriate) in the reported non-accrual balances above, but are excluded from the impaired finance receivables disclosure below as charge-offs are typically determined and recorded for such loans when they are more than 120 – 150 days past due.

12



The following table contains information about impaired finance receivables and the related allowance for credit losses, exclusive of finance receivables that were identified as impaired at the Convenience Date for which the Company is applying the income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality), which are disclosed further below in this note.

Impaired Loans
At or for the Six Months Ended June 30, 2011 (dollars in millions)

  Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
 
 
 
 
With no related allowance recorded:                      
Commercial                      
   Corporate Finance – Other $ 78.5    $ 182.6    $    $ 184.7
   Corporate Finance – SBL   42.7     56.8         42.1
   Transportation Finance   7.7     9.6         9.1
   Trade Finance   53.6     70.9         89.8
   Vendor Finance – US   16.7     30.1         20.0
   Vendor Finance – International   12.3     31.6         14.5
With an allowance recorded:                      
Commercial                      
   Corporate Finance – Other   103.5     118.7     35.1     122.7
   Corporate Finance – SBL   47.4     51.3     11.7     49.2
   Transportation Finance   49.0     54.6     12.0     52.9
   Trade Finance   19.7     22.9     6.2     22.0
 
 
 
 
Total Commercial Impaired Loans(1)   431.1     629.1     65.0     607.0
Total Loans Impaired at Convenience date(2)   311.7     983.5     13.3     555.4
 
 
 
 
Total $ 742.8   $ 1,612.6   $ 78.3   $ 1,162.4
 
 
 
 
(1)     

Interest income recorded while the loans were impaired was not material for the quarter and six months ended June 30, 2011.

 
(2)     

Details of finance receivables that were identified as impaired at the Convenience date are presented under Loans and Debt Securities Acquired with Deteriorated Credit Quality.

 

Impaired Loans for the six months ended June 30, 2010 (dollars in millions)
Average Recorded Investment $402.3

At December 31, 2010(1) Recorded
Investment(1)
   Unpaid
Principal
Balance(1)
   Related
Allowance
 
 
 
 
With no related allowance recorded:                
Commercial                
   Corporate Finance – Other $ 235.3   $ 377.5   $
   Corporate Finance – SBL   50.7     72.2    
   Transportation Finance   11.0     12.8    
   Trade Finance   131.5     150.0    
   Vendor Finance – US   26.5     51.5    
   Vendor Finance – International   15.7     38.6    
With an allowance recorded:                
Commercial                
   Corporate Finance – Other   148.8     161.8     43.3
   Corporate Finance – SBL   51.9     54.5     12.7
   Transportation Finance   56.4     57.6     10.0
   Trade Finance   27.1     31.1     5.3
 
 
 
Total Commercial $ 754.9   $ 1,007.6   $ 71.3
 
 
 
(1)     

December 31, 2010 balances were conformed to current presentation and adjusted to exclude $81.2 million of recorded net investment and $161.1 million of unpaid principal related to loans classified in Assets Held for Sale.

 

13



Impairment occurs when, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to contractual terms of the agreement. The Company has established review and monitoring procedures designed to identify, as early as possible, customers that are experiencing financial difficulty. We capture and analyze credit risk based on our internal probability of obligor default (PD) and loss given default (LGD) ratings. A PD rating is determined by evaluating borrower credit-worthiness, including analyzing credit history, financial condition, cash flow adequacy, financial performance and management quality. An LGD rating is predicated on transaction structure, collateral valuation and related guarantees or recourse. Further, related considerations in determining probability of collection include the following:

Impairment is measured as the shortfall between estimated value and recorded investment in the finance receivable. A specific allowance is recorded for the shortfall. In instances where the estimated value exceeds the recorded investment, no specific allowance is recorded. The estimated value is determined using fair value of collateral and other cash flows if the finance receivable is collateralized, or the present value of expected future cash flows discounted at the contract’s effective interest rate. In instances when the Company measures impairment based on the present value of expected future cash flows, the change in present value is reported as bad-debt expense.

The following summarizes key elements of the Company’s policy regarding the determination of collateral fair value in the measurement of impairment:

The Company periodically modifies the terms of finance receivables in response to borrowers’ difficulties. Modifications that include a financial concession to the borrower are accounted for as troubled debt restructurings (TDRs). The net investment of TDRs at June 30, 2011 and December 31, 2010 was $354.1 million and $461.7 million, of which 92% and 95% were on non-accrual. Corporate Finance receivables accounted for 75% and 73% of the total TDRs. At June 30, 2011 and December 31, 2010, there were

14



$39.5 million and $19.6 million, respectively, of commitments to lend additional funds to borrowers whose loan terms have been modified in TDRs.

Loans and Debt Securities Acquired with Deteriorated Credit Quality

For purposes of this presentation, finance receivables that were identified as impaired at the Convenience Date are presented separately below. The Company is applying the income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) to loans considered impaired under FSA at the time of emergence. The Company has no other loans reported under this guidance.

  June 30, 2011   December 31, 2010
 
 
(dollars in millions) Carrying
Amount
   Outstanding
balance (1)
   Related
Allowance
   Carrying
Amount
   Outstanding
balance (1)
   Related
Allowance
 
 
 
 
 
 
Commercial $ 310.4   $ 974.2   $ 13.3   $ 795.6   $ 1,914.6   $ 54.9
Consumer   1.3     9.3         1.5     14.3    
 
 
 
 
 
 
Totals $ 311.7   $ 983.5   $ 13.3   $ 797.1   $ 1,928.9   $ 54.9
 
 
 
 
 
 

  Quarter ended June 30, 2011   Quarter ended June 30, 2010
 
 
(dollars in millions) Provision for Credit Losses   Net Charge-offs   Provision for Credit Losses   Net Charge-offs
 
 
 
 
Commercial $ 1.1   $ 11.3   $ 32.3   $ 6.3
Consumer   0.4     0.4     0.2     0.2
 
 
 
 
Totals $ 1.5   $ 11.7   $ 32.5   $ 6.5
 
 
 
 
 
  Six months ended June 30, 2011
  Six months ended June 30, 2010
(dollars in millions) Provision for Credit Losses   Net Charge-offs   Provision for Credit Losses   Net Charge-offs
 
 
 
 
Commercial $ 71.5   $ 113.1   $ 85.8   $ 54.1
Consumer   1.2     1.2     1.9     1.9
 
 
 
 
Totals $ 72.7   $ 114.3   $ 87.7   $ 56.0
 
 
 
 
(1)     

Represents the sum of contractual principal, interest and fees earned at the reporting date, calculated as pre-FSA net investment plus inception to date of charge-offs.

The following table presents the changes to the accretable discount related to all loans accounted for under ASC 310-30 (loans acquired with deteriorated credit quality).

Accretable discount activity for loans accounted for under ASC 310-30 at Emergence Date (dollars in millions):

  Quarter ended
June 30, 2011
  Six months ended
June 30, 2011
 
 
 
 
 
Accretable discount, beginning of the period $ 167.5   $ 207.2  
Accretion   (13.2 )   (25.5 )
Disposals/transfers(1)   (18.9 )   (46.3 )
 
 
 
Accretable discount, end of period $ 135.4   $ 135.4  
 
 
 
(1)     

Amounts include transfers of non-accretable to accretable discounts, which were not material for the quarter and six months ended June 30, 2011.

 

15



NOTE 3 — ALLOWANCE FOR LOAN LOSSES

The following table presents changes in the allowance for loan losses.

Allowance for Loan Losses and Recorded Investment in Finance Receivables (dollars in millions)

At or for periods ended June 30, (dollars in millions)

  2011   2010  
 
 
 
  Corporate
Finance
  Transportation
Finance
  Trade
Finance
  Vendor
Finance
  Total
Commercial
  Consumer   Total   Total  
 
 
 
 
 
 
 
 
 
Allowance for loan                                                
losses:                                                
 
Quarter ended                                                
Beginning balance $ 263.8   $ 24.7   $ 29.6   $ 84.4   $ 402.5   $   $ 402.5   $ 213.9  
Provision for credit                                                
losses   61.3     4.7     4.0     13.8     83.8     0.9     84.7     246.7  
Changes relating to                                                
sales, foreign currency                                                
translation, other   (7.3 )   (0.3 )   (0.4 )   0.5     (7.5 )       (7.5 )   2.6  
Gross charge-offs(2)   (53.3 )   (0.1 )   (4.2 )   (29.5 )   (87.1 )   (1.2 )   (88.3 )   (113.3 )
Recoveries   13.4     0.1     6.3     12.5     32.3     0.3     32.6     7.0  
 
 
 
 
 
 
 
 
 
 
Allowance balance –                                                
end of period $ 277.9   $ 29.1   $ 35.3   $ 81.7   $ 424.0   $   $ 424.0   $ 356.9  
 
 
 
   
 
 
 
 
 
 
 
Six months ended                                                
Beginning balance $ 303.7   $ 23.7   $ 29.9   $ 58.9   $ 416.2   $   $ 416.2   $  
Provision for credit                                                
losses   135.8     6.5     7.3     56.7     206.3     1.8     208.1     472.8  
Change relating to new                                                
accounting                                                
pronouncement(1)                               68.6  
Changes relating to                                                
sales, foreign currency                                                
translation, other   (4.7 )   (0.4 )   0.3     0.8     (4.0 )       (4.0 )   (0.7 )
Gross charge-offs(2)   (178.3 )   (0.8 )   (10.4 )   (55.8 )   (245.3 )   (2.4 )   (247.7 )   (193.0 )
Recoveries   21.4     0.1     8.2     21.1     50.8     0.6     51.4     9.2  
 
 
 
 
 
 
 
 
 
 
Allowance balance –                                                
end of period $ 277.9   $ 29.1   $ 35.3   $ 81.7   $ 424.0   $   $ 424.0   $ 356.9  
 
 
 
 
 
 
 
 
 
Individually evaluated                                                
for impairment $ 46.8   $ 12.0   $ 6.2   $   $ 65.0   $   $ 65.0        
Collectively evaluated                                                
for impairment   220.5     17.1     29.1     79.0     345.7         345.7        
Loans acquired with                                                
deteriorated credit quality(3)   10.6             2.7     13.3         13.3        
 
 
 
 
 
 
 
     
Allowance balance –                                                
end of period $ 277.9   $ 29.1   $ 35.3   $ 81.7   $ 424.0   $   $ 424.0        
 
 
 
 
 
 
 
 
Reserve for unfunded                                                
lending commitments(4) $ 10.1   $ 1.2   $ 4.0   $   $ 15.3   $   $ 15.3        
 
 
 
 
 
 
 
 
 
Finance receivables:                                                
 
 
Individually evaluated for                                                
impairment $ 272.1   $ 56.7   $ 73.3   $ 29.0   $ 431.1   $   $ 431.1        
Collectively evaluated for                                                
impairment   6,876.7   1,299.6     2,465.1     3,876.1     14,517.5     7,024.4     21,541.9        
Loans acquired with                                                
deteriorated credit quality(3)   275.1             35.3     310.4     1.3     311.7        
 
 
 
 
 
 
 
     
 
Ending balance $ 7,423.9   $ 1,356.3   $ 2,538.4   $ 3,940.4   $ 15,259.0   $ 7,025.7   $ 22,284.7        
 
 
 
 
 
 
 
     
 
Percent of loans total loans   33.3 %   6.1 %   11.4 %   17.7 %   68.5 %   31.5 %   100.0 %      
 
 
 
 
 
 
 
     
(1)     

Reflects reserves associated with loans consolidated in accordance with 2010 adoption of accounting guidance on consolidation of variable interest entities.

 
(2)     

Gross charge-offs include $40 million that were charged directly to the specific allowance for loan losses for the June 30, 2011 quarter, of which $36 million related to Corporate Finance with the remainder primarily related to Trade Finance. Amounts for the six month period were $115 million, of which $106 million related to Corporate Finance and the remainder to Trade Finance.

 
(3)     

Represents loans considered impaired in FSA and are accounted for under the guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality).

 
(4)     

Represents additional credit loss reserves for unfunded lending commitments and letters of credit recorded in Other Liabilities.

 

16



The allowance for loan losses balance prior to emergence was eliminated in FSA. The balance reflects estimated amounts for loans originated subsequent to the Emergence Date, loans that were held in VIEs that the Company has consolidated, and incremental amounts required on loans that were on the books at the Emergence Date.

NOTE 4 — INVESTMENT SECURITIES

At the end of the 2011 first quarter, the Company utilized cash to purchase U.S. Treasury securities. During the second quarter, the Company also purchased U.S. Government Agency securities. These investments mature in 91 days or less, and the carrying value approximates fair value. Certain U.S. Treasury and agency securities were purchased using $1.3 billion of restricted cash. The restricted cash utilized resided in a Cash Sweep account, for which investments in certain high-grade securities is a permitted use.

Total investment securities include debt and equity securities. Debt instruments primarily consisted of U.S. Treasuries, U.S. agency bonds and foreign government bonds while equity securities include common stock and warrants.

Investment Securities (dollars in millions)

  June 30,
2011
   December 31,
2010
 
 
Debt securities available-for-sale $ 2,700.1   $
Equity securities available-for-sale   22.7     37.5
Debt securities held-to-maturity(1)   178.1     195.9
Non-marketable equity securities carried at cost(2)   82.4     95.1
 
 
Total investment securities $ 2,983.3   $ 328.5
 
 
(1)     

Recorded at amortized cost less impairment on securities that have credit-related impairment.

 
(2)     

Non-marketable equity securities are carried at cost and primarily consist of shares issued by customers during loan work out situations or as part of an original loan investment.

Debt securities are recorded on the Consolidated Balance Sheet as of the trade date and classified based on management’s intention on the date of purchase.

Securities Available-for-Sale

The following table presents amortized cost and fair value of securities available-for-sale (AFS) at June 30, 2011. December 31, 2010 balances were not significant and are not presented.

(dollars in millions)

  June 30, 2011
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Fair
Value
 
 
  
  
Debt securities AFS                
   U.S. Treasury $ 1,805.0   $   $ 1,805.0
   U.S. Government Agency Obligations   895.1         895.1
 
 
 
      Total debt securities available for sale   2,700.1         2,700.1
Equity securities AFS   16.5     6.2     22.7
 
 
 
Total securities AFS $ 2,716.6   $ 6.2   $ 2,722.8
 
 
 

The Company conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other than temporary. Any credit-related impairment on debt

17



securities that the Company does not plan to sell and is not likely to be required to sell is recognized in the Consolidated Statement of Income, with the non-credit-related impairment recognized in other comprehensive income. For other impaired debt securities, the entire impairment is recognized in the Consolidated Statement of Income.

The following table presents interest and dividends on investments:

(dollars in millions)
Quarter Ended June 30,    Six Months Ended June 30,
 
 
2011    2010   2011    2010
 
 
 
 
Interest $ 6.9   $ 6.3   $ 14.6   $ 11.9
Dividends   0.9     1.0     0.9     2.7
 
 
 
 
Total interest and dividends $ 7.8   $ 7.3   $ 15.5   $ 14.6
 
 
 
 

Gross realized investment gains for the quarter and six months ended June 30, 2011 were $12.3 million and $35.3 million respectively, and exclude losses from other-than-temporary impairment. Realized investment gains in 2010 were $3.7 million and $7.0 million for the quarter and six months period, respectively.

Debt Securities Held-to-Maturity

The carrying value and fair value of securities held-to-maturity (HTM) at June 30, 2011 and December 31, 2010 were as follows:

(dollars in millions)

    Carrying
value
   Gross
unrecognized
gains
   Fair
value
 
 
 
June 30, 2011                  
U.S. Treasury and federal agency securities                  
   U.S. Treasury Agency obligations   $ 105.2   $ 0.8   $ 106.0
Mortgage-backed securities                  
   U.S. government and government-sponsored agency guaranteed     53.6     1.9     55.5
State and municipal     0.4         0.4
Foreign government     18.9         18.9
 
 
 
Total debt securities held-to-maturity   $ 178.1   $ 2.7   $ 180.8
 
 
 
December 31, 2010                  
U.S. Treasury and federal agency securities                  
   U.S. Treasury Agency obligations   $ 119.8   $ 0.7   $ 120.5
Mortgage-backed securities                  
   U.S. government and government-sponsored agency guaranteed     56.9     1.0     57.9
State and municipal     0.4         0.4
Foreign government     18.8         18.8
 
 
 
Total debt securities held-to-maturity   $ 195.9   $ 1.7     197.6
 
 
 

18



The following table presents the amortized cost and fair value of debt securities HTM by contractual maturity dates:

  June 30, 2011   December 31, 2010
 
 
(dollars in millions) Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
 
 
 
 
Mortgage-backed securities(1)                      
   After 10 years(2) $ 53.6    $ 55.5    $ 56.9    $ 57.9
 
 
 
 
Total   53.6     55.5     56.9     57.9
 
 
 
 
U.S. Treasury and federal agencies                      
   After 1 but within 5 years   105.2     106.0     119.8     120.5
 
 
 
 
Total   105.2     106.0     119.8     120.5
 
 
 
 
State and municipal                      
   After 1 but within 5 years   0.3     0.3     0.2     0.2
   After 5 but within 10 years   0.1     0.1     0.2     0.2
 
 
 
 
Total   0.4     0.4     0.4     0.4
 
 
 
 
Foreign government                      
   Due within 1 year   18.9     18.9     18.8     18.8
 
 
 
 
Total   18.9     18.9     18.8     18.8
 
 
 
 
Total debt securities HTM $ 178.1   $ 180.8   $ 195.9   $ 197.6
 
 
 
 
(1)     

Includes mortgage-backed securities of U.S. federal agencies.

 
(2)     

Investments with no stated maturities are included as contractual maturities of greater than 10 years. Actual maturities may differ due to call or prepayment rights.

Other-Than-Temporary Impairments

Recognition and Measurement of Other-Than-Temporary Impairments (OTTI)

OTTI credit-related impairments on equity securities recognized in earnings totaled $1.3 million for the quarter and $7.4 million for the six months ended June 30, 2011, respectively. The 2010 impairment charges for the comparable periods were not significant. Impairment amounts in accumulated other comprehensive income were not significant at June 30, 2011 and December 31, 2010.

Evaluating Investments for OTTI

The Company conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other than temporary. The Company accounts for investment impairments in accordance with ASC 320-10-35-34, Investments—Debt and Equity Securities: Recognition of an Other-Than-Temporary Impairment. Under the guidance for debt securities, OTTI is recognized in earnings for debt securities that the Company has an intent to sell or that the Company believes it is more-likely-than-not that it will be required to sell prior to recovery of the amortized cost basis. For those securities that the Company does not intend to sell or expect to be required to sell, credit-related impairment is recognized in earnings, while the non-credit related impairment recorded in AOCI.

An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI for AFS securities, while such losses related to HTM securities are not recorded, as these investments are carried at their amortized cost.

19



Amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of a purchase discount or premium. Regardless of the classification of the securities as AFS or HTM, the Company has assessed each investment for impairment.

Factors considered in determining whether a loss is temporary include:

The Company’s review for impairment generally includes:

For equity securities, management considers the various factors described above, including its intent and ability to hold the equity security for a period of time sufficient for recovery to cost. Where management lacks that intent or ability to hold the equity security, the security’s decline in fair value is deemed to be other than temporary and is recorded in earnings. AFS equity securities deemed other-than-temporarily impaired are written down to fair value, with the full difference between fair value and cost recognized in earnings.

NOTE 5 — LONG-TERM BORROWINGS

The following table presents outstanding long-term borrowings, net of FSA.

  June 30, 2011   December 31,
2010
 
 
Long-term Borrowings(1)
(dollars in millions)
CIT Group
Inc.
   Subsidiaries    Total    Total
 
 
 
 
Secured borrowings $   $ 9,858.8   $ 9,858.8   $ 10,965.8
First lien facility   197.9     2,841.3     3,039.2     3,042.6
Series A Notes – 7.00%   7,939.8         7,939.8     19,037.9
Series B Notes – 10.25%               765.8
Series C Notes – 7.00%   7,892.0         7,892.0    
Series C Notes – other   2,000.0         2,000.0    
Other debt   84.6     76.7     161.3     167.7
 
 
 
 
Total debt $ 18,114.3   $ 12,776.8   $ 30,891.1   $ 33,979.8
 
 
 
 
(1)     

The presented rates are contractual and do not reflect the impact of FSA. Rates associated with the Series C – other are discussed further below.

 

20



Secured Borrowings

Set forth below are borrowings and pledged assets primarily owned by consolidated variable interest entities. Creditors of these entities received ownership and/or security interests in the assets. These 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 First Lien Facility or the Series A or C Notes described below.

Secured Borrowings and Pledged Asset Summary (dollars in millions)

  June 30, 2011 December 31, 2010
 
 
  Secured
 Borrowing
   Assets
Pledged
   Secured
Borrowing
   Assets
Pledged
 
 
 
 
Education trusts and conduits (student loans) $ 4,006.8   $ 5,318.0   $ 4,184.4   $ 5,558.8
GSI Facility borrowings(1)   1,067.8     1,755.1     1,624.6     2,349.5
Trade Finance   382.1     1,550.5     504.9     1,479.6
Corporate Finance (SBL)   271.9     297.2     258.0     283.6
Other equipment secured facilities(2)   1,952.3     2,501.3     2,235.0     2,704.4
 
 
 
 
Subtotal – Finance Receivables   7,680.9     11,422.1     8,806.9     12,375.9
 
 
 
 
Transportation Finance – Aircraft(3)   1,413.8     1,646.6     1,315.1     1,531.0
Transportation Finance – Rail   146.6     143.1     148.9     146.2
GSI Facility borrowings (Aircraft)   488.2     1,106.8     519.8     1,119.3
Other structures   77.9     100.7     99.8     126.2
 
 
 
 
Subtotal – Equipment under operating leases   2,126.5     2,997.2     2,083.6     2,922.7
 
 
 
 
FHLB borrowings (Consumer)(4)   51.4     105.3     75.3     119.8
 
 
 
 
Total $ 9,858.8   $ 14,524.6   $ 10,965.8   $ 15,418.4
 
 
 
 
(1)     

At June 30, 2011 borrowings are secured by $1.0 billion of corporate finance receivables, $0.6 billion of student loans and $0.1 billion of small business lending loans, of which $102.6 million were classified as Assets Held for sale at June 30, 2011.

 
(2)     

Includes facilities secured by equipment primarily in Vendor Finance and Corporate Finance and the associated secured debt.

 
(3)     

Secured financing facilities for the purchase of aircraft.

 
(4)     

Collateralized with Government Debentures and Certificates of Deposit.

Variable Interest Entities

The Company utilizes Variable Interest Entities (“VIEs”) in the ordinary course of business to support its own and its customers’ financing needs.

The most significant types of VIEs that CIT utilizes are ‘on balance sheet’ secured financings of pools of leases and loans originated by the Company. The Company originates pools of assets and sells these to special purpose entities which, in turn, issue debt securities backed by the asset pools or sell individual interests in the assets to investors. CIT retains the servicing rights and participates in certain cash flows. These VIEs are typically organized as trusts or limited liability companies, and are intended to be bankruptcy remote, from a legal standpoint.

The main risks inherent in these secured borrowing structures are: deterioration in the credit performance of the vehicle’s underlying asset portfolio, potential timing mismatches between the cash flows of the underlying assets and the repayment obligations of the secured borrowing, and risk associated with the servicing of the underlying assets.

Investors usually have recourse to the assets in the VIEs and typically benefit from other credit enhancements, such as: (1) a reserve or cash collateral account which requires the Company to deposit cash in an account, which will first be used to cover any defaulted obligor payments, (2) over-

21



collateralization in the form of excess assets in the VIE, (3) subordination, whereby the Company retains a subordinate position in the secured borrowing which would absorb losses due to defaulted obligor payments before the senior certificate holders. The VIE may also enter into derivative contracts in order to convert yield or currency of the underlying assets to match the needs of the VIE investors or to limit or change the risk of the VIE.

With respect to events or circumstances that could expose CIT to a loss, as these are accounted for as on balance sheet secured financings, the Company records an allowance for loan losses for the credit risks associated with the underlying leases and loans. As these are secured borrowings, CIT has an obligation to pay the debt in accordance with the terms of the underlying agreements.

Generally, third-party investors in the obligations of the consolidated VIE’s have legal recourse only to the assets of the VIEs and do not have recourse to the Company beyond certain specific provisions that are customary for secured financing transactions, such as asset repurchase obligations for breaches of representations and warranties. In addition, the assets are generally restricted only to pay such liabilities.

First Lien Facility

In August 2010, CIT amended its existing first lien credit facility agreements (the “First Lien Facility”) and refinanced the remaining principal balance. The First Lien Facility had an outstanding balance of $3 billion at June 30, 2011 that matures in August 2015. This facility carries an interest rate of LIBOR + 4.50% with a 1.75% LIBOR floor. The First Lien Facility is generally secured by a first lien on substantially all U.S. assets that are not otherwise pledged to secure the borrowings of special purpose entities as described above under “Secured Borrowings,” 65% of the voting shares and 100% of the non-voting shares of certain foreign subsidiaries and between 44% and 65% of the equity interest or capital stock in certain other non-U.S., non-regulated subsidiaries. The First Lien Facility is subject to a collateral coverage covenant (based on CIT’s book value in accordance with GAAP) of 2.5x the outstanding loan balance, tested quarterly and upon certain transfers, dispositions or releases of collateral. The First Lien Facility also contains a number of additional covenants, some of which do not impose restrictions on the Company if CIT continues to maintain a collateral coverage ratio of 2.75x or greater.

In July 2011, CIT redeemed $500 million of the First Lien Facility. The net impact of the acceleration of deferred debt costs and the amortization of the related FSA premium will increase third quarter interest expense by approximately $15 million.

Series A and Series C Notes

In March 2011, the Company issued $2 billion of new Series C Second-Priority Secured Notes, consisting of $1.3 billion of three-year 5.25% fixed rate notes and $700 million of seven-year 6.625% fixed rate notes. The covenants in the new Series C Notes are materially less restrictive than those in the outstanding Series A Notes, and more consistent with covenants in investment grade-rated bonds. The proceeds of the transaction were used, in conjunction with available cash, to redeem the $2.5 billion of Series A Notes in May 2011 discussed below.

The Series A Notes and Series C Notes are generally secured by second-priority security interests in all the assets securing the First Lien Facility. The 2014 Series A Notes Indentures limit the ability of the Company 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. The 2015-2017 Series A Notes and Series C Notes Indentures limit the Company’s ability to create liens, merge or consolidate, or sell, transfer, lease or dispose of all or substantially all of its assets. Under the terms of the Series A Notes, the Company is required to use certain cash collections to repay the First Lien Facility and Series A Notes on an accelerated basis as part of the Cash Sweep; there is no such requirement under the Series C Notes.

22



The guarantees and collateral for the Series C Notes will be released upon the Series C Notes receiving an investment grade rating from each of Moody’s and S&P after giving effect to the release. In addition, the guarantees and/or collateral for the Series C Notes will be automatically released if the same guarantees and/or collateral for the Series A Notes are released at the same time or if the Series A Notes have been paid off in full.

In the event of a Change of Control as defined in the Series A Indentures, holders of the Series A Notes will have the right to require the Company, as applicable, to repurchase all or a portion of the Series A Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of such repurchase.

Upon a Change of Control Triggering Event as defined in the Series C Indentures, holders of the Series C Notes will have the right to require the Company, as applicable, to repurchase all or a portion of the Series C Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of such repurchase.

On May 2, 2011, the Company redeemed $2.5 billion of 7% Series A Notes at a redemption price of 102% of the aggregate principal amount. This redemption included approximately $1.1 billion principal amount of remaining 2013 Series A Notes and approximately $1.4 billion principal amount of the 2014 Series A Notes. The acceleration of FSA amortization on these Notes increased second quarter interest expense by $113 million, approximately $66 million for the 2013 maturities and $47 million for the 2014 maturities.

During the 2011 first quarter, we redeemed $1.0 billion of the 7% Series A Notes due in 2013 at a redemption price of 102% of the aggregate principal amount redeemed. The acceleration of FSA amortization on the Series A Notes was $25 million and resulted in an increase to interest expense.

In June 2011, we completed an Exchange Offer and Consent Solicitation for outstanding 7% Series A Second-Priority Secured Notes, other than the Series A Notes that mature in 2014. In this transaction, the Company received the requisite consents to adopt proposed amendments to the indenture of Series A notes that mature in 2015, 2016 and 2017.

At the Offer Expiration, tenders with consents or separate consents were received from holders of approximately $10.9 billion in aggregate principal amount of Series A Notes, made up of $8.76 billion (pre-FSA) Series A Notes tendered and accepted for exchange, and $2.17 billion Series A Notes separately consented, including a majority of each maturity of these Series A Notes. The Series C Notes with an aggregate principal amount of $8.76 billion (pre-FSA), which have the same interest rate and interest payment dates but mature one business day later than the Series A Notes for which they were exchanged, were issued in exchange for the Series A Notes tendered and accepted.

Consents were solicited to replace the covenants and events of default in the Series A Notes indenture with the same covenants and events of default as those in the indenture that govern the existing 5.250% Series C Second-Priority Secured Notes due 2014 and 6.625% Series C Second-Priority Secured Notes due 2018, except that the Cash Sweep covenant was retained in the Series A Notes indenture as amended. The covenants in the Series C Notes are materially less restrictive than those in the Series A Notes and are more consistent with covenants of investment-grade rated bonds.

Approximately $27 million of consent fees were paid to Series A Note holders that delivered consents and were capitalized and will be amortized as an adjustment of interest expense over the life of the Series C Notes issued in exchange.

23



Summarized Financial Information of Subsidiaries

In accordance with the Series A Notes Indenture, the following tables present two mutually exclusive sets of condensed consolidating financial statements, reflecting the following:


CONDENSED CONSOLIDATING BALANCE SHEETS (dollars in millions)

  Non Guarantor Entities  
 
 
  CIT
Group
Inc.
   Guarantor
Entities
   Pledged
Entities
   Other Non
Guarantor
Entities
   Eliminations    Consolidated
Total
 
 
 
 
 
 
 
 
June 30, 2011                                    
ASSETS:                                    
Net loans $   $ 4,393.1   $ 2,179.9   $ 15,809.6   $ (521.9 ) $ 21,860.7  
Operating lease equipment, net       4,694.7     4,554.9     1,708.3     (37.5 )   10,920.4  
Assets held for sale   7.9     542.0     238.2     1,075.7     (0.3 )   1,863.5  
Cash and deposits with banks   1,412.6     1,595.0     1,726.7     2,682.7     (61.3 )   7,355.7  
Investment securities   1,395.1     1,379.8     6.7     383.6     (181.9 )   2,983.3  
Other assets   32,262.7     19,884.3     4,350.2     3,402.6     (56,873.8 )   3,026.0  
 
 
 
 
 
 
 
   Total Assets $ 35,078.3   $ 32,488.9   $ 13,056.6   $ 25,062.5   $ (57,676.7 ) $ 48,009.6  
 
 
 
 
 
 
 
LIABILITIES AND EQUITY:                                    
Long-term borrowings, including deposits $ 18,114.3   $ 2,861.8   $ 1,267.5   $ 13,346.0   $ (270.4 ) $ 35,319.2  
Credit balances of factoring clients       1,283.8         2.9     (201.8 )   1,084.9  
Other liabilities   8,022.5     (998.9 )   4,547.4     (7,555.1 )   (1,353.3 )   2,662.6  
 
 
 
 
 
 
 
   Total Liabilities   26,136.8     3,146.7     5,814.9     5,793.8     (1,825.5 )   39,066.7  
 
 
 
 
 
 
 
Total Stockholders’ Equity   8,941.5     29,342.2     7,241.7     19,268.3     (55,852.2 )   8,941.5  
Noncontrolling minority interests               0.4     1.0     1.4  
 
 
 
 
 
 
 
   Total Equity   8,941.5     29,342.2     7,241.7     19,268.7     (55,851.2 )   8,942.9  
 
 
 
 
 
 
 
   Total Liabilities and Equity $ 35,078.3   $ 32,488.9   $ 13,056.6   $ 25,062.5   $ (57,676.7 ) $ 48,009.6  
 
 
 
 
 
 
 
 
December 31, 2010(*)                                    
ASSETS:                                    
Net loans $   $ 5,249.2   $ 2,388.5   $ 16,762.7   $ (316.1 ) $ 24,084.3  
Operating lease equipment, net       4,421.8     4,847.9     1,904.6     (37.6 )   11,136.7  
Assets held for sale       340.2     293.5     584.8         1,218.5  
Cash and deposits with banks   2,725.6     4,404.8     1,176.1     2,936.3     (38.8 )   11,204.0  
Investment securities       100.8     7.3     403.5     (183.1 )   328.5  
Other assets   31,047.4     18,524.6     4,598.1     2,816.1     (54,000.0 )   2,986.2  
 
 
 
 
 
 
 
   Total Assets $ 33,773.0   $ 33,041.4   $ 13,311.4   $ 25,408.0   $ (54,575.6 ) $ 50,958.2  
 
 
 
 
 
 
 
LIABILITIES AND EQUITY:                                    
Long-term borrowings, including deposits $ 19,322.0   $ 2,866.2   $ 2,083.0   $ 14,497.0   $ (252.2 ) $ 38,516.0  
Credit balances of factoring clients       926.1         9.2         935.3  
Other liabilities   5,535.0     850.9     4,451.1     (7,908.3 )   (335.5 )   2,593.2  
 
 
 
 
 
 
 
   Total Liabilities   24,857.0     4,643.2     6,534.1     6,597.9     (587.7 )   42,044.5  
 
 
 
 
 
 
 
Total Stockholders’ Equity   8,916.0     28,398.2     6,776.9     18,809.8     (53,984.9 )   8,916.0  
Noncontrolling minority interests           0.4     0.3     (3.0 )   (2.3 )
 
 
 
 
 
 
 
   Total Equity   8,916.0     28,398.2     6,777.3     18,810.1     (53,987.9 )   8,913.7  
 
 
 
 
 
 
 
   Total Liabilities and Equity $ 33,773.0   $ 33,041.4   $ 13,311.4   $ 25,408.0   $ (54,575.6 ) $ 50,958.2  
 
 
 
 
 
 
 
(*)     

2010 data has been conformed to the current quarter presentation.

 

24




CONSOLIDATING STATEMENTS OF OPERATION (dollars in millions)

      Non Guarantor Entities
   
  CIT
Group
Inc.
  Guarantor
Entities
  Pledged
Entities
  Other Non
Guarantor
Entities
  Eliminations   Consolidated
Total
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2011                                    
Interest income $ 1.8   $ 469.6   $ 181.7   $ 596.8   $ (4.6 ) $ 1,245.3  
Interest expense   (1,054.3 )   (143.1 )   (116.0 )   (199.0 )   7.8     (1,504.6 )
 
 
 
 
 
 
 
Net interest revenue   (1,052.5 )   326.5     65.7     397.8     3.2     (259.3 )
Provision for credit losses   (6.7 )   (42.5 )   (86.3 )   (72.6 )       (208.1 )
 
 
 
 
 
 
 
Net interest revenue, after credit                                    
provision   (1,059.2 )   284.0     (20.6 )   325.2     3.2     (467.4 )
Equity in net income of subsidiaries   1,071.3     609.1     216.5     56.7     (1,953.6 )    
Other Income                                    
Rental income on operating leases       289.7     359.2     182.3         831.2  
Other   (125.5 )   336.0     91.8     227.1     (11.3 )   518.1  
 
 
 
 
 
 
 
   Total other income   (125.5 )   625.7     451.0     409.4     (11.3 )   1,349.3  
 
 
 
 
 
 
 
Total revenue, net of interest expense                                    
and credit provision   (113.4 )   1,518.8     646.9     791.3     (1,961.7 )   881.9  
 
 
 
 
 
 
 
Other Expenses                                    
Depreciation on operating lease                                    
equipment       (100.8 )   (123.2 )   (82.0 )       (306.0 )
Operating expenses   (11.0 )   (277.8 )   (76.7 )   (110.6 )   13.9     (462.2 )
 
 
 
 
 
 
 
   Total other expenses   (11.0 )   (378.6 )   (199.9 )   (192.6 )   13.9     (768.2 )
 
 
 
 
 
 
 
Income (loss) before income taxes   (124.4 )   1,140.2     447.0     598.7     (1,947.8 )   113.7  
Benefit (provision) for income taxes   142.0     (103.7 )   (59.5 )   (79.0 )   7.6     (92.6 )
 
 
 
 
 
 
 
Net income (loss) before attribution of                                    
noncontrolling interests   17.6     1,036.5     387.5     519.7     (1,940.2 )   21.1  
Net income attributable to noncontrolling                                    
interests, after tax           0.4     0.5     (4.4 )   (3.5 )
 
 
 
 
 
 
 
Net income (loss) $ 17.6   $ 1,036.5   $ 387.9   $ 520.2   $ (1,944.6 ) $ 17.6  
 
 
 
 
 
 
 
Six Months Ended June 30, 2010(*)                                    
Interest income $ 1.0   $ 980.1   $ 312.8   $ 859.9   $ (25.3 ) $ 2,128.5  
Interest expense   (885.9 )   (290.1 )   (216.8 )   (259.4 )   13.3     (1,638.9 )
 
 
 
 
 
 
 
Net interest revenue   (884.9 )   690.0     96.0     600.5     (12.0 )   489.6  
Provision for credit losses   (11.1 )   (280.9 )   (51.5 )   (136.2 )   6.9     (472.8 )
 
 
 
 
 
 
 
Net interest revenue, after credit provision   (896.0 )   409.1     44.5     464.3     (5.1 )   16.8  
Equity in net income of subsidiaries   871.7     519.2     263.9     291.7     (1,946.5 )    
Other Income                                    
Rental income on operating leases       277.2     364.6     202.9     (1.0 )   843.7  
Other   233.5     65.2     190.1     12.7     (12.6 )   488.9  
 
 
 
 
 
 
 
   Total other income   233.5     342.4     554.7     215.6     (13.6 )   1,332.6  
 
 
 
 
 
 
 
Total revenue, net of interest expense and                                    
credit provision   209.2     1,270.7     863.1     971.6     (1,965.2 )   1,349.4  
 
 
 
 
 
 
 
Other Expenses                                    
Depreciation on operating lease equipment       (125.7 )   (129.6 )   (96.0 )   0.5     (350.8 )
Operating expenses   17.8     (342.8 )   (95.2 )   (145.1 )   25.8     (539.5 )
 
 
 
 
 
 
 
   Total other expenses   17.8     (468.5 )   (224.8 )   (241.1 )   26.3     (890.3 )
 
 
 
 
 
 
 
Income (loss) before income taxes   227.0     802.2     638.3     730.5     (1,938.9 )   459.1  
Benefit (provision) for income taxes   98.8     1.5     (130.9 )   (101.6 )   0.6     (131.6 )
 
 
 
 
 
 
 
Net income (loss) before attribution of                                    
noncontrolling interests   325.8     803.7     507.4     628.9     (1,938.3 )   327.5  
Net income attributable to noncontrolling                                    
interests, after tax       0.4     (0.5 )   0.5     (1.7 )   (1.3 )
 
 
 
 
 
 
 
Net income (loss) $ 325.8   $ 804.1   $ 506.9   $ 629.4   $ (1,940.0 ) $ 326.2  
 
 
 
 
 
 
 
(*)     

2010 data has been conformed to the current quarter presentation.

 

25




CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (dollars in millions)

      Non Guarantor Entities
   
Six Months Ended June 30, 2011 CIT Group
Inc.
  Guarantor
Entities
  Pledged
Entities
  Other Non
Guarantor
Entities
  Eliminations   Consolidated
Total
 
 
 
 
 
 
 
 
Cash Flows From Operating                                    
Activities:                                    
Net cash flows provided by (used                                    
for) operations $ (1,086.2 ) $ 424.4   $ 275.5   $ 641.9   $   $ 255.6  
 
 
 
 
 
 
 
Cash Flows From Investing                                    
Activities:                                    
Net (increase) decrease in                                    
financing and leasing assets and                                    
other investing activities   (1,406.4 )   (331.8 )   420.3     973.7    
    (344.2 )
(Increase) decrease in inter-                                    
company loans and investments   2,688.1               (2,688.1 )    
 
 
 
 
 
 
 
Net cash flows provided (used for)                                    
by investing activities   1,281.7     (331.8 )   420.3     973.7   (2,688.1 )   (344.2 )
 
 
 
 
 
 
 
Cash Flows From Financing                                    
Activities:                                    
Net increase (decrease) in debt                                    
and other financing activities   (1,502.2 )   21.9     (701.4 )   (1,450.0 )       (3,631.7 )
Inter-company financing       (2,914.6 )   539.1     (312.6 ) 2,688.1      
 
 
 
 
 
 
 
Net cash flows provided by (used                                    
for) financing activities   (1,502.2 )   (2,892.7 )   (162.3 )   (1,762.6 ) 2,688.1     (3,631.7 )
 
 
 
 
 
 
 
Net (decrease) increase in                                    
unrestricted cash and cash                                    
equivalents   (1,306.7 )   (2,800.1 )   533.5     (147.0 )       (3,720.3 )
Unrestricted cash and cash                                    
equivalents, beginning of period   2,703.6     2,946.4     1,021.1     1,979.1         8,650.2  
 
 
 
 
 
 
 
Unrestricted cash and cash                                    
equivalents, end of period $ 1,396.9   $ 146.3   $ 1,554.6   $ 1,832.1   $   $ 4,929.9  
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,                                    
2010(*)                                    
Cash Flows From Operating                                    
Activities:                                    
Net cash flows provided by (used                                    
for) operations $ (159.6 ) $ (282.6 ) $ 59.7   $ 560.6   $   $ 178.1  
 
 
 
 
 
 
 
Cash Flows From Investing                                    
Activities:                                    
Net decrease in financing and                                    
leasing assets and other investing                                    
activities   459.4     2,879.4     755.4     3,028.6         7,122.8  
(Increase) in inter-company loans                                    
and investments   893.4               (893.4 )    
 
 
 
 
 
 
 
Net cash flows provided by (used                                    
for) investing activities   1,352.8     2,879.4     755.4     3,028.6   (893.4 )   7,122.8  
 
 
 
 
 
 
 
Cash Flows From Financing                                    
Activities:                                    
Net (decrease) in debt and other                                    
financing activities   (227.1 )   (3,128.0 )   (210.5 )   (2,653.1 )       (6,218.7 )
Inter-company financing       726.7     (972.9 )   (647.2 ) 893.4      
 
 
 
 
 
 
 
Net cash flows provided by (used                                    
for) financing activities   (227.1 )   (2,401.3 )   (1,183.4 )   (3,300.3 ) 893.4     (6,218.7 )
 
 
 
 
 
 
 
Net increase (decrease) in                                    
unrestricted cash and cash                                    
equivalents   966.1     195.5     (368.3 )   288.9         1,082.2  
Unrestricted cash and cash                                    
equivalents, beginning of period   609.3     4,420.6     808.1     2,567.2         8,405.2  
 
 
 
 
 
 
 
Unrestricted cash and cash                                    
equivalents, end of period $ 1,575.4   $ 4,616.1   $ 439.8   $ 2,856.1   $   $ 9,487.4  
 
 
 
 
 
 
 
(*)     

2010 data has been conformed to the current quarter presentation.

 

26




CONDENSED CONSOLIDATING BALANCE SHEETS (dollars in millions)

  CIT Group Inc.   Restricted
Entities
  Unrestricted
Entities
  Eliminations   Consolidated
Total
 
June 30, 2011
 
 
 
 
 
ASSETS:                              
Net loans $   $ 6,814.1   $ 15,568.5   $ (521.9 ) $ 21,860.7  
Operating lease equipment, net       9,462.2     1,495.7     (37.5 )   10,920.4  
Assets held for sale   7.9     921.0     934.9     (0.3 )   1,863.5  
Cash and deposits with banks   1,412.6     3,829.3     2,175.1     (61.3 )   7,355.7  
Investment securities   1,395.1     1,386.5     383.6     (181.9 )   2,983.3  
Other assets   32,262.7     5,956.5     494.6     (35,687.8 )   3,026.0  
 
 
 
 
 
 
   Total Assets $ 35,078.3   $ 28,369.6   $ 21,052.4   $ (36,490.7 ) $ 48,009.6  
 
 
 
 
 
 
LIABILITIES AND EQUITY:                              
Long-term borrowings, including deposits $ 18,114.3   $ 4,138.6   $ 13,336.7   $ (270.4 ) $ 35,319.2  
Credit balances of factoring clients       1,283.8     2.9     (201.8 )   1,084.9  
Other liabilities   8,022.5     (2,823.4 )   (1,183.2 )   (1,353.3 )   2,662.6  
 
 
 
 
 
 
   Total Liabilities   26,136.8     2,599.0     12,156.4     (1,825.5 )   39,066.7  
 
 
 
 
 
 
Total Stockholders’ Equity   8,941.5     25,770.6     8,895.6     (34,666.2 )   8,941.5  
Noncontrolling minority interests           0.4     1.0     1.4  
 
 
 
 
 
 
   Total Equity   8,941.5     25,770.6     8,896.0     (34,665.2 )   8,942.9  
 
 
 
 
 
 
   Total Liabilities and Equity $ 35,078.3   $ 28,369.6   $ 21,052.4   $ (36,490.7 ) $ 48,009.6  
 
 
 
 
 
 
 
December 31, 2010(*)                              
ASSETS:                              
Net loans $   $ 8,041.4   $ 16,359.0   $ (316.1 ) $ 24,084.3  
Operating lease equipment, net       9,605.7     1,568.6     (37.6 )   11,136.7  
Assets held for sale       678.4     540.1         1,218.5  
Cash and deposits with banks   2,725.6     5,885.6     2,631.6     (38.8 )   11,204.0  
Investment securities       108.1     403.5     (183.1 )   328.5  
Other assets   31,047.4     9,115.0     328.8     (37,505.0 )   2,986.2  
 
 
 
 
 
 
   Total Assets $ 33,773.0   $ 33,434.2   $ 21,831.6   $ (38,080.6 ) $ 50,958.2  
 
 
 
 
 
 
LIABILITIES AND EQUITY:                              
Long-term borrowings, including deposits $ 19,322.0   $ 4,949.2   $ 14,497.0   $ (252.2 ) $ 38,516.0  
Credit balances of factoring clients       926.1     9.2         935.3  
Other liabilities   5,535.0     (888.6 )   (1,717.7 )   (335.5 )   2,593.2  
 
 
 
 
 
 
   Total Liabilities   24,857.0     4,986.7     12,788.5     (587.7 )   42,044.5  
 
 
 
 
 
 
Total Stockholders’ Equity   8,916.0     28,447.1     9,042.8     (37,489.9 )   8,916.0  
Noncontrolling minority interests       0.4     0.3     (3.0 )   (2.3 )
 
 
 
 
 
 
   Total Equity   8,916.0     28,447.5     9,043.1     (37,492.9 )   8,913.7  
 
 
 
 
 
 
   Total Liabilities and Equity $ 33,773.0   $ 33,434.2   $ 21,831.6   $ (38,080.6 ) $ 50,958.2  
 
 
 
 
 
 
(*)     

2010 data has been conformed to the current quarter presentation.

 

27




CONSOLIDATING STATEMENTS OF OPERATION (dollars in millions)

  CIT Group Inc.   Restricted
Entities
  Unrestricted
Entities
  Eliminations   Consolidated
Total
 
 
 
 
 
 
 
Six Months Ended June 30, 2011                              
Interest income $ 1.8   $ 679.8   $ 568.3   $ (4.6 ) $ 1,245.3  
Interest expense   (1,054.3 )   (193.2 )   (264.9 )   7.8     (1,504.6 )
 
 
 
 
 
 
Net interest revenue   (1,052.5 )   486.6     303.4     3.2     (259.3 )
Provision for credit losses   (6.7 )   (126.8 )   (74.6 )       (208.1 )
 
 
 
 
 
 
Net interest revenue, after credit provision   (1,059.2 )   359.8     228.8     3.2     (467.4 )
Equity in net income of subsidiaries   1,071.3     711.0         (1,782.3 )    
Other Income                              
Rental income on operating leases       689.9     141.3         831.2  
Other   (125.5 )   528.1     126.8     (11.3 )   518.1  
 
 
 
 
 
 
   Total other income
  (125.5 )   1,218.0     268.1     (11.3 )   1,349.3  
 
 
 
 
 
 
Total revenue, net of interest expense and                              
credit provision   (113.4 )   2,288.8     496.9     (1,790.4 )   881.9  
 
 
 
 
 
 
Other Expenses                              
Depreciation on operating lease equipment       (246.1 )   (59.9 )       (306.0 )
Operating expenses   (11.0 )   (382.8 )   (82.3 )   13.9     (462.2 )
 
 
 
 
 
 
   Total other expenses   (11.0 )   (628.9 )   (142.2 )   13.9     (768.2 )
 
 
 
 
 
 
Income (loss) before income taxes   (124.4 )   1,659.9     354.7     (1,776.5 )   113.7  
Benefit (provision) for income taxes   142.0     (174.2 )   (68.0 )   7.6     (92.6 )
 
 
 
 
 
 
Net income (loss) before attribution of                              
noncontrolling interests   17.6     1,485.7     286.7     (1,768.9 )   21.1  
Net income attributable to noncontrolling                              
interests, after tax       0.4     0.5     (4.4 )   (3.5 )
 
 
 
 
 
 
Net income (loss) $ 17.6   $ 1,486.1   $ 287.2   $ (1,773.3 ) $ 17.6  
 
 
 
 
 
 
Six Months Ended June 30, 2010(*)                              
Interest income $ 1.0   $ 1,357.1   $ 795.7   $ (25.3 ) $ 2,128.5  
Interest expense   (885.9 )   (445.7 )   (320.6 )   13.3     (1,638.9 )
 
 
 
 
 
 
Net interest revenue   (884.9 )   911.4     475.1     (12.0 )   489.6  
Provision for credit losses   (11.1 )   (358.6 )   (110.0 )   6.9     (472.8 )
 
 
 
 
 
 
Net interest revenue, after credit provision   (896.0 )   552.8     365.1     (5.1 )   16.8  
Equity in net income of subsidiaries   871.7     203.4     (87.2 )   (987.9 )    
Other Income                              
Rental income on operating leases       687.0     157.7     (1.0 )   843.7  
Other   233.5     279.0     (11.0 )   (12.6 )   488.9  
 
 
 
 
 
 
   Total other income   233.5     966.0     146.7     (13.6 )   1,332.6  
 
 
 
 
 
 
Total revenue, net of interest expense and                              
credit provision   209.2     1,722.2     424.6     (1,006.6 )   1,349.4  
 
 
 
 
 
 
Other Expenses                              
Depreciation on operating lease equipment       (290.1 )   (61.2 )   0.5     (350.8 )
Operating expenses   17.8     (491.3 )   (91.8 )   25.8     (539.5 )
 
 
 
 
 
 
   Total other expenses   17.8     (781.4 )   (153.0 )   26.3     (890.3 )
 
 
 
 
 
 
Income (loss) before income taxes   227.0     940.8     271.6     (980.3 )   459.1  
Benefit (provision) for income taxes   98.8     (134.9 )   (96.1 )   0.6     (131.6 )
 
 
 
 
 
 
Net income (loss) before attribution of                              
noncontrolling interests   325.8     805.9     175.5     (979.7 )   327.5  
Net income attributable to noncontrolling                              
interests, after tax           0.4     (1.7 )   (1.3 )
 
 
 
 
 
 
Net income (loss) $ 325.8   $ 805.9   $ 175.9   $ (981.4 ) $ 326.2  
 
 
 
 
 
 
(*)     

2010 data has been conformed to the current quarter presentation.

NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS

As part of managing economic risk and exposure to interest rate, foreign currency and, in limited instances, credit risk, CIT enters into derivative transactions in over-the-counter markets with other financial institutions. CIT does not enter into derivative financial instruments for speculative purposes. Derivative instruments transacted since emergence from bankruptcy are cash collateralized.

The Company continues to assess hedge requirements and has reestablished counterparty relationships to facilitate hedging where economically appropriate. During 2011 and 2010, the Company’s portfolio was in an asset sensitive position, whereby assets re-price faster than liabilities, and interest margin increases in a rising interest rate environment. Our hedging strategies and qualifying hedges relate primarily to

28



currency risk management of investments in foreign operations. The Company utilizes cross-currency swaps and foreign currency forward contracts to effectively convert U.S. dollar denominated debt to a foreign currency. These transactions are classified as either foreign currency net investment hedges, or foreign currency cash flow hedges, with resulting gains and losses reflected in accumulated other comprehensive income, a separate component of equity. For hedges of foreign currency net investment positions the “forward” method is applied whereby effectiveness is assessed and measured based on the amounts and currencies of the individual hedged net investments versus the notional amounts and underlying currencies of the derivative contract. For those hedging relationships where the critical terms of the entire debt instrument and the derivative are identical and the credit-worthiness of the counterparty to the hedging instrument remains sound, there is an expectation of no hedge ineffectiveness so long as those conditions continue to be met. The net interest differential is recognized on an accrual basis as an adjustment to other income or as interest expense to correspond with the hedged position.

See the Company’s Form 10-K, “Note 1 — Business and Summary of Significant Accounting Policies” for further description of its derivative transaction policies.

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, 2011
  December 31, 2010
 
Qualifying Hedges Notional
Amount
   Asset Fair
Value
   Liability
Fair Value
  Notional
Amount
   Asset Fair
Value
   Liability
Fair Value
 
 
 
 
 
 
 
 
Cross currency swaps $ 429.1   $   $ (26.0 ) $ 414.7   $ 0.8   $ (12.1 )
Foreign currency forward exchange –                                    
cash flow hedges   164.2         (6.1 )   183.6     6.4     (1.4 )
Foreign currency forward exchange –                                    
net                                    
investment hedges   1,492.3     0.7     (104.5 )   1,333.4     0.5     (61.0 )
 
 
 
 
 
 
 
Total Qualifying Hedges $ 2,085.6   $ 0.7   $ (136.6 ) $ 1,931.7   $ 7.7   $ (74.5 )
 
 
 
 
 
 
 
Non-Qualifying Hedges                                    
Cross currency swaps $ 1,380.8   $   $ (91.2 ) $ 1,330.3   $ 14.2   $ (38.4 )
Interest rate swaps   916.4     1.9     (39.7 )   1,046.8     4.5     (37.7 )
Written options   37.0             273.8          
Purchased options   931.0     1.8         903.0     2.7      
Foreign currency forward exchange                                    
contracts   2,157.3     8.9     (99.7 )   2,210.0     4.3     (50.2 )
TRS(1)   1,041.5             609.9          
 
 
 
 
 
 
 
Total Non-qualifying Hedges $ 6,464.0   $ 12.6   $ (230.6 ) $ 6,373.8   $ 25.7   $ (126.3 )
 
 
 
 
 
 
 
(1)     

A financing facility with Goldman Sachs International (GSI) is structured as a total return swap (TRS), under which amounts available for advances are accounted for as a derivative. Pursuant to applicable accounting guidance, only the unutilized portion of the TRS is accounted for as a derivative and recorded at its estimated fair value.

 

The “notional amount” of the swap of $1,041.5 million at June 30, 2011 and $609.9 million at December 31, 2010 represent the unused portion of the GSI Facility and constitute a derivative financial instrument. It is calculated as the maximum facility commitment amount, currently $2,125.0 million, less the actual adjusted qualifying borrowing base outstanding of $1,083.5 million at June 30, 2011 and $1,515.1 million at December 31, 2010. The notional amount of the derivative will increase as the adjusted qualifying borrowing base decreases due to repayment of the underlying debt to investors. If CIT funds additional ABS under the GSI Facility, the adjusted qualifying borrowing base of the total return swap will increase and the notional amount of the derivative will decrease accordingly.

 

Valuation of the derivative related to the GSI Facility is based on several factors using a discounted cash flow (DCF) methodology, including:

 
  • CIT’s funding costs for similar recent secured financings;
  • Forecasted usage of the long-dated GSI Facility through the final maturity date in 2028; and
  • Forecasted amortization, including prepayment assumptions, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion.

29



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

Derivative Instrument Gains and Losses (dollars in millions)

  Gain / (Loss)
Recognized
Quarters Ended June 30,   Six Months Ended June 30,  
 
 
 
Derivative Instruments 2011   2010   2011   2010  



 
 
 
 
Qualifying Hedges                          
Foreign currency exchange rate                          
fluctuations – cash flow hedges Other income $ (4.1 ) $ 9.3   $ (13.7 ) $ 9.3  
 
 
 
 
 
Total Qualifying Hedges     (4.1 )   9.3     (13.7 )   9.3  
Non Qualifying Hedges                          
Cross currency swaps Other income   (4.0 )   103.8     (45.0 )   113.1  
Interest rate swaps Other income   (11.1 )   (30.7 )   (5.2 )   (50.1 )
Foreign currency forward exchange                          
contracts Other income   (15.4 )   94.7     (68.8 )   164.8  
 
 
 
 
 
Total Non-qualifying Hedges     (30.5 )   167.8     (119.0 )   227.8  
 
 
 
 
 
Total derivatives-income statement impact $ (34.6 ) $ 177.1   $ (132.7 ) $ 237.1  
 
 
 
 
 

NOTE 7 — FAIR VALUE

Fair Value Hierarchy

The Company is required to report fair value measurements for specified classes of assets and liabilities. See the Company’s Form 10-K, “Note 1 — Business and Summary of Significant Accounting Policies” for description of its fair value measurement policy.

The Company characterizes inputs in the determination of fair value according to the fair value hierarchy. The fair value of the Company’s assets and liabilities where the measurement objective specifically requires the use of fair value are set forth in the tables below:

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

June 30, 2011 Total   Level 1   Level 2   Level 3  
 
 
 
 
 
Assets                        
Debt Securities available for sale $ 2,700.1   $   $ 2,700.1   $  
Equity Securities available for sale   22.7     19.3     3.4      
Trading assets at fair value – derivatives   12.6         12.6      
Derivative counterparty assets at fair value   0.7         0.7      
 
 
 
 
 
Total Assets $ 2,736.1   $ 19.3   $ 2,716.8   $  
 
 
 
 
 
Liabilities                        
Trading liabilities at fair value – derivatives $ (230.6 ) $   $ (230.6 ) $  
Derivative counterparty liabilities at fair value   (136.6 )       (136.6 )    
 
 
 
 
 
Total Liabilities $ (367.2 ) $   $ (367.2 ) $  
 
 
 
 
 
 
December 31, 2010 Total   Level 1   Level 2   Level 3  
 
 
 
 
 
Assets                        
Equity Securities available for sale $ 37.5   $ 16.2   $ 3.4   $ 17.9  
Trading assets at fair value – derivatives   25.7         25.7      
Derivative counterparty assets at fair value   7.7         7.7      
 
 
 
 
 
Total Assets $ 70.9   $ 16.2   $ 36.8   $ 17.9  
 
 
 
 
 
Liabilities                        
Trading liabilities at fair value – derivatives $ (126.3 ) $   $ (126.0 ) $ (0.3 )
Derivative counterparty liabilities at fair value   (74.5 )       (74.5 )    
 
 
 
 
 
Total Liabilities $ (200.8 ) $   $ (200.5 ) $ (0.3 )
 
 
 
 
 

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The following table presents the current carrying value of the financial instruments for which a non-recurring change in fair value has been recorded, and the associated pre-tax impact:

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

       Fair Value Measurements at Reporting Date Using:  
     
 
June 30, 2011 Total   Level 1    Level 2    Level 3    Total Losses
 
 
 
 
 
 
Assets                              
Assets Held for Sale $ 30.0   $   $   $ 30.0   $ (4.0 )
Impaired loans   141.3             141.3     (29.7 )
 
 
 
 
 
 
Total $ 171.3   $   $   $ 171.3   $ (33.7 )
 
 
 
 
 
 

Loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value. At the time of transfer, a write-down of the loan is recorded as a charge-off, if applicable. Once classified as held for sale, the amount by which the carrying value exceeds fair value is recorded as a valuation allowance.

Impaired finance receivables (including loans or capital leases) of $500,000 or greater that are placed on non-accrual status are subject to periodic individual review in conjunction with the Company’s ongoing problem loan management (PLM) function. Impairment occurs when, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to contractual terms of the agreement. Impairment is measured as the shortfall between estimated value and recorded investment in the finance receivable, with the estimated value determined using fair value of collateral and other cash flows if the finance receivable is collateralized, or the present value of expected future cash flows discounted at the contract’s effective interest rate.

Level 3 Gains and Losses

The tables below set forth a summary of changes in the estimated fair value of the Company’s Level 3 financial assets and liabilities measured on a recurring basis. At June 30, 2011 the Company’s Level 3 financial assets measured on a recurring basis were zero as a result of sales and maturities.

  Total   Derivatives   Equity Securities
available for sale
 
 
 
 
Assets and Liabilities                  
March 31, 2011 $ (0.3 ) $ (0.3 ) $  
Gains or losses realized/unrealized                  
    Included in other income   0.3     0.3      
 
 
 
 
Quarter Ended June 30, 2011 $   $   $  
 
 
 
 
December 31, 2010 $ 17.6   $ (0.3 ) $ 17.9  
Gains or losses realized/unrealized                  
    Included in other income   5.7     0.3     5.4  
Other net, (primarily sales proceeds)   (23.3 )       (23.3 )
 
 
 
 
Six Months Ended June 30, 2011 $   $   $  
 
 
 
 

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FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying and estimated fair values of financial instruments presented below exclude leases and certain other assets and liabilities, for which disclosure is not required. Assumptions used in valuing financial instruments are disclosed below.

  June 30, 2011   December 31, 2010  
 
 
 
  Carrying
Value
  Estimated
Fair Value
  Carrying
Value
  Estimated
Fair Value
 
 
 
 
 
 
Assets                        
Trading assets – derivatives $ 12.6   $ 12.6   $ 25.7   $ 25.7  
Derivative counterparty assets at fair value   0.7     0.7     7.7     7.7  
Assets held for sale (excluding leases)(1)   1,058.1     1,208.4     466.0     466.0  
Loans (excluding leases)   17,181.5     17,116.2     20,680.3     21,356.8  
Investment Securities   2,983.3     2,986.0     328.5     330.2  
Other assets and unsecured counterparty receivable(2)   1,486.7     1,486.7     1,507.6     1,507.6  
                 
Liabilities                        
Deposits(3)   (4,453.0 )   (4,507.6 )   (4,562.7 )   (4,660.0 )
Trading liabilities – derivatives   (230.6 )   (230.6 )   (126.3 )   (126.3 )
Derivative counterparty liabilities at fair value   (136.6 )   (136.6 )   (74.5 )   (74.5 )
Long-term borrowings(3)   (31,051.1 ) (32,897.6 )   (34,208.1 ) (36,452.0 )
Other liabilities(4)   (1,652.5 )   (1,652.5 )   (1,769.9 )   (1,769.9 )
   
(1)     

Prior period balances have been conformed to current period presentation to exclude finance leases.

 
(2)     

Other assets subject to fair value disclosure include accrued interest receivable and other receivables, certain investment securities and miscellaneous other assets whose carrying values approximate fair value.

 
(3)     

Deposits and long-term borrowings include accrued interest.

 
(4)     

Other liabilities include accrued liabilities, which have a fair value that approximates carrying value.

Assumptions used to value financial instruments as of June 30, 2011 are unchanged from those disclosed in “Note 10 — Fair Value” of the 2010 Form 10-K.

Derivatives – the estimated fair values of derivatives were calculated internally using market data and represent the net amount receivable or payable to terminate, taking into account current market rates. See “Note 6 — Derivative Financial Instruments” for notional principal amounts and fair values.

Assets held for sale – Assets held-for-sale are recorded at lower of cost or fair value on the balance sheet. The fair value is generally determined using internally generated valuations, which are considered Level 3 methodologies. Commercial loans are generally valued individually, while small-ticket commercial and consumer type loans are valued on an aggregate portfolio basis.

Loans – Since there is no liquid secondary market for most loans in the Company’s portfolio, the fair value is estimated based on discounted cash flow analysis. In addition to the characteristics of the underlying contracts, key inputs to the analysis include interest rates, prepayment rates, and credit spreads. For the commercial loan portfolio, the market based credit spread inputs are derived from instruments with comparable credit risk characteristics obtained from independent third party vendors. For the consumer loan portfolio, the discount spread is derived based on the company’s estimate of a market participant’s required return on equity that incorporate credit loss estimates based on expected and current default rates.

Deposits – the fair value of deposits was estimated based upon a present value discounted cash flow analysis. Discount rates used in the present value calculation are based on the Company’s current rates.

Long-term borrowings – Most fixed-rate notes were valued based on quoted market estimates. Where market estimates were not available, values were computed using a discounted cash flow analysis with a discount rate approximating current market rates for issuances by CIT of similar term debt. The difference between the carrying values of long-term borrowings reflected in the consolidated balance sheets is accrued interest payable.

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NOTE 8 — STOCKHOLDERS’ EQUITY

Accumulated Other Comprehensive (Loss) / Income

Total comprehensive (Loss)/ Income was $(56.9) million and $137.0 million for the quarters ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, total comprehensive income was $18.4 million and $317.8 million, respectively; including Accumulated Other Comprehensive (Loss) of $(2.7) million and $(9.7) million for the current and prior year to date periods.

The following table details the ending component balances of Accumulated Other Comprehensive Loss, net of tax:

  June 30, 2011   December 31, 2010  
 
 
 
Foreign currency translation adjustments $ (21.9 ) $ (12.9 )
Changes in benefit plan net gain/(loss) and prior service (cost)/credit   2.7     2.8  
Unrealized gain on available for sale investments   8.1     2.2  
Changes in fair values of derivatives qualifying as cash flow hedges   (1.2 )   (1.7 )
 
 
 
Total accumulated other comprehensive loss $ (12.3 ) $ (9.6 )
 
 
 

NOTE 9 — REGULATORY CAPITAL

The Company and CIT Bank are each subject to various regulatory capital requirements administered by the Federal Reserve Bank of New York (“FRBNY”) and the Federal Deposit Insurance Corporation (“FDIC”).

Quantitative measures established by regulation to ensure capital adequacy require that the Company and CIT Bank each maintain minimum 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 maintaining a minimum Total Risk Based Capital Ratio of 13%. In connection with converting to a Utah state bank in December 2008, CIT Bank committed to maintaining for at least three years a Tier 1 Leverage Ratio of at least 15%.

The calculation of the Company’s regulatory capital ratios are subject to review and consultation with the FRBNY, which may result in refinements to amounts reported at June 30, 2011.

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Tier 1 Capital and Total Capital Components (dollars in millions)

  CIT Group Inc.   CIT Bank  
 
 
 
Tier 1 Capital
June 30,
2011
  December 31,
2010
  June 30,
2011
  December 31,
2010
 
 
 
 
 
 
Total stockholders’ equity $ 8,941.5   $ 8,916.0   $ 1,913.5   $ 1,832.2  
Effect of certain items in accumulated other                        
comprehensive loss excluded from Tier 1 Capital   (9.5 )   (3.3 )   (0.1 )   (0.1 )
 
 
 
 
 
Adjusted total equity   8,932.0     8,912.7     1,913.4     1,832.1  
Less: Goodwill   (264.5 )   (277.4 )        
Disallowed intangible assets   (84.1 )   (119.2 )        
Investment in certain subsidiaries   (35.3 )   (33.4 )        
Other Tier 1 components(1)   (62.7 )   (65.2 )   (80.7 )   (97.8 )
 
 
 
 
 
Total Tier 1 Capital   8,485.4     8,417.5     1,832.7     1,734.3  
Tier 2 Capital                        
Qualifying reserve for credit losses   439.3     416.2     23.2     10.7  
Less: Investment in certain subsidiaries   (35.3 )   (33.4 )        
Other Tier 2 components(2)   2.6     0.2     0.1     0.1  
 
 
 
 
 
Total Tier 2 Capital   406.6     383.0     23.3     10.8  
 
 
 
 
 
Total Capital (Tier 1 and Tier 2 Capital) $ 8,892.0   $ 8,800.5   $ 1,856.0   $ 1,745.1  
 
 
 
 
 
Risk-weighted assets(4) $ 44,037.0   $ 44,176.7   $ 3,854.7   $ 3,022.0  
 
 
 
 
 
Total Capital (to risk-weighted assets):                        
Actual   20.2 %   19.9 %   48.1 %   57.7 %
Required Ratio for Capital Adequacy Purposes   13.0 %(3)   13.0 %(3)   8.0 %   8.0 %
Tier 1 Capital (to risk-weighted assets):                        
Actual   19.3 %   19.1 %   47.5 %   57.4 %
Required Ratio for Capital Adequacy Purposes   4.0 %   4.0 %   4.0 %   4.0 %
Tier 1 Capital Leverage Ratio:                        
Actual   17.1 %   16.2 %   27.4 %   24.2 %
Required Ratio for Capital Adequacy Purposes   4.0 %   4.0 %   15.0 %(3)   15.0 %(3)
   
(1)     

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.

 
(2)     

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.

 
(3)     

The Company and CIT Bank each committed to maintaining certain capital ratios above regulatory minimum levels.

 
(4)     

Risk-weighted assets include purchase commitments for aircraft to be purchased under a June 2011 Memorandum of Understanding.

NOTE 10 — INCOME TAXES

CIT’s tax provision of $26.9 million for the second quarter decreased compared to a tax provision of $88.2 million in the prior year quarter primarily as a result of lower international earnings and a decrease in discrete items.

CIT’s tax provision of $92.6 million for the six months ended June 30, 2011 decreased compared to a tax provision of $131.6 million in the prior year six months primarily as a result of lower international earnings. For the year to date tax provision, the Company recorded income tax expense on the earnings of certain international operations and no income tax benefit on its domestic losses. A tax benefit was not recognized on the domestic losses because management has concluded that it does not currently meet the criteria to recognize these tax benefits considering its recent history of domestic losses. The year end 2011 effective tax rate may vary from the current rate primarily due to changes in the mix of domestic and international earnings.

The tax provision for the second quarter and six months ended 2011 included $2.2 million and $18.8 million, respectively, of discrete tax expense items. Included in the discrete items for the second quarter and year to date was approximately $0.8 million and $9.8 million, primarily related to a net increase in liabilities for uncertain tax positions and incremental valuation allowances on certain foreign losses. The Company anticipates that it is reasonably possible that the total unrecognized tax benefits will decrease

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due to the settlement of audits and the expiration of statutes of limitation prior to June 30, 2012 in the range of $0-$10 million.

The tax provision for the year to date also reflects $9 million of discrete tax expense items primarily associated with the correction of certain foreign tax expense calculations relating to prior periods. Management has concluded that the adjustments were not individually or in the aggregate material to the consolidated financial statements, as of and for the period ended June 30, 2011, or to any of the preceding periods as reported.

As of December 31, 2010, CIT had cumulative U.S. Federal net operating loss carry-forwards (NOL’s) of $4.0 billion. Excluding FSA adjustments, which are not included in the calculation of U.S. Federal taxable income, the Company generated a domestic pretax loss of $288 million in the second quarter ($701 million year to date) which, excluding certain other book-to-tax adjustments, will increase the post-emergence NOLs. Pursuant to Section 382 of the Internal Revenue Code, the Company is generally subject to a $230 million annual limitation on the use of its $1.9 billion of pre-emergence NOLs. NOLs arising in post-emergence years are not subject to this limitation.

NOTE 11 — COMMITMENTS

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

Commitments (dollars in millions)

  June 30, 2011    December 31,
 
 
  Due to Expire        2010
 
     
  Within
One Year
   After
One Year
  Total
Outstanding
  Total
Outstanding
   
 
 
 
 
Financing Commitments                      
   Financing and leasing assets $ 276.8   $ 2,339.1   $ 2,615.9   $ 3,083.2
Letters of credit and acceptances                      
   Standby letters of credit   78.3     162.8     241.1     284.7
   Other letters of credit
  101.0     32.7     133.7     99.0
Guarantees                      
   Deferred purchase credit protection agreements   1,244.0         1,244.0     1,667.9
   Guarantees, acceptances and other recourse                      
   obligations   13.5     21.3     34.8     25.8
Purchase and Funding Commitments                      
   Aerospace manufacturer purchase commitments   926.9     6,978.0     7,904.9     5,701.4
   Rail and other manufacturer purchase                      
   commitments   486.4         486.4    
Other                      
   Liabilities for unrecognized tax benefits   10.0     442.1     452.1     451.6

Financing Commitments

Financing commitments, referred to as loan commitments, or lines of credit, reflect CIT’s agreements to lend to its customers, subject to the customers’ compliance with contractual obligations. The table above includes approximately $0.5 billion of commitments at June 30, 2011 and $0.7 billion at December 31, 2010 for instances where the customer is not in compliance with contractual obligations, and therefore CIT does not have the contractual obligation to lend. As financing commitments may not be fully drawn, expire unused, be reduced or cancelled at the customer’s request, and require the customer to be in compliance with certain conditions, total commitment amounts do not necessarily reflect actual future cash flow requirements.

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At June 30, 2011, substantially all financing commitments were senior facilities, with approximately 57% secured by equipment or other assets and the remainder comprised of cash-flow or enterprise value facilities. The vast majority of these commitments are syndicated transactions. CIT is lead agent in approximately 28% of the facilities. Most of our undrawn and available financing commitments are in Corporate Finance. The top ten undrawn commitments totaled $306 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, the total of which was not material for either period presented. 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

In the normal course of meeting the needs of clients, CIT sometimes enters into agreements to provide financing and letters of credit. 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.

Deferred Purchase Agreements

A Deferred Purchase Agreement (“DPA”) is provided in conjunction with factoring, whereby CIT provides a 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. The outstanding amount of DPAs is the maximum potential exposure that CIT would be required to pay under all DPAs. This maximum amount would only occur if all receivables subject to DPAs default in the manner described above, thereby requiring CIT to purchase all such receivables from the DPA clients.

The methodology used to determine the DPA liability is similar to the methodology used to determine the allowance for loan losses associated with the finance receivables, which reflects embedded losses based on various factors, including expected losses reflecting our internal customer and facility credit ratings. The liability recorded in Other Liabilities related to the DPAs totaled $4.0 million and $4.2 million at June 30, 2011 and December 31, 2010, respectively.

Purchase and Funding Commitments

CIT’s purchase commitments relate primarily to purchases of commercial aircraft and rail equipment. Commitments to purchase new commercial aircraft are predominantly with Airbus Industries (“Airbus”) and The Boeing Company (“Boeing”). CIT may also, from time to time, commit to purchase an aircraft directly with an airline. Aerospace equipment purchases are contracted for specific models, using baseline aircraft specifications 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 the delivery date. The estimated commitment amounts in the preceding table are based on contracted purchase prices reduced for pre-delivery payments to date and exclude buyer furnished equipment selected by the lessee. Pursuant to existing contractual commitments, 148 aircraft remain to be purchased from Airbus and Boeing, including 50 A320neo Family aircraft to be purchased under a June 2011 Memorandum of Understanding for which a Purchase Agreement was signed in July 2011. Aircraft deliveries are scheduled periodically through 2019. Commitments exclude unexercised options to order additional aircraft.

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The Company’s rail business entered into a commitment to purchase 3,500 railcars in the first quarter of 2011 and entered into a commitment to purchase 2,250 railcars in the second quarter of 2011. Pursuant to these contractual commitments, approximately 5,550 railcars remain to be purchased, with deliveries scheduled periodically in 2011 and 2012 and are included in the preceding table. On July 26, 2011, CIT announced orders for 5,000 railcars (which includes the second quarter commitments of 2,250 railcars and an incremental 2,750 railcars not included in the preceding table) from multiple manufacturers, for which deliveries are scheduled throughout 2012. Rail equipment purchase commitments are at fixed prices subject to price increases for certain materials.

NOTE 12 — CONTINGENCIES

Litigation

CIT is currently involved, and from time to time in the future may be involved, in a number of judicial, regulatory, and arbitration proceedings relating to matters that arise in connection with the conduct of its business (collectively, “Litigation”). In view of the inherent difficulty of predicting the outcome of Litigation matters, particularly when such matters are in their early stages or where the claimants seek indeterminate damages, CIT cannot state with confidence what the eventual outcome of the pending Litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines, or penalties related to each pending matter may be. In accordance with applicable accounting guidance, CIT establishes reserves for Litigation when those matters present loss contingencies as to which it is both probable that a loss will occur and the amount of such loss can be reasonably estimated. Based on currently available information, CIT believes that the results of Litigation that is currently pending, taken together, will not have a material adverse effect on the Company’s financial condition, but may be material to the Company’s operating results or cash flows for any particular period, depending in part on its operating results for that period. The actual results of resolving such matters may be substantially higher than the amounts reserved.

For certain Litigation matters in which the Company is involved, the Company is able to estimate a range of reasonably possible losses in excess of the loss amount accrued. For other matters for which a loss is probable or reasonably possible, such an estimate is not reasonably possible. For Litigation where losses are reasonably possible, management currently estimates the aggregate range of reasonably possible losses as up to $265 million in excess of established reserves. This estimate represents reasonably possible losses (in excess of established reserves and other amounts referenced above) over the life of such Litigation, which may span a currently indeterminable number of years, and is based on information currently available as of June 30, 2011. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate. Those Litigation matters for which an estimate is not reasonably possible or as to which a loss does not appear to be reasonably possible, based on current information, are not included within this estimated range and, therefore, this estimated range does not represent the Company’s maximum loss exposure.

The foregoing statements about our litigation are based on the Company’s judgments, assumptions, and estimates and are necessarily subjective and uncertain. Some of our pending litigation matters are described below.

Securities Class Action

In July and August 2008, two putative class action lawsuits were filed in the United States District Court for the Southern District of New York (the “New York District Court”) on behalf of CIT’s pre-reorganization stockholders against CIT, its former CEO and its former CFO. In August 2008, a putative class action lawsuit was filed in the New York District Court by a holder of CIT-PrZ equity units against CIT, its former CEO, former CFO, former Controller and certain members of its current and former Board of Directors. In May 2009, the Court consolidated these three shareholder actions into a single action and appointed

37



Pensioenfonds Horeca & Catering as Lead Plaintiff to represent the proposed class, which consists of all acquirers of CIT common stock and PrZ preferred stock from December 12, 2006 through March 5, 2008, who allegedly were damaged, including acquirers of CIT-PrZ preferred stock pursuant to the October 17, 2007 offering of such preferred stock.

In July 2009, the Lead Plaintiff filed a consolidated amended complaint alleging violations of the Securities Exchange Act of 1934 (“1934 Act”) and the Securities Act of 1933 (“1933 Act”). Specifically, it is alleged that the Company, its former CEO, former CFO, former Controller, and a former Vice Chairman violated Section 10(b) of the 1934 Act by making false and misleading statements and omissions regarding CIT’s subprime home lending and student lending businesses. The allegations relating to the Company’s home lending business are based on the assertion that the Company failed to fully disclose the risks in the Company’s portfolio of subprime mortgage loans. The allegations relating to the Company’s student lending business are based upon the assertion that the Company failed to account in its financial statements or, in the case of the preferred stockholders, its registration statement and prospectus, for private loans to students of a helicopter pilot training school, which it is alleged were highly unlikely to be repaid and should have been written off. The Lead Plaintiff also alleges that the Company, its former CEO, former CFO and former Controller and those current and former Directors of the Company who signed the registration statement in connection with the October 2007 CIT-PrZ preferred offering violated the 1933 Act by making false and misleading statements concerning the Company’s student lending business as described above.

Pursuant to a Notice of Dismissal filed on November 24, 2009, CIT Group Inc. was dismissed as a defendant from the consolidated securities action as a result of its discharge in bankruptcy. On June 10, 2010, the Court denied the remaining defendants’ motion to dismiss the consolidated amended complaint. The action continues as to the remaining defendants and CIT’s obligation to defend and indemnify such defendants continues. The case is in the discovery stage. Plaintiffs seek, among other relief, unspecified damages and interest. Non-binding mediation is scheduled for August, 2011.

Tyco Tax Agreement

This matter, which was previously reported as a contractual contingency in our SEC filings, has now evolved into litigation. In connection with our separation from Tyco International Ltd (“Tyco”) in 2002, CIT and Tyco entered into a Tax Agreement pursuant to which, among other things, CIT agreed to pay Tyco for tax savings actually realized by CIT, if any, as a result of the use of certain tax attributes resulting from net operating losses recognized while Tyco owned CIT (the “Tyco Tax Attribute”), which savings would not have been realized absent the existence of the Tyco Tax Attribute. During CIT’s bankruptcy, CIT rejected the Tax Agreement, and Tyco and CIT entered into a Standstill Agreement pursuant to which (a) CIT agreed that it would defer bringing its subordination claim against Tyco and (b) Tyco agreed that it would defer bringing its damages claim against CIT while the parties exchanged information about CIT’s tax position, including past usage and retention of the various attributes on its consolidated tax return. Notwithstanding the Standstill Agreement, Tyco filed a Notice of Arbitration during the 2011 second quarter, demanding arbitration of its alleged contractual damages resulting from rejection of the Tax Agreement. CIT filed a motion in the United States Bankruptcy Court for the Southern District of New York seeking a stay of the arbitration, together with an adversary proceeding seeking to subordinate Tyco’s interests under section 510(b) of the Bankruptcy Code, which would result in Tyco being treated like equity holders under CIT’s confirmed Plan of Reorganization and receiving no recovery in connection with the termination of the Tax Agreement. By stipulation, the parties have agreed to stay the arbitration pending the court’s ruling on the subordination claims.

The amount of the Federal Tyco Tax Attribute is approximately $794 million and the state Tyco Tax Attribute is approximately $180 million as of the separation date. CIT’s approximate applicable federal and state tax rates are currently 35% and 6.5%, respectively. CIT has recorded a valuation allowance against a significant portion of its federal and state deferred tax assets, as the Company continues to conclude that it does not currently meet the criteria to recognize these assets. It is CIT’s position that it

38



has not received federal tax benefits from the Tyco Tax Attribute within the meaning of the Tax Agreement and that it is speculative as to when, if ever, any such benefits may be realized in the future.

Le Nature’s Inc.

CIT was the lead lessor under a syndicated lease of equipment (the “Lease”) to Le Nature’s Inc., a beverage bottler, for a newly-constructed bottling facility in Phoenix, Arizona. In 2005, CIT and co-lessors funded $144.8 million of which approximately $45 million was funded by CIT. In 2006, CIT sold $5 million of its interest in the Lease.

In November 2006, amid allegations that Le Nature’s had perpetrated a fraudulent scheme, creditors filed an involuntary bankruptcy against Le Nature’s in the United States Bankruptcy Court for the Western District of Pennsylvania. Upon the commencement of the bankruptcy, Le Nature’s immediately ceased operations and a Chapter 11 trustee was appointed.

Subsequent to the commencement of the Le Nature’s bankruptcy, certain co-lessors and certain parties that participated in CIT’s and other co-lessors’s interests in the Lease filed lawsuits against CIT and others to recover the balance of their respective investments, asserting various claims including fraud, civil conspiracy, and civil Racketeer Influenced and Corrupt Organizations Act (RICO). Plaintiffs seek damages in excess of $84 million as well as claims for treble damages under RICO. All but one of these actions has been consolidated for discovery purposes in the United States District Court for the Western District of Pennsylvania.

In October 2008, the Liquidating Trustee of Le Nature’s commenced an action against, among others, Le Nature’s lenders and lessors, including CIT, asserting a variety of claims on behalf of the liquidation trust.

In October 2008, CIT commenced a lawsuit in the Superior Court for the State of Arizona, Maricopa County, against the manufacturer of the equipment that was the subject of the Lease, certain of its principals, and the former CEO of Le Nature’s, alleging, among other things, fraud, conspiracy, civil RICO and negligent misrepresentation, seeking compensatory and punitive damages.

In February 2009, CIT commenced a lawsuit in the Superior Court for the State of Arizona, Maricopa County, against the former independent auditing firm for Le Nature’s, asserting professional negligence.

In May 2009, one of Le Nature’s other equipment lessors commenced an action against CIT, as well as the equipment manufacturer, and certain principals of the equipment manufacturer, in the Circuit Court of Wisconsin, Milwaukee County, asserting claims for fraud and misrepresentation.

NOTE 13 — BUSINESS SEGMENT INFORMATION

Management’s Policy in Identifying Reportable Segments

CIT’s reportable segments are comprised of strategic business units that are aggregated into segments primarily based upon industry categories and to a lesser extent, the core competencies relating to product origination, distribution methods, operations and servicing and the nature of their regulatory environment. This segment reporting is consistent with the presentation of financial information to management.

Types of Products and Services

CIT has five reportable segments: Corporate Finance, Transportation Finance, Trade Finance, Vendor Finance and Consumer. Corporate Finance and Trade Finance offer secured lending and receivables collection as well as other financial products and services to small and midsize companies. These include secured revolving lines of credit and term loans, credit protection, accounts receivable collection, import

39



and export financing and factoring, debtor-in-possession and turnaround financing and management advisory services. Transportation Finance offers secured lending and leasing products to midsize and larger companies across the aerospace, rail and defense industries. Vendor Finance partners with manufacturers and distributors to offer secured lending and leasing products predominantly to small and mid-size companies primarily in information technology, telecommunication and office equipment markets. Consumer includes a liquidating portfolio of predominately government-guaranteed student loans and certain consumer loans of CIT Bank.

Segment Profit and Assets

The Company refined its expense and capital allocation methodologies during the first quarter of 2011. For 2011, Corporate and other includes certain costs that had been previously allocated to the segments, including prepayment penalty fees on high-cost debt payments and certain corporate liquidity costs. In addition, the Company refined the capital and interest allocation methodologies for the segments. These changes had the most impact on Transportation Finance given the capital requirements for their forward-purchase commitments and reduced the interest expense charged to this segment. On a comparable basis, pre-tax income for Transportation Finance would have been approximately $67 million for the quarter ended June 30, 2010 and $140 million for the six months then ended. These increases would be offset by decreases in Corporate and Other for the respective periods. The refinement was not significant to the other segments. The 2010 balances are reflected as originally reported and are not conformed to the 2011 presentation.

Corporate and Other includes cash liquidity in excess of the amount required by the business units that management determines is prudent for the overall company and the prepayment penalty fees associated with debt repayments.

40



The following table presents reportable segment information and the reconciliation of segment balances to consolidated financial statements:

Business Segments (dollars in millions)

  Corporate
Finance
  Transportation
Finance
  Trade
Finance
  Vendor
Finance
  Commercial
Segments
  Consumer   Total
Segments
  Corporate
and Other
  Total  
 
 
 
 
 
 
 
 
 
 
 
For the quarter ended June 30, 2011                    
 
Total interest                                                      
income $ 270.9   $ 44.5   $ 17.9   $ 195.1   $ 528.4   $ 68.9   $ 597.3   $ 4.8   $ 602.1  
Total interest                                                      
expense   (212.0 )   (250.8 )   (29.5 )   (145.5 )   (637.8 )   (48.7 )   (686.5 )   (119.2 )   (805.7 )
Provision for                                                      
credit losses   (61.3 )   (4.7 )   (4.0 )   (13.8 )   (83.8 )   (0.9 )   (84.7 )       (84.7 )
Rental                                                      
income on                                                      
operating                                                      
leases   5.5     339.5         72.9     417.9         417.9         417.9  
Other                                                      
income,                                                      
excluding                                                      
rental                                                      
income   118.2     33.0     42.8     50.8     244.8     3.1     247.9     (8.0 )   239.9  
Depreciation                                                      
on operating                                                      
lease                                                      
equipment   (3.0 )   (86.7 )       (55.8 )   (145.5 )       (145.5 )       (145.5 )
Other                                                      
expenses   (66.9 )   (37.4 )   (26.4 )   (82.1 )   (212.8 )   (15.5 )   (228.3 )   (17.5 )   (245.8 )
 
 
 
 
 
 
 
 
 
 
Income                                                      
(loss) before                                                      
provision                                                      
(benefit) for                                                      
income taxes $ 51.4   $ 37.4   $ 0.8   $ 21.6   $ 111.2   $ 6.9   $ 118.1   $ (139.9 ) $ (21.8 )
 
 
 
 
 
 
 
 
 
 
 
For the quarter ended June 30, 2010                    
Total interest                                                      
income $ 494.7   $ 57.8   $ 24.4   $ 345.2   $ 922.1   $ 96.7   $ 1,018.8   $ 5.0   $ 1,023.8  
Total interest                                                      
expense   (276.0 )   (234.3 )   (49.5 )   (190.4 )   (750.2 )   (59.4 )   (809.6 )   2.1     (807.5 )
Provision for                                                      
credit losses   (95.2 )   (3.0 )   (12.3 )   (111.9 )   (222.4 )   (9.3 )   (231.7 )   (15.0 )   (246.7 )
Rental                                                      
income on                                                      
operating                                                      
leases   7.3     315.0         96.1     418.4         418.4     (0.5 )   417.9  
Other                                                      
income,                                                      
excluding                                                      
rental                                                      
income   206.4     18.2     51.4     33.2     309.2     18.3     327.5     11.0     338.5  
Depreciation                                                      
on operating                                                      
lease                                                      
equipment   (5.1 )   (85.9 )       (87.4 )   (178.4 )       (178.4 )   0.3     (178.1 )
Other                                                      
expenses   (90.3 )   (45.5 )   (33.0 )   (86.3 )   (255.1 )   (22.7 )   (277.8 )       (277.8 )
 
 
 
 
 
 
 
 
 
 
Income                                                      
(loss) before                                                      
provision                                                      
(benefit) for                                                      
income taxes $ 241.8   $ 22.3   $ (19.0 ) $ (1.5 ) $ 243.6   $ 23.6   $ 267.2   $ 2.9   $ 270.1  
 
 
 
 
 
 
 
 
 
 

41



  Corporate
Finance
  Trans-
portation
Finance
  Trade
Finance
  Vendor
Finance
  Commercial
Segments
  Consumer   Total
Segments
  Corporate
and Other
  Total  
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2011                                              
Total interest                                                      
income $ 569.6   $ 87.0   $ 35.0   $ 403.4   $ 1,095.0   $ 139.7   $ 1,234.7   $ 10.6   $ 1,245.3  
Total interest                                                      
expense   (408.8 )   (461.3 )   (55.2 )   (278.5 )   (1,203.8 )   (101.7 )   (1,305.5 )   (199.1 )   (1,504.6 )
Provision for                                                      
credit losses   (135.8 )   (6.5 )   (7.3 )   (56.7 )   (206.3 )   (1.8 )   (208.1 )       (208.1 )
Rental income                                                      
on operating                                                      
leases   12.0     664.2         155.0     831.2         831.2         831.2  
Other income,                                                      
excluding rental                                                      
income   282.0     57.3     79.9     82.4     501.6     6.2     507.8     10.3     518.1  
Depreciation on                                                      
operating lease                                                      
equipment   (5.9 )   (183.4 )       (116.7 )   (306.0 )       (306.0 )       (306.0 )
 
Other expenses   (125.7 )   (77.2 )   (54.2 )   (153.8 )   (410.9 )   (32.9 )   (443.8 )   (18.4 )   (462.2 )
 
 
 
 
 
 
 
 
 
 
Income (loss)                                                      
before provision                                                      
(benefit) for                                                      
income taxes $ 187.4   $ 80.1   $ (1.8 ) $ 35.1   $ 300.8   $ 9.5   $ 310.3   $ (196.6 ) $ 113.7  
 
 
 
 
 
 
 
 
 
 
 
Select Period End Balances                                                
Loans including                                                      
receivables                                                      
pledged $ 7,423.9   $ 1,356.3   $ 2,538.4   $ 3,940.4   $ 15,259.0   $ 7,025.7   $ 22,284.7   $   $ 22,284.7  
Credit balances                                                      
of factoring                                                      
clients           (1,084.9 )       (1,084.9 )       (1,084.9 )       (1,084.9 )
Assets held for                                                      
sale   378.8     257.3         528.1     1,164.2     699.3     1,863.5         1,863.5  
Operating lease                                                      
equipment, net   51.1     10,619.3         250.0     10,920.4         10,920.4         10,920.4  
For the six months ended June 30, 2010                                              
Total interest                                                      
income $ 1,042.7   $ 121.5   $ 54.9   $ 707.2   $ 1,926.3   $ 192.6   $ 2,118.9   $ 9.6   $ 2,128.5  
Total interest                                                      
expense   (574.8 )   (492.6 )   (91.1 )   (358.3 )   (1,516.8 )   (126.2 )   (1,643.0 )   4.1     (1,638.9 )
Provision for                                                      
credit losses   (229.1 )   (4.3 )   (46.2 )   (164.4 )   (444.0 )   (13.8 )   (457.8 )   (15.0 )   (472.8 )
Rental income                                                      
on operating                                                      
leases   16.1     621.8         206.9     844.8         844.8     (1.1 )   843.7  
Other income,                                                      
excluding rental                                                      
income   309.0     40.4     100.6     72.0     522.0     24.1     546.1     (57.2 )   488.9  
Depreciation on                                                      
operating lease                                                      
equipment   (8.7 )   (164.5 )       (178.1 )   (351.3 )       (351.3 )   0.5     (350.8 )
 
Other expenses   (170.2 )   (85.1 )   (65.0 )   (173.2 )   (493.5 )   (44.2 )   (537.7 )   (1.8 )   (539.5 )
 
 
 
 
 
 
 
 
 
 
Income (loss)                                                      
before provision                                                      
(benefit) for                                                      
income taxes $ 385.0   $ 37.2   $ (46.8 ) $ 112.1   $ 487.5   $ 32.5   $ 520.0   $ (60.9 ) $ 459.1  
 
 
 
 
 
 
 
 
 
 
Select Period                                                      
End Balances                                                      
Loans including                                                      
receivables                                                      
pledged $ 10,346.2   $ 1,636.9   $ 2,514.6   $ 6,101.3   $ 20,599.0   $ 8,789.6   $ 29,388.6   $   $ 29,388.6  
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   105.6     10,296.9         551.9     10,954.4         10,954.4         10,954.4  

NOTE 14 — SUBSEQUENT EVENTS

On July 15, 2011, CIT redeemed $500 million of the $3 billion senior secured first lien facility. The net impact of the acceleration of deferred debt costs and the favorable FSA amortization will increase third quarter interest expense by approximately $15 million.

On July 26, 2011, CIT announced orders for 5,000 railcars (which includes the second quarter commitment of 2,250 railcars and an incremental 2,750 railcars in July 2011) from multiple manufacturers, for which deliveries are scheduled throughout 2012. The orders include the exercise of an option for an additional 1,750 railcars received when the Company ordered 3,500 railcars earlier this year.

42



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

Founded in 1908, CIT Group Inc. (“we”, “CIT” or the “Company”), a Delaware Corporation, is a bank holding company that provides commercial financing and leasing products and other financial services to small and middle market businesses across a wide variety of industries. CIT became a bank holding company in December 2008 and CIT Bank, a Utah state-chartered bank, is the Company’s principal bank subsidiary.

CIT operates primarily in North America, with locations in Europe, Latin America and Asia and has four commercial business segments – Corporate Finance, Trade Finance, Transportation Finance and Vendor Finance. We also own and manage a pool of liquidating consumer loans, predominantly government guaranteed student loans, that are reported in the Consumer segment.

As of June 30, 2011 the Company had 3,480 employees and approximately $48 billion in assets.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” contain 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, 2010 (the “2010 Form 10-K”).

The June 30, 2010 amounts have been restated to correct for errors found by the Company subsequent to the filing of its third quarter 2010 report on Form 10-Q, related primarily to the application of Fresh Start Accounting (“FSA”), the effects of which were disclosed in the Company’s December 31, 2010 Form 10-K. The effect of the restatement increased net income for the quarter and six months ended June 30, 2010 by approximately $40 million and $87 million, respectively, to $182 million and $326 million as compared to the amount originally reported in the June 30, 2010 Form 10-Q. Comparisons to the 2010 balances are to the restated amounts. See the Company’s 2010 Form 10-K, “Note 26 — Selected Quarterly Financial Data (Unaudited)” of Item 8 and “Select 2010 Form 10-Q Restated Sections” of Item 7 for further information.

Management uses certain non-GAAP financial measures in its analysis of the financial condition and results of operations of the Company. See “Non-GAAP Financial Measurements” for a reconciliation of these to comparable GAAP measures.

2011 PRIORITIES AND PROGRESS

We continue to make progress on our priorities, which we described in our December 31, 2010 Form 10-K. The following highlight some of our progress:

     1. Focus on growth in our four core businesses, both domestically and internationally

43



volume sequentially and year-over-year. Committed new business volume was $2.1 billion, up from $1.1 billion in the prior year quarter and $1.7 billion last quarter.

     2. Improve profitability, including reducing our cost of capital and operating expenses

     3. Expand the role of CIT Bank, both in asset origination and funding capabilities

44



During the second half of 2011 we will continue to advance these business priorities, as well as those relating to risk management, compliance and control functions and to substantially satisfy the open items in the Written Agreement with the Federal Reserve Bank of New York that the Company entered into on August 12, 2009.

2011 FINANCIAL OVERVIEW

Net loss for the quarter ended June 30, 2011 of $48 million, $0.24 per diluted share, compared to net income of $66 million, $0.33 per diluted share for the 2011 first quarter and $182 million, $0.91 per diluted share, a year ago, primarily on reduced benefits from fresh start accounting (“FSA”) accretion. The components of FSA accretion and amortization are detailed in the following section “Fresh Start Accounting”. The $108 million sequential decline in FSA accretion and the decrease of $425 million from the 2010 second quarter reflect accelerated repayment of second lien debt carried at a discount and lower asset levels in the 2011 second quarter. Lower credit costs partially offset the lower FSA accretion. Net income for the six months ended June 30, 2011 was $18 million, $0.09 per diluted share, down from $326 million, $1.63 per diluted share for 2010, reflecting similar trends.

Net finance revenue(1) for the quarter ended June 30, 2011 declined to $69 million from $197 million last quarter and $456 million in the prior year quarter as a result of a declining asset base and lower FSA accretion benefits, which has had a lower impact on interest income in 2011 due to higher loan sales in 2010, but continues to impact interest expense due to continued debt repayment (See “Fresh Start Accounting”). Average earning assets1 of $34 billion for the quarter declined $1 billion sequentially and $8 billion from a year ago quarter largely due to asset sales. Net finance revenue as a percentage of average earning assets (“finance margin”) was 0.80%, down both sequentially and from the prior year as reduced net FSA accretion more than offset the benefit from the reduction in second lien debt. Excluding FSA and prepayment penalties on debt, finance margin was 1.45%, essentially unchanged from the prior quarter and up from 0.73% a year ago. Compared to the first quarter, the second quarter result reflected slightly higher asset yields and a reduction in second lien debt offset by costs related to liability restructuring and reduced benefits on a secured borrowing facility (the Total Return Swap). The expansion of finance margin from the prior year quarter was primarily driven by lower funding costs, including increased benefits from the Total Return Swap. Net operating lease revenue(1) improved primarily reflecting higher utilization. Net finance revenue for the six months ended June 30, 2011 totaled $266 million, down from $983 million as the benefits from FSA accretion declined $794 million compared to the prior year six months.

Provision for credit losses for the quarter ended June 30, 2011 was $85 million, a decrease of 31% sequentially and 66% from the prior year quarter. Provision for credit losses for the six months ended June 30, 2011 totaled $208 million, down from $473 million for the prior year six months. The declines reflect improved trends in credit metrics including declines in net charge-offs and non-accrual balances.

Other income (excluding operating lease rentals) for the quarter ended June 30, 2011 declined to $240 million from $278 million last quarter and $339 million in the prior year quarter. The sequential decline was driven by mark-to-market valuations on non-qualifying hedge derivatives, as well as a lower level of recoveries on receivables charged-off prior to the adoption of FSA. The decrease from the prior year quarter was primarily due to lower recoveries on pre-FSA charge-offs. Other income for the six months ended June 30, 2011 totaled $518 million, up from $489 million for the prior year six months as higher


(1)     

Net finance revenue, average earning assets and net operating lease margin are non-GAAP measures; see reconciliation of non-GAAP to GAAP financial information

 

45



gains on asset sales and favorable mark to market valuations offset the decline in recoveries on pre-FSA charge-offs.

Operating expenses were $246 million for the quarter, up from $216 million last quarter and down from $279 million in the prior year quarter. The 14% sequential increase in operating expenses was driven by non-recurring servicing expenses in Vendor Finance, approximately $7 million of which pertained to the correction of prior periods, and higher litigation-related costs. The 12% decline from the prior-year quarter is mostly attributable to lower employee costs. Headcount declined 13% from a year ago to 3,480 at June 30, 2011. Operating expenses for the six months ended June 30, 2011 totaled $462 million, down from $540 million for the prior year six months, primarily due to lower employee costs.

Provision for income taxes of $27 million in the second quarter declined from $66 million last quarter and $88 million in the prior year quarter. The declines reflect lower international earnings, primarily in Canada in the current quarter, and discrete items recorded in the prior quarter, as we continue to record valuation allowances on U.S. losses. The tax provision predominantly reflects provisions for taxable income generated by our international operations and no income tax benefit on our U.S. losses due to a full valuation allowance. Provision for income taxes for the six months ended June 30, 2011 totaled $93 million, down from $132 million for the prior year six months. The decline reflects lower international earnings.

Total assets at June 30, 2011 were $48 billion, down $3 billion from March 31, 2011 and $7 billion from a year ago. Cash and short-term investments totaled $10 billion, down $2 billion sequentially reflecting debt repayments. Loans totaled $22 billion at June 30, 2011, down $1 billion during the quarter primarily due to transfers to assets held for sale, as portfolio originations largely offset portfolio collections, and down $7 billion from last year generally due to sales. Operating lease equipment remained stable at $11 billion.

Funded new business volume was $1.7 billion, up 30% sequentially and 67% from the prior year quarter, as Corporate Finance, Transportation Finance and Vendor Finance each reported double-digit percentage increases in lending/leasing volume sequentially and year-over-year. Year to date, funded new business totaled $3.1 billion, up from $1.9 billion last year. Committed new business volume was $2.1 billion, up from $1.7 billion last quarter and $1.1 billion in the prior year quarter. Year to date, committed volume was $3.8 billion, up from $2.1 billion last year. Factoring volume in our Trade Finance segment totaled $6.1 billion, essentially unchanged sequentially and down modestly from $6.3 billion in the prior year quarter as 4% growth in U.S. factoring volume was more than offset by the wind-down of our European operation. For the 2011 six months, factoring volume totaled $12.3 billion, down from $12.7 billion in the prior year. However, excluding volume from the wind-down of our European operation, factoring volume was up 3%.

Credit metrics improved in the quarter. Net charge-offs and non-accrual loans were down from recent quarters and inflows to non-accrual loans also continued to decline. Net charge-offs were $56 million, down from $141 million in the prior quarter and $106 million in the 2010 second quarter. The reduction from the prior quarter was driven primarily by a $77 million decline in Corporate Finance, as the prior quarter included significant charge-offs in the energy portfolio. In addition, the current quarter includes $33 million of recoveries of post-emergence charge-offs compared to $19 million and $7 million in the prior quarter and prior year quarter, respectively. Non-accrual loans were $1.1 billion at June 30, 2011, down 19% and 48%, respectively, from the prior quarter and the prior year quarter. All segments experienced declines in relation to prior periods, with the most notable improvements in Corporate Finance.

46




FRESH START ACCOUNTING

Upon emergence from bankruptcy in 2009, CIT applied Fresh Start Accounting (FSA) in accordance with generally accepted accounting principles in the United States of America (GAAP). Accretion and amortization of certain FSA adjustments are reflected in operating results and described below.

The implementation of FSA resulted in the establishment of a new basis of accounting for the majority of the Company’s assets and liabilities as of December 31, 2009 based upon the December 31, 2009 fair values for those assets and liabilities. The adoption of FSA also resulted in the elimination of the allowance for loan losses (“ALLL”), which was effectively recorded as discounts on loans in adjusting to then fair values. A portion of this discount is attributable to embedded credit losses at December 31, 2009. As a result, our reported charge-offs and the carrying values of our non-accrual loans are reduced in the post-emergence periods from what would have been reported without FSA. Though FSA reduced the carrying values of non-accrual loans, it did not impact the classification of the applicable loans as non-accrual loans, impaired loans or TDRs.

Given this framework, FSA most impacts our Net Finance Revenue and Credit Metrics trends. Net finance revenue reflects the accretion of the FSA adjustments to the loans and leases, as well as debt, which were marked to fair value at the emergence date. Because FSA impacts the credit metrics trends, we analyze charge-offs, non-accrual / impaired loans, and TDRs both including and excluding the effects of FSA. As noted above, FSA had the effect of lowering the carrying amount of our loans and leases and eliminating the ALLL as of December 31, 2009. The ALLL increased gradually to reflect the accretion of discounts on the pre-emergence portfolio (which increases the carrying value and the need for credit reserves) and reserves on post-emergence loans and leases. Charge-offs of post-FSA (GAAP) loans are lower as their carrying value is lower compared to pre-FSA balances.

Given the ongoing impact of FSA on CIT’s financial statements, credit metrics, and the different business profile, the results are not generally comparable with those of other financial institutions. Whereas other financial institutions may be experiencing current credit trends resulting in declining reserves, CIT’s allowance is being rebuilt.

Accretable and non-accretable discounts are tracked on a loan-by-loan basis. We record the transfer of loans to assets held for sale (AHFS) in accordance with guidance in ASC 310-10-35-49. Upon transfer of a loan to AHFS, it is carried at the lower of cost or fair value, which establishes a new basis for the loan and eliminates the specific accretable and non-accretable discounts. With the elimination of the specific accretable and non-accretable discount, there is no accretable discount to accrete into income in future periods. Contractual interest earned on loans while in AHFS is recorded in Finance income. Gain or loss on the sale of the asset is recognized at the time of sale and is determined by comparing the proceeds received with the carrying value.

47



The following table presents FSA adjustments by balance sheet caption:


Fresh Start Accounting (Discount) / Premium (dollars in millions)

  June 30, 2011   March 31, 2011   December 31, 2010  
 
 
 
 
  Accretable   Non-accretable   Accretable   Non-accretable   Accretable   Non-accretable  
 
 
 
 
 
 
 
Loans $ (977.9 ) $ (121.5 ) $ (1,303.0 ) $ (263.9 ) $ (1,555.4 ) $ (372.2 )
Operating lease equipment, net   (2,891.9 )       (2,954.1 )       (3,022.0 )    
Intangible assets / goodwill   84.1     264.5     99.1     277.4     119.2     277.4  
Other assets   (158.7 )       (191.6 )       (223.4 )    
 
 
 
 
 
 
 
Total $ (3,944.4 ) $ 143.0   $ (4,349.6 ) $ 13.5   $ (4,681.6 ) $ (94.8 )
 
 
 
 
 
 
 
Deposits $ 24.4   $   $ 30.5   $   $ 38.5   $  
Long-term borrowings   (2,436.8 )       (2,735.3 )       (2,948.5 )    
Other liabilities(1)   46.4     277.0         313.4         351.6  
 
 
 
 
 
 
 
Total $ (2,366.0 ) $ 277.0   $ (2,704.8 ) $ 313.4   $ (2,910.0 ) $ 351.6  
 
 
 
 
 
 
 
(1)     

The accretable balance reflects a reclass of FSA discount associated with unfunded loan commitments, which had previously been included with “Loans”. Prior periods have not been conformed due to system limitations.

Interest income is increased by the FSA accretion on loans, which primarily relates to Corporate Finance ($0.4 billion) and Consumer ($0.4 billion). Due to the contractual maturity of the underlying loans, most accretion income will be realized within the next 2 years. In addition to the scheduled accretion on loans recorded with each scheduled payment, the decline in accretable balance was accelerated during 2011 primarily as a result of asset sales. The declines in non-accretable balance were primarily due to asset sales and prepayments, and also reflect charge-offs.

Interest expense is increased by the FSA accretion of the long-term borrowings adjustment, which is recognized over the contractual maturity of the underlying debt. If the debt is repaid prior to its contractual maturity, and the repayment is accounted for as a debt extinguishment, accretion of the FSA discount on the underlying debt would be accelerated. If the repayment is accounted for as a debt modification, the FSA discount is amortized over the term of the new financing on an effective yield method. Debt maturity terms are: 2014–2017 for the Series A Notes, 2015–2017 for the Series C Notes that were exchanged from Series A and 2011–2040 for the other secured borrowings, of which over 85% is expected to be recognized by 2021. The following table summarizes the estimated scheduled FSA accretion on the first and second lien debt and secured borrowings. The table assumes repayment of the first and second lien debt on its scheduled due date. Actual results will differ from contractual realization in the event of prepayment of the first or second lien debt. Differences will also occur if the secured assets underlying the secured borrowings repay faster than obligated. The differences from the estimates could vary materially and are inherently subject to significant uncertainties that may be beyond the Company’s control.


Debt Type Outstanding FSA
Balance
  Remaining
2011
  2012   2013   2014   2015 and Thereafter  


 
 
 
 
 
 
First Lien Facility $ 88.3   $ 12.1   $ 19.7   $ 20.7   $ 21.9   $ 13.9  
Series A Notes   (834.8 )   (75.7 )   (162.9 )   (179.4 )   (163.4 )   (253.4 )
Series C Notes (exchanged)   (873.0 )   (67.3 )   (144.4 )   (158.7 )   (174.4 )   (328.2 )
Secured Borrowings   (763.5 )   (77.6 )   (125.3 )   (97.0 )   (79.8 )   (383.8 )
Other debt   (53.8 )   (2.6 )   (2.9 )   (2.4 )   (2.5 )   (43.4 )
 
 
 
 
 
 
 
Total $ (2,436.8 ) $ (211.1 ) $ (415.8 ) $ (416.8 ) $ (398.2 ) $ (994.9 )
 
 
 
 
 
 
 

Depreciation expense is reduced by the accretion of the operating lease equipment discount, which relates primarily to Transportation Finance aircraft and rail operating lease assets. We estimate an economic average life before disposal of these assets of approximately 15 and 30 years, respectively.

In conjunction with FSA, operating lease rentals were adjusted as of the emergence date. As a result, an intangible asset was recorded to adjust these contracts that were, in aggregate, above their market rentals rates. These adjustments (net) will be amortized, thereby lowering rental income (a component of Other Income) over the remaining lives of the lease agreements on a straight line basis. Rental income is reduced by accretion of the intangible assets, which is based on the contractual maturity of the underlying operating lease. The majority of the remaining accretion has a contractual maturity of less than two years.

48



Goodwill was recorded to reflect the excess of the reorganization equity value over the fair value of tangible and identifiable intangible assets, net of liabilities.

Other assets relates primarily to a discount on a receivable from GSI in conjunction with a secured borrowing facility. The discount is accreted to Other Income over the expected payout of the receivables. Based on current estimates, approximately 75% of the remaining discount will be recognized within the next five years.

Other liabilities relates primarily to a liability recorded to reflect the current fair value of aircraft purchase commitments outstanding at the time. As the aircraft are purchased, through 2018, the cost basis of the assets will be reduced by the associated liability.

The following table summarizes the impact of accretion and amortization of FSA adjustments by segment on the Consolidated Statement of Operations:


Accretion / (Amortization) of Fresh Start Accounting Adjustments (dollars in millions)

  Corporate
Finance
  Transportation
Finance
  Trade
Finance
  Vendor
Finance
  Consumer   Corporate
and Other
  Total
CIT
 
 
 
 
 
 
 
 
 
Quarter Ended June 30, 2011                                          
Interest income $ 143.4   $ 19.7   $   $ 36.4   $ 22.5   $   $ 222.0  
Interest expense   (135.6 )   (80.9 )   (8.0 )   (37.0 )   (13.7 )   (17.3 )   (292.5 )
Rental income on                                          
operating leases       (15.1 )                   (15.1 )
Depreciation expense   1.6     57.9         4.2             63.7  
 
 
 
 
 
 
 
 
FSA – net finance                                          
revenue   9.4     (18.4 )   (8.0 )   3.6     8.8     (17.3 )   (21.9 )
Other income   25.3     5.1             2.5         32.9  
 
 
 
 
 
 
 
 
Total $ 34.7   $ (13.3 ) $ (8.0 ) $ 3.6   $ 11.3   $ (17.3 ) $ 11.0  
 
 
 
 
 
 
 
 
Quarter Ended March 31, 2011                                    
Interest income $ 175.1   $ 17.8   $   $ 34.3   $ 22.5   $   $ 249.7  
Interest expense   (117.6 )   (43.5 )   (3.6 )   (18.3 )   (14.4 )   (7.9 )   (205.3 )
Rental income on                                          
operating leases       (19.0 )                   (19.0 )
Depreciation expense   1.3     57.3         2.7             61.3  
 
 
 
 
 
 
 
 
FSA – net finance                                          
revenue   58.8     12.6     (3.6 )   18.7     8.1     (7.9 )   86.7  
Other income   24.5     4.9             2.4         31.8  
 
 
 
 
 
 
 
 
Total $ 83.3   $ 17.5   $ (3.6 ) $ 18.7   $ 10.5   $ (7.9 ) $ 118.5  
 
 
 
 
 
 
 
 
Quarter Ended June 30, 2010                                          
Interest income $ 309.6   $ 25.0   $ 2.9   $ 70.3   $ 31.2   $ 0.9   $ 439.9  
Interest expense   (43.3 )   (16.2 )   (1.6 )   (7.3 )   (4.6 )   (0.2 )   (73.2 )
Rental income on                                          
operating leases       (26.6 )                   (26.6 )
Depreciation expense   4.1     59.4         7.5             71.0  
 
 
 
 
 
 
 
 
FSA – net finance                                          
revenue   270.4     41.6     1.3     70.5     26.6     0.7     411.1  
Other income   18.4     3.7             1.8         23.9  
 
 
 
 
 
 
 
 
Total $ 288.8   $ 45.3   $ 1.3   $ 70.5   $ 28.4   $ 0.7   $ 435.0  
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2011                                    
Interest income $ 318.5   $ 37.5   $   $ 70.7   $ 45.0   $   $ 471.7  
Interest expense   (253.2 )   (124.4 )   (11.6 )   (55.3 )   (28.1 )   (25.2 )   (497.8 )
Rental income on                                          
operating leases       (34.1 )                   (34.1 )
Depreciation expense   2.9     115.2         6.9             125.0  
 
 
 
 
 
 
 
 
FSA – net finance                                          
revenue   68.2     (5.8 )   (11.6 )   22.3     16.9     (25.2 )   64.8  
Other income   49.8     10.0             4.9         64.7  
 
 
 
 
 
 
 
 
Total $ 118.0   $ 4.2   $ (11.6 ) $ 22.3   $ 21.8   $ (25.2 ) $ 129.5  
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2010                                    
Interest income $ 676.1   $ 54.0   $ 9.6   $ 135.8   $ 64.0   $ 0.1   $ 939.6  
Interest expense   (90.1 )   (45.2 )   (3.5 )   (18.4 )   (10.9 )   0.2     (167.9 )
Rental income on                                          
operating leases       (52.8 )                   (52.8 )
Depreciation expense   6.3     116.8         16.4             139.5  
 
 
 
 
 
 
 
 
FSA – net finance                                          
revenue   592.3     72.8     6.1     133.8     53.1     0.3     858.4  
Other income   45.9     9.2             4.5     0.1     59.7  
 
 
 
 
 
 
 
 
Total $ 638.2   $ 82.0   $ 6.1   $ 133.8   $ 57.6   $ 0.4   $ 918.1  
 
 
 
 
 
 
 
 

49




NET FINANCE REVENUE(2)

The following tables present management’s view of consolidated margin and include the net interest spread we make on loans and on the equipment we lease, in dollars and as a percent of average earning assets(2).


Net Finance Revenue (dollars in millions)

  Quarters Ended   Six Months Ended  
 
 
 
  June 30,
2011
  March 31,
2011
  June 30,
2010
  June 30,
2011
  June 30,
2010
 
 
 
 
 
 
 
Interest income $ 602.1   $ 643.2   $ 1,023.8   $ 1,245.3   $ 2,128.5  
Rental income on operating leases   417.9     413.3     417.9     831.2     843.7  
 
 
 
 
 
 
Finance revenue   1,020.0     1,056.5     1,441.7     2,076.5     2,972.2  
Interest expense   (805.7 )   (698.9 )   (807.5 )   (1,504.6 )   (1,638.9 )
Depreciation on operating lease equipment   (145.5 )   (160.5 )   (178.1 )   (306.0 )   (350.8 )
 
 
 
 
 
 
Net finance revenue $ 68.8   $ 197.1   $ 456.1   $ 265.9   $ 982.5  
 
 
 
 
 
 
Average Earnings Assets (“AEA”) $ 34,477.8   $ 35,194.1   $ 42,211.9   $ 34,846.0   $ 43,674.7  
 
 
 
 
 
 
As a % of AEA:                              
Interest income   6.99 %   7.31 %   9.70 %   7.15 %   9.75 %
Rental income on operating leases   4.85 %   4.70 %   3.96 %   4.77 %   3.86 %
 
 
 
 
 
 
Finance revenue   11.84 %   12.01 %   13.66 %   11.92 %   13.61 %
Interest expense   (9.35 )%   (7.94 )%   (7.65 )%   (8.63 )%   (7.50 )%
Depreciation on operating lease equipment   (1.69 )%   (1.83 )%   (1.69 )%   (1.76 )%   (1.61 )%
 
 
 
 
 
 
Net finance revenue   0.80 %   2.24 %   4.32 %   1.53 %   4.50 %
 
 
 
 
 
 
As a % of AEA by Segment:                              
Corporate Finance   3.06 %   5.00 %   7.39 %   4.05 %   7.58 %
Transportation Finance   1.53 %   1.99 %   1.75 %   1.76 %   1.43 %
Trade Finance   (3.25 )%   (2.50 )%   (5.89 )%   (2.90 )%   (4.06 )%
Vendor Finance   5.27 %   7.32 %   8.79 %   6.32 %   9.43 %
Commercial Segments   2.44 %   3.73 %   4.98 %   3.09 %   5.26 %
Consumer   1.03 %   0.88 %   1.64 %   0.96 %   1.42 %

Average earning assets are less than comparable balances in Average Balance Sheet tables displayed later in this document due to the exclusion of deposits with banks and other investments offset by the inclusion of credit balances of factoring clients.

Net finance revenue declined during the quarter due to lower earning assets and reduced benefit from FSA accretion. Average earning assets were down $0.7 billion from the prior quarter and $7.7 billion from the 2010 second quarter. FSA accretion related to net finance revenue declined $109 million sequentially and $433 million from the prior year quarter driven by lower assets and higher accretion on debt prepayments. As a percentage of average earning assets, net finance revenue was down from the prior quarter as the reduced benefit from FSA accretion in interest income and costs associated with liability restructuring more than offset the benefits from paying off high cost debt. When compared to the prior year quarter, the impact of FSA was partially offset by higher receipts related to a total return swap, which in turn caused a reduction in interest expense.

New business yields in Vendor Finance remain in low double-digits, though down from last quarter. Transportation Finance yields benefited from completion of certain aircraft redeployment, higher rail utilization and lower aircraft maintenance costs, partially offset by some pressure on equipment renewal rates, which were below the average rate for the portfolios. Corporate Finance lending yields were under


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